UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017 March 31, 2020
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-52566
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
| MARYLAND | 73-1721791 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
2 SOUTH POINTE DRIVE, SUITE 100, LAKE FOREST, CA | 92630 |
| (Address of principal executive offices) | (Zip Code) |
800-978-8136
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405(Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | Smaller reporting company | x | |
| Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).¨ Yes x No
As of November 7, 2017,May 6, 2020, we had 23,027,978 shares of common stock of Summit Healthcare REIT, Inc. outstanding.
FORM 10-Q
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| Page 2 of |
PART I — FINANCIAL INFORMATION
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| September 30, 2017 | December 31, 2016 | |||||||||||||||
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | 4,235,000 | $ | 10,757,000 | $ | 13,683,000 | $ | 13,260,000 | ||||||||
| Restricted cash | 3,575,000 | 3,806,000 | 2,839,000 | 2,817,000 | ||||||||||||
| Real estate properties, net | 70,111,000 | 58,739,000 | 46,115,000 | 46,513,000 | ||||||||||||
| Notes receivable | 4,777,000 | 4,801,000 | 484,000 | 575,000 | ||||||||||||
| Deferred costs and deposits | 500,000 | 240,000 | ||||||||||||||
| Tenant and other receivables, net | 4,315,000 | 4,262,000 | 3,686,000 | 3,812,000 | ||||||||||||
| Deferred leasing commissions, net | 1,308,000 | 1,413,000 | 589,000 | 607,000 | ||||||||||||
| Other assets, net | 250,000 | 290,000 | 681,000 | 594,000 | ||||||||||||
| Equity-method investments | 8,369,000 | 5,095,000 | 12,668,000 | 13,131,000 | ||||||||||||
| Total assets | $ | 97,440,000 | $ | 89,403,000 | $ | 80,745,000 | $ | 81,309,000 | ||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 3,438,000 | $ | 2,979,000 | $ | 2,283,000 | $ | 2,504,000 | ||||||||
| Accrued salaries and benefits | 210,000 | 256,000 | ||||||||||||||
| Security deposits | 1,208,000 | 1,208,000 | 664,000 | 664,000 | ||||||||||||
| Loans payable, net of debt issuance costs | 61,002,000 | 51,717,000 | 45,405,000 | 45,577,000 | ||||||||||||
| Total liabilities | 65,858,000 | 56,160,000 | 48,352,000 | 48,745,000 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2017 and December 31, 2016 | — | — | ||||||||||||||
| Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at September 30, 2017 and December 31, 2016 | 23,000 | 23,000 | ||||||||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2020 and December 31, 2019 | — | — | ||||||||||||||
| Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at March 31, 2020 and December 31, 2019 | 23,000 | 23,000 | ||||||||||||||
| Additional paid-in capital | 117,326,000 | 117,243,000 | 116,226,000 | 116,184,000 | ||||||||||||
| Accumulated deficit | (86,468,000 | ) | (84,767,000 | ) | (84,056,000 | ) | (83,843,000 | ) | ||||||||
| Total stockholders’ equity | 30,881,000 | 32,499,000 | 32,193,000 | 32,364,000 | ||||||||||||
| Noncontrolling interest | 701,000 | 744,000 | ||||||||||||||
| Noncontrolling interests | 200,000 | 200,000 | ||||||||||||||
| Total equity | 31,582,000 | 33,243,000 | 32,393,000 | 32,564,000 | ||||||||||||
| Total liabilities and equity | $ | 97,440,000 | $ | 89,403,000 | $ | 80,745,000 | $ | 81,309,000 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| Page 3 of |
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental revenues | $ | 1,644,000 | $ | 1,639,000 | $ | 4,488,000 | $ | 5,183,000 | ||||||||
| Resident services and fee income, net | 2,413,000 | 2,017,000 | 6,829,000 | 6,162,000 | ||||||||||||
| Tenant reimbursements and other income | 224,000 | 217,000 | 596,000 | 665,000 | ||||||||||||
| Acquisition and asset management fees | 293,000 | 206,000 | 594,000 | 338,000 | ||||||||||||
| Interest income from notes receivable | 44,000 | 44,000 | 132,000 | 119,000 | ||||||||||||
| 4,618,000 | 4,123,000 | 12,639,000 | 12,467,000 | |||||||||||||
| Expenses: | ||||||||||||||||
| Property operating costs | 395,000 | 404,000 | 1,187,000 | 1,332,000 | ||||||||||||
| Resident services costs | 1,658,000 | 1,750,000 | 4,917,000 | 5,267,000 | ||||||||||||
| General and administrative | 1,688,000 | 1,411,000 | 4,004,000 | 3,524,000 | ||||||||||||
| Depreciation and amortization | 823,000 | 898,000 | 2,307,000 | 2,791,000 | ||||||||||||
| 4,564,000 | 4,463,000 | 12,415,000 | 12,914,000 | |||||||||||||
| Operating income (loss) | 54,000 | (340,000 | ) | 224,000 | (447,000 | ) | ||||||||||
| Income from equity-method investees | 73,000 | 68,000 | 251,000 | 167,000 | ||||||||||||
| Other income | 5,000 | 21,000 | 37,000 | 93,000 | ||||||||||||
| Interest expense | (806,000 | ) | (755,000 | ) | (2,173,000 | ) | (2,344,000 | ) | ||||||||
| Net loss | (674,000 | ) | (1,006,000 | ) | (1,661,000 | ) | (2,531,000 | ) | ||||||||
| Noncontrolling interests’ share in net income | (15,000 | ) | (19,000 | ) | (40,000 | ) | (53,000 | ) | ||||||||
| Net loss applicable to common stockholders | $ | (689,000 | ) | $ | (1,025,000 | ) | $ | (1,701,000 | ) | $ | (2,584,000 | ) | ||||
| Basic and diluted loss per common share: | ||||||||||||||||
| Net loss applicable to common stockholders | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.11 | ) | ||||
| Weighted average shares used to calculate basic and diluted net loss per common share | 23,027,978 | 23,027,978 | 23,027,978 | 23,027,978 | ||||||||||||
Three Months Ended March 31, | ||||||||
| 2019 | 2020 | |||||||
| Revenues: | ||||||||
| Total rental revenues | $ | 1,600,000 | 2,079,000 | |||||
| Acquisition and asset management fees | 326,000 | 210,000 | ||||||
| Interest income from notes receivable | 7,000 | 6,000 | ||||||
| Total operating revenue | 1,933,000 | 2,295,000 | ||||||
| Expenses: | ||||||||
| Property operating costs | 257,000 | 294,000 | ||||||
| General and administrative | 939,000 | 1,275,000 | ||||||
| Depreciation and amortization | 417,000 | 499,000 | ||||||
| Total operating expenses | 1,613,000 | 2,068,000 | ||||||
| Other operating income: | ||||||||
| Gain on sale of real estate properties | - | 4,147,000 | ||||||
| Operating income | 320,000 | 4,374,000 | ||||||
| Income from equity-method investees | 30,000 | 130,000 | ||||||
| Other income | 42,000 | 52,000 | ||||||
| Interest expense | (593,000 | ) | (756,000 | ) | ||||
| Net (loss) income | (201,000 | ) | 3,800,000 | |||||
| Noncontrolling interests’ share in net (income) loss | (12,000 | ) | 123,000 | |||||
| Net (loss) income applicable to common stockholders | $ | (213,000 | ) | 3,923,000 | ||||
| Earnings per common share: | ||||||||
| Basic: | ||||||||
| (Loss) income | $ | (0.01 | ) | $ | 0.17 | |||
| Net (loss) income applicable to common stockholders | $ | (0.01 | ) | $ | 0.17 | |||
| Diluted: | ||||||||
| (Loss) income | $ | (0.01 | ) | $ | 0.17 | |||
| Net (loss) income applicable to common stockholders | $ | (0.01 | ) | $ | 0.17 | |||
| Weighted average shares used to calculate earnings per common share: | ||||||||
| Basic | 23,027,978 | 23,027,978 | ||||||
| Diluted | 23,027,978 | 23,513,331 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| Page 4 of |
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2017
(Unaudited)
| Common Stock | ||||||||||||||||||||||||||||
| Number of Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
| Balance — January 1, 2017 | 23,027,978 | $ | 23,000 | $ | 117,243,000 | $ | (84,767,000 | ) | $ | 32,499,000 | $ | 744,000 | $ | 33,243,000 | ||||||||||||||
| Stock-based compensation | — | — | 83,000 | — | 83,000 | — | 83,000 | |||||||||||||||||||||
| Distributions paid to noncontrolling interests | — | — | — | — | — | (83,000 | ) | (83,000 | ) | |||||||||||||||||||
| Net (loss) income | — | — | — | (1,701,000 | ) | (1,701,000 | ) | 40,000 | (1,661,000 | ) | ||||||||||||||||||
| Balance — September 30, 2017 | 23,027,978 | $ | 23,000 | $ | 117,326,000 | $ | (86,468,000 | ) | $ | 30,881,000 | $ | 701,000 | $ | 31,582,000 | ||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| Number of Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
Balance — January 1, 2020 | 23,027,978 | $ | 23,000 | $ | 116,184,000 | $ | (83,843,000 | ) | $ | 32,364,000 | $ | 200,000 | $ | 32,564,000 | ||||||||||||||
| Stock-based compensation | — | — | 42,000 | — | 42,000 | — | 42,000 | |||||||||||||||||||||
| Distributions paid to noncontrolling interests | — | — | — | — | — | (12,000 | ) | (12,000 | ) | |||||||||||||||||||
| Net (loss) income | — | — | — | (213,000 | ) | (213,000 | ) | 12,000 | (201,000 | ) | ||||||||||||||||||
Balance — March 31, 2020 | 23,027,978 | $ | 23,000 | $ | 116,226,000 | $ | (84,056,000 | ) | $ | 32,193,000 | $ | 200,000 | $ | 32,393,000 | ||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| Number of Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
Balance — January 1, 2019 | 23,027,978 | $ | 23,000 | $ | 115,950,000 | $ | (86,956,000 | ) | $ | 29,017,000 | $ | 349,000 | $ | 29,366,000 | ||||||||||||||
| Stock-based compensation | — | — | 68,000 | — | 68,000 | — | 68,000 | |||||||||||||||||||||
| Distributions paid to noncontrolling interests | — | — | — | — | — | (13,000 | ) | (13,000 | ) | |||||||||||||||||||
| Net income (loss) | — | — | — | 3,923,000 | 3,923,000 | (123,000 | ) | 3,800,000 | ||||||||||||||||||||
Balance — March 31, 2019 | 23,027,978 | $ | 23,000 | $ | 116,018,000 | $ | (83,033,000 | ) | $ | 33,008,000 | $ | 213,000 | $ | 33,221,000 | ||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| Page 5 of |
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,661,000 | ) | $ | (2,531,000 | ) | ||
| Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities: | ||||||||
| Amortization of debt issuance costs | 136,000 | 103,000 | ||||||
| Depreciation and amortization | 2,307,000 | 2,791,000 | ||||||
| Straight-line rents | (337,000 | ) | (466,000 | ) | ||||
| Bad debt expense | 148,000 | 32,000 | ||||||
| Stock-based compensation expense | 83,000 | 22,000 | ||||||
| Income from equity-method investees | (251,000 | ) | (167,000 | ) | ||||
| Change in operating assets and liabilities: | ||||||||
| Restricted cash related to current activities | 116,000 | (87,000 | ) | |||||
| Tenant and other receivables, net | 398,000 | 269,000 | ||||||
| Other assets | 62,000 | 203,000 | ||||||
| Accounts payable and accrued liabilities | 235,000 | 525,000 | ||||||
| Accrued salaries and benefits | (46,000 | ) | (198,000 | ) | ||||
| Net cash and cash equivalents provided by operating activities | 1,190,000 | 496,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Restricted cash | 340,000 | 293,000 | ||||||
| Deferred costs and deposits | (482,000 | ) | (345,000 | ) | ||||
| Real estate acquisitions | (13,452,000 | ) | — | |||||
| Real estate improvements | (122,000 | ) | (144,000 | ) | ||||
| Proceeds from contribution of properties, net of cash and restricted cash contributed | — | 2,814,000 | ||||||
| Investment in equity-method investees | (3,694,000 | ) | (1,845,000 | ) | ||||
| Distributions received from equity-method investees | 608,000 | 173,000 | ||||||
| Payments from notes receivable | 24,000 | 24,000 | ||||||
| Net cash and cash equivalents (used in) provided by investing activities | (16,778,000 | ) | 970,000 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of loans payable | 10,050,000 | — | ||||||
| Payments of loans payable | (729,000 | ) | (710,000 | ) | ||||
| Distributions paid to noncontrolling interests | (83,000 | ) | (41,000 | ) | ||||
| Deferred financing costs | (172,000 | ) | (29,000 | ) | ||||
| Net cash and cash equivalents provided by (used in) financing activities | 9,066,000 | (780,000 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (6,522,000 | ) | 686,000 | |||||
| Cash and cash equivalents – beginning of period | 10,757,000 | 6,603,000 | ||||||
| Cash and cash equivalents – end of period | $ | 4,235,000 | $ | 7,289,000 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,800,000 | $ | 2,214,000 | ||||
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (201,000 | ) | $ | 3,800,000 | |||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Amortization of debt issuance costs | 33,000 | 35,000 | ||||||
| Depreciation and amortization | 417,000 | 499,000 | ||||||
| Straight-line rents | (62,000 | ) | (111,000 | ) | ||||
| Stock-based compensation expense | 42,000 | 68,000 | ||||||
| Gain on sale of real estate properties | - | (4,147,000 | ) | |||||
| Income from equity-method investees | (30,000 | ) | (130,000 | ) | ||||
| Change in operating assets and liabilities: | ||||||||
| Tenant and other receivables, net | 300,000 | 83,000 | ||||||
| Other assets | (110,000 | ) | (73,000 | ) | ||||
| Accounts payable and accrued liabilities | (198,000 | ) | 60,000 | |||||
| Net cash provided by operating activities | 191,000 | 84,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of real estate properties, net of transaction costs | - | 24,725,000 | ||||||
| Investment in equity-method investees | - | (4,905,000 | ) | |||||
| Distributions received from equity-method investees | 381,000 | 118,000 | ||||||
| Issuance of notes receivable | - | (97,000 | ) | |||||
| Payments from notes receivable | 91,000 | 64,000 | ||||||
| Net cash provided by investing activities | 472,000 | 19,905,000 | ||||||
| Cash flows from financing activities: | ||||||||
| Payments of loans payable | (206,000 | ) | (19,586,000 | ) | ||||
| Distributions payable | - | (1,499,000 | ) | |||||
| Distributions paid to noncontrolling interests | (12,000 | ) | (13,000 | ) | ||||
| Net cash used in financing activities | (218,000 | ) | (21,098,000 | ) | ||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 445,000 | (1,109,000 | ) | |||||
| Cash, cash equivalents and restricted cash – beginning of period | 16,077,000 | 14,956,000 | ||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 16,522,000 | $ | 13,847,000 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 503,000 | $ | 730,000 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| Page 6 of |
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2020
(Unaudited)
1. Organization
Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of sixthree properties, 95.3% of four properties, 95% of one property, a 10% equity interest in an unconsolidated equity-method investment that holds 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds two properties, a 20% equity interest in twoan unconsolidated equity-method investmentsinvestment that each holdholds two properties, and a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, a 10% equity interest in an unconsolidated equity-method investment that holds six properties and a 15% equity interest in an unconsolidated equity-method investment that holds 14 properties. Summit is a Maryland corporation, formed in 2004 under the General Corporation Law of Maryland for the purpose of investing in and owning real estate. As used in these notes, the “Company”, “we”, “us” and “our” refer to Summit and its consolidated subsidiaries, except where the context otherwise requires.
We conduct substantially all of our operations through Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), which is a Delaware limited partnership. As of September 30, 2017, weWe own a 99.88% general partner interest in the Operating Partnership, and Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements.
Cornerstone Healthcare Partners LLC – Consolidated Joint Venture
We own 95% of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% non-controllingnoncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated with our financial statements and owns fivefour properties (the “JV Properties”).
with another partially owned subsidiary. As of September 30, 2017,March 31, 2020, we own a 95.3% interest in the four of the JV Properties, and CHREF owns a 4.7% interest. We continue to own a 95% interestSee Note 13 for the disposition of real estate properties in 2019 which includes one of the fifth JV Property, and CHREF owns a 5% interest.Properties.
Summit Union Life Holdings, LLC – Equity-Method Investment
OnIn April 29, 2015, through our Operating Partnership, we entered into a limited liability company agreement (as amended, the “SUL LLC Agreement”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements (see Note 5).equity-method. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we have a 10% interest in the SUL JV. As of September 30, 2017 and December 31, 2016, the SUL JV ownedwhich owns 17 properties.
Summit Fantasia Holdings, LLC – Equity-Method Investment
OnIn September 27, 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia LLC Agreement”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements.equity-method. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we have a 20%35% interest in the Fantasia JV. As of September 30, 2017 and December 31, 2016, the Fantasia JV ownedwhich owns two properties.
Summit Fantasia Holdings II, LLC – Equity-Method Investment
OnIn December 23, 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements.equity-method. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we have a 20% interest in the Fantasia II JV. As of September 30, 2017, the Fantasia II JV ownedwhich owns two properties.
| Page 7 of 37 |
Summit Fantasia Holdings III, LLCLLC– Equity-Method Investment
OnIn July 27, 2017, through our Operating Partnership, we entered into a limited liability company agreement (“Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements.equity-method. As of September 30, 2017,March 31, 2020 and December 31, 2019, we have a 10% interest in the Fantasia III JV. As of September 30, 2017, the Fantasia III JV ownedwhich owns nine properties.
Summit Fantasy Pearl Holdings, LLCLLC– Equity-Method Investment
OnIn October 2, 2017, through our Operating Partnership, we entered into a limited liability company agreement (“FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and will beis accounted for under the equity-methodequity-method. As of March 31, 2020 and December 31, 2019, we have a 10% interest in the Company’sFPH JV which owns six properties.
Indiana JV– Equity-Method Investment
In February 2019, through our wholly-owned subsidiary, Summit Indiana, LLC, we formed a new joint venture (“Indiana JV”), a Delaware limited liability company. On March 13, 2019, we entered into a Limited Liability Company Agreement (“Indiana JV Agreement”) with two unrelated parties: a real estate holding company and a global institutional asset management firm, both Delaware limited liability companies. The Indiana JV is not consolidated in our condensed consolidated financial statements. See Note 13 – Subsequent Eventstatements and is accounted for further information.under the equity-method. As of March 31, 2020 and December 31, 2019, we have a 15% interest in the Indiana JV which owns 14 properties.
Summit Healthcare Asset Management, LLC (TRS)
Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, and FPH JV, and as the operating member of the Indiana JV (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All acquisition fees and asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.
Friendswood TRS
Friendswood TRS (“Friendswood TRS”) is our wholly-owned TRS and the licensed operator and tenant of Friendship Haven Healthcare and Rehabilitation Center (“Friendship Haven”) (see Note 3).
2. Summary of Significant Accounting Policies
For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2017.25, 2020. There have been no material changes to our policies since that filing.filing except as noted under Recently Adopted Accounting Pronouncements.
The accompanying condensed consolidated balance sheet at December 31, 20162019 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 20162019 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the SEC on March 29, 201725, 2020 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 20162019 have been omitted in this report.
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Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership (of which the Company owns 99.88%) and CHP LLC (of which the Company owns 95%). All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. Operating results for the ninethree months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 2020.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.
| March 31, 2020 | December 31, 2019 | |||||||
| Cash and cash equivalents | $ | 13,683,000 | $ | 13,260,000 | ||||
| Restricted cash | 2,839,000 | 2,817,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows | $ | 16,522,000 | $ | 16,077,000 | ||||
Recently Issued Accounting Pronouncements
TheIn January 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2017-13. This ASU adds, amends, and supersedes SEC paragraphs of2020-01 to clarify the Accounting Standards Codification (ASC) related tointeraction among the adoption and transition provisions of ASU No. 2014-09, Revenue From Contracts with Customers and ASU 2016-02, Leases, for public business entities. The ASU is titled ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.
ASU 2017-13 codifies portions of an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting essentially delaying the effective date of the revenue recognition and leasesaccounting standards for equity securities, equity method investments and certain derivatives. The new ASU clarifies that a subsetcompany should consider observable transactions that require a company to either apply or discontinue the equity method of public entities. The SEC Observer madeaccounting under Topic 323, Investments—Equity Method and Joint Ventures, for the following SEC Staff Announcement, “Transition Related to Accounting Standards Updates No. 2014-09 and 2016-02,” atpurposes of applying the July 20, 2017 EITF meeting:
The SEC staff would not object to a public business entity that otherwise would not meetmeasurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the definition of a public business entity, except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC, adopting: (1) ASC Topic 606, Revenue from Contracts with Customers for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, and (2) ASC Topic 842, Leases for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
A public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC may still elect to adopt ASC Topic 606 and ASC Topic 842 according to the public business entity effective dates.
This announcement is applicable only toequity method. For public business entities, that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial informationamendments in another entity’s filing with the SEC. This announcement is not applicable to other public business entities. As we include our significant tenant’s financials as an exhibit to our Form 10-K report, we will adopt this ASU as it relates to those financial statements.
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows.
The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements; however, once adopted, restricted cash will be presented with cash and cash equivalents in our condensed consolidated statements of cash flows and, at September 30, 2017, that amount was approximately $3.6 million.
In February 2016, the FASB issued ASU No. 2016-02,Leases. The new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including2020, and interim periods within those fiscal years. A modified retrospective transition approachThe Company is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after,currently evaluating the beginningeffect that implementation of the earliest comparative periodnew standard will have on its financial position, results of operations, and cash flows.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (���ASU 2016-13”). ASU 2016-13 requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented inat the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial statements, with certain practical expedients available. We continueasset(s) to evaluatepresent the impactnet carrying value at the amount expected to be collected on the financial asset. The amendments in ASU 2016-13 are an improvement because they eliminate the probable initial recognition threshold under current GAAP and, instead, reflect an entity’s current estimate of our adoption of this new standardall expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in 2019 and we estimatemeasuring the effect on our condensed consolidated financial statements could be approximately $0.3 million, as we have an operating lease that will be added to the assets and liabilities of our condensed consolidated balance sheet. As generally accepted accounting principles for lessors remains mostly unchanged, we do not expect it to have an impact on our leases from our tenants.
The FASB has issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.incurred loss. In May 2014,November 2018, the FASB issued ASU No. 2014-09,Revenue2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2018-19”), which amends ASU 2016-13 to clarify that receivables arising from Contractsoperating leases are not within the scope of Subtopic 326-20, and instead, impairment of such receivables should be accounted for in accordance with Customers (Topic 606). The amendments in ASU 2015-14 defer2016-02, Leases, as amended by subsequent ASUs (“Topic 842”). In November 2019, the effective dateFASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”), which amends ASU 2016-13 to clarify or address stakeholders’ specific issues about certain aspects of ASU 2014-092016-13. ASU 2016-13, ASU 2018-19 and ASU 2019-11 are effective for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reportingfiscal years and interim periods within those years beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is2019, with early adoption permitted only as of annual reporting periodsthe fiscal years beginning after December 15, 2016, including interim reporting periods within that reporting period.2018. The Company adopted ASU 2016-13, ASU 2018-19 and ASU 2019-11 (collectively, “Topic 326”) on January 1, 2020. The adoption of the new standard on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations, or cash flows.
Coronavirus (COVID-19)
Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the United States and more than 175 countries. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The COVID-19 pandemic and measures to prevent its spread are expected to negatively impact the senior housing and skilled nursing facilities, in a number of ways, including but not limited to:
| · | Decreased occupancy and increased operating costs for the Company’s tenants and borrowers, which may adversely impact their ability to make full and timely rental and debt payments to the Company. In some cases, the Company may have to restructure tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to the Company as those currently in place. Reduced or modified rental and debt amounts could result in the determination that the full amounts of the Company’s real estate properties and notes receivable are not recoverable, which could result in an impairment charge. |
| · | Decreased occupancy and increased operating costs for the Company’s Equity-Method Investments as they own senior housing and skilled nursing facilities which may negatively impact the operating results of these investments. In some cases, the Equity-Method Investments may have to restructure tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to the Equity-Method Investments as those currently in place. Prolonged deterioration in the operating results for these investments could result in the determination that the full amounts of the Company’s investments are not recoverable, which could result in an impairment charge. |
It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on our operations and results as the situation is rapidly evolving. While we have not seen a material impact on rental revenue from any of our consolidated properties or debt payments from borrowers on notes receivable, or the operating results of our Equity-Method Investments for the period ended March 31, 2020, we are starting to see some of our Equity-Method Investment tenants experiencing some decreased occupancy and increased operating costs related to COVID-19. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses associated with notes receivable in future periods.
CARES Act
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is a stimulus package that provides various forms of relief through, among other things, grants, loans and tax incentives to certain businesses and individuals. In particular, the CARES Act created an emergency lending facility known as the Paycheck Protection Program (PPP), which is administered by the Small Business Administration (SBA) and provides federally insured and, in some cases, forgivable loans to certain, eligible businesses so that those businesses can continue to cover certain of their near-term operating expenses and retain employees. We have evaluated the CARES Act and determined that there was no impact that our adoption of this new revenue recognition standard into the first quarter of 2018Company for the three months ended March 31, 2020. We will have on our rental revenues and we do not expect this to have a significant impact on our condensed consolidated financial statements as our rental revenue relates to triple net leases and related tenant reimbursements, which are excluded from this standard. Non-lease components will be evaluated under this standard upon adoption of ASU No. 2016-02. Additionally, we continue to evaluate and monitor the CARES Act, and any new COVID-19-related legislation to determine the ultimate impact this standard may have on our interest income revenue and acquisition and asset management fees, which have historically been less than five percent of our total revenue.
We continue to evaluate the impact the adoption of this ASU will have on our resident services and fee income. Approximately 80% of this revenue is related to Medicare and Medicaid, for which the recorded revenue is already reducedbenefits, if any, to the net expected amounts we will be entitled to receive from these parties. Additional estimations using a portfolio approach may be required for certain insurance payors and private payments.Company.
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The Company has elected the modified retrospective transition method. Upon adoption of this ASU in 2018, the Company anticipates that additional disclosures will be necessary to separately disclose the components of our total revenue. The Company expects to complete its evaluation of this ASU during the fourth quarter of 2017.
3. Investments in Real Estate Properties
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, our investments in our 11 real estate properties which includeincluding those acquired throughheld by our consolidated subsidiaries and CHP, LLC, but excluding(excluding the 3050 properties owned by our unconsolidated Equity-Method Investments, were as follows:Investments) are set forth below:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
| Land | $ | 7,318,000 | $ | 5,548,000 | $ | 6,237,000 | $ | 6,237,000 | ||||||||
| Buildings and improvements | 69,467,000 | 58,450,000 | 48,295,000 | 48,295,000 | ||||||||||||
| Less: accumulated depreciation | (8,496,000 | ) | (7,011,000 | ) | (8,796,000 | ) | (8,444,000 | ) | ||||||||
| Buildings and improvements, net | 60,971,000 | 51,439,000 | 39,499,000 | 39,851,000 | ||||||||||||
| Furniture and fixtures | 6,943,000 | 6,165,000 | 4,230,000 | 4,230,000 | ||||||||||||
| Less: accumulated depreciation | (5,121,000 | ) | (4,413,000 | ) | (3,851,000 | ) | (3,805,000 | ) | ||||||||
| Furniture and fixtures, net | 1,822,000 | 1,752,000 | 379,000 | 425,000 | ||||||||||||
| Real estate properties, net | $ | 70,111,000 | $ | 58,739,000 | $ | 46,115,000 | $ | 46,513,000 | ||||||||
For the three months ended September 30, 2017March 31, 2020 and 2016,2019, depreciation and amortization expense (excluding leasing commission amortization) was approximately $0.8$0.4 million and $0.9 million, respectively. For the nine months ended September 30, 2017 and 2016, depreciation and amortization expense (excluding leasing commission amortization) was approximately $2.2 million and $2.7$0.5 million, respectively.
As of September 30, 2017,March 31, 2020, our portfolio consisted of 11seven real estate properties which were 100% leased to the tenants of the related facilities. See Note 13 for further information regarding the disposition of our four properties located in North Carolina in February 2019.
The following table provides summary information regarding our portfolio (excluding the 3050 properties owned by our unconsolidated Equity-Method Investments) as of September 30, 2017:March 31, 2020:
| Property | Location | Date Purchased | Type(2) | Purchase Price | Loans Payable, Debt | Number of Beds | Location | Date Purchased | Type(1) | Purchase Price | Loans Payable, Excluding Debt Issuance Costs | |||||||||||||||||||||||
| Sheridan Care Center | Sheridan, OR | August 3, 2012 | SNF | $ | 4,100,000 | $ | 4,813,000 | 51 | Sheridan, OR | August 3, 2012 | SNF | $ | 4,100,000 | $ | 4,447,000 | |||||||||||||||||||
| Fernhill Care Center | Portland, OR | August 3, 2012 | SNF | 4,500,000 | 4,222,000 | 63 | Portland, OR | August 3, 2012 | SNF | 4,500,000 | 3,901,000 | |||||||||||||||||||||||
Friendship Haven Healthcare and Rehabilitation Center | Galveston County, TX | September 14, 2012 | SNF | 15,000,000 | 6,904,000 | 150 | Galveston County, TX | September 14, 2012 | SNF | 15,000,000 | 10,725,000 | |||||||||||||||||||||||
| Pacific Health and Rehabilitation Center | Tigard, OR | December 24, 2012 | SNF | 8,140,000 | 7,038,000 | 73 | Tigard, OR | December 24, 2012 | SNF | 8,140,000 | 6,503,000 | |||||||||||||||||||||||
| Danby House | Winston-Salem, NC | January 31, 2013 | AL/MC | 9,700,000 | 7,671,000 | 100 | ||||||||||||||||||||||||||||
| Brookstone of Aledo | Aledo, IL | July 2, 2013 | AL | 8,625,000 | 7,244,000 | 66 | Aledo, IL | July 2, 2013 | AL | 8,625,000 | 6,952,000 | |||||||||||||||||||||||
| The Shelby House | Shelby, NC | October 4, 2013 | AL | 4,500,000 | 4,740,000 | 72 | ||||||||||||||||||||||||||||
| The Hamlet House | Hamlet, NC | October 4, 2013 | AL | 6,500,000 | 4,005,000 | 60 | ||||||||||||||||||||||||||||
| The Carteret House | Newport, NC | October 4, 2013 | AL | 4,300,000 | 3,379,000 | 64 | ||||||||||||||||||||||||||||
| Sundial Assisted Living | Redding, CA | December 18, 2013 | AL | 3,500,000 | 2,800,000 | 65 | Redding, CA | December 18, 2013 | AL | 3,500,000 | 3,831,000 | |||||||||||||||||||||||
| Pennington Gardens | Chandler, AZ | July 17, 2017 | AL/MC | 13,400,000 | 10,050,000 | 90 | Chandler, AZ | July 17, 2017 | AL/MC | 13,400,000 | 10,438,000 | |||||||||||||||||||||||
| Total: | $ | 82,265,000 | $ | 62,866,000 | 854 | $ | 57,265,000 | $ | 46,797,000 | |||||||||||||||||||||||||
| (1) |
| SNF is an abbreviation for skilled nursing facility. AL is an abbreviation for assisted living facility. MC is an abbreviation for memory care facility. |
AL is an abbreviation for assisted living facility.
MC is an abbreviation for memory care facility.
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Future Minimum Lease Payments
The future minimum lease payments to be received under our existing tenant operating leases for our 11 real estate properties, which include those acquired through our subsidiaries and CHP, LLC, but excluding(excluding the 3050 properties owned by our unconsolidated Equity-Method Investments,Investments) as of March 31, 2020, for the period from OctoberApril 1, 20172020 to December 31, 20172020 and for each of the four following years and thereafter ending December 31 are as follows(1):follows:
| Years ending | ||||
| October 1, 2017 to December 31, 2017 | $ | 1,555,000 | ||
| 2018 | 6,296,000 | |||
| 2019 | 6,429,000 | |||
| 2020 | 6,565,000 | |||
| 2021 | 6,703,000 | |||
| Thereafter | 51,195,000 | |||
| $ | 78,743,000 | |||
| Years ending | ||||
| April 1, 2020 to December 31, 2020 | $ | 4,056,000 | ||
| 2021 | 5,511,000 | |||
| 2022 | 5,626,000 | |||
| 2023 | 5,742,000 | |||
| 2024 | 5,441,000 | |||
| Thereafter | 28,890,000 | |||
| $ | 55,266,000 | |||
2017 Acquisition - Chandler, AZ2020 Acquisitions
On July 17, 2017, we acquired a 100% interest in Pennington Gardens, a 90-bed assisted living/memory care facility located in Chandler, Arizona (“Pennington Gardens”) for a purchase price of $13.4 million plus approximately $52,000 in acquisition costs, which was funded through cash on hand plus a collateralized loan (see Note 4). Pennington Gardens is leased pursuant to a 15-year triple net lease with two five-year renewal options.None.
2019 Acquisitions
None.
Leasing Commissions
As a self-managed REIT, we no longer pay leasing commissions. Leasing commissions are capitalized at cost and amortized on a straight-line basis over the related lease term. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, total costs incurred were $1.9$1.1 million, and $1.9 million, respectively, and the unamortized balance of capitalized leasing commissions was approximately $1.3 million and $1.4 million, respectively.$0.6 million. Amortization expense for the three months ended September 30, 2017March 31, 2020 and 20162019 was $35,000approximately $17,000 and $40,000, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $0.1 million and $0.1 million,$0, respectively.
4. Loans Payable
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, our loans payable consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Loan payable to Capital One, National Association in monthly installments of approximately $36,000, including interest at LIBOR plus 2.95% (4.2% at September 30, 2017), due in July 2018, and collateralized by Pennington Gardens. | $ | 10,050,000 | $ | - | ||||
| Loan payable to Healthcare Financial Solutions, LLC in monthly installments of approximately $15,000, including interest at LIBOR (floor of 0.50%) plus 4.0% (5.3% at September 30, 2017 and 5.0% at December 31, 2016, respectively), due in October 2018, and collateralized by Sundial Assisted Living. | $ | 2,800,000 | $ | 2,800,000 | ||||
| Loan payable to Oxford Finance, LLC in monthly installments of approximately $53,000, including interest at LIBOR (floor of 0.75%) plus 6.50% (7.8% as of September 30, 2017 and 7.25% as of December 31, 2016, respectively) due in October 2019, collateralized by Friendship Haven. | 6,904,000 | 6,978,000 | ||||||
| Loans payable to Lancaster Pollard (insured by HUD) in monthly installments of approximately $209,000, including interest, ranging from a fixed rate of 3.70% to 3.78%, due in September 2039 through January 2051, and collateralized by Sheridan, Fernhill, Pacific Health, Shelby, Hamlet, Carteret, Aledo and Danby. | 43,112,000 | 43,768,000 | ||||||
| 62,866,000 | 53,546,000 | |||||||
| Less debt issuance costs | (1,864,000 | ) | (1,829,000 | ) | ||||
| Total loans payable | $ | 61,002,000 | $ | 51,717,000 | ||||
| March 31, 2020 | December 31, 2019 | |||||||
| Loan payable to CIBC Bank USA in monthly installments of approximately $75,000, including cash collateral and interest at LIBOR plus 3.75% (5.13% and 5.45% at March 31, 2020 and December 31, 2019, respectively), due in March 2021, and collateralized by Friendship Haven. See Note 14 for further information. | $ | 10,725,000 | $ | 10,725,000 | ||||
| Loan payable to Capital One Multifamily Finance, LLC (insured by HUD) in monthly installments of approximately $49,000, including interest at a fixed rate of 4.23%, due in September 2053, and collateralized by Pennington Gardens. | $ | 10,438,000 | $ | 10,473,000 | ||||
| Loans payable to ORIX Real Estate Capital, LLC (insured by HUD) in monthly installments of approximately $139,000, including interest, ranging from a fixed rate of 3.70% to 4.2%, due in September 2039 through April 2054, and as of March 31, 2020 and December 31, 2019, collateralized by Sheridan, Fernhill, Pacific Health, Aledo and Sundial Assisted Living. | $ | 25,634,000 | $ | 25,804,000 | ||||
| 46,797,000 | 47,002,000 | |||||||
| Less debt issuance costs | (1,392,000 | ) | (1,425,000 | ) | ||||
| Total loans payable | $ | 45,405,000 | $ | 45,577,000 | ||||
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As of September 30, 2017,March 31, 2020, we have total debt obligations of approximately $62.9$46.8 million that will mature between 20182021 and 2051.2054. See Note 3 for loans payable balance for each property. All of the loans payable have certain financial and non-financial covenants, including ratios and financial statement considerations. As of September 30, 2017,March 31, 2020, we were in compliance with all of thoseour debt covenants.
In connection with our loans payable, we incurred debt issuance costs. TheAs of March 31, 2020 and December 31, 2019, the unamortized balance of the debt issuance costs was approximately $1.9 million and $1.8 million as of September 30, 2017 and December 31, 2016, respectively.$1.4 million. These debt issuance costs are being amortized over the life of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For the three months ended September 30, 2017March 31, 2020 and 2016, $69,0002019, $33,000 and $34,000, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations. For the nine months ended September 30, 2017 and 2016, $0.1 million and $0.1 million,$35,000, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations.
During the three months ended September 30, 2017March 31, 2020 and 2016,2019, we incurred approximately $0.7$0.6 million and $0.7 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable. During the nine months ended September 30, 2017 and 2016, we incurred approximately $2.0 million and $2.2 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable.
The principal payments due on the loans payable (excluding debt issuance costs) for the period from OctoberApril 1, 20172020 to December 31, 20172020 and for each of the four following years and thereafter ending December 31 are as follows:follows (see Note 14):
| Years Ending | Principal Amount | |||
| October 1, 2017 to December 31, 2017 | $ | 249,000 | ||
| 2018 | 13,870,000 | |||
| 2019 | 7,725,000 | |||
| 2020 | 986,000 | |||
| 2021 | 1,024,000 | |||
| Thereafter | 39,012,000 | |||
| $ | 62,866,000 | |||
| Years Ending | Principal Amount | |||
| April 1, 2020 to December 31, 2020 | $ | 836,000 | ||
| 2021 | 11,594,000 | |||
| 2022 | 903,000 | |||
| 2023 | 939,000 | |||
| 2024 | 976,000 | |||
| Thereafter | 31,549,000 | |||
| $ | 46,797,000 | |||
The following information describes our loan activity for 2020 and 2019:
CIBC Bank USA
On March 30, 2019, CHP Friendswood SNF, LLC entered into a $10,725,000, three-year term loan and security agreement with CIBC Bank USA, which is collateralized by the nine months ended September 30, 2017Friendship Haven facility. We incurred approximately $0.2 million in debt issuance costs.
The monthly payments, commencing in May 2019, consist of interest plus approximately $18,000 of cash loan guarantee payments, (increasing to $19,000 for year 2 and as$20,000 for year 3), which will be held in a cash loan guarantee fund until maturity date. As of September 30, 2017March 31, 2020 and December 31, 2016:2019, the total amount in the cash loan guarantee fund was approximately $433,000 and $375,000, respectively, and is included in restricted cash in our condensed consolidated balance sheet. See table above listing loans payable for further information.
On April 23, 2020, we refinanced the existing CIBC loan with an ORIX Real Estate Capital, LLC (“ORIX”) HUD-insured loan. See Note 14 for further information.
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Capital One, National Association
In July 2017, in conjunction with the acquisition of Pennington Gardens (see Note 3), we entered into a $10.1 million first priority mortgage loan collateralized by Pennington Gardens with Capital One, National Association. The loan, which bears interest at the One Month LIBOR (London Interbank Offered Rate) plus 2.95%, matures on July 17, 2018, with the option for two six-month extensions. The loan may be prepaid with no penalty if the property is refinanced through United States Department of Housing and Urban Development (“HUD”); otherwise we will be required to pay an exit fee, as defined in the loan agreement. We incurred approximately $0.2 million in deferred financing costs.
Healthcare Financial Solutions, LLC (a.k.a. Capital One)
We havehad an amended loan agreement for the Sundial Assisted Living property located in Redding, California, with Healthcare Financial Solutions, LLC (“HFS”). See table above listing loans payable for further information. The that was terminated on April 24, 2019 as the loan was interest-only through January 2017 and then the loan payments increased to approximately $15,000 a month, including interest. The principal payment portion of this loan payment commencing in February 2017 is being held in a sinking fund until maturity date. If the loan is refinanced prior to the maturity date, the loan payments in the sinking fund will be released to us; otherwise at the maturity date, the loan payments in the sinking fund will be released to the lender and applied to the outstanding principal balance. Additionally, the loan is collateralized by the property and cross-guaranteed with several properties owned by the SUL JV, which will be released from the guarantee when the property is refinanced with a HUD-insured loan or upon repayment atthrough ORIX. See below under ORIX for further information regarding the maturity date.HUD Redding Loan.
Oxford Finance, LLC
We have a secured term loan agreement with Oxford Finance, LLC collateralized by the Friendship Haven facility. See table above listing loans payable for further information. Prior to the maturity date, we may prepay the loan, in whole, subject to certain terms and by paying an exit fee as further described in the loan agreement.
Lancaster Pollard Mortgage Company,ORIX Real Estate Capital, LLC
We have several properties with HUD-insured loans from the Lancaster Pollard Mortgage Company, LLC (“Lancaster Pollard”).ORIX. See table above listing loans payable for further information.
All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our condensed consolidated balance sheets.
5. Equity-Method Investments
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the balances of our Equity-Method Investments were approximately $8.4$12.7 million and $5.1$13.1 million, respectively, and are as follows:
Summit Union Life Holdings, LLC
In April 2015, we formed the SUL JV, which is owned 10% by the Operating Partnership and 90% by Best Years. The SUL JV will continueexist until an event of dissolution occurs, as defined in the SUL LLC Agreement.
During 2015, we contributed our limited liability company interests in six properties (“JV 2 Properties”) toagreement of the SUL JV and retained a 10% interest in those six properties. Concurrent with this contribution, the Operating Partnership recorded a receivable for approximately $362,000 for distributions that could not be paid prior to the contribution of the JV 2 Properties due to cash restrictions related to the loans payable for the contributed JV 2 Properties. In April 2017, we received approximately $122,000 to pay down the distribution receivable from one of the JV 2 properties. As of September 30, 2017 and December 31, 2016, the receivable of $240,000 and $362,000, respectively, due from the JV 2 properties, is included in tenant and other receivables in our condensed consolidated balance sheets.(the “SUL LLC Agreement”).
Under the SUL LLC Agreement, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Yearspari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing or another capital event will be paid first to the Operating Partnership and Best Yearspari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.
In April 2017, one2015, the Operating Partnership recorded a receivable for approximately $362,000 for distributions that could not be paid prior to the contribution of the original six properties contributed in April 2015 (“JV 2 Properties”) due to cash restrictions related to the loans payable for the contributed JV 2 Properties. As of March 31, 2020 and December 31, 2019, the receivable balance of $184,000 due from the JV 2 properties that owed Summit approximately $110,000 in distributions payable was able to repay the funds; however, the cash was retained by the property to fund future capital calls. Through September 2017, we applied approximately $5,000 of this as additional capital. As of September 30, 2017, the remaining balance of $105,000 is included in tenant and other receivables in our condensed consolidated balance sheets.
As of September 30, 2017,March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the SUL JV was approximately $3.5 million.$3.2 million and $3.1 million, respectively.
Summit Fantasia Holdings, LLC
In September 2016, we formed the Fantasia JV, which is owned 20% by the Operating Partnership and 80% by Fantasia. The Fantasia JV will continueexist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia LLC Agreement.Agreement”).
Under the Fantasia LLC Agreement, as amended in April 2018, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70%50% to Fantasia and 30%50% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70%50% to Fantasia and 30%50% to the Operating Partnership.
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As of September 30, 2017,March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia JV was approximately $1.1 million.$2.0 million and $2.1 million, respectively.
Summit Fantasia Holdings II, LLC
In December 2016, we formed the Fantasia II JV, which is owned 20% by the Operating Partnership and 80% by Fantasia. The Fantasia II JV will continueexist until an event of dissolution occurs, as defined in the Fantasia II LLC Agreement.
On February 28, 2017, through the Fantasia II JV, we acquired a 20% interest in two skilled nursing facilities, located in Rhode Island, for a total aggregate purchase price of $27 million, which was funded through capital contributions from the memberslimited liability company agreement of the Fantasia II JV plus the proceeds from a collateralized loan. The facilities consist of a total of 318 licensed beds, and are operated by and leased to a third party operator. We contributed approximately $1.9 million for the acquisition, which includes approximately $0.2 million of acquisition costs paid in 2016.(the “Fantasia II LLC Agreement”).
Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70% to Fantasia and 30% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia II JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.
As of September 30, 2017,March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.8 million.$1.5 million and $1.5 million, respectively.
Summit Fantasia Holdings III, LLC
On July 27, 2017, through our Operating Partnership, we entered into aThe Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement (“Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements.
On August 10, 2017, through the Fantasia III JV, we acquired a 10% interest in nine skilled nursing facilities, located in Connecticut, for a total aggregate purchase price of $60 million for the properties, which was funded through capital contributions from the members of the Fantasia III JV plus the proceeds from a collateralized loan. The facilities consist of a total of 1,285 licensed beds, and will be operated by and leased to a third party operator. We contributed approximately $2.0 million to the Fantasia(the “Fantasia III JV in connection with the acquisition.LLC Agreement”).
Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership.
As of September 30, 2017,March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.9 million.$1.6 million and $1.6 million, respectively.
Summit Fantasy Pearl Holdings, LLC
On October 2, 2017, through our Operating Partnership, we entered intoThe FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).
Under the FPH LLC Agreement, with Fantasia, Atlantis and Fantasy, and formednet operating cash flow of the FPH JV. TheJV will be distributed quarterly, first to the memberspari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, is not consolidated in our consolidated financial statements anda refinancing or another capital event, will be accounted for underpaid to the memberspari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.
As of March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the FPH JV was approximately $0.3 million and $0.5 million, respectively.
Indiana JV
The Indiana JV will continue until an event of dissolution occurs, as defined in the Company’s condensed consolidated financial statements. See Note 13Indiana JV Agreement.
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Under the Indiana JV Agreement, net operating cash flow of the Indiana JV will be distributed monthly to the memberspari passu in accordance with their respective capital percentages, and thereafter as defined in the Indiana JV Agreement.
As of March 31, 2020 and December 31, 2019, the balance of our equity-method investment related to the Indiana JV was approximately $4.1 million and $4.3 million, respectively.
Our equity-method investment in the Indiana JV is considered a significant investee as our proportionate share of its assets are greater than 20% of our total assets as of December 31, 2019. The results of operations for further information.the three months ended March 31, 2020 and 2019 are as follows:
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| Total revenue | $ | 2,947,000 | $ | 760,000 | ||||
| Net operating income | $ | 2,944,000 | $ | 760,000 | ||||
| Income from operations | $ | 1,868,000 | $ | 476,000 | ||||
| Net (loss) income | $ | (104,000 | ) | $ | 47,000 | |||
Distributions from Equity-Method Investments
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we have distributions receivable, which isare included in tenant and other receivables in our condensed consolidated balance sheets, as follows:
| September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
| SUL JV | $ | 168,000 | $ | 365,000 | $ | 122,000 | $ | 97,000 | ||||||||
| Fantasia JV | 29,000 | 31,000 | 36,000 | 180,000 | ||||||||||||
| Fantasia II JV | 60,000 | - | 79,000 | 48,000 | ||||||||||||
| Fantasia III JV | 59,000 | - | 113,000 | 117,000 | ||||||||||||
| FPH JV | 23,000 | 39,000 | ||||||||||||||
| Indiana JV | 201,000 | 162,000 | ||||||||||||||
| Total | $ | 316,000 | $ | 396,000 | $ | 574,000 | $ | 643,000 | ||||||||
For the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, we have received cash distributions, which are included in our cash flows from operating activities in tenant and other receivables, and cash flows from investing activities, as follows:
| Nine Months Ended September 30, 2017 | Nine months Ended September 30, 2016 | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Total Cash Received | Cash Flow from Operating | Cash Flow from Investing | Total Cash Received | Cash Flow Operating | Cash Flow from Investing | Total Cash Distributions Received | Cash Flow from Operating Activities | Cash Flow from Investing Activities | Total Cash Distributions Received | Cash Flow from Operating Activities | Cash Flow from Investing Activities | |||||||||||||||||||||||||||||||||||||
| SUL JV | $ | 556,000 | $ | 117,000 | $ | 439,000 | $ | 340,000 | $ | 167,000 | $ | 173,000 | $ | 119,000 | $ | 95,000 | $ | 24,000 | $ | 114,000 | $ | 43,000 | $ | 71,000 | ||||||||||||||||||||||||
| Fantasia JV | 136,000 | 19,000 | 117,000 | - | - | - | 144,000 | - | 144,000 | - | - | - | ||||||||||||||||||||||||||||||||||||
| Fantasia II JV | 148,000 | 96,000 | 52,000 | - | - | - | 46,000 | 46,000 | - | 69,000 | 47,000 | 22,000 | ||||||||||||||||||||||||||||||||||||
| Fantasia III JV | - | - | - | - | - | - | 57,000 | 40,000 | 17,000 | 39,000 | 30,000 | 9,000 | ||||||||||||||||||||||||||||||||||||
| FPH JV | 49,000 | - | 49,000 | 21,000 | 5,000 | 16,000 | ||||||||||||||||||||||||||||||||||||||||||
| Indiana JV | 147,000 | - | 147,000 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 840,000 | $ | 232,000 | $ | 608,000 | $ | 340,000 | $ | 167,000 | $ | 173,000 | $ | 562,000 | $ | 181,000 | $ | 381,000 | $ | 243,000 | $ | 125,000 | $ | 118,000 | ||||||||||||||||||||||||
Acquisition and Asset Management Fees
We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an acquisition fee, as defined in the applicable joint venture agreements. Additionally, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in the agreements. For the three months ended September 30, 2017March 31, 2020 and 2016,2019, we recorded approximately $0.3 million and $0.2 million, respectively, in acquisition and asset management fees from our Equity-Method Investments. For the nine months ended September 30, 2017 and 2016, we recorded approximately $0.6 million and $0.3 million, respectively, in acquisition and asset management fees from our Equity-Method Investments.Investments (see Note 6).
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6. Receivables
Notes Receivable
FernhillFriendswood TRS Note
In September 2014, we loanedThe Operating Partnership entered into an amended and restated promissory note dated January 1, 2018, with Friendswood TRS for approximately $140,000 to$1.1 million. The note does not bear interest and is due in 48 equal payments of approximately $22,000. We recorded a discount of approximately $95,000 on the operator of the Fernhill facility for certain property improvements at a fixednote using an imputed interest rate of interest of 6% payable in monthly installments through January 2019.4.25%. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the balance on the note was approximately $47,000$0.4 million and $71,000,$0.5 million, respectively.
Nantucket Note
On January 7, 2015, through our Operating Partnership, we sold Sherburne Commons to The Residences at Sherburne Commons, Inc. (“Sherburne Buyer”), an unaffiliated Massachusetts non-profit corporation, in exchange for $5.0 million, as evidenced by a purchase money note from Sherburne Buyer to us as the lender.
The $5.0 million purchase money note is collateralized by the Sherburne Commons property, bears an annual interest rate of 3.5% and matures on December 31, 2017. Interest payments on the note are due monthly and are recorded as payments are received. Outstanding and unpaid principal due shall be paid from the net proceeds payable to Sherburne Buyer from the sale of the residential cottages in Sherburne Commons. We may also participate in additional interest of up to $1 million from 50% of the net proceeds of cottage sales through December 31, 2018.
As of September 30, 2017, we have not collected any funds related to the principal on the note and the net carrying amount of the note receivable was approximately $4.7 million. For the three months ended September 30, 2017 and 2016, we received interest payments from the note of approximately $43,000 and $43,000, which is recorded as interest income from notes receivable in our condensed consolidated statements of operations. For the nine months ended September 30, 2017 and 2016, we received interest payments from the note of approximately $129,000 and $115,000, which is recorded as interest income from notes receivable in our condensed consolidated statements of operations.
Tenant and Other Receivables, Net
Tenant and other receivables, net consists of:
| September 30, 2017 | December 31, 2016 | |||||||
| Accounts receivable from resident services, net of allowance for doubtful accounts of $332,000 and $267,000, respectively | $ | 775,000 | $ | 866,000 | ||||
| Straight-line rent receivables | 2,721,000 | 2,384,000 | ||||||
| Distribution receivables from Equity-Method Investments | 316,000 | 396,000 | ||||||
| Receivable from JV 2 properties | 240,000 | 362,000 | ||||||
| Other receivables | 263,000 | 254,000 | ||||||
| Total | $ | 4,315,000 | $ | 4,262,000 | ||||
March 31, 2020 | December 31, 2019 | |||||||
| Straight-line rent receivables | $ | 2,608,000 | $ | 2,546,000 | ||||
| Distribution receivables from Equity-Method Investments | 574,000 | 643,000 | ||||||
| Receivable from JV 2 properties | 184,000 | 184,000 | ||||||
| Asset management fees | 320,000 | 430,000 | ||||||
| Other receivables | - | 9,000 | ||||||
| Total | $ | 3,686,000 | $ | 3,812,000 | ||||
7. Related Party Transactions
CRA
Prior to the termination of our advisory agreement on April 1, 2014 with CRA (our former advisor, a related party), we incurred costs related to fees paid and costs reimbursed for services rendered to us by CRA through March 31,September 30, 2014. Some of the fees we had paid to CRA were considered to be in excess of allowed amounts and, therefore, CRA was required to reimburse us for the amount of the excess costs we paid to them. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the receivables from CRA are fully reserved due to the uncertainty of collectability and are included in tenant and other receivables in our condensed consolidated balance sheets.sheets (see Note 10).
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we had the following receivables and reserves:reserves related to CRA:
| Receivables | Reserves | Balance | ||||||||||
| Organizational and offering costs | $ | 738,000 | $ | (738,000 | ) | $ | - | |||||
| Asset management fees and expenses | 32,000 | (32,000 | ) | - | ||||||||
| Operating expenses (direct and indirect) | 189,000 | (189,000 | ) | - | ||||||||
| Operating expenses (2%/25% Test) | 1,717,000 | (1,717,000 | ) | - | ||||||||
| Total | $ | 2,676,000 | $ | (2,676,000 | ) | $ | - | |||||
Equity-Method Investments
See NoteNotes 5 and 6 for further discussion of distributions and acquisition and asset management fees related to our Equity-Method Investments.
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8. Concentration of Risk
Our cash is generally invested in short-term money market instruments. As of September 30, 2017,March 31, 2020, we had cash and cash equivalent accounts in excess of FDIC-insured limits. However, we do not believe the risk associated with this excess is significant.
As of September 30, 2017,March 31, 2020, we owned one property in California, three properties in Oregon, four properties in North Carolina, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 3050 properties held by our Equity-Method Investments). Accordingly, there is a geographic concentration of risk subject to economic conditions in certain states.
Additionally, for the three months ended September 30, 2017,March 31, 2020, we leased our 11seven real estate properties to four different tenants under long-term triple net leases, three of which comprise 50%, 30% and 19% of our tenant rental revenue. For the three months ended September 30, 2016, we leased our 11 healthcare properties to five different tenants under long-term triple net leases, twoand four of which comprised 51%the five tenants each represented rental revenue greater than 10% (35%, 24%, 20% and 30% of our tenant rental revenue.15%). For the ninethree months ended September 30, 2017,March 31, 2019, we leased our 11 healthcare properties to four different tenants under long-term triple net leases, three of which comprise 55%, 33% and 11% of our tenant rental revenue. For the nine months ended September 30, 2016, we leased our 11 healthcareseven real estate properties to five different tenants under long-term triple net leases, twoand four of which comprise 48%the five tenants each represented rental revenue greater than 10% (35%, 24%, 19%, and 28% of our tenant rental revenue.15%).
As of September 30, 2017 and DecemberMarch 31, 2016,2020, we have one tenant that constitutes a significant asset concentration, as the net assets of the tenant are 36% and 38%, respectively,approximately 20% of our total assets as of December 31, 2016.assets.
9. Fair Value Measurements of Financial Instruments
Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, notes receivable, deposits, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, accrued salaries and benefits, security deposits and loans payable. With the exception of the Nantucket note receivable (see Note 6) and loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the fair value of the Nantucket note receivable (see Note 6)loans payable was approximately $4.9$46.2 million and $47.4 million, compared to the carrying valueprincipal balance (excluding debt discount) of approximately $4.7 million. The fair value of the note receivable was estimated based on cash flow analysis at an assumed market rate of interest. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our notes receivable are classified as Level 3 assets within the fair value hierarchy.
As of September 30, 2017 and December 31, 2016, the fair value of our loans payable was approximately $63.4$46.8 million and $54.3 million compared to the carrying value of approximately $62.9 million and $53.5$47.0 million, respectively. The fair value of our loans payable iswas estimated using lending rates available to us for financial instruments with similar terms and maturities. To estimate fair value as of September 30, 2017,March 31, 2020, we utilized a discount raterates ranging from 4.4%4.2% to 7.8%6.0% and a weighted-averageweighted average discount rate of 4.9%4.6%. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 assetsliability within the fair value hierarchy.
As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019.
At September 30, 2017March 31, 2020 and December 31, 2016,2019, we do not have any financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.
10. Commitments and Contingencies
We conductinspect our properties under a Phase I assessment for eachthe presence of our properties at acquisition to evaluate whether hazardous or toxic substances are present on the properties.substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.
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Legal Proceedings
On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its former directors, and twoone of its officers and one of its former officers as defendants, seeking declaratory and injunctive relief and compensatory and punitive damages. On AprilSeptember 17, 2014, Judge Nakamura denied in its entirety plaintiffs’ ex parte application forwe filed a temporary restraining orderFirst Amended Cross-Complaint seeking compensatory damages and an accounting pursuant to show cause whySections 10(c)(i) and 17(c)(ii) of the Advisory Agreement and including any monies Plaintiffs and Terry Roussel directly or indirectly received from or paid to the Company. On February 22, 2018, the action was assigned to a preliminary injunction against the defendants should not issue.different trial judge. On May 19, 2014,29, 2018, the Company filed a counter claimmotion for terminating and monetary sanctions against plaintiffsCRA, Cornerstone Ventures, Inc. and certain individuals affiliated withtheir counsel, Winget Spadafora & Schwartzberg. On November 30, 2018, the new trial judge vacated the trial date, pending resolution of the Company’s motion for terminating and monetary sanctions against CRA and affiliated entities. TheCornerstone Ventures, Inc. and denied the Company’s motion for sanctions against Winget Spadafora & Schwartzberg. On February 13, 2019, the trial judge held another hearing on the Company’s motion for terminating and monetary sanctions and indicated that it intended to grant the Company’s motion for terminating sanctions and award the Company continues to believe that allmonetary sanctions. On March 14, 2019, the Court entered an Order and Judgment granting the Company’s motion for terminating sanctions, awarding the Company monetary sanctions in the amount of plaintiffs’ claims are without merit$588,672, and will continue to vigorously defend itself. .. Wedismissing CRA and Cornerstone Ventures Inc.’s Complaint with prejudice. On May 21, 2019, CRA and Cornerstone Ventures, Inc. filed motions for summary adjudication on plaintiffs’ claimsa notice of appeal from the Judgment and, on our cross claims.June 3, 2019, the Company filed a notice of cross-appeal from the Judgment. On July 9, 2019, the California Court of Appeal, Fourth District dismissed CRA and Cornerstone Ventures, Inc.’s appeal with prejudice. The court heardbriefing to the Court of Appeal, Fourth District on the Company’s appeals against CRA, Cornerstone Ventures, Inc and Winget Spadafora & Schwartzberg was completed on April 27, 2020, and on April 28, 2020, the Company filed its request for oral argument on the motions for summary adjudication and granted the motions in part and denied the motions part. A trial is scheduled to commence on March 26, 2018.its appeals.
AIn September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC orand Healthcare Real Estate Qualified Purchasers Fund, LLC.LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. At a status hearing, the Bankruptcy Court expressed concern about HCRE commencing this litigation and urged the parties to mediate the issues. A mediation was held but the parties did not reach a settlement. The Bankruptcy Court recently granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay. The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay. This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court. The Bankruptcy Court has not taken any action on the matter since the Third Circuit remanded the case. We believe that all of HCRE’s remaining alleged claims are without merit and will vigorously defend ourselves.
Friendship Haven and HMG Services Management Agreement
Under our three-year management agreement with HMG (see Note 3), dated January 1, 2017, either party may terminate the agreement by written notice to the other party. However, if we terminate the agreement within one year, we are obligated to pay a termination fee up to three times the highest monthly management fee paid to HMG prior to the termination. For 2017, if we terminated the agreement, we expect the termination fee could be approximately $130,000.
Indemnification and Employment Agreements
We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, in September 2015,effective October 1, 2018, we entered into three-yearamended our employment agreements with our executive officers whichto extend the term of each agreement for an additional three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements.
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Management of our Equity-Method Investments
As the manager of our Equity-Method Investments, we are responsible for managing the day-to-day operations and are, thus, subject to contingencies that may arise in the normal course of their operations. Additionally, we could be subject to a capital call from our Equity-Method Investments.
11. Equity
Share-Based Compensation Plans
Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the estimated fairbook value of our liabilities, which approximate book value, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a lack of a control premium, and divided by the total by the number of our common shares outstanding at the time the options were granted.
The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on evaluations of expected futurethe simplified method as we do not have sufficient historical exercise behavior.data. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant with maturity dates approximating the expected term of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option.
On January 1, 2017,2020, the Compensation Committee of the Board of Directors approved the issuance of 99,00045,000 stock options under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”) to our directors andnon-executive employees. The stock options vest monthly beginning on February 1, 20172020 and continuing over a three-year period through January 1, 2020.2023. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.35.
In March 2017, 182,796 stock options were issued under our Incentive Plan to executive management as part of their 2016 performance bonus arrangement. The options vested 33% on the grant date and the remaining 67% will vest in equal monthly installments beginning January 1, 2017 and continuing over a two-year period through December 31, 2018. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.29.
On April 3, 2017, the Compensation Committee of the Board of Directors approved the issuance of 170,000 stock options to executive management related to their performance goals for 2016. The stock options were granted under the Incentive Plan, with 33% vesting on the grant date and the remaining 67% vesting in equal monthly installments beginning May 1, 2017 and continuing over a two-year period through April 2019. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.30.$0.57.
The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:
| 2017 | 2020 | |||||||
| Stock options granted | 451,796 | 45,000 | ||||||
| Expected Volatility | 23.58 | % | ||||||
| Expected lives | 2.22 years | |||||||
| Expected volatility | 22.31 | % | ||||||
| Expected term | 5.75 years | |||||||
| Risk-free interest rate | 1.24 | % | 1.72 | % | ||||
| Dividends | 0 | % | ||||||
| Dividend yield | 0 | % | ||||||
| Fair value per share | $ | 0.31 | $ | 0.57 | ||||
| Page 19 of 37 |
The following table summarizes our stock options as of September 30, 2017:March 31, 2020:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | Options | Weighted Average Exercise Price | Weighted Contractual |
Aggregate | |||||||||||||||||||||||||
| Options outstanding at January 1, 2017 | 400,000 | $ | 1.72 | |||||||||||||||||||||||||||||
| Options outstanding at January 1, 2020 | 1,826,908 | $ | 2.09 | |||||||||||||||||||||||||||||
| Granted | 451,796 | 2.03 | 45,000 | 2.26 | ||||||||||||||||||||||||||||
| Exercised | — | — | ||||||||||||||||||||||||||||||
| Cancelled/forfeited | — | — | ||||||||||||||||||||||||||||||
| Options outstanding at September 30, 2017 | 851,796 | $ | 1.88 | 9.05 | $ | 551,000 | ||||||||||||||||||||||||||
| Options outstanding at March 31, 2020 | 1,871,908 | $ | 2.09 | 7.57 | $ | 1,375,000 | ||||||||||||||||||||||||||
| Options exercisable at September 30, 2017 | 575,409 | $ | 1.83 | 8.62 | $ | 402,000 | ||||||||||||||||||||||||||
| Options exercisable at March 31, 2020 | 1,528,104 | $ | 2.05 | 7.27 | $ | 1,181,000 | ||||||||||||||||||||||||||
For our outstanding non-vested options as of September 30, 2017,March 31, 2020, the weighted average grant date fair value per share was $0.29.$0.56. As of September 30, 2017,March 31, 2020, we have unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, which is expected to be recognized as follows:
| Years Ending December 31, | ||||
| October 1, 2017 to December 31, 2017 | $ | 18,000 | ||
| 2018 | 46,000 | |||
| 2019 | 17,000 | |||
| 2020 | 1,000 | |||
| $ | 82,000 | |||
| Years Ending December 31, | ||||
| April 1, 2020 to December 31, 2020 | $ | 109,000 | ||
| 2021 | 66,000 | |||
| 2022 | 15,000 | |||
| 2023 | 1,000 | |||
| $ | 191,000 | |||
The stock-based compensation expense reported for the three months ended September 30, 2017March 31, 2020 and 20162019 was approximately $18,000$42,000 and $7,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations. The stock-based compensation expense reported for the nine months ended September 30, 2017 and 2016 was approximately $83,000 and $22,000,$68,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.
12. Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share (“EPS”) for the Company’s common stock for the three months ended March 31, 2020 and 2019, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS:
Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| (Loss) income | $ | (201,000 | ) | $ | 3,800,000 | |||
| (Income) loss attributable to noncontrolling interest | (12,000 | ) | 123,000 | |||||
| Net (loss) income applicable to common stockholders | $ | (213,000 | ) | $ | 3,923,000 | |||
| Denominator: | ||||||||
| Basic: | ||||||||
| Denominator for basic EPS - weighted average shares | 23,027,978 | 23,027,978 | ||||||
| Effect of dilutive shares: | ||||||||
| Stock options | - | 485,353 | ||||||
| Denominator for diluted EPS – adjusted weighted average shares | 23,027,978 | 23,513,331 | ||||||
| Basic EPS | $ | (0.01 | ) | $ | 0.17 | |||
| Diluted EPS | $ | (0.01 | ) | $ | 0.17 | |||
| Page |
12.13. Dispositions
In accordance with ASC 360, Property, Plant & Equipment, we report resultsSale of operations from real estate assets that meet the definition of a component of an entity that have been sold, or meet the criteria to be classified as held for sale, as discontinued operations.
Disposal of Real EstateFour North Carolina Properties
On April 29, 2016, we contributed RiverglenFebruary 14, 2019, our wholly-owned subsidiaries HP Shelby, LLC, HP Hamlet, LLC, HP Carteret, LLC, and our 95%-owned subsidiary, HP Winston-Salem, LLC, sold to Agemark Acquisition, LLC the SUL JV (see Note 5)following four properties located in North Carolina (“NC Properties”): The Shelby House, an assisted living facility located in Shelby, North Carolina; The Hamlet House, an assisted living facility located in Hamlet, North Carolina, The Carteret House, an assisted living facility located in Newport, North Carolina and therefore, Riverglen is no longer consolidatedDanby House, an assisted living and memory care facility located in our condensed consolidated financial statements. The aggregate net value of Riverglen at the date of the contribution was approximately $3.9 million, which approximated the Operating Partnership’s carrying value on the date of contribution (total assets were approximately $9.2 million less liabilities of approximately $5.3 million, which included approximately $4.7 million in a HUD insured loan payable).Winston-Salem, North Carolina.
Medford Purchase Option and Sale
In September 2016, the option holder for our Medford property provided notice to us to exercise its option to purchase the property. On October 31, 2016, we sold the Medford property. The total consideration received by the Company and its subsidiaries pursuant to that sale price was $10.8 million, of which we received approximately $3.8$27.0 million in cash. The aggregate carrying value of Medford atCompany incurred approximately $1.2 million is transaction costs, mainly for the prepayment penalty related to the HUD-insured loans (the “HUD Loans”). On the date of the sale, was approximately $1.3 million, (totalthe total assets of the NC Properties were approximately $8.0$22.1 million, lessand liabilities were approximately $19.5 million, including approximately $19.4 million of approximately $6.7 million, which included approximately $6.7 millionoutstanding principal on the HUD Loans. The HUD Loans were paid off in a HUD-insured loan payable).full using the proceeds of the sale. As a result of the sale, as of November 1, 2016, Medford isFebruary 15, 2019, the NC Properties are no longer consolidatedincluded in our consolidated financial statements. Additionally, in October 2016, we recorded a net gain of approximately $2.8 million related to the sale.
13. Subsequent Event
Summit Fantasy Pearl Holdings, LLC
On October 2, 2017, through our Operating Partnership, we entered into the FPH LLC Agreement with Fantasia, Atlantis, and Fantasy and formed the FPH JV. The FPH JV is not consolidated in our consolidated financial statements and will be accounted for under the equity-method in the Company’s condensed consolidated financial statements.
In November 2017, throughDuring the FPH JV,period ended March 31, 2019, we acquiredrecorded a 10% interest in six skilled nursing facilities, located in Iowa, for a total aggregate purchase pricegain of $29.5approximately $4.2 million for the properties, which was funded through capital contributions from the members of the FPH JV plus the proceeds from a collateralized loan. The facilities consist of a total of 551 licensed beds, and will be operated by and leased to a third party operator.
Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly, first to the memberspari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds fromon the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the memberspari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.NC Properties.
We serve as the manager of the FPH JV and provide management services in exchange for fees and reimbursements. Under the FPH LLC Agreement, as the manager, we are paid an acquisition fee upon closing of an acquisition, as defined in the agreement, based on the purchase price paid for the properties. Additionally, we are paid on a quarterly basis an annual asset management fee equal to 0.75% of the initial capital contribution of the members.14. Subsequent Event
We contributed approximately $1.0 million for the acquisition.CHP Friendswood, LLC loan payable refinancing
On April 23, 2020, we refinanced our outstanding $10,725,000 loan payable for CHP Friendswood, LLC with a HUD-insured loan through ORIX. The loan bears interest at a fixed rate of 2.79%, plus 0.65% for mortgage insurance premiums, for the term of the loan and is collateralized by Friendship Haven. The loan matures in April 2055 and amortizes over 35 years. The loan proceeds of approximately $11.9 million were used to pay down the outstanding loan balance of approximately $10.8 million to CIBC, to fund certain HUD reserves and to pay debt issuance costs of approximately $0.7 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2017.25, 2020.
| Page 21 of 37 |
Overview
As of September 30, 2017,March 31, 2020, our ownership interests in our 11seven real estate properties of senior housing facilities was as follows: 100% ownership of sixthree properties fiveand a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC, of which we have a 95.3% interest in four properties and a 95% interest in the fifth property.LLC. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 20% interest in two unconsolidated equity-method investments that each own two properties, and a 10%35% equity interest in an unconsolidated equity-method investment that holds two properties, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, a 10% equity interest in an unconsolidated equity-method investment that holds six properties and a 15% equity interest in an unconsolidated equity-method investment that holds 14 properties (collectively, our “Equity-Method Investments”). As used in this report, the “Company,” “we,” “us” and “our” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.
Our revenues are comprised largely of tenant rental income from our 11seven real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, and acquisition and asset management fees resulting from our Equity-Method Investments, and fees earned for resident care from Friendship Haven (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements).Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our condensed consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture equity or other equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with favorablesustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.
We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled-nursingskilled nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities caters tofocuses on different segments of the senior population.
Coronavirus (COVID-19)
Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the United States and more than 175 countries. It has been reported that COVID-19 appears most dangerous for seniors, and the mortality rate increases with age. The occupancy at our properties could significantly decrease if COVID-19 or other public health outbreak results in early resident move-outs, our operators delay accepting new residents due to quarantines or otherwise, or potential occupants determine to postpone moving to a senior housing facility. A decrease in occupancy or increase in costs is likely to have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations. In addition, actions our operators take to address COVID-19 are expected to materially increase their operating costs, including costs related to enhanced health and safety precautions among other measures, which could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent. Furthermore, infections at our facilities could lead to material increases in litigation costs for which our operators, or possibly we, may be liable. If these developments continue or increase in severity, such developments are likely to have a material adverse effect on our business and results of operations. The extent to which COVID-19 could impact our business and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.
Summit Portfolio Properties
At September 30, 2017,March 31, 2020, our portfolio consisted of 11seven real estate properties as noted above. All of the properties are 100% leased on a triple net basis. The following table provides summary information (excluding the 3050 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of September 30, 2017:March 31, 2020:
| Properties | Beds | Square Footage | Purchase Price | Properties | Beds | Square Footage | Purchase Price | |||||||||||||||||||||||||
| SNF | 4 | 337 | 109,306 | $ | 31,740,000 | 4 | 337 | 109,306 | $ | 31,740,000 | ||||||||||||||||||||||
| AL or AL/MC | 7 | 517 | 250,750 | 50,525,000 | 3 | 221 | 136,765 | 25,525,000 | ||||||||||||||||||||||||
| Total Real Estate Properties | 11 | 854 | 360,056 | $ | 82,265,000 | 7 | 558 | 246,071 | $ | 57,265,000 | ||||||||||||||||||||||
| Property | Location | Date Purchased | Type | Beds | 2020 Rental | ||||||||||
| Sheridan Care Center | Sheridan, OR | August 3, 2012 | SNF | 51 | $ | 123,000 | |||||||||
| Fernhill Care Center | Portland, OR | August 3, 2012 | SNF | 63 | 131,000 | ||||||||||
| Friendship Haven Healthcare and Rehabilitation Center | Galveston County TX | September 14, 2012 | SNF | 150 | 353,000 | ||||||||||
| Pacific Health and Rehabilitation Center | Tigard, OR | December 24, 2012 | SNF | 73 | 242,000 | ||||||||||
| Brookstone of Aledo | Aledo, IL | July 2, 2013 | AL | 66 | 191,000 | ||||||||||
| Sundial Assisted Living | Redding, CA | December 18, 2013 | AL | 65 | 99,000 | ||||||||||
| Pennington Gardens | Chandler, AZ | July 17, 2017 | AL/MC | 90 | 277,000 | ||||||||||
| Total | 558 | ||||||||||||||
| Property | Location | Date Purchased | Type | Beds | 2017 Revenue1 | |||||||||
| Sheridan Care Center | Sheridan, OR | August 3, 2012 | SNF | 51 | $ | 369,000 | ||||||||
| Fernhill Care Center | Portland, OR | August 3, 2012 | SNF | 63 | 394,000 | |||||||||
| Friendship Haven Healthcare and Rehabilitation Center | Galveston County TX | September 14, 2012 | SNF | 150 | — | 2 | ||||||||
| Pacific Health and Rehabilitation Center | Tigard, OR | December 24, 2012 | SNF | 73 | 726,000 | |||||||||
| Danby House | Winston-Salem, NC | January 31, 2013 | AL/MC | 100 | 721,000 | |||||||||
| Brookstone of Aledo | Aledo, IL | July 2, 2013 | AL | 66 | 573,000 | |||||||||
| The Shelby House | Shelby, NC | October 4, 2013 | AL | 72 | 342,000 | |||||||||
| The Hamlet House | Hamlet, NC | October 4, 2013 | AL | 60 | 493,000 | |||||||||
| The Carteret House | Newport, NC | October 4, 2013 | AL | 64 | 326,000 | |||||||||
| Sundial Assisted Living | Redding, CA | December 18, 2013 | AL | 65 | 269,000 | |||||||||
| Pennington Gardens | Chandler, AZ | July 17, 2017 | AL/MC | 90 | 221,000 | |||||||||
| Total | 854 | |||||||||||||
1 Represents year-to-date through September 30, 2017March 31, 2020 rental revenue based on in-place leases, including straight-line rent.
2 Rent due under a lease between us and our wholly-owned taxable REIT subsidiary (“Friendswood TRS”) was approximately $1.2 million year-to-date through September 30, 2017. Such rental income is eliminated in consolidation.
| Page 22 of 37 |
Summit Equity-Method Investment Portfolio Properties
We continue to believe that raising institutional joint venture equity to make acquisitions will be accretive to shareholder value and will move us closer to our goal of resuming shareholder distributions.value. Our sole source of equity since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is the mosta prudent strategy for growth and our shareholders benefitgrowth.
A summary of the condensed combined financial data for the following reasons:balance sheets and statements of income for all unconsolidated Equity-Method Investments are as follows:
| Condensed Combined Balance Sheets: | March 31, 2020 | December 31, 2019 | ||||||
| Total Assets | $ | 416,933,000 | $ | 421,268,000 | ||||
| Total Liabilities | $ | 317,529,000 | $ | 318,150,000 | ||||
| Members Equity: | ||||||||
| Summit | $ | 12,781,000 | $ | 13,245,000 | ||||
| JV Partners | $ | 86,623,000 | $ | 89,873,000 | ||||
| Total Members Equity | $ | 99,404,000 | $ | 103,118,000 | ||||
| Condensed Combined Statements of Income: | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||
| Total Revenue: | $ | 12,326,000 | $ | 9,377,000 | ||||
| Net Operating Income | $ | 9,577,000 | $ | 7,551,000 | ||||
| Income from Operations | $ | 5,899,000 | $ | 4,522,000 | ||||
| Net Income | $ | 142,000 | $ | 1,055,000 | ||||
| Summit equity interest in Equity-Method Investments net income | $ | 30,000 | $ | 130,000 | ||||
| JV Partners interest in Equity-Method Investments net income | $ | 112,000 | $ | 925,000 | ||||
Summit Union Life Holdings, LLC
In April 2015, through our operating partnership (“Operating Partnership”), we formed Summit Union Life Holdings, LLC (“SUL JV”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and entered into a limited liability company with Best Years with respect to the SUL JV (the “SUL LLC Agreement”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements.equity-method.
Under the SUL LLC Agreement, as amended, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Yearspari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing, or another capital event will be paid first to the Operating Partnership and Best Yearspari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.
The following reconciles our 10% equity investment in the SUL JV from inception through September 30, 2017:March 31, 2020:
| JV 2 Properties (Colorado, Oregon and Virginia) – April 2015 | $ | 1,007,000 | $ | 1,059,000 | ||||
| Creative Properties (Texas) – October 2015 | 837,000 | 837,000 | ||||||
| Cottage Properties (Wisconsin) – December 2015 | 544,000 | 613,000 | ||||||
| Riverglen (New Hampshire) – April 2016 | 392,000 | 424,000 | ||||||
| Delaware Properties – September 2016 | 1,783,000 | 1,846,000 | ||||||
| Total investments | 4,563,000 | 4,779,000 | ||||||
| Income from equity-method investee | 417,000 | 1,062,000 | ||||||
| Distributions | (1,468,000 | ) | (2,718,000 | ) | ||||
| Total investment at September 30, 2017 | $ | 3,512,000 | ||||||
| Total investment at March 31, 2020 | $ | 3,123,000 | ||||||
| Page 23 of 37 |
A summary of the unaudited condensed consolidated financial data for the balance sheets and statements of income for the unconsolidated SUL JV, of which we own a 10% equity interest, is as follows:
| Condensed Consolidated Balance Sheets of SUL JV: | March 31, 2020 | December 31, 2019 | ||||||
| Real estate properties and intangibles, net | $ | 133,708,000 | $ | 135,038,000 | ||||
| Cash and cash equivalents | 4,864,000 | 4,928,000 | ||||||
| Other assets | 10,839,000 | 10,882,000 | ||||||
| Total Assets: | $ | 149,411,000 | $ | 150,848,000 | ||||
| Loans payable, net | $ | 105,686,000 | $ | 106,049,000 | ||||
| Other liabilities | 6,533,000 | 7,268,000 | ||||||
| Members’ equity: | ||||||||
| Best Years | 33,954,000 | 34,245,000 | ||||||
| Summit | 3,238,000 | 3,286,000 | ||||||
| Total Liabilities and Members’ Equity | $ | 149,411,000 | $ | 150,848,000 | ||||
| Condensed Consolidated Balance Sheets of SUL JV: | September 30, 2017 | December 31, 2016 | ||||||
| Real estate properties and intangibles, net | $ | 147,210,000 | $ | 151,439,000 | ||||
| Cash and cash equivalents | 7,832,000 | 4,750,000 | ||||||
| Other assets | 7,222,000 | 4,860,000 | ||||||
| Total Assets: | $ | 162,264,000 | $ | 161,049,000 | ||||
| Loans payable, net | $ | 109,443,000 | $ | 104,717,000 | ||||
| Other liabilities | 11,883,000 | 13,185,000 | ||||||
| Members’ equity: | ||||||||
| Best Years | 37,313,000 | 39,186,000 | ||||||
| Summit | 3,625,000 | 3,961,000 | ||||||
| Total Liabilities and Members’ Equity | $ | 162,264,000 | $ | 161,049,000 | ||||
Condensed Consolidated Statements of Income of SUL JV:
| Three Months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenue | $ | 3,853,000 | $ | 3,149,000 | $ | 11,773,000 | $ | 8,195,000 | ||||||||
| Property and general expenses | (412,000 | ) | (321,000 | ) | (1,337,000 | ) | (1,016,000 | ) | ||||||||
| Depreciation and amortization expense | (1,432,000 | ) | (1,068,000 | ) | (4,292,000 | ) | (2,682,000 | ) | ||||||||
| Income from operations | 2,009,000 | 1,760,000 | 6,144,000 | 4,497,000 | ||||||||||||
| Interest expense | (1,480,000 | ) | (994,000 | ) | (4,241,000 | ) | (2,589,000 | ) | ||||||||
| Amortization and write-off of debt issuance costs | (449,000 | ) | (90,000 | ) | (731,000 | ) | (239,000 | ) | ||||||||
| Net Income | $ | 80,000 | $ | 676,000 | $ | 1,172,000 | $ | 1,669,000 | ||||||||
| Summit equity interest in SUL JV net income | $ | 8,000 | $ | 68,000 | $ | 117,000 | $ | 167,000 | ||||||||
| Condensed Consolidated Statements of Income of SUL JV: | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||
| Total revenue | $ | 4,550,000 | $ | 4,366,000 | ||||
| Property operating expenses | (1,229,000 | ) | (960,000 | ) | ||||
| Net operating income | 3,321,000 | 3,406,000 | ||||||
| General and administrative expense | (94,000 | ) | (99,000 | ) | ||||
| Depreciation and amortization expense | (1,349,000 | ) | (1,433,000 | ) | ||||
| Income from operations | 1,878,000 | 1,874,000 | ||||||
| Interest expense | (1,225,000 | ) | (1,423,000 | ) | ||||
| Amortization of deferred financing costs | (53,000 | ) | (23,000 | ) | ||||
| Interest income | 3,000 | 3,000 | ||||||
| Other income | 352,000 | - | ||||||
| Net income | $ | 955,000 | $ | 431,000 | ||||
| Summit equity interest in SUL JV net income | $ | 96,000 | $ | 43,000 | ||||
As of September 30, 2017,March 31, 2020, the 17 properties held by SUL JV, our unconsolidated 10% equity-method investment, in SUL JV15 of which are 100% leased on a triple net basis, and are as follows:
| Property | Location | Type | Number of Beds | |||||
| Lamar Estates | Lamar, CO | SNF | 60 | |||||
| Monte Vista Estates | Monte Vista, CO | SNF | 60 | |||||
| Myrtle Point Care Center | Myrtle Point, OR | SNF | 55 | |||||
| Gateway Care and Retirement Center | Portland, OR | SNF/IL | 91 | |||||
| Applewood Retirement Community | Salem, OR | IL | 69 | |||||
| Front Royal, VA | AL | 78 | ||||||
| Pine Tree Lodge Nursing Center | Longview, TX | SNF | 92 | |||||
| Granbury Care Center | Granbury, TX | SNF | 181 | |||||
| Twin Oaks Nursing Center | Jacksonville, TX | SNF | 116 | |||||
| Dogwood Trails Manor | Woodville, TX | SNF | 90 | |||||
| Carolina Manor | Appleton, WI | AL | 45 | |||||
| Carrington Manor | Green Bay, WI | AL | 20 | |||||
| Marla Vista Manor | Green Bay, WI | AL | 40 | |||||
| Marla Vista Gardens | Green Bay, WI | AL | 20 | |||||
| Riverglen House of Littleton | Littleton, NH | AL | 59 | |||||
| Atlantic Shore Rehabilitation and Health Center | Millsboro, DE | SNF | 181 | |||||
| Pinnacle Rehabilitation and Health Center | Smyrna, DE | SNF | 151 | |||||
| Total: | 1,408 |
| Page 24 of 37 |
SummitEquity-Method Partner - Fantasia Holdings,Investment III LLC
On September 27,In 2016 and 2017, through our Operating Partnership, we entered into athree separate limited liability company agreement (theagreements (collectively, the “Fantasia LLC Agreement”Agreements”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed three separate companies, Summit Fantasia Holdings, LLC (the(“Fantasia I”), Summit Fantasia Holdings II, LLC (“Fantasia II”) and Summit Fantasia Holdings III, LLC (“Fantasia III”) (collectively, the “Fantasia JV”JVs”). The Fantasia JV isJVs are not consolidated in our condensed consolidated financial statements and isare accounted for under the equity-method in the Company’s condensed consolidated financial statements.
On October 31, 2016, throughequity-method. Through the Fantasia JV,JVs: we acquiredown a 20%35% interest in two senior housing facilities, one located in Citrus Heights, California and one located Oregon; a 20% interest in Corvallis, Oregon, fortwo skilled nursing facilities located in Rhode Island; and a total purchase price of $23 million.10% interest in nine skilled nursing facilities located in Connecticut.
Under the Fantasia LLC Agreement,Agreements, net operating cash flow of the Fantasia JVJVs will be distributed quarterly,monthly, first to the Operating Partnership and Fantasiapari passu (8% for Fantasia I and II and 9% for Fantasia III) until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 50% to Fantasia and 50% to the Operating Partnership for Fantasia I, 70% to Fantasia and 30% to the Operating Partnership.Partnership for Fantasia II, and 75% to Fantasia and 25% to the Operating Partnership for Fantasia III. All capital proceeds from the sale of the properties held by the Fantasia JV,JVs, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu as noted above until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.Partnership, as noted above.
The following reconciles our 20% equity investmentinvestments in the Fantasia JVJVs from inception through September 30, 2017:March 31, 2020:
| Summit Citrus Heights ( California) – October 2016 | $ | 663,000 | ||
| Summit Corvallis (Oregon) – October 2016 | 611,000 | |||
| Total investment | 1,274,000 | |||
| Income from equity-method investee | 24,000 | |||
| Distributions | (166,000 | ) | ||
| Total investment at September 30, 2017 | $ | 1,132,000 |
| Summit Fantasia Holdings, LLC – October 2016 | $ | 2,524,000 | ||
| Summit Fantasia Holdings II, LLC – February 2017 | 1,923,000 | |||
| Summit Fantasia Holdings III, LLC – August 2017 | 1,953,000 | |||
| Total investment | 6,400,000 | |||
| Income from Fantasia JVs | 762,000 | |||
| Distributions | (2,001,000 | ) | ||
| Total Fantasia investments at March 31, 2020 | $ | 5,161,000 |
A summary of the condensed combined financial data for the balance sheets and statements of income for the unconsolidated Fantasia JVs, of which we own a 10% to 35% equity interest, is as follows:
| Condensed Combined Balance Sheets of Fantasia JVs: | March 31, 2020 | December 31, 2019 | ||||||
| Real estate properties, net | $ | 103,518,000 | $ | 104,244,000 | ||||
| Cash and cash equivalents | 4,397,000 | 5,893,000 | ||||||
| Other assets | 5,187,000 | 4,423,000 | ||||||
| Total Assets: | $ | 113,102,000 | $ | 114,560,000 | ||||
| Loans payable, net | $ | 75,834,000 | $ | 75,830,000 | ||||
| Other liabilities | 5,520,000 | 6,835,000 | ||||||
| Members’ equity: | ||||||||
| Fantasia JVs | 26,587,000 | 26,691,000 | ||||||
| Summit | 5,161,000 | 5,204,000 | ||||||
| Total Liabilities and Members’ Equity | $ | 113,102,000 | $ | 114,560,000 | ||||
| Page 25 of 37 |
| Condensed Combined Statements of Income of Fantasia JVs: | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||
| Total revenue | $ | 3,944,000 | $ | 3,357,000 | ||||
| Property operating expenses | (1,395,000 | ) | (732,000 | ) | ||||
| Net operating income | 2,549,000 | 2,625,000 | ||||||
| General and administrative expense | (90,000 | ) | (141,000 | ) | ||||
| Depreciation and amortization expense | (727,000 | ) | (727,000 | ) | ||||
| Income from operations | 1,732,000 | 1,757,000 | ||||||
| Interest expense | (1,029,000 | ) | (1,148,000 | ) | ||||
| Amortization of debt issuance costs | (73,000 | ) | (85,000 | ) | ||||
| Interest income | 15,000 | 11,000 | ||||||
| Net income | $ | 645,000 | $ | 535,000 | ||||
| Summit equity interest in Fantasia JVs net income | $ | 85,000 | $ | 76,000 | ||||
As of September 30, 2017,March 31, 2020, the two13 properties ofin Fantasia JVs, our unconsolidated 20% equity-method investment in Fantasia JVinvestments, are all 100% leased on a triple net basis, and are as follows:
| Property | Location | Type | Number of Beds | |||||
| Sun Oak Assisted Living | Citrus Heights, CA | AL/MC | 78 | |||||
| Regent Court Senior Living | Corvallis, OR | MC | 48 | |||||
Summit Fantasia Holdings II, LLC
On December 23, 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in the Company’s condensed consolidated financial statements.
On February 28, 2017, through the Fantasia II JV, we acquired a 20% interest in two skilled nursing facilities, located in Rhode Island, for a total purchase price of $27 million.
Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia II JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70% to Fantasia and 30% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.
The following reconciles our 20% equity investment in the Fantasia II JV from inception through September 30, 2017:
| Summit Woonsocket (Rhode Island) – February 2017 | $ | 1,285,000 | ||
| Summit Smithfield (Rhode Island) – February 2017 | 638,000 | |||
| Total investment | 1,923,000 | |||
| Income from equity-method investee | 96,000 | |||
| Distributions | (207,000 | ) | ||
| Total investment at September 30, 2017 | $ | 1,812,000 |
As of September 30, 2017, the two properties of our unconsolidated 20% equity-method investment in Fantasia II JV are as follows:
| Trinity Health and Rehabilitation Center | Woonsocket, Rhode Island | SNF | 185 | |||||
| Hebert Nursing Home | Smithfield, Rhode Island | SNF | 133 | |||||
Summit Fantasia Holdings III, LLC
On July 27, 2017, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and will be accounted for under the equity-method in the Company’s condensed consolidated financial statements.
On August 10, 2017, through the Fantasia III JV, we acquired a 10% interest in nine skilled nursing facilities, located in Connecticut, for a total aggregate purchase price of $60 million for the properties.
Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasiapari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasiapari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership.
The following reconciles our 10% equity investment in the Fantasia III JV from inception through September 30, 2017:
| Connecticut properties | $ | 1,953,000 | ||
| Total investment | 1,953,000 | |||
| Income from equity-method investee | 19,000 | |||
| Distributions | (59,000 | ) | ||
| Total investment at September 30, 2017 | $ | 1,913,000 |
As of September 30, 2017, the nine properties of our unconsolidated 10% equity-method investment in Fantasia III JV are as follows:
| Chelsea Place Care Center | Hartford, CT | SNF | 234 | |||||
| Touchpoints at Manchester | Manchester, CT | SNF | 131 | |||||
| Touchpoints at Farmington | Farmington, CT | SNF | 105 | |||||
| Fresh River Healthcare | East Windsor, CT | SNF | 140 | |||||
| Trinity Hill Care Center | Trinity Hill, CT | SNF | 144 | |||||
| Touchpoints at Bloomfield | Bloomfield, CT | SNF | 150 | |||||
| Westside Care Center | Westside, CT | SNF | 162 | |||||
| Silver Springs Care Center | Meriden, CT | SNF | 159 | |||||
| Touchpoints of Chestnut | Chestnut, CT | SNF | 60 | |||||
| Total: | ||||||||
Summit Fantasy Pearl Holdings, LLC
OnIn October 2, 2017, through our Operating Partnership, we entered into a limited liability company agreement (the “FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and will be accounted for under the equity-method in the Company’s consolidated financial statements.
In November 2017, through the FPH JV, we acquired a 10% interest in six senior housing facilities, located in Iowa, for a total aggregate purchase price of $29.5 million for the properties, which was funded through capital contributions from the members of the FPH JV plus the proceeds from a collateralized loan. The facilities consist of a total of 551 licensed beds, and will be operated by and leased to a third party operator.equity-method.
Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly,monthly, first to the memberspari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the memberspari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.
We serve as the manager of the FPH JV and provide management services in exchange for fees and reimbursements. Under the FPH LLC Agreement, as the manager, we are paid an acquisition fee upon closing of an acquisition, as defined in the agreement, based on the purchase price paid for the properties. Additionally, we are paid on a quarterly basis an annual asset management fee equal to 0.75% of the initial capital contribution of the members.
We contributed approximately $1.0 million for this acquisition.
| Page |
The following reconciles our equity investment in the FPH JV from inception through March 31, 2020:
| Iowa properties – November 2017 | $ | 929,000 | ||
| Total investment | 929,000 | |||
| Loss from equity-method investee | (172,000 | ) | ||
| Distributions | (465,000 | ) | ||
| Total FPH investment at March 31, 2020 | $ | 292,000 |
A summary of the condensed consolidated financial data for the balance sheets and statements of operations for the unconsolidated FPH JV is as follows:
| Condensed Consolidated Balance Sheets of FPH JV: | March 31, 2020 | December 31, 2019 | ||||||
| Real estate properties, net | $ | 26,989,000 | $ | 27,296,000 | ||||
| Cash and cash equivalents | 1,048,000 | 1,186,000 | ||||||
| Other assets | 861,000 | 784,000 | ||||||
| Total Assets: | $ | 28,898,000 | $ | 29,266,000 | ||||
| Loans payable, net | $ | 21,499,000 | $ | 21,600,000 | ||||
| Other liabilities | 3,161,000 | 1,796,000 | ||||||
| Members’ equity: | ||||||||
| Fantasia JVs | 3,946,000 | 5,407,000 | ||||||
| Summit | 292,000 | 463,000 | ||||||
| Total Liabilities and Members’ Equity | $ | 28,898,000 | $ | 29,266,000 | ||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| Condensed Consolidated Statements of Operations of FPH JV: | 2020 | 2019 | ||||||
| Total revenue | $ | 885,000 | $ | 894,000 | ||||
| Property operating expenses | (122,000 | ) | (134,000 | ) | ||||
| Net operating income | 763,000 | 760,000 | ||||||
| General and administrative expense | (35,000 | ) | (38,000 | ) | ||||
| Depreciation and amortization expense | (307,000 | ) | (307,000 | ) | ||||
| Income from operations | 421,000 | 415,000 | ||||||
| Interest expense | (259,000 | ) | (341,000 | ) | ||||
| Amortization of debt issuance costs | (15,000 | ) | (32,000 | ) | ||||
| Other expense | (1,501,000 | ) | - | |||||
| Net (loss) income | $ | (1,354,000 | ) | $ | 42,000 | |||
| Summit equity interest in FPH JV net (loss) income | $ | (135,000 | ) | $ | 4,000 | |||
| Page 27 of 37 |
As of March 31, 2020, the six properties of our unconsolidated equity-method investments in FPH JV, all of which are 100% leased on a triple net basis, are as follows:
| Property | Location | Type | Number of Beds | |||||
| Accura Healthcare of Bancroft | Bancroft, Iowa | SNF/AL | 50 | |||||
| Accura Healthcare of Milford | Milford, Iowa | SNF/AL | 94 | |||||
| Accura Healthcare of Carroll | Carroll, Iowa | SNF/IL | 124 | |||||
| Accura Healthcare of Cresco | Cresco, Iowa | SNF | 59 | |||||
| Accura Healthcare of Marshalltown | Marshalltown, Iowa | SNF | 86 | |||||
| Accura Healthcare of Spirit Lake | Spirit Lake, Iowa | SNF | 98 | |||||
| Total: | 511 |
Indiana JV
On February 28, 2019 we formed a new joint venture (“Indiana JV”), a Delaware limited liability company, and on March 13, 2019, we entered into a Limited Liability Company Agreement (“Indiana JV Agreement”) through our wholly-owned subsidiary, Summit Indiana, LLC, with two unrelated parties: a real estate holding company and a global institutional asset management firm, both Delaware limited liability companies. The Indiana JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method.
Under the Indiana JV Agreement, net operating cash flow of the Indiana JV will be distributed monthly to the memberspari passu in accordance with their respective capital percentages, and thereafter as defined in the Indiana JV Agreement.
The following reconciles our equity investment in the Indiana JV from inception through March 31, 2020:
| Indiana properties – March 2019 | $ | 4,906,000 | ||
| Total investment | 4,906,000 | |||
| Loss from equity-method investee | (93,000 | ) | ||
| Distributions | (723,000 | ) | ||
| Total Indiana JV investment at March 31, 2020 | $ | 4,090,000 |
A summary of the condensed consolidated financial data for the balance sheets and statements of operations for the unconsolidated Indiana JV is as follows:
| Condensed Consolidated Balance Sheets of Indiana JV: | March 31, 2020 | December 31, 2019 | ||||||
| Real estate properties, net | $ | 120,617,000 | $ | 122,343,000 | ||||
| Cash and cash equivalents | 3,457,000 | 3,137,000 | ||||||
| Other assets | 1,448,000 | 1,114,000 | ||||||
| Total Assets: | $ | 125,522,000 | $ | 126,594,000 | ||||
| Loans payable, net | $ | 95,404,000 | $ | 95,329,000 | ||||
| Other liabilities | 3,892,000 | 3,443,000 | ||||||
| Members’ equity: | ||||||||
| Indiana JV | 22,136,000 | 23,530,000 | ||||||
| Summit | 4,090,000 | 4,292,000 | ||||||
| Total Liabilities and Members’ Equity | $ | 125,522,000 | $ | 126,594,000 | ||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| Condensed Consolidated Statements of Operations of Indiana JV: | 2020 | 2019 | ||||||
| Total revenue | $ | 2,947,000 | $ | 760,000 | ||||
| Property operating expenses | (3,000 | ) | - | |||||
| Net operating income | 2,944,000 | 760,000 | ||||||
| General and administrative expense | (172,000 | ) | (33,000 | ) | ||||
| Depreciation and amortization expense | (904,000 | ) | (251,000 | ) | ||||
| Income from operations | 1,868,000 | 476,000 | ||||||
| Interest expense | (1,896,000 | ) | (416,000 | ) | ||||
| Amortization of debt issuance costs | (76,000 | ) | (13,000 | ) | ||||
| Net (loss) income | $ | (104,000 | ) | $ | 47,000 | |||
| Summit equity interest in Indiana JV net (loss) income | $ | (16,000 | ) | $ | 7,000 | |||
| Page 28 of 37 |
As of March 31, 2020, the 14 properties of our unconsolidated equity-method investments in Indiana JV, all of which are 100% leased on a triple net basis, are as follows:
| Property | Location | Type | Number of Beds | |||||
| Bloomington Nursing and Rehab | Bloomington, IN | SNF | 38 | |||||
| Summerfield Health Care Center | Cloverdale, IN | SNF | 43 | |||||
| University Nursing and Rehab | Evansville, IN | SNF/AL | 47/22 | |||||
| Sugar Creek Nursing and Rehab | Greenfield, IN | SNF | 60 | |||||
| Hanover Nursing Center | Hanover, IN | SNF/AL | 125/12 | |||||
| New Albany Nursing and Rehabilitation | New Albany, IN | SNF/AL | 122/21 | |||||
| Willow Manor Nursing and Rehab | Vincennes, IN | SNF | 170 | |||||
| North Ridge Village and Rehab Center | Albion, IN | SNF/AL | 77/12 | |||||
| Greenhill Manor | Fowler, IN | SNF | 64 | |||||
| Meridian Nursing and Rehab | Indianapolis, IN | SNF | 44 | |||||
| Wintersong Village | Knox, IN | SNF | 48 | |||||
| Essex Nursing and Rehab | Lebanon, IN | SNF | 38 | |||||
| Washington Nursing Center | Washington, IN | SNF | 140 | |||||
| Rural Health Care | Indianapolis, IN | SNF | 50 | |||||
| Total: | 1,133 |
Distributions from Equity-Method Investments
For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:
| Three Months Ended September 30, | Nine months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
| Distributions | $ | 323,000 | $ | 163,000 | $ | 870,000 | $ | 458,000 | $ | 493,000 | $ | 298,000 | ||||||||||||
| Cash received for distributions | $ | 312,000 | $ | 126,000 | $ | 840,000 | $ | 340,000 | $ | 562,000 | $ | 243,000 | ||||||||||||
Acquisition and Asset Management Fees
We serve as the manager or operating member (collectively, the manager) of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an acquisition fee, as defined in the agreements. Additionally, we are paid an annual asset management fee for managing the properties owned by our Equity-Method Investments, as defined in the agreements. For the three months ended September 30, 2017March 31, 2020 and 2016,2019, we recorded approximately $0.3 million and $0.2 million, respectively, in acquisition and asset management fees. For the nine months ended September 30, 2017 and 2016, we recorded approximately $0.6 million and $0.3 million, respectively, in acquisition and asset management fees.
| Page 29 of 37 |
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162019 as filed with the SEC on March 29, 2017.25, 2020.
Results of Operations
Our results of operations are described below:
Three Months Ended September 30, 2017March 31, 2020 Compared to Three Months Ended September 30, 2016March 31, 2019
| Three Months Ended September 30, | ||||||||||||
| 2017 | 2016 | $ Change | ||||||||||
| Rental revenues | $ | 1,644,000 | $ | 1,639,000 | $ | 5,000 | ||||||
| Tenant reimbursements and other income | 224,000 | 217,000 | 7,000 | |||||||||
| Resident services and fee income | 2,413,000 | 2,017,000 | 396,000 | |||||||||
| Total revenues | 4,281,000 | 3,873,000 | 408,000 | |||||||||
| Less expenses: | ||||||||||||
| Property operating costs | (395,000 | ) | (404,000 | ) | 9,000 | |||||||
| Resident services costs | (1,658,000 | ) | (1,750,000 | ) | 92,000 | |||||||
| Net operating income(1) | 2,228,000 | 1,719,000 | 509,000 | |||||||||
| Acquisition & asset management fees | 293,000 | 206,000 | 87,000 | |||||||||
| Interest income from notes receivable | 44,000 | 44,000 | - | |||||||||
| General and administrative | (1,688,000 | ) | (1,411,000 | ) | (277,000 | ) | ||||||
| Depreciation and amortization | (823,000 | ) | (898,000 | ) | 75,000 | |||||||
| Income from equity-method investees | 73,000 | 68,000 | 5,000 | |||||||||
| Other income | 5,000 | 21,000 | (16,000 | ) | ||||||||
| Interest expense | (806,000 | ) | (755,000 | ) | (51,000 | ) | ||||||
| Net loss | (674,000 | ) | (1,006,000 | ) | 332,000 | |||||||
| Noncontrolling interests’ share in income | (15,000 | ) | (19,000 | ) | 4,000 | |||||||
| Net loss applicable to common stockholders | $ | (689,000 | ) | $ | (1,025,000 | ) | $ | 336,000 | ||||
| Three Months Ended March 31, | ||||||||||||
| 2020 | 2019 | $ Change | ||||||||||
| Total rental revenues | 1,600,000 | 2,079,000 | (479,000 | ) | ||||||||
| Property operating costs | (257,000 | ) | (294,000 | ) | 37,000 | |||||||
| Net operating income(1) | 1,343,000 | 1,785,000 | (442,000 | ) | ||||||||
| Acquisition & asset management fees | 326,000 | 210,000 | 116,000 | |||||||||
| Interest income from notes receivable | 7,000 | 6,000 | 1,000 | |||||||||
| General and administrative | (939,000 | ) | (1,275,000 | ) | 336,000 | |||||||
| Depreciation and amortization | (417,000 | ) | (499,000 | ) | 82,000 | |||||||
| Income from equity-method investees | 30,000 | 130,000 | (100,000 | ) | ||||||||
| Other income | 42,000 | 52,000 | (10,000 | ) | ||||||||
| Interest expense | (593,000 | ) | (756,000 | ) | 163,000 | |||||||
| Gain on disposition of real estate properties | - | 4,147,000 | (4,147,000 | ) | ||||||||
| Net (loss) income | (201,000 | ) | 3,800,000 | (4,001,000 | ) | |||||||
| Noncontrolling interests’ share in income (loss) | (12,000 | ) | 123,000 | (135,000 | ) | |||||||
| Net (loss) income applicable to common stockholders | $ | (213,000 | ) | $ | 3,923,000 | $ | (4,136,000 | ) | ||||
| (1) | Net operating income (“NOI”) is a non-GAAP supplemental measure used to evaluate the operating performance of real estate properties. We define NOI as total rental revenues |
Total rental revenuerevenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Property operating costs include insurance, property taxes and other operating expenses, including management fees. Resident service and fee income and resident services costs are generated from Friendswood TRS.expenses. Net operating income increaseddecreased $0.4 million for the three months ended September 30, 2017March 31, 2020 compared to the three months ended September 30, 2016March 31, 2019 primarily due to the $0.4 million increase in revenue from resident services and fee income and by a corresponding $0.1 million decrease in resident services costs due to improvements in facility management at Friendship Haven.
The net increase in general and administrative expensessale of $0.3 million is primarily due to an increase of approximately $0.2 million in legal expenses associated with the CRA litigationour four NC Properties (see Notes 7 and 10Note 13 to the accompanying Notes to Condensed Consolidated Financial Statements).
The net decrease in depreciationgeneral and amortizationadministrative expenses of $0.3 million for the three months ended September 30, 2017 is primarily dueMarch 31, 2020 compared to the three months ended September 30, 2016 included two months for Medford (soldMarch 31, 2019 is primarily due to a decrease in October 2016) (see Note 12 to the accompanying Notes to Condensed Consolidated Financial Statements)legal expenses of approximately $0.1 million and none for the three months ended September 30, 2017.payroll related expenses of approximately $0.2 million.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
| Nine Months Ended September 30, | ||||||||||||
| 2017 | 2016 | $ Change | ||||||||||
| Rental revenues | $ | 4,488,000 | $ | 5,183,000 | $ | (695,000 | ) | |||||
| Tenant reimbursements and other income | 596,000 | 665,000 | (69,000 | ) | ||||||||
| Resident services and fee income | 6,829,000 | 6,162,000 | 667,000 | |||||||||
| Total revenues | 11,913,000 | 12,010,000 | (97,000 | ) | ||||||||
| Less expenses: | ||||||||||||
| Property operating costs | (1,187,000 | ) | (1,332,000 | ) | 145,000 | |||||||
| Resident services costs | (4,917,000 | ) | (5,267,000 | ) | 350,000 | |||||||
| Net operating income(1) | 5,809,000 | 5,411,000 | 398,000 | |||||||||
| Acquisition and asset management fees | 594,000 | 338,000 | 256,000 | |||||||||
| Interest income from notes receivable | 132,000 | 119,000 | 13,000 | |||||||||
| General and administrative | (4,004,000 | ) | (3,524,000 | ) | (480,000 | ) | ||||||
| Depreciation and amortization | (2,307,000 | ) | (2,791,000 | ) | 484,000 | |||||||
| Income from equity-method investees | 251,000 | 167,000 | 84,000 | |||||||||
| Other income | 37,000 | 93,000 | (56,000 | ) | ||||||||
| Interest expense | (2,173,000 | ) | (2,344,000 | ) | 171,000 | |||||||
| Net loss | (1,661,000 | ) | (2,531,000 | ) | 870,000 | |||||||
| Noncontrolling interests’ share in income | (40,000 | ) | (53,000 | ) | 13,000 | |||||||
| Net loss applicable to common stockholders | $ | (1,701,000 | ) | $ | (2,584,000 | ) | $ | 883,000 | ||||
| Page 30 of |
The net decrease in depreciation and amortization |
Total rental revenue for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Property operating costs include insurance, property taxes and other operating expenses, including management fees. Resident services and fee income and resident services costs are generated from Friendswood TRS. Net operating income increased by approximately $0.4 million for the ninethree months ended September 30, 2017March 31, 2020 compared to the ninethree months ended September 30, 2016. This was primarily due to a $0.8 million decrease in rental revenues and tenant reimbursements, as the rental revenue for the nine months ended September 30, 2016 included four months of Riverglen (contributed to the SUL JV in April 2016) and nine months of rental revenue and costs for Medford (sold in October 2016) (see Note 12 to the accompanying Notes to Condensed Consolidated Financial Statements) and none for the nine months ended September 30, 2017, offset by a $0.7 million increase in resident service and fee income, due to improvement in facility management at Friendship Haven. The decrease in property operating costs and resident services costs are due to the same factors related to the revenues.
The increase in the acquisition and asset management fees of approximately $0.3 million is due to the acquisition fees earned on the Fantasia II properties of approximately $0.1 million (acquired in February 2017) and Fantasia III properties of approximately $0.1 million (acquired in August 2017) and an increase in asset management fees due to the addition of the Fantasia JV and SUL JV properties acquired in late 2016, Fantasia II JV properties acquired in February 2017 and Fantasia III JV properties acquired in August 2017.
The net increase in general and administrative expenses of $0.5 millionMarch 31, 2019 is primarily due to an increasethe sale of approximately $0.4 million in legal expenses associated with the CRA litigationour four NC Properties (see Notes 7 and 10Note 13 to the accompanying Notes to Condensed Consolidated Financial Statements).
The decrease in depreciation and amortization and interest expense for the nine months ended September 30, 2017 is primarily due to nine months ended September 30, 2016 included four months for Riverglen (contributed to the SUL JV in April 2016) and nine months for Medford (sold in October 2016) (see Note 12 to the accompanying Notes to Condensed Consolidated Financial Statements) and none for the nine months ended September 30, 2017.
Liquidity and Capital Resources
As of September 30, 2017,March 31, 2020, we had approximately $4.2$13.7 million in cash and cash equivalents on hand. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.
Going forward, we expect our primary sources of cash to be rental revenues, joint venture distributions, and acquisition and asset management fees and tenant reimbursements.fees. In addition, we may increase cash through the sale of additional properties, which may result in the deconsolidation of properties we already own, or borrowing against currently-owned properties. For the foreseeable future, we expect our primary uses of cash to be for funding future acquisitions, investments in joint ventures, operating expenses, interest expense on outstanding indebtedness and the repayment of principal on loans payable. We may also incur expenditures for renovations of our existing properties, such as increasing the size of the properties by developing additional rentable square feet and/or making the spaceour facilities more appealing.appealing in their market.
We continue to pursue options for repaying and/or refinancing debt obligations with long-term, fixed rate U.S. Department of Housing and Urban Development (“HUD”) insured-insured loans. In OctoberSeptember 2018, April 2019 and December 2015,April 2020, we successfully refinanced two of our existing loan arrangementsthree outstanding loans with Lancaster Pollard (HUD-insured) loans (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements). We are currently in negotiations to refinance our two outstandingHUD-insured loans that mature in 2018 with HUD-insured loansbetween 2053 and expect these to close within the next 12 months.2055, respectively. Additionally, in September and October 2017, as part of our responsibilities under the operating agreements as the manager of our Equity-Method Investments, we successfully refinanced fourseven existing loan arrangementsloans of our Equity-Method Investments with Lancaster Pollard (HUD-insured)HUD-insured loans.
We believe that market conditions may be acceptable to continue to raise capital through additional joint venture arrangements with either our existing joint venture partners or new partners, although there can be no assurances that any such transactions will have terms acceptable to us or will be consummated.
Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties.
CARES Act
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is a stimulus package that provides various forms of relief through, among other things, grants, loans and tax incentives to certain businesses and individuals. In particular, the CARES Act created an emergency lending facility known as the Paycheck Protection Program (PPP), which is administered by the Small Business Administration (SBA) and provides federally insured and, in some cases, forgivable loans to certain, eligible businesses so that those businesses can continue to cover certain of their near-term operating expenses and retain employees. We have evaluated the CARES Act and determined that there was no impact to the Company for the three months ended March 31, 2020. We will continue to evaluate and monitor the CARES Act, and any new COVID-19-related legislation to determine the ultimate impact and benefits, if any, to the Company.
Credit Facilities and Loan Agreements
As of September 30, 2017,March 31, 2020, we had the following debt obligations which have not changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, except for the addition of the Capital Oneapproximately $46.8 million. The outstanding balance by loan agreement is as follows (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements)Statements for further information regarding our refinancing arrangements):
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Distributions
We made no stockholderThe Company declared a cash distribution of approximately $1.5 million in November 2018, which was paid on January 31, 2019 to shareholders of record as of January 15, 2019. No distributions during the nine months ended September 30, 2017.were declared in 2019.
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Funds from Operations (“FFO”)
FFO is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
The following is the reconciliation from net lossincome (loss) applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net loss applicable to common stockholders (GAAP) | $ | (689,000 | ) | $ | (1,025,000 | ) | $ | (1,701,000 | ) | $ | (2,584,000 | ) | ||||
| Adjustments: | ||||||||||||||||
| Depreciation and amortization | 823,000 | 898,000 | 2,307,000 | 2,791,000 | ||||||||||||
| Depreciation and amortization related to non-controlling interests | (20,000 | ) | (24,000 | ) | (60,000 | ) | (72,000 | ) | ||||||||
| Depreciation related to SUL JV | 143,000 | 107,000 | 429,000 | 268,000 | ||||||||||||
| Depreciation related to Fantasia, Fantasia II and III JV | 90,000 | — | 208,000 | — | ||||||||||||
| Funds provided by operations (FFO) applicable to common stockholders | $ | 347,000 | $ | (44,000 | ) | $ | 1,183,000 | $ | 403,000 | |||||||
| Weighted-average number of common shares outstanding - basic and diluted | 23,027,978 | 23,027,978 | 23,027,978 | 23,027,978 | ||||||||||||
| FFO per weighted average common shares | $ | 0.02 | $ | 0.00 | $ | 0.05 | $ | 0.02 | ||||||||
| Three Months Ended | ||||||||
| March 31, 2020 | March 31, 2019 | |||||||
| Net (loss) income applicable to common stockholders (GAAP) | $ | (213,000 | ) | $ | 3,923,000 | |||
| Adjustments: | ||||||||
| Depreciation and amortization | 417,000 | 499,000 | ||||||
| Depreciation and amortization related to non-controlling interests | (10,000 | ) | (12,000 | ) | ||||
| Depreciation related to Equity-Method Investments | 558,000 | 346,000 | ||||||
| Gain on sale of real estate properties | - | (4,147,000 | ) | |||||
| Funds provided by operations (FFO) applicable to common stockholders | $ | 752,000 | $ | 609,000 | ||||
| Weighted-average number of common shares outstanding - basic | 23,027,978 | 23,027,978 | ||||||
| FFO per weighted average common shares - basic | $ | 0.03 | $ | 0.03 | ||||
| Weighted-average number of common shares outstanding - diluted | 23,027,978 | 23,513,331 | ||||||
| FFO per weighted average common shares - diluted | $ | 0.03 | $ | 0.03 | ||||
Subsequent Event
See Note 1314 to the accompanying Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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Item 4. Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our President (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our President (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) evaluated the effectiveness of our disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings. |
On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its former directors, and twoone of its officers and one of its former officers as defendants, seeking declaratory and injunctive relief and compensatory and punitive damages. On AprilSeptember 17, 2014, Judge Nakamura denied in its entirety plaintiffs’ ex parte application for a temporary restraining order to show cause why a preliminary injunction against the defendants should not issue. On May 19, 2014, we filed a counter claimFirst Amended Cross-Complaint seeking compensatory damages and an accounting pursuant to Sections 10(c)(i) and 17(c)(ii) of the Advisory Agreement and including any monies Plaintiffs and Terry Roussel directly or indirectly received from or paid to the Company. On February 22, 2018, the action was assigned to a different trial judge. On May 29, 2018, the Company filed a motion for terminating and monetary sanctions against plaintiffsCRA, Cornerstone Ventures, Inc. and certain individuals affiliated withtheir counsel, Winget Spadafora & Schwartzberg. On November 30, 2018, the new trial judge vacated the trial date, pending resolution of the Company’s motion for terminating and monetary sanctions against CRA and affiliated entities. TheCornerstone Ventures, Inc. and denied the Company’s motion for sanctions against Winget Spadafora & Schwartzberg. On February 13, 2019, the trial judge held another hearing on the Company’s motion for terminating and monetary sanctions and indicated that it intended to grant the Company’s motion for terminating sanctions and award the Company continues to believe that allmonetary sanctions. On March 14, 2019, the Court entered an Order and Judgment granting the Company’s motion for terminating sanctions, awarding the Company monetary sanctions in the amount of plaintiffs’ claims are without merit$588,672, and will continue to vigorously defend itself. Plaintiffsdismissing CRA and defendants are conducting discovery. WeCornerstone Ventures Inc.’s Complaint with prejudice. On May 21, 2019, CRA and Cornerstone Ventures, Inc. filed motions for summary adjudication on plaintiffs’ claimsa notice of appeal from the Judgment and, on our cross claims.June 3, 2019, the Company filed a notice of cross-appeal from the Judgment. On July 9, 2019, the California Court of Appeal, Fourth District dismissed CRA and Cornerstone Ventures, Inc.’s appeal with prejudice. The court heardbriefing to the Court of Appeal, Fourth District on the Company’s appeals against CRA, Cornerstone Ventures, Inc and Winget Spadafora & Schwartzberg was completed on April 27, 2020, and on April 28, 2020, the Company filed its request for oral argument on the motions for summary adjudication and granted the motions in part and denied the motions part. A trial is scheduled to commence on March 26, 2018.its appeals.
AIn September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC orand Healthcare Real Estate Qualified Purchasers Fund, LLC.LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. At a status hearing, the Bankruptcy Court expressed concern about HCRE commencing this litigation and urged the parties to mediate the issues. A mediation was held but the parties did not reach a settlement. The Bankruptcy Court recently granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay. The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay. This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court. The Bankruptcy Court has not taken any action on the matter since the Third Circuit remanded the case. We believe that all of HCRE’s remaining alleged claims are without merit and will vigorously defend ourselves.
| Item 1A. | Risk Factors. |
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the periods covered by this Form 10-Q.
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(b) Not applicable.
(c) During the ninethree months ended September 30, 2017,March 31, 2020, we redeemed no shares pursuant to our stock repurchase program.
| Item 3. | Defaults Upon Senior Securities. |
Item 3. Defaults Upon Senior Securities.None.
| Item 4. | Mine Safety Disclosures. |
None.
| Item 5. | Other Information. |
None.
Item 4. Mine Safety Disclosures.
None.
None.
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| Item 6. | Exhibits. |
| Page |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 9th day of November, 2017.authorized.
| SUMMIT HEALTHCARE REIT, INC. | ||
| /s/ Kent Eikanas | ||
| Date: May 14, 2020 | Kent Eikanas | |
(Principal Executive Officer) | ||
| /s/ Elizabeth A. Pagliarini | ||
| Date: May 14, 2020 | Elizabeth A. Pagliarini | |
| Chief Financial Officer | ||
(Principal Financial |
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