UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | |
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☐ | 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.
(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.) |
| |
23382 MILL CREEK DRIVE, SUITE 125, LAGUNA HILLS, CA | 92653 |
(Address of principal executive offices) | (Zip Code) |
800-978-8136
(Registrant’s telephone number, including area code)
2 SOUTH POINTE DRIVE, SUITE 100, LAKE FOREST, CA 92630
(Former name, former address and former fiscal year, if changed since last report)
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. ⌧☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧☒ 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
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Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
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Emerging growth company | ☐ |
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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 ⌧☒ No
As of NovemberAugust 7, 2022,2023, 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
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| 6 | |
| Notes to Condensed Consolidated Financial Statements (unaudited) | 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
ASSETS | | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 12,089,000 | | $ | 10,488,000 | | $ | 11,138,000 | | $ | 11,572,000 |
Restricted cash | |
| 2,825,000 | |
| 2,673,000 | |
| 2,922,000 | |
| 2,591,000 |
Real estate properties, net | |
| 174,683,000 | |
| 179,102,000 | |
| 170,158,000 | |
| 173,127,000 |
Intangible lease assets, net | |
| 13,950,000 | |
| 14,687,000 | |
| 13,213,000 | |
| 13,704,000 |
Tenant and other receivables, net | |
| 4,673,000 | |
| 3,386,000 | |
| 5,571,000 | |
| 5,020,000 |
Deferred leasing commissions, net | |
| 402,000 | |
| 466,000 | ||||||
Other assets, net | |
| 1,683,000 | |
| 422,000 | |
| 2,098,000 | |
| 2,107,000 |
Equity-method investments | |
| 7,640,000 | |
| 7,902,000 | |
| 5,152,000 | |
| 5,182,000 |
Total assets | | $ | 217,945,000 | | $ | 219,126,000 | | $ | 210,252,000 | | $ | 213,303,000 |
| | | | | | | | | | | | |
LIABILITIES AND EQUITY | |
| | |
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| | |
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|
Accounts payable and accrued liabilities | | $ | 6,001,000 | | $ | 2,551,000 | | $ | 6,289,000 | | $ | 5,585,000 |
Security deposits | |
| 4,651,000 | |
| 4,651,000 | |
| 4,651,000 | |
| 4,651,000 |
Loans payable, net of debt issuance costs | |
| 180,223,000 | ��� |
| 180,370,000 | |
| 180,054,000 | |
| 180,169,000 |
Total liabilities | |
| 190,875,000 | |
| 187,572,000 | |
| 190,994,000 | |
| 190,405,000 |
| | | | | | | | | | | | |
Commitments and contingencies | |
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| | | | | | | ||||||
Stockholders’ Equity | |
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Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2022 and December 31, 2021 | |
| — | |
| — | ||||||
Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at September 30, 2022 and December 31, 2021 | |
| 23,000 | |
| 23,000 | ||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2023 and December 31, 2022 | |
| — | |
| — | ||||||
Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at June 30, 2023 and December 31, 2022 | |
| 23,000 | |
| 23,000 | ||||||
Additional paid-in capital | |
| 116,424,000 | |
| 116,401,000 | |
| 116,449,000 | |
| 116,432,000 |
Accumulated deficit | |
| (89,548,000) | |
| (85,041,000) | |
| (97,391,000) | |
| (93,734,000) |
Total stockholders’ equity | |
| 26,899,000 | |
| 31,383,000 | |
| 19,081,000 | |
| 22,721,000 |
Noncontrolling interests | |
| 171,000 | |
| 171,000 | |
| 177,000 | |
| 177,000 |
Total equity | |
| 27,070,000 | |
| 31,554,000 | |
| 19,258,000 | |
| 22,898,000 |
Total liabilities and equity | | $ | 217,945,000 | | $ | 219,126,000 | | $ | 210,252,000 | | $ | 213,303,000 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| Nine months Ended | | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| | September 30, |
| September 30, | | June 30, |
| June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenues: | | | |
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Total rental revenues | | $ | 5,416,000 | | $ | 1,853,000 | | $ | 16,392,000 | | $ | 4,061,000 | | $ | 5,380,000 | | $ | 5,435,000 | | $ | 10,747,000 | | $ | 10,976,000 |
Resident fees and services | | | 1,125,000 | | | — | | | 2,396,000 | | | — | | | 1,633,000 | | | 863,000 | | | 3,002,000 | | | 1,271,000 |
Asset management fees | |
| 165,000 | |
| 165,000 | |
| 495,000 | |
| 789,000 | ||||||||||||
Interest income from notes receivable | |
| — | |
| 7,000 | |
| — | |
| 20,000 | ||||||||||||
Acquisition and asset management fees | | | 147,000 | | | 165,000 | | | 295,000 | | | 330,000 | ||||||||||||
Total operating revenue | |
| 6,706,000 | |
| 2,025,000 | |
| 19,283,000 | |
| 4,870,000 | |
| 7,160,000 | |
| 6,463,000 | |
| 14,044,000 | |
| 12,577,000 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses: | |
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Property operating costs | |
| 846,000 | |
| 264,000 | |
| 2,385,000 | |
| 694,000 | |
| 746,000 | |
| 766,000 | |
| 1,552,000 | |
| 1,539,000 |
Resident costs | | | 1,281,000 | | | — | | | 2,474,000 | | | — | | | 1,056,000 | | | 818,000 | | | 2,266,000 | | | 1,193,000 |
General and administrative | |
| 1,280,000 | |
| 933,000 | |
| 3,460,000 | |
| 3,426,000 | |
| 1,091,000 | |
| 1,132,000 | |
| 2,200,000 | |
| 2,180,000 |
Depreciation and amortization | |
| 1,813,000 | |
| 524,000 | |
| 5,498,000 | |
| 1,316,000 | |
| 1,810,000 | |
| 1,848,000 | |
| 3,615,000 | |
| 3,685,000 |
Total operating expenses | |
| 5,220,000 | |
| 1,721,000 | |
| 13,817,000 | |
| 5,436,000 | |
| 4,703,000 | |
| 4,564,000 | |
| 9,633,000 | |
| 8,597,000 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | |
| 1,486,000 | |
| 304,000 | |
| 5,466,000 | |
| (566,000) | ||||||||||||
Operating income | |
| 2,457,000 | |
| 1,899,000 | |
| 4,411,000 | |
| 3,980,000 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss from equity-method investees | |
| (7,000) | |
| 191,000 | |
| (496,000) | |
| (595,000) | ||||||||||||
Gain on sale of equity-method investment | | | — | | | — | | | — | | | 3,515,000 | ||||||||||||
Income (loss) from equity-method investees | |
| 117,000 | |
| (1,131,000) | |
| 242,000 | |
| (489,000) | ||||||||||||
Other income | |
| 43,000 | |
| 5,000 | |
| 206,000 | |
| 17,000 | |
| 100,000 | |
| 161,000 | |
| 196,000 | |
| 163,000 |
Interest expense | |
| (3,498,000) | |
| (729,000) | |
| (9,634,000) | |
| (1,767,000) | |
| (4,336,000) | |
| (3,105,000) | |
| (8,470,000) | |
| (6,136,000) |
Net (loss) income | |
| (1,976,000) | |
| (229,000) | |
| (4,458,000) | |
| 604,000 | ||||||||||||
Net loss | |
| (1,662,000) | |
| (2,176,000) | |
| (3,621,000) | |
| (2,482,000) | ||||||||||||
Noncontrolling interests’ share in net (income) loss | |
| (12,000) | |
| (18,000) | |
| (49,000) | |
| (58,000) | |
| (19,000) | |
| (18,000) | |
| (36,000) | |
| (37,000) |
Net (loss) income applicable to common stockholders | | $ | (1,988,000) | | $ | (247,000) | | $ | (4,507,000) | | $ | 546,000 | ||||||||||||
Net loss applicable to common stockholders | | $ | (1,681,000) | | $ | (2,194,000) | | $ | (3,657,000) | | $ | (2,519,000) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share: | |
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Basic: | |
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Net (loss) income applicable to common stockholders | | $ | (0.09) | | $ | (0.01) | | $ | (0.20) | | $ | 0.02 | ||||||||||||
Basic and diluted loss per common share: | |
| | |
| | |
| | |
| | ||||||||||||
Net loss applicable to common stockholders | | $ | (0.07) | | $ | (0.10) | | $ | (0.16) | | $ | (0.11) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | |
| | |
| | |
| | |
| | ||||||||||||
Net (loss) income applicable to common stockholders | | $ | (0.09) | | $ | (0.01) | | $ | (0.20) | | $ | 0.02 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Weighted average shares used to calculate earnings per common share | |
| | | | | | | | |
|
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Basic | |
| 23,027,978 | |
| 23,027,978 | |
| 23,027,978 | |
| 23,027,978 | ||||||||||||
Diluted | |
| 23,027,978 | |
| 23,027,978 | |
| 23,027,978 | |
| 23,553,606 | ||||||||||||
Weighted average shares used to calculate basic and diluted earnings per common share | |
| 23,027,978 | | | 23,027,978 | | | 23,027,978 | |
| 23,027,978 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | | | Common Stock | | | | | | | | | | | | | ||||||||||||
| | | | Common | | | | | | | | | | | | | | | | | | | Common | | | | | | | | | | | | | | | | ||
| | Number | | Stock | | Additional | | | | | Total | | | | | | | | Number | | Stock | | Additional | | | | | Total | | | | | | | ||||||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||||||||
|
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity |
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity | ||||||||||||
Balance — January 1, 2022 |
| 23,027,978 | | $ | 23,000 | | $ | 116,401,000 | | $ | (85,041,000) | | $ | 31,383,000 | | $ | 171,000 | | $ | 31,554,000 | ||||||||||||||||||||
Balance — January 1, 2023 |
| 23,027,978 | | $ | 23,000 | | $ | 116,432,000 | | $ | (93,734,000) | | $ | 22,721,000 | | $ | 177,000 | | $ | 22,898,000 | ||||||||||||||||||||
Stock-based compensation |
| — | |
| — | |
| 8,000 | |
| — | |
| 8,000 | |
| — | |
| 8,000 |
| — | |
| — | |
| 7,000 | |
| — | |
| 7,000 | |
| — | |
| 7,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (18,000) | |
| (18,000) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (17,000) | |
| (17,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (325,000) | |
| (325,000) | |
| 19,000 | |
| (306,000) |
| — | |
| — | |
| — | |
| (1,976,000) | |
| (1,976,000) | |
| 17,000 | |
| (1,959,000) |
Balance — March 31, 2022 | | 23,027,978 | | $ | 23,000 | | $ | 116,409,000 | | $ | (85,366,000) | | $ | 31,066,000 | | $ | 172,000 | | $ | 31,238,000 | ||||||||||||||||||||
Balance — March 31, 2023 | | 23,027,978 | | $ | 23,000 | | $ | 116,439,000 | | $ | (95,710,000) | | $ | 20,752,000 | | $ | 177,000 | | $ | 20,929,000 | ||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 6,000 | | | — | | | 6,000 | | | — | | | 6,000 | | — | | | — | | | 10,000 | | | — | | | 10,000 | | | — | | | 10,000 |
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (18,000) | | | (18,000) | | — | | | — | | | — | | | — | | | — | | | (19,000) | | | (19,000) |
Net (loss) income | | — | | | — | | | — | | | (2,194,000) | | | (2,194,000) | | | 18,000 | | | (2,176,000) | | — | | | — | | | — | | | (1,681,000) | | | (1,681,000) | | | 19,000 | | | (1,662,000) |
Balance — June 30, 2022 | | 23,027,978 | | $ | 23,000 | | $ | 116,415,000 | | $ | (87,560,000) | | $ | 28,878,000 | | $ | 172,000 | | $ | 29,050,000 | ||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 9,000 | | | — | | | 9,000 | | | — | | | 9,000 | ||||||||||||||||||||
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (13,000) | | | (13,000) | ||||||||||||||||||||
Net (loss) income | | — | | | — | | | — | | | (1,988,000) | | | (1,988,000) | | | 12,000 | | | (1,976,000) | ||||||||||||||||||||
Balance — September 30, 2022 |
| 23,027,978 | | $ | 23,000 | | $ | 116,424,000 | | $ | (89,548,000) | | $ | 26,899,000 | | $ | 171,000 | | $ | 27,070,000 | ||||||||||||||||||||
Balance — June 30, 2023 | | 23,027,978 | | $ | 23,000 | | $ | 116,449,000 | | $ | (97,391,000) | | $ | 19,081,000 | | $ | 177,000 | | $ | 19,258,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | | | Common Stock | | | | | | | | | | | | | ||||||||||||
| | | | Common | | | | | | | | | | | | | | | | | | | Common | | | | | | | | | | | | | | | | ||
| | Number | | Stock | | Additional | | | | | Total | | | | | | | | Number | | Stock | | Additional | | | | | Total | | | | | | | ||||||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||||||||
|
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity |
| Shares | �� | Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity | ||||||||||||
Balance — January 1, 2021 |
| 23,027,978 | | $ | 23,000 | | $ | 116,335,000 | | $ | (84,456,000) | | $ | 31,902,000 | | $ | 195,000 | | $ | 32,097,000 | ||||||||||||||||||||
Balance — January 1, 2022 |
| 23,027,978 | | $ | 23,000 | | $ | 116,401,000 | | $ | (85,041,000) | | $ | 31,383,000 | | $ | 171,000 | | $ | 31,554,000 | ||||||||||||||||||||
Stock-based compensation |
| — | |
| — | |
| 36,000 | |
| — | |
| 36,000 | |
| — | |
| 36,000 |
| — | |
| — | |
| 8,000 | |
| — | |
| 8,000 | |
| — | |
| 8,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (16,000) | |
| (16,000) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (18,000) | |
| (18,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (1,758,000) | |
| (1,758,000) | |
| 18,000 | |
| (1,740,000) |
| — | |
| — | |
| — | |
| (325,000) | |
| (325,000) | |
| 19,000 | |
| (306,000) |
Balance — March 31, 2021 | | 23,027,978 | | $ | 23,000 | | $ | 116,371,000 | | $ | (86,214,000) | | $ | 30,180,000 | | $ | 197,000 | | $ | 30,377,000 | ||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 11,000 | | | — | | | 11,000 | | | — | | | 11,000 | ||||||||||||||||||||
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (19,000) | | | (19,000) | ||||||||||||||||||||
Net income (loss) | | — | | | — | | | — | | | 2,551,000 | | | 2,551,000 | | | 22,000 | | | 2,573,000 | ||||||||||||||||||||
Balance — June 30, 2021 | | 23,027,978 | | $ | 23,000 | | $ | 116,382,000 | | $ | (83,663,000) | | $ | 32,742,000 | | $ | 200,000 | | $ | 32,942,000 | ||||||||||||||||||||
Balance — March 31, 2022 | | 23,027,978 | | $ | 23,000 | | $ | 116,409,000 | | $ | (85,366,000) | | $ | 31,066,000 | | $ | 172,000 | | $ | 31,238,000 | ||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 9,000 | | | — | | | 9,000 | | | — | | | 9,000 | | — | | | — | | | 6,000 | | | — | | | 6,000 | | | — | | | 6,000 |
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (17,000) | | | (17,000) | | — | | | — | | | — | | | — | | | — | | | (18,000) | | | (18,000) |
Net (loss) income | | — | | | — | | | — | | | (247,000) | | | (247,000) | | | 18,000 | | | (229,000) | | — | | | — | | | — | | | (2,194,000) | | | (2,194,000) | | | 18,000 | | | (2,176,000) |
Balance — September 30, 2021 |
| 23,027,978 | | $ | 23,000 | | $ | 116,391,000 | | $ | (83,910,000) | | $ | 32,504,000 | | $ | 201,000 | | $ | 32,705,000 | ||||||||||||||||||||
Balance — June 30, 2022 | | 23,027,978 | | $ | 23,000 | | $ | 116,415,000 | | $ | (87,560,000) | | $ | 28,878,000 | | $ | 172,000 | | $ | 29,050,000 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | |
| | Nine months Ended September 30, | | Six Months Ended June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Cash flows from operating activities: | | | | | | | | | | | | |
Net (loss) income | | $ | (4,458,000) | | $ | 604,000 | ||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
| | |
| | ||||||
Net loss | | $ | (3,621,000) | | $ | (2,482,000) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
| | ||||||
Amortization of debt issuance costs | |
| 684,000 | |
| 72,000 | |
| 457,000 | |
| 457,000 |
Depreciation and amortization | |
| 5,498,000 | |
| 1,316,000 | |
| 3,615,000 | |
| 3,685,000 |
Amortization of above-market lease intangible | | | 47,000 | | | 16,000 | | | 32,000 | | | 32,000 |
Straight-line rents | |
| (1,108,000) | |
| 435,000 | |
| (606,000) | |
| (748,000) |
Stock-based compensation expense | |
| 23,000 | |
| 56,000 | |
| 17,000 | |
| 14,000 |
Gain on sale of equity-method investment | |
| — | | | (3,515,000) | ||||||
Loss from equity-method investees | |
| 496,000 | |
| 595,000 | ||||||
(Income) loss from equity-method investees | |
| (242,000) | |
| 489,000 | ||||||
Change in operating assets and liabilities: | |
| | |
| | |
| | |
| |
Tenant and other receivables, net | |
| 274,000 | |
| 634,000 | |
| 279,000 | |
| 202,000 |
Other assets | |
| (98,000) | |
| 561,000 | ||||||
Other assets, net | |
| 15,000 | |
| (261,000) | ||||||
Accounts payable and accrued liabilities | |
| 2,620,000 | |
| 436,000 | |
| 768,000 | |
| 2,387,000 |
Security deposits | | | — | | | 594,000 | ||||||
Net cash provided by operating activities | |
| 3,978,000 | |
| 1,804,000 | |
| 714,000 | |
| 3,775,000 |
| | | | | | | | | | | | |
Cash flows from investing activities: | |
| | |
| | |
| | |
| |
Real estate acquisitions | |
| — | |
| (20,133,000) | ||||||
Additions to real estate and other assets | |
| (483,000) | |
| — | |
| (170,000) | |
| (132,000) |
Investment in equity-method investees | |
| (1,111,000) | |
| (140,000) | |
| (156,000) | |
| (722,000) |
Proceeds from sale of equity-method investment | | | — | | | 5,411,000 | ||||||
Distributions received from equity-method investees | |
| 422,000 | |
| 1,339,000 | |
| 203,000 | |
| 272,000 |
Payments from notes receivable | | | — | | | 196,000 | ||||||
Net cash used in investing activities | |
| (1,172,000) | |
| (13,327,000) | |
| (123,000) | |
| (582,000) |
| | | | | | | | | | | | |
Cash flows from financing activities: | |
| | |
| | |
| | |
| |
Proceeds from issuance of loans payable | |
| — | | | 15,000,000 | ||||||
Payments of loans payable | |
| (831,000) | |
| (789,000) | |
| (572,000) | |
| (551,000) |
Distributions paid to noncontrolling interests | |
| (49,000) | | | (52,000) | |
| (36,000) | | | (36,000) |
Deferred financing costs | | | (173,000) | | | (228,000) | | | (86,000) | | | — |
Net cash (used in) provided by financing activities | |
| (1,053,000) | |
| 13,931,000 | ||||||
Net cash used in financing activities | |
| (694,000) | |
| (587,000) | ||||||
| | | | | | | | | | | | |
Net increase in cash, cash equivalents and restricted cash | |
| 1,753,000 | |
| 2,408,000 | ||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | |
| (103,000) | |
| 2,606,000 | ||||||
Cash, cash equivalents and restricted cash – beginning of period | |
| 13,161,000 | |
| 17,591,000 | |
| 14,163,000 | |
| 13,161,000 |
Cash, cash equivalents and restricted cash – end of period | | $ | 14,914,000 | | $ | 19,999,000 | | $ | 14,060,000 | | $ | 15,767,000 |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| | |
| | |
| |
Cash paid for interest | | $ | 7,864,000 | | $ | 1,382,000 | | $ | 7,789,000 | | $ | 4,809,000 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20222023
(Unaudited)
1. Organization
Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of 14 properties, 95.3% of four properties, 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 one property, 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, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties. In June 2021, we sold our 15% equity interest in an unconsolidated equity-method investment that held 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, including but not limited to Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), except where the context otherwise requires.
We conduct substantially all of our operations through the Operating Partnership, which is a Delaware limited partnership. We 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.
Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
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% noncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated within our condensed consolidated financial statements and owns four properties (the “JV Properties”) with another partially owned subsidiary. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we own a 95.3% interest in the four JV Properties, and CHREF owns a 4.7% interest.
Summit Union Life Holdings, LLC – Equity-Method Investment
In April 2015, through our Operating Partnership, we entered into a limited liability company 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. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have a 10% interest in the SUL JV which owns 17 properties.
Summit Fantasia Holdings, LLC – Equity-Method Investment
In September 2016, through our Operating Partnership, we entered into a limited liability company 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 I JV”). The Fantasia I JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have a 35% interest in the Fantasia I JV which owns one property at September 30, 2022 and owned two properties at December 31, 2021.property.
7
Summit Fantasia Holdings II, LLC – Equity-Method Investment
In December 2016, through our Operating Partnership, we entered into a limited liability company 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. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have a 20% interest in the Fantasia II JV which owns two properties.
7
Summit Fantasia Holdings III, LLC– Equity-Method Investment
In July 2017, through our Operating Partnership, we entered into a limited liability company 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 our condensed consolidated financial statements. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have a 10% interest in the Fantasia III JV which owns nine properties.
Summit Fantasy Pearl Holdings, LLC– Equity-Method Investment
In October 2017, through our Operating Partnership, we entered into a limited liability company 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 is accounted for under the equity-method in our condensed consolidated financial statements. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have a 10% interest in the FPH JV which owns six properties.
Indiana JV– Equity-Method InvestmentTaxable REIT Subsidiaries
In June 2021, we sold our 15% equity interest in the Indiana joint venture (the “Indiana JV”) for approximately $5.4 million. See Note 5 for further information.
As of September 30, 2022 and December 31, 2021, we have a 0% interest in the Indiana JV.
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 I JV, Fantasia II JV, Fantasia III JV, and FPH JV and the Indiana JV prior to the sale of our equity interest on June 11, 2021 (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All 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.
SHOP TRS LLC
SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary that is the sole member for two of our 100% owned real estate properties that are leased to an affiliated subsidiary (see Note 3 under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial Assisted Living”), collectively, the “Operated Properties”) and the operations are consolidated in our condensed consolidated financial statements.
Coronavirus (COVID-19)
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. In 2022, two of our tenants experienced a material adverse effect on their operations related to COVID-19, which affected their ability to make rent payments in 2022 and resulted in the termination of the leases and becoming Operated Properties (see Note 3 for further information). Additionally, see Note 5 for further discussion related to our Equity-Method Investments.
The extent to which COVID-19 could continue to impact our business, cash flow and results of operations is highly uncertain and cannot be predicted with confidence. The 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 in future periods.
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, 20212022 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022. In addition, refer to our revenue recognition note below related to our resident fees and services.2023.
8
The accompanying condensed consolidated balance sheet at December 31, 20212022 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, 20212022 consolidated financial statements and contained in our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the SEC on March 31, 20222023 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, 20212022 have been omitted in this report.
8
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 and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). 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 three and ninesix months ended SeptemberJune 30, 20222023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023.
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.
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Cash and cash equivalents | | $ | 12,089,000 | | $ | 10,488,000 |
Restricted cash | |
| 2,825,000 | |
| 2,673,000 |
Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows | | $ | 14,914,000 | | $ | 13,161,000 |
Coronavirus (COVID-19)
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. Two of our tenants have experienced a material adverse effect on their operations related to COVID-19, which has affected their ability to make rent payments in 2022 and 2021 (see Note 3 for further information on its impact on us).
The extent to which COVID-19 could continue to impact our business, cash flow and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The 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 in future periods.
Reclassification of Intangible Lease Assets
The following table provides a reconciliation for the reclassification of our intangible lease assets as of December 31, 2021 in our consolidatedbalance sheets to conform to the presentation as of September 30, 2022:
| | | | | | | | | |
|
| As previously reported |
| Increase (decrease) |
| As reclassified | |||
Real estate properties, net | | $ | 192,862,000 | | $ | (13,760,000) | | $ | 179,102,000 |
Intangible lease assets, net | | $ | — | | $ | 14,687,000 | | $ | 14,687,000 |
Other assets, net | | $ | 1,349,000 | | $ | (927,000) | | $ | 422,000 |
Total assets | | $ | 219,126,000 | | $ | — | | $ | 219,126,000 |
The intangible lease assets related to our prior acquisitions in 2021 were reclassified from real estate properties, net and other assets, net into a separate line item as of September 30, 2022. The result of this reclassification did not have any effect on our total assets, liabilities, accumulated deficit, net loss or statements of cash flows.
9
Revenue Recognition - Resident Fees and Services
We recognize resident fees and services revenue at the amount that we expect to be entitled to in exchange for providing resident care and services. Resident fees are recognized and billed monthly based on the contracted rate in the resident lease agreements and the reimbursements from Medicaid are based on contracted reimbursement rates. These amounts are paid directly from the residents and/or third-party payors (currently only Medicaid). Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by us. The majority of resident fees and services is attributable to the portion of the base monthly lease fee in the resident lease agreement. The Company has elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognizes the resident fee revenue based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the lease component is the predominant component and the services included under the resident agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. Resident services consist of care level services and certain other ancillary services (i.e., housekeeping, laundry, etc.). These services are provided and paid for in addition to the standard fees included in each resident lease (i.e., room and board, standard meals, etc.).
Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and our historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigation.
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Cash and cash equivalents | | $ | 11,138,000 | | $ | 11,572,000 |
Restricted cash | |
| 2,922,000 | |
| 2,591,000 |
Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows | | $ | 14,060,000 | | $ | 14,163,000 |
3. Investments in Real Estate Properties
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, our investments in real estate properties, including those held by our consolidated subsidiaries (excluding the 35 properties owned by our unconsolidated Equity-Method Investments), are set forth below:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Land | | $ | 15,565,000 | | $ | 15,565,000 | | $ | 15,565,000 | | $ | 15,565,000 |
Buildings and improvements | |
| 166,989,000 | |
| 166,989,000 | |
| 166,989,000 | |
| 166,989,000 |
Less: accumulated depreciation | |
| (14,840,000) | |
| (11,395,000) | |
| (18,264,000) | |
| (15,985,000) |
Buildings and improvements, net | |
| 152,149,000 | |
| 155,594,000 | |
| 148,725,000 | |
| 151,004,000 |
Furniture and fixtures | |
| 12,440,000 | |
| 12,137,000 | |
| 12,570,000 | |
| 12,440,000 |
Less: accumulated depreciation | |
| (5,471,000) | |
| (4,194,000) | |
| (6,702,000) | |
| (5,882,000) |
Furniture and fixtures, net | |
| 6,969,000 | |
| 7,943,000 | |
| 5,868,000 | |
| 6,558,000 |
Real estate properties, net | | $ | 174,683,000 | | $ | 179,102,000 | | $ | 170,158,000 | | $ | 173,127,000 |
For the three months ended SeptemberJune 30, 2023 and 2022, and 2021, depreciation and amortization expense (excluding intangible lease intangibles amortization and leasing commission amortization) was approximately $1.6 million and $0.5$1.6 million, respectively. For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, depreciation expense (excluding intangible lease amortization and leasing commission amortization) was approximately $4.8$3.1 million and $1.3$3.2 million, respectively.
As of SeptemberJune 30, 2022,2023, our portfolio consisted of 18 real estate properties, 16 of which were 100% leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (see below under Pennington Gardens Operations LLC and Sundial Operations LLC).
During 2021, our tenants for the Pennington Gardens and Sundial Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues that affected their ability to make their rent payments in 2022 and 2021. As a result, we experienced the following impacts:
10
Pennington Gardens Operations LLC
In March 2021, under a receivership, we began recording rent payments on a cash basis for our Pennington Gardens facility and wrote off the remaining straight-line rent receivable of $0.4 million. In October 2021, we reached an agreement with the tenant to terminate the lease. We notified the lender and the U.S. Department of Housing and Urban Development (“HUD”) and requested emergency approval to change the operator and terminate the lease. In November 2022, the operator change was approved by HUD.
On February 3, 2022, the current receiver, who was acting as the operator, received the license to be the licensed operator. As such, on February 10, 2022, the tenant’s lease was terminated, and we received $0.2 million from the tenant as part of the settlement agreement which was recorded in total rental revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2022. Concurrently, we entered into a new lease agreement with Pennington Gardens Operations LLC, the newly formed operating company for Pennington Gardens, which is a wholly owned subsidiary of SHOP TRS LLC, a wholly-owned taxable REIT subsidiary of Summit. As such, the operations of Pennington Gardens are consolidated in our financial statements beginning February 11, 2022, and all intercompany transactions have been eliminated. For the three and nine months ended September 30, 2022, revenues from Pennington Gardens Operations are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
Sundial Operations LLC
In October 2021, we reached an agreement with the tenant of our Sundial Assisted Living facility in Redding, California to terminate the lease, and we requested approval from HUD to terminate the lease and install a new licensed operator/manager. Beginning in June 2021, we recorded rent payments on a cash basis and in May 2021, wrote off the remaining straight-line rent receivable of $0.1 million.
On June 6, 2022, the new operator received approval to be the licensed operator of the facility and the previous tenant’s lease was terminated. We received $0.05 million from the tenant as part of the settlement agreement, which was recorded in total rental revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2022. On June 7, 2022, we entered into a new lease agreement with Sundial Operations LLC, the newly formed operating company for Sundial Assisted Living, which is a wholly owned subsidiary of SHOP TRS LLC. As such, the operations of Sundial Assisted Living will be consolidated in our financial statements as of June 7, 2022. For the three and nine months ended September 30, 2022, revenues from Sundial Operations are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
119
During 2022, our tenants for the Pennington Gardens and Sundial Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues that affected their ability to make their rent payments in 2022. As a result, we experienced the following impacts:
Pennington Gardens Operations LLC
In February 2022, our former tenant’s lease was terminated and we received approximately $0.2 million under a settlement agreement which is recorded in total rental revenues in the condensed consolidated statements of operations. Concurrently, we entered into a management agreement with a new operator that began operating the facility, Pennington Gardens and we entered into a new lease agreement with Pennington Gardens Operations LLC, the newly formed operating company for Pennington Gardens, which is a wholly owned subsidiary of SHOP TRS. As such, the operations of Pennington Gardens are consolidated in our financial statements beginning February 11, 2022, and all intercompany transactions have been eliminated. For the three and six months ended June 30, 2023 and for the period from February 11, 2022 through June 30, 2022, revenues from Pennington Gardens Operations are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
Sundial Operations LLC
In June 2022, our former tenant’s lease was terminated and we entered into a management agreement with a new operator that began operating the facility, Sundial Assisted Living. Concurrently, we entered into a new lease agreement with Sundial Operations LLC, the newly formed operating company for Sundial Assisted Living, which is a wholly owned subsidiary of SHOP TRS. As such, for the three and six months ended June 30, 2023 and for the period from June 7, 2022 through June 30, 2022, the operations of Sundial Assisted Living are consolidated in our financial statements and revenues from Sundial Assisted Living are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
The following table provides summary information regarding our portfolio (excluding the 35 properties owned by our unconsolidated Equity-Method Investments and the $12.75 million loan from Oxford Finance, LLC (“Oxford”) (see Note 4) with Summit Georgia Holdings LLC, our wholly-owned subsidiary) as of SeptemberJune 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Loans | | | | | | | | | | | Loans | ||
| | | | | | | | | | | Payable, | | | | | | | | | | | Payable, | ||
| | | | | | | | | | | Excluding | | | | | | | | | | | Excluding | ||
| | | | | | | | | | | Debt | | | | | | | | | | | Debt | ||
| | | | | | | | Purchase | | Issuance | | | | | | | | Purchase | | Issuance | ||||
Property |
| Location |
| Date Purchased |
| Type(1) |
| Price |
| Costs |
| Location |
| Date Purchased |
| Type(1) |
| Price |
| Costs | ||||
Sheridan Care Center |
| Sheridan, OR | | August 3, 2012 |
| SNF | | $ | 4,100,000 | | $ | 4,044,000 |
| Sheridan, OR | | August 3, 2012 |
| SNF | | $ | 4,100,000 | | $ | 3,916,000 |
Fernhill Care Center |
| Portland, OR | | August 3, 2012 |
| SNF | |
| 4,500,000 | |
| 3,548,000 |
| Portland, OR | | August 3, 2012 |
| SNF | |
| 4,500,000 | |
| 3,435,000 |
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County, TX | | September 14, 2012 |
| SNF | |
| 15,000,000 | |
| 11,381,000 |
| Galveston County, TX | | September 14, 2012 |
| SNF | |
| 15,000,000 | |
| 11,219,000 |
Pacific Health and Rehabilitation Center |
| Tigard, OR | | December 24, 2012 |
| SNF | |
| 8,140,000 | |
| 5,915,000 |
| Tigard, OR | | December 24, 2012 |
| SNF | |
| 8,140,000 | |
| 5,727,000 |
Brookstone of Aledo |
| Aledo, IL | | July 2, 2013 |
| AL | |
| 8,625,000 | |
| 6,633,000 |
| Aledo, IL | | July 2, 2013 |
| AL | |
| 8,625,000 | |
| 6,531,000 |
Sundial Assisted Living |
| Redding, CA | | December 18, 2013 |
| AL | |
| 3,500,000 | |
| 3,698,000 |
| Redding, CA | | December 18, 2013 |
| AL | |
| 3,500,000 | |
| 3,655,000 |
Pennington Gardens |
| Chandler, AZ | | July 17, 2017 |
| AL/MC | |
| 13,400,000 | |
| 10,078,000 |
| Chandler, AZ | | July 17, 2017 |
| AL/MC | |
| 13,400,000 | |
| 9,960,000 |
Yucaipa Hill Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | | 10,715,000 | | | 8,014,000 | | Yucaipa, CA | | July 2, 2021 | | SNF | | | 10,715,000 | | | 8,014,000 |
Creekside Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | | 4,780,000 | | | 3,575,000 | | Yucaipa, CA | | July 2, 2021 | | SNF | | | 4,780,000 | | | 3,575,000 |
University Post Acute | | Mentone, CA | | July 2, 2021 | | SNF | | | 4,560,000 | | | 3,411,000 | | Mentone, CA | | July 2, 2021 | | SNF | | | 4,560,000 | | | 3,411,000 |
Calhoun Health Center | | Calhoun, GA | | December 30, 2021 | | SNF | | | 7,670,000 | | | 6,549,000 | | Calhoun, GA | | December 30, 2021 | | SNF | | | 7,670,000 | | | 6,549,000 |
Maple Ridge Health Care Center | | Cartersville, GA | | December 30, 2021 | | SNF | | | 13,548,000 | | | 11,568,000 | | Cartersville, GA | | December 30, 2021 | | SNF | | | 13,548,000 | | | 11,568,000 |
Chatsworth Health Care Center | | Chatsworth, GA | | December 30, 2021 | | SNF | | | 29,785,000 | | | 25,432,000 | | Chatsworth, GA | | December 30, 2021 | | SNF | | | 29,785,000 | | | 25,432,000 |
East Lake Arbor | | Decatur, GA | | December 30, 2021 | | SNF | | | 15,640,000 | | | 13,354,000 | | Decatur, GA | | December 30, 2021 | | SNF | | | 15,640,000 | | | 13,354,000 |
Fairburn Health Care Center | | Fairburn, GA | | December 30, 2021 | | SNF | | | 14,644,000 | | | 12,503,000 | | Fairburn, GA | | December 30, 2021 | | SNF | | | 14,644,000 | | | 12,503,000 |
Grandview Health Care Center | | Jasper, GA | | December 30, 2021 | | SNF | | | 10,061,000 | | | 8,591,000 | | Jasper, GA | | December 30, 2021 | | SNF | | | 10,061,000 | | | 8,591,000 |
Rosemont at Stone Mountain | | Stone Mountain, GA | | December 30, 2021 | | SNF | | | 23,908,000 | | | 20,414,000 | | Stone Mountain, GA | | December 30, 2021 | | SNF | | | 23,908,000 | | | 20,414,000 |
Willowwood Nursing Center & Rehab | | Flowery Branch, GA | | December 30, 2021 | | SNF | | | 14,744,000 | | | 12,589,000 | | Flowery Branch, GA | | December 30, 2021 | | SNF | | | 14,744,000 | | | 12,589,000 |
Total: | | | | |
| | | $ | 207,320,000 | | $ | 171,297,000 | | | | |
| | | $ | 207,320,000 | | $ | 170,443,000 |
(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.
|
|
10
Future Minimum Lease Payments
The future minimum lease payments to be received under our existing tenant operating leases (excluding the 35 properties owned by our unconsolidated Equity-Method Investments and the intercompany leaseslease between our wholly-owned subsidiaries,subsidiaries: Summit Chandler LLC and Pennington Gardens, Operations LLC,and HP Redding LLC and Sundial Operations LLC)Sundial) as of SeptemberJune 30, 2022,2023, for the period from OctoberJuly 1, 20222023 to December 31, 20222023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
Years ending |
| | |
| | |
October 1, 2022 to December 31, 2022 | | $ | 4,433,000 | |||
2023 | |
| 17,983,000 | |||
July 1, 2023 to December 31, 2023 | | $ | 9,006,000 | |||
2024 | |
| 18,272,000 | |
| 18,272,000 |
2025 | |
| 18,566,000 | |
| 18,566,000 |
2026 | |
| 18,865,000 | |
| 18,865,000 |
2027 | |
| 19,168,000 | |||
Thereafter | |
| 165,462,000 | |
| 146,294,000 |
| | $ | 243,581,000 | | $ | 230,171,000 |
20222023 Acquisitions
None.
122022 Acquisitions
TableImpairment of Contents
2021 Acquisitions
CA3Real Estate Properties
On July 2, 2021, through our wholly-owned subsidiary, we acquired three skilled nursing facilities, two located in Yucaipa, California and one located in Mentone, California (collectively, the “CA3 Properties”), for the purchase price of $20,055,000, which was funded through cash on hand plus the proceeds from the loan described in Note 4. We incurred approximately $80,000 in acquisition costs in connection with these acquisitions. The CA3 Properties are leased to three tenants under three separate 15-year triple net leases, each of which has two five-year renewal options.
GA8 Properties
On December 30, 2021, through Summit Georgia Holdings LLC, our wholly-owned subsidiary, we acquired eight skilled nursing facilities located in Georgia (collectively, the “GA8 Properties”), for the total purchase price of $130,000,000, which was funded through cash on hand plus the proceeds from the loans described in Note 4. The GA8 Properties are leased to eight tenants under eight separate 15-year triple net leases, each of which has two five-year renewal options.
Leasing Commissions
As a self-managed REIT,result of our ongoing analysis for potential impairment of our investments in real estate, we have not paid leasing commissions since 2013. Leasing commissions are capitalized at cost and amortized on a straight-line basis overmay be required to adjust the related lease term. Ascarrying value of September 30, 2022 and December 31, 2021,certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the unamortized balance of capitalized leasing commissions was approximately $0.4 million and $0.5 million, respectively. Amortization expense for the threesix months ended SeptemberJune 30, 2022 and 2021 was approximately $15,000 and $18,000, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was approximately $63,000 and $53,000, respectively.2023 or 2022.
1311
4. Loans Payable
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, our loans payable consisted of the following:
| | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
| June 30, 2023 |
| December 31, 2022 | ||||
Loans payable to Lument (formerly ORIX Real Estate Capital, LLC) (insured by HUD) in monthly installments of approximately $183,000, including interest, ranging from a fixed rate of 2.79% to 4.2%, due in September 2039 through April 2055, and as of September 30, 2022 and December 31, 2021, collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial and Friendship Haven. | | $ | 35,219,000 | | $ | 35,934,000 | ||||||
Loans payable to Lument (formerly ORIX Real Estate Capital, LLC) (insured by HUD) in monthly installments of approximately $183,000, including interest, ranging from a fixed rate of 2.79% to 4.2%, due in September 2039 through April 2055, and as of June 30, 2023 and December 31, 2022, collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial and Friendship Haven. | | $ | 34,484,000 | | $ | 34,976,000 | ||||||
| | | | | | | | | | | | |
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. | | | 10,078,000 | | | 10,194,000 | | | 9,959,000 | | | 10,039,000 |
| | | | | | | | | | | | |
Loan payable to CIBC Bank, USA in monthly installments of approximately of $106,000 including cash collateral fund payments, variable interest rate as noted below (6.63% and 5% at September 30, 2022 and December 31, 2021, respectively), due in July 2024, and as of December 31, 2021, collateralized by Yucaipa Hill Post Acute, Creekside Post Acute and University Post Acute. | | | 15,000,000 | | | 15,000,000 | ||||||
Loan payable to CIBC Bank, USA in monthly installments of approximately of $133,000 including cash collateral fund payments, variable interest rate (9.3% and 8.2% at June 30, 2023 and December 31, 2022, respectively), due in July 2024, and as of December 31, 2022, collateralized by Yucaipa Hill Post Acute, Creekside Post Acute and University Post Acute (“CA3 Properties”). | | | 15,000,000 | | | 15,000,000 | ||||||
| | | | | | | | | | | | |
Loan payable to CIBC Bank, USA in monthly installments of approximately $459,000 (interest only through December 2023) variable interest rate as noted below (6.1% and 4% at September 30, 2022 and December 31, 2021, respectively), due in December 2024, and as of September 30, 2022 and December 31, 2021, collateralized by Calhoun Health Center, Maple Ridge Health Care Center, Chatsworth Health Care Center, East Lake Arbor, Fairburn Health Care Center, Grandview Health Care Center, Rosemont at Stone Mountain, and Willowwood Nursing Center & Rehab. | | | 91,000,000 | | | 91,000,000 | ||||||
Loan payable to CIBC Bank, USA in monthly installments of approximately $600,000 (interest only through December 2023) variable interest rate (8.7% and 7.7% at June 30, 2023 and December 31, 2022, respectively), due in December 2024, and collateralized by Calhoun Health Center, Maple Ridge Health Care Center, Chatsworth Health Care Center, East Lake Arbor, Fairburn Health Care Center, Grandview Health Care Center, Rosemont at Stone Mountain, and Willowwood Nursing Center & Rehab (“GA8 Properties”). | | | 91,000,000 | | | 91,000,000 | ||||||
| | | | | | | | | | | | |
Loan payable to Oxford Finance, LLC in monthly installments of approximately $226,000 (interest only through maturity), variable interest rate as noted below (13.6% and 12% at September 30, 2022 and December 31, 2021, respectively) due in March 2025, collateralized in second position by Calhoun Health Center, Maple Ridge Health Care Center, Chatsworth Health Care Center, East Lake Arbor, Fairburn Health Care Center, Grandview Health Care Center, Rosemont at Stone Mountain, and Willowwood Nursing Center & Rehab. | | | 20,000,000 | | | 20,000,000 | ||||||
Loan payable to Oxford Finance, LLC in monthly installments of approximately $260,000 (interest only through maturity), variable interest rate (16.2% and 15.1% at June 30, 2023 and December 31, 2022, respectively) due in March 2025, collateralized in second position by the GA8 Properties. | | | 20,000,000 | | | 20,000,000 | ||||||
| | | | | | | | | | | | |
Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $144,000 (interest only through maturity), variable interest rate as noted below (13.6% and 12% at September 30, 2022 and December 31, 2021, respectively) due in December 2026, secured by the equity interests of our wholly-owned subsidiary, Summit Georgia Holdings LLC, the parent holding company for the GA8 Properties. | | | 12,750,000 | | | 12,750,000 | ||||||
Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $168,000 (interest only through maturity), variable interest rate (16.2% and 15.1% at June 30, 2023 and December 31, 2022, respectively) due in December 2026, secured by the equity interests of our wholly-owned subsidiary, Summit Georgia Holdings LLC, the parent holding company for the GA8 Properties. | | | 12,750,000 | | | 12,750,000 | ||||||
| |
| 184,047,000 | |
| 184,878,000 | |
| 183,193,000 | |
| 183,765,000 |
Less debt issuance costs | |
| (3,824,000) | |
| (4,508,000) | |
| (3,139,000) | |
| (3,596,000) |
Total loans payable | | $ | 180,223,000 | | $ | 180,370,000 | | $ | 180,054,000 | | $ | 180,169,000 |
As of SeptemberJune 30, 2022,2023, we have total debt obligations of approximately $184.0$183.2 million that will mature between 2024 and 2055. 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 SeptemberJune 30, 2022,2023, we were in compliance with all of our debt covenants.covenants except for our GA8 Properties which were out of compliance with their consolidated minimum EBITDAR covenant. We have requested a waiver.
During the three months ended SeptemberJune 30, 20222023 and 2021,2022, we incurred approximately $3.2$4.1 million and $0.7$2.7 million of interest expense, respectively, (excludingexcluding debt issuance costs, amortization and interest expense related to the Oxford mezzanine loan as noted below (“Oxford Monthly Fee”)), related to our loans payable. During the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, we incurred approximately $8.4$8.0 million and $1.7$5.2 million, respectively, of interest expense (excluding debt issuance costs, and amortization and interest expense related to the Oxford mezzanine loan as noted below (“Oxford Monthly Fee”))Fee) related to our loans payable.
1412
In connection with our loans payable, we incurred debt issuance costs. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the unamortized balance of the debt issuance costs was approximately $3.8$3.1 million and $4.5$3.6 million, respectively. 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 each of the three months ended SeptemberJune 30, 20222023 and 2021,2022, $0.2 million and $0.01 million, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations. For each of the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, $0.7$0.5 million and $0.01 million, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations.
During the three months ended SeptemberJune 30, 2023 and 2022, we incurred approximately $0.1$0 million and $0.2 million, respectively, of interest expense related to the Oxford Monthly Fee which is included in interest expense in our condensed consolidated statements of operations. During the ninesix months ended SeptemberJune 30, 2023 and 2022, we incurred approximately $0.5$0 million and $0.4 million, respectively of interest expense related to the Oxford Monthly Fee and is included in interest expense in our condensed consolidated statements of operations.
The principal payments due on the loans payable (excluding debt issuance costs and cash collateral funds)costs) for the period from OctoberJuly 1, 20222023 to December 31, 20222023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
| | Principal | | Principal | ||
Years Ending |
| Amount |
| Amount | ||
October 1, 2022 to December 31, 2022 | | $ | 283,000 | |||
2023 | |
| 1,158,000 | |||
July 1, 2023 to December 31, 2023 | | $ | 584,000 | |||
2024 | |
| 107,201,000 | |
| 107,201,000 |
2025 | |
| 21,246,000 | |
| 21,246,000 |
2026 | |
| 14,042,000 | |
| 14,042,000 |
2027 | |
| 1,341,000 | |||
Thereafter | |
| 40,117,000 | |
| 38,779,000 |
| | $ | 184,047,000 | | $ | 183,193,000 |
The following information notes our 2021 loan activity:
CA3 Properties
On July 2,In 2021, in conjunction with the acquisition of the CA3 Properties (see Note 3), we entered into a first priority $15.0 million mortgage loan collateralized by the CA3 Properties with CIBC Bank, USA (“CIBC”). The loan bears interest at the One Month London Interbank Offer Rate (“LIBOR”) (with a floor of 1%) plus 4.00%, or the Secured Overnight Financing Rate (“SOFR”) when LIBOR is discontinued, and matures on July 2, 2024. The loan is interest onlySee table above listing loans payable for the first year and thereafter requires additional monthly installments of principal that are held by the lender in a cash loan guarantee fund until maturity. The loan may be prepaid at any time with no penalty if the CA3 Properties are refinanced through HUD, otherwise we would be required to pay a prepayment premium equal to three percent (3%), two percent (2%) and one percent (1%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively. In the event the Company sells or transfers one or more properties, we would be required to pay an exit fee equal to (i) one-half of one percent (0.5%) of the amount of the outstanding principal balance of the Loan if such sale or transfer occurs on or prior to the second (2nd) year anniversary of the Closing Date; and (ii) zero percent (0%) if such sale or transfer occurs after the second (2nd) year anniversary of the Closing Date.futher information.
GA8 Properties
WeIn 2021, we acquired our interest in the GA8 Properties subject to a $91.0 million first priority mortgage loan with CIBC collateralized by those properties, a $20$20.0 million subordinated term loan with Oxford Financing LLC (“Oxford”) collateralized by those properties and a $12.75 million mezzanine loan with Oxford secured by the equity interests of the wholly-owned subsidiary, Summit Georgia Holdings LLC, the parent holding company for the GA8 Properties.
15
On December 30, 2021, we entered into a loan agreement with CIBC See table above listing loans payable for $91.0 million in principal amount. The loan bears interest at the SOFR plus 3.50% with a SOFR floor of 50 basis points, or the bank’s base rate plus 0.75% (with a minimum of 4.0%), and matures on December 30, 2024. The loan is interest-only for two years and then requires additional monthly installments of principal that are held by the lender in a cash loan guarantee fund until maturity. The loan may be prepaid at any time with no penalty if the GA8 Properties are refinanced through HUD, otherwise we would be required to pay an a prepayment premium equal to three percent (3%), two percent (2%) and one percent (1%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively. In the event the Company sells or transfers one or more of the GA8 Properties, we would be required to pay an exit fee equal to (i) one-half of one percent (0.5%) of the amount of the outstanding principal balance of the Loan if such sale or transfer occurs on or prior to the second (2nd) year anniversary of the Closing Date; and (ii) zero percent (0%) if such sale or transfer occurs after the second (2nd) year anniversary of the Closing Date.
On December 30, 2021, we entered into a subordinated term loan agreement with Oxford for $20.0 million in principal amount. The loan bears interest at LIBOR plus 11.0% with a LIBOR floor of 100 basis points (or with a LIBOR replacement rate), and matures on September 30, 2025. The loan is interest only. The entire loan may be prepaid at any time and would be subject at that time to a prepayment premium fee equal to five percent (5%), two percent (2%) and one percent (1%) of the amount repaid if the repayment is made or the loan is accelerated prior to first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively, or no prepayment fee if the GA8 Properties are refinanced through HUD. Additionally, we are required to pay an exit fee of $100,000 if the loan is paid off by December 31, 2024, or $140,000 if the loan is paid off after that date.
On December 30, 2021, we entered into a mezzanine loan agreement with Oxford for $12.75 million in principal amount. The loan bears interest at LIBOR plus 11.0% with a LIBOR floor of 100 basis points (or with a LIBOR replacement rate), and matures on December 30, 2026. The loan is interest-only and requires a monthly fee in the amount of (i) twenty-two percent (22%) of net cash flow attributable to each month or portion thereof during the loan term, and (ii) five percent (5%) of net cash flow attributable to each month or portion thereof during the post-repayment period which is the earlier of (i) the second anniversary of the loan repayment date and (ii) the date upon which Summit no longer owns any direct or indirect interest in any of the properties and all accrued monthly fees, all excess cash fees and all other liabilities then due agent or lenders are indefeasibly paid in full. The entire Oxford mezzanine loan may be prepaid at any time prior to the three-year anniversary and would be subject at that time to a yield maintenance premium fee equal to the interest that would have been paid for the full three years, which will be due and payable upon the earliest of the maturity or acceleration of the loan, or payment of the loan in full.futher information.
HUD-insured loans
We have six properties with HUD-insured loans from Lument Capital (formerly ORIX Real Estate Capital, LLC) and one property with a HUD-insured loan from Capital One Multifamily Finance, LLC. 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.
13
5. Equity-Method Investments
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the balances of our Equity-Method Investments were approximately $7.6$5.2 million and $7.9$5.2 million, respectively, and are as follows:
Summit Union Life Holdings, LLC
The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”).
16
Under the SUL LLC Agreement, net operating cash flow of the SUL JV is distributed monthly, first to the Operating Partnership and Best Years pari 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 Years pari 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%.
For the ninesix months ended SeptemberJune 30, 2023 and 2022, we invested approximately $821,000$156,000 and $650,000, respectively, related to capital calls for the SUL JV. In JulyDuring 2022, the SUL JV entered into an agreementagreements with a brokerbrokers to market the property, Riverglen House of Littleton,three properties for sale.sale, however, no agreements for such sales have been executed.
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the balance of our equity-method investment related to the SUL JV was approximately $3.3$2.4 million and $2.9$2.4 million, respectively.
Summit Fantasia Holdings, LLC
The Fantasia I JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia I LLC Agreement”).
Under the Fantasia I LLC Agreement, net operating cash flow of the Fantasia I JV is distributed quarterly, first to the Operating Partnership and Fantasia pari passu 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. All capital proceeds from the sale of the properties held by the Fantasia I JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 50% to Fantasia and 50% to the Operating Partnership.
For the ninesix months ended SeptemberJune 30, 2023 and 2022, we invested approximately $290,000$0 and $72,000, respectively, related to capital calls for the Fantasia I JV. In June 2022, the Fantasia I JV recorded an impairment charge of approximately $3.2 million and we recorded our 35% share of the impairment of approximately $1.1 million in loss from equity-method investees in the condensed consolidated statements of operations for the ninethree and six months ended SeptemberJune 30, 2022. Additionally, we determined the fair value of our investment in the Fantasia I JV to be impaired and recorded a $0.1 million impairment charge in June 2022 and an additional $0.1 million impairment charge in September 2022 which is recorded in the loss from equity-method investees in the condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 2022.
In August 2022, the Fantasia I JV agreed to sell oneits remaining property, Sun Oak Assisted Living; therefore the property is considered as Held For SaleLiving. In July 2023, Fantasia assigned their 65% interest, for no consideration, in the Fantasia I JV as of September 30, 2022.to Summit.
As of SeptemberJune 30, 20222023 and December 31, 2021, the balance of2022, our equity-method investment related to the Fantasia I JV was approximately $1.1 million and $2.0 million, respectively.$0.
Summit Fantasia Holdings II, LLC
The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”).
14
Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia II JV is distributed quarterly, first to the Operating Partnership and Fantasia pari 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 Fantasia pari 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.
In October 2022,June 2023, the tenant for the two properties in the Fantasia II JV entered intofiled for receivership. The two properties are currently being operated by the receivership estate in conjunction with a purchasethird party manager under a one-year management agreement. As of June 30, 2023, there has been no change in the tenant leases and sale agreement to sell their two properties.the Fantasia II JV is currently negotiating with the receiver and manager regarding ongoing lease terms.
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.2 million and $1.3$1.2 million, respectively.
17
Summit Fantasia Holdings III, LLC
The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”).
Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV is distributed quarterly, first to the Operating Partnership and Fantasia pari 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 Fantasia pari 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.6 million and $1.5$1.6 million, respectively.
Summit Fantasy Pearl Holdings, LLC
The 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, net operating cash flow of the FPH JV is distributed quarterly, first to the members pari 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 members pari 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.
AsIn December 2022, Summit recorded an impairment of September 30, 2022approximately $0.2 million in the FPH JV due to issues related to tenant operations, and December 31, 2021, the balance ofconsequently, reduced our equity-method investment relatedbalance to the FPH JV was approximately $0.4 million and $0.2 million, respectively.
Indiana JV
In June 2021, we sold our 15% interest in the Indiana JV for approximately $5.4 million in cash. As of September 30, 2022 and December 31, 2021, we have a 0% interest in the Indiana JV.
Summarized Financial Data for Equity-Method Investments
Our Equity-Method Investments are significant equity-method investments in the aggregate.
The results of operations of our Equity-Method Investments for the nine months ended September 30, 2022 are summarized below:
| | | | | | | | | | | | | | | | | | | |
| | | | | Fantasia | | Fantasia | | Fantasia | | FPH | | Combined |
| |||||
|
| SUL JV |
| JV |
| II JV |
| III JV |
| JV |
| Total |
| ||||||
Revenue | | $ | 15,670,000 | | $ | 1,962,000 | | $ | 2,147,000 | | $ | 6,250,000 | | $ | 2,773,000 | | $ | 28,802,000 | |
Income (loss) from operations | | $ | 4,484,000 | | $ | (2,480,000) | | $ | 1,484,000 | | $ | 3,026,000 | | $ | 1,252,000 | | $ | 7,766,000 | |
Net income (loss) | | $ | 910,000 | | $ | (2,692,000) | | $ | 791,000 | | $ | 1,373,000 | | $ | 2,633,000 | | $ | 3,015,000 | |
Summit interest in Equity-Method Investments net income (loss) | | $ | 91,000 | | $ | (942,000) | | $ | 158,000 | | $ | 137,000 | | $ | 263,000 | | $ | (293,000) | (1) |
|
|
$0.
1815
The resultsAs of operationsJune 30, 2023 and December 31, 2022, the balance of our Equity-Method Investments forequity-method investment related to the nine months ended September 30, 2021 are summarized below:FPH JV was $0.
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| Fantasia |
| Fantasia |
| Fantasia |
| FPH |
| Indiana |
| Combined | ||||||
| | SUL JV |
| JV |
| II JV |
| III JV |
| JV | | JV |
| Total | |||||||
Revenue | | $ | 15,339,000 | | $ | 2,860,000 | | $ | 2,759,000 | | $ | 6,156,000 | | $ | 2,731,000 | | $ | (3,166,000) | (1) | $ | 26,679,000 |
Income (loss) from operations | | $ | 5,072,000 | | $ | 282,000 | | $ | 1,448,000 | | $ | 3,094,000 | | $ | 1,255,000 | | $ | (5,093,000) | | $ | 6,058,000 |
Net income (loss) | | $ | 1,421,000 | | $ | 369,000 | | $ | 738,000 | | $ | 1,510,000 | | $ | 1,205,000 | | $ | (8,567,000) | | $ | (3,324,000) |
Summit interest in Equity-Method Investments net income (loss) | | $ | 142,000 | | $ | 129,000 | | $ | 148,000 | | $ | 151,000 | | $ | 121,000 | | $ | (1,286,000) | | $ | (595,000) |
Distributions from Equity-Method Investments
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we have distributions receivable, which are included in tenant and other receivables in our condensed consolidated balance sheets, as follows:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
SUL JV | | $ | 260,000 | | $ | 273,000 | | $ | 266,000 | | $ | 259,000 |
Fantasia JV | |
| 235,000 | |
| 205,000 | ||||||
Fantasia I JV | |
| — | |
| — | ||||||
Fantasia II JV | |
| 49,000 | |
| 54,000 | |
| 30,000 | |
| 55,000 |
Fantasia III JV | |
| 27,000 | |
| 22,000 | |
| 54,000 | |
| 22,000 |
FPH JV | |
| 64,000 | |
| 28,000 | |
| 64,000 | |
| 64,000 |
Total | | $ | 635,000 | | $ | 582,000 | | $ | 414,000 | | $ | 400,000 |
For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, 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, 2022 | | Nine months Ended September 30, 2021 | | Six Months Ended June 30, 2023 | | Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| | | | | Cash Flow | | Cash Flow | | | | | Cash Flow | | Cash Flow | | | | | Cash Flow | | Cash Flow | | | | | Cash Flow | | Cash Flow | ||||||||
| | Total Cash | | from | | from | | Total Cash | | from | | from | | Total Cash | | from | | from | | Total Cash | | from | | from | ||||||||||||
| | Distributions | | Operating | | Investing | | Distributions | | Operating | | Investing | | Distributions | | Operating | | Investing | | Distributions | | Operating | | Investing | ||||||||||||
|
| Received |
| Activities |
| Activities |
| Received |
| Activities |
| Activities |
| Received |
| Activities |
| Activities |
| Received |
| Activities |
| Activities | ||||||||||||
SUL JV | | $ | 434,000 | | $ | 91,000 | | $ | 343,000 | | $ | 631,000 | | $ | 142,000 | | $ | 489,000 | | $ | 266,000 | | $ | 92,000 | | $ | 174,000 | | $ | 286,000 | | $ | 63,000 | | $ | 223,000 |
Fantasia JV | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | ||||||||||||||||||
Fantasia I JV | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | ||||||||||||||||||
Fantasia II JV | |
| 237,000 | |
| 158,000 | |
| 79,000 | |
| 225,000 | |
| 148,000 | |
| 77,000 | |
| 135,000 | |
| 106,000 | |
| 29,000 | |
| 156,000 | |
| 107,000 | |
| 49,000 |
Fantasia III JV | |
| 95,000 | |
| 95,000 | |
| — | |
| 123,000 | |
| 123,000 | |
| — | |
| 12,000 | |
| 12,000 | |
| — | |
| 48,000 | |
| 48,000 | |
| — |
FPH JV | |
| 56,000 | |
| 56,000 | |
| — | |
| 114,000 | |
| 114,000 | |
| — | |
| — | |
| — | |
| — | |
| 56,000 | |
| 56,000 | |
| — |
Indiana JV | | | — | | | — | | | — | | | 773,000 | | | — | | | 773,000 | ||||||||||||||||||
Total | | $ | 822,000 | | $ | 400,000 | | $ | 422,000 | | $ | 1,866,000 | | $ | 527,000 | | $ | 1,339,000 | | $ | 413,000 | | $ | 210,000 | | $ | 203,000 | | $ | 546,000 | | $ | 274,000 | | $ | 272,000 |
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 annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in those agreements. For each of the three months ended SeptemberJune 30, 20222023 and 2021,2022, we recorded approximately $0.1 million and $0.2 million, respectively, in asset management fees from our Equity-Method Investments. For each of the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, we recorded approximately $0.5$0.3 million and $0.8 million, respectively, in asset management fees from our Equity-Method Investments (see Note 7).
19
6. Receivables
Tenant and Other Receivables, Net
Tenant and other receivables, net consists of:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Straight-line rent receivables | | $ | 3,503,000 | | $ | 2,395,000 | | $ | 4,468,000 | | $ | 3,862,000 |
Distribution receivables from Equity-Method Investments | |
| 635,000 | |
| 582,000 | |
| 414,000 | |
| 400,000 |
Asset management fees | |
| 303,000 | |
| 323,000 | |
| 302,000 | |
| 375,000 |
Other receivables | |
| 232,000 | |
| 86,000 | |
| 387,000 | |
| 383,000 |
Total | | $ | 4,673,000 | | $ | 3,386,000 | | $ | 5,571,000 | | $ | 5,020,000 |
16
7. Related Party Transactions
Equity-Method Investments
See Notes 5 and 6 for further discussion of distributions and asset management fees related to our Equity-Method Investments.
8. Intangible Lease Assets
Intangible lease assets as of September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
In-place leases | | $ | 13,778,000 | | $ | 13,778,000 | | $ | 13,778,000 | | $ | 13,778,000 |
Less: accumulated amortization | |
| (707,000) | |
| (18,000) | |
| (1,396,000) | |
| (937,000) |
In-place leases, net | |
| 13,071,000 | |
| 13,760,000 | |
| 12,382,000 | |
| 12,841,000 |
Above-market leases | |
| 959,000 | |
| 959,000 | |
| 959,000 | |
| 959,000 |
Less: accumulated amortization | |
| (80,000) | |
| (32,000) | |
| (128,000) | |
| (96,000) |
Above-market leases, net | |
| 879,000 | |
| 927,000 | |
| 831,000 | |
| 863,000 |
Total intangible lease assets, net | | $ | 13,950,000 | | $ | 14,687,000 | | $ | 13,213,000 | | $ | 13,704,000 |
For each of the three months ended SeptemberJune 30, 20222023 and 2021,2022, amortization expense for intangible lease assets was approximately $0.2 million, and $25,000, respectively, of which approximately $16,000 and $16,000, respectively, relates to the amortization of above-marketabove market leases which is included within rental revenues in the accompanying condensed consolidated statements of operations. For each of the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, amortization expense for intangible lease assets was approximately $0.7$0.5 million, and $25,000, respectively, of which approximately $48,000 and $16,000, respectively,$32,000 relates to the amortization of above-market leases which is included within rental revenues in the accompanying condensed consolidated statements of operations.
Expected future amortization of the intangible lease assets as of SeptemberJune 30, 2022,2023, for the period from OctoberJuly 1, 20222023 to December 31, 20222023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
Years ending December 31, |
|
| |
|
| |
October 1, 2022 to December 31, 2022 | | $ | 244,000 | |||
2023 | |
| 980,000 | |||
July 1, 2023 to December 31, 2023 | | $ | 490,000 | |||
2024 | |
| 980,000 | |
| 980,000 |
2025 | |
| 980,000 | |
| 980,000 |
2026 | |
| 980,000 | |
| 980,000 |
2027 | |
| 980,000 | |||
Thereafter | |
| 9,786,000 | |
| 8,803,000 |
| | $ | 13,950,000 | | $ | 13,213,000 |
20
9. Right of Use (ROU) Asset - Operating
On April 1,In November 2022, we entered into a temporary space license agreement (“Temporary License”) and a standard officean operating lease (“New Lease”) with Lakehills CM-CG LLC (collectively, the “LH Lease”).
The Temporary License, for space located in Laguna Hills, California, began on April 22, 2022 and expires on the date we move out of such temporary office space or five (5) days after the substantial completion of certain tenant improvements in the office space subject to the New Lease, but in no event later than April 21, 2023. We are entitled to use such office space at no cost during the term of the Temporary License.
Concurrent with the execution of the Temporary License, we entered into the New Lease which will begin in November 2022(“Office Lease”) for a period of sixty-six (66) months, with a five-year renewal option. The office space subject to the NewOffice Lease is also located in Laguna Hills, California. The NewOffice Lease provides for the abatement of the base rent for the second full calendar month (January 2023) through the seventh full calendar month of the lease term.term (June 2023). The initial annual base rent is $204,399 and increases three percent (3%) each year on the anniversary date of the commencement of the NewOffice Lease.
The LHOffice Lease is classified as an operating lease. An ROU assetA “right to use” or “ROU asset” represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The LHOffice Lease did not provide an explicit rate of interest; therefore we used an estimated incremental borrowing rate of 5% based on a fully collateralized and fully amortizing loan with a maturity date of the same length as the lease that is based on information available at the commencement date in determining the present value of lease payments. At inception, we recorded an ROU asset and lease liability of approximately $888,000. As a result, the Company had non-cash activity of $888,000 for the ROU asset obtained in exchange for new operating lease liabilities. The LHOffice Lease does not contain material residual value guarantees or material restrictive covenants.
17
Supplemental balance sheet information related to the LHOffice Lease as of September 30, 2022 isare as follows:
| | | | | |
Component |
| Consolidated Balance Sheet Caption |
|
| |
Right of use asset - operating |
| Other assets, net | | $ | 856,000 |
Lease liability - operating |
| Accounts payable and accrued liabilities | | $ | 907,000 |
| | | | | | | | |
Component |
| Consolidated Balance Sheet Caption |
| June 30, 2023 |
| December 31, 2022 | ||
Right of use asset - operating |
| Other assets, net | | $ | 766,000 | | $ | 833,000 |
Lease liability - operating |
| Accounts payable and accrued liabilities | | $ | 957,000 | | $ | 933,000 |
Lease expense is presented as part of continuing operations within general and administrative expenses in the condensed consolidated statements of operations. For the three months ended SeptemberJune 30, 2022,2023, we recognized approximately $30,000$45,000 in lease expense and we were not required to make any rent payments. Forfor the ninesix months ended SeptemberJune 30, 2022,2023, we recognized approximately $50,000$90,000 in lease expense and we were not required to make any rent payments.expense. The lease payments will be classified within operating activities in the consolidated statements of cash flows. As of SeptemberJune 30, 2022,2023, we had not made any lease payments and the weighted average remaining lease term is 5.64.7 years.
Pursuant to ASC 842, leaseLease payments on the LHOffice Lease for the period from OctoberJuly 1, 20222023 to December 31, 20222023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
Year |
| Lease payments |
| Lease payments | ||
October 1, 2022 to December 31, 2022 | | $ | 17,000 | |||
2023 | |
| 120,000 | |||
July 1, 2023 to December 31, 2023 | | $ | 103,000 | |||
2024 | |
| 212,000 | |
| 211,000 |
2025 | |
| 218,000 | |
| 217,000 |
2026 | |
| 224,000 | |
| 224,000 |
2027 | |
| 231,000 | |||
Thereafter | |
| 310,000 | |
| 99,000 |
Total lease payments | | $ | 1,101,000 | | $ | 1,085,000 |
Less imputed interest ($155,000) and moving expense reimbursement ($39,000) | |
| (194,000) | |||
Less imputed interest | |
| (128,000) | |||
Total lease liability | | $ | 907,000 | | $ | 957,000 |
21
10. Concentration of Risk
Our cash is generally invested in short-term money market instruments. As of SeptemberJune 30, 2022,2023, we had cash and cash equivalent accounts in excess of FDIC-insured limits. However,During March 2023, in response to the banking crisis, we dotransferred cash balances in excess of FDIC-insured limits from a smaller regional bank to a multi-national bank. To date, we have not believe the risk associated with this excess is significant.experienced losses or lack of access to cash in our cash and cash equivalent accounts.
As of SeptemberJune 30, 2022,2023, we owned eight properties in Georgia, four properties in California, three properties in Oregon, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 35 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 SeptemberJune 30, 2023, we leased our 16 real estate properties to 14 different tenants under long-term triple net leases, and three of the 14 tenants each represented more than 10% of our rental revenue. For the three months ended June 30, 2022, 16 of our real estate properties were leased to 14 different tenants under long-term triple net leases, and three of the 14 tenants each represented more than 10% of our rental revenue.
For the threesix months ended SeptemberJune 30, 2021, we leased2023, 16 of our 10 real estate properties were leased to eight14 different tenants under long-term triple net leases, and fourthree of the eight14 tenants each represented more than 10% of our rental revenue.
For the ninesix months ended SeptemberJune 30, 2022, 16 of our real estate properties were leased to 14 different tenants under long-term triple net leases, and three of the 14 tenants each represented more than 10% of our rental revenue. For the nine months ended September 30, 2021, we leased our 10 real estate properties to eight different tenants under long-term triple net leases, and three of the eight tenants each represented more than 10% of our rental revenue.
As of SeptemberJune 30, 2022,2023, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than 20% of our total assets due to cross-default provisions in the leases.
18
11. Fair Value Measurements of Financial Instruments
Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the HUD-insured 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 and for our Oxford and CIBC loans (per Note 4), the carrying amount approximates fair value because the borrowings are based on variable market interest rates.payment.
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the fair value of our HUD-insured loans payable was $35.6$36.5 million and $52.5$38.9 million, compared to the principal balance (excluding debt discount) of $45.3$44.4 million and $46.1$45.0 million, respectively. The fair value of loans payable was estimated using lending rates available to us for financial instruments with similar terms and maturities. To estimateThe fair value as of September 30, 2022, we usedour fixed rate debt was estimated by discounting the future cash flow analyses, based onflows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for similar types of borrowing arrangements.the same remaining maturities. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability 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 three and nine months ended SeptemberJune 30, 2022 and 2021.
At September 30, 20222023 and December 31, 2021,2022, we believe the carrying amounts of our variable rate debt are reasonably estimated at their notional amounts as there have been minimal changes to the fixed spread portion of interest rates for similar loans observed in the market, and as the variable portion of our interest rates fluctuate with the associated market indices. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy.
As of June 30, 2023 and December 31, 2022, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.
12. Commitments and Contingencies
We inspect our properties under a Phase I assessment for the presence of hazardous or toxic 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.
22
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.
19
Legal Proceedings
HCRE
In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, 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. The Bankruptcy Court 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 held a status conference on February 4, 2021, and subsequently entered scheduling orders to govern discovery and pretrial matters, and discovery is ongoing.matters. The parties have filed dispositive motions, including a motion filed by the Company and the petitioning creditors for judgment on the pleadings. On February 4, 2022, the Bankruptcy Court entered an order denying the motion for judgment on the pleadings on the basis that the Bankruptcy Court would consider the points raised therein after trial. The Bankruptcy Court also entered an order denying HCRE’s motion to dismiss certain counterclaims and severing certain other counterclaims asserted by the petitioning creditors and the Company against HCRE on jurisdictional grounds, with the effect that such counterclaims may be pursued in the United States District Court. TheTrial in the Bankruptcy Court has completed discovery and scheduled a trial date forwas conducted on January 9 and 10, 2023, with final concluding arguments presented on January 19, 2023. On May 12, 2023, the Court issued an opinion to award the plaintiffs $75,000 for reimbursement of legal fees related to the filing of the involuntary bankruptcy petition plus $517,000 for reimbursement of attorney’s fees related to the stay violation. The court has not yet entered an order or judgment, and will consider post-trial motions before finalizing such amounts. In May 2023, Summit filed notice for an appeal. Based on the assessment by management, as of June 30, 2023, the Company has accrued $75,000 for the reimbursement of legal fees and $0 for the $517,000 in attorney’s fees as we believe that a loss is currently not probable under Accounting Standards Codification 450, “Contingencies.”
Eikanas Dispute
On May 15, 2023, the Board of Directors of the Company sent Kent Eikanas, the then-Chief Executive Officer, written notice of various deficiencies in his performance , thereby initiating the 60-day cure period required by Mr. Eikanas’s Amended and Restated Employment Agreement, dated October 19, 2021. On June 5, 2023, Mr. Eikanas filed a lawsuit against the Company in the Superior Court of California for, among other things, wrongful termination and breach of contract, and seeking unspecified monetary damages. Based on the assessment by management, the Company believes that a loss is currently not probable or estimable under ASC 450, “Contingencies”, and as of SeptemberJune 30, 2022 and December 31, 20212023, no accrual has been made with regard to the claim. See Note 14 under Executive Management Changes for further information.
20
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, effective October 19, 2021, we entered into new employment agreements with our executive officers, Kent Eikanas (Chief Executive Officer) and Elizabeth Pagliarini (Chief Financial Officer), for a term of 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. On July 14, 2023, the employment agreement with Mr. Eikanas was terminated (see Note 14 for further information).
Management of our Equity-Method Investments
As the manager of our Equity-Method Investments, we are responsible for the day-to-day management. Additionally, we could be subject to a capital call from our Equity-Method Investments (see Note 5)5 for capital call activity).
13. 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 book value of our liabilities, 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.
23
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 the simplified method as we do not have sufficient historical exercise 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 April 1, 2022,2023, we granted 81,00080,000 stock options to our non-executive employees under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”). The stock options vest monthly beginning on May 1, 20222023 and continuing over a three-year period through April 1, 2025.2026. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.91.
The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | |
|
| 2022 |
| |
Stock options granted |
| | 81,000 | |
Expected volatility |
| | 36.5 | % |
Expected term |
| | 5.75 | years |
Risk-free interest rate |
| | 2.53 | % |
Dividend yield |
| | 0 | % |
Fair value per share | | $ | 0.91 | |
The following table summarizes our stock options as of September 30, 2022:
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | Weighted | | Average | | | | |
| | | | Average | | Remaining | | Aggregate | ||
| | | | Exercise | | Contractual | | Intrinsic | ||
|
| Options |
| Price |
| Term |
| Value | ||
Options outstanding at January 1, 2022 |
| 1,867,908 | | $ | 2.09 |
| |
| | |
Granted |
| 81,000 | |
| 2.35 |
| |
| | |
Exercised |
| — | |
| |
| |
| | |
Cancelled/forfeited |
| — | |
| |
| |
| | |
Options outstanding at September 30, 2022 |
| 1,948,908 | | $ | 2.10 |
| 5.24 | | $ | 1,644,000 |
| | | | | | | | | | |
Options exercisable at September 30, 2022 |
| 1,874,380 | | $ | 2.09 |
| 5.08 | | $ | 1,600,000 |
For our outstanding non-vested options as of September 30, 2022, the weighted average grant date fair value per share was $0.89. As of September 30, 2022, we have unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized as follows:
| | | |
Years Ending December 31, |
| | |
October 1, 2022 to December 31, 2022 | | $ | 8,000 |
2023 | |
| 25,000 |
2024 | |
| 25,000 |
2025 | |
| 8,000 |
| | $ | 66,000 |
The stock-based compensation expense reported for the three months ended September 30, 2022 and 2021 was approximately $9,000 and $9,000, 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, 2022 and 2021 was approximately $23,000 and $56,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.
| | | | |
|
| 2023 |
| |
Stock options granted |
| | 80,000 | |
Expected volatility |
| | 37.3 | % |
Expected term |
| | 5.75 | years |
Risk-free interest rate |
| | 3.65 | % |
Dividend yield |
| | — | % |
Fair value per share | | $ | 0.91 | |
2421
14. Earnings Per Share
The following table presents the calculationsummarizes our stock options as of basic and diluted earnings per share (“EPS”) for the Company’s common stock for the three and nine months ended SeptemberJune 30, 2022 and 2021, 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:2023:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Numerator: | | | | | | |
| |
|
| |
|
(Loss) income | | $ | (1,976,000) | | $ | (229,000) | | $ | (4,458,000) | | $ | 604,000 |
(Income) loss attributable to noncontrolling interest | | | (12,000) | | | (18,000) | |
| (49,000) | |
| (58,000) |
Net (loss) income applicable to common stockholders | | $ | (1,988,000) | | $ | (247,000) | | $ | (4,507,000) | | $ | 546,000 |
| | | | | | | | | | | | |
Denominator: | | | | | | | |
| | |
| |
Basic: | | | | | | | |
| | |
| |
Denominator for basic EPS - weighted average shares | | | 23,027,978 | | | 23,027,978 | |
| 23,027,978 | |
| 23,027,978 |
Effect of dilutive shares: | | | | | | | |
| | |
| |
Stock options | | | — | | | — | |
| — | |
| 525,628 |
| | | | | | | | | | | | |
Denominator for diluted EPS – adjusted weighted average shares | | | 23,027,978 | | | 23,027,978 | |
| 23,027,978 | |
| 23,553,606 |
| | | | | | | | | | | | |
Basic EPS | | $ | (0.09) | | $ | (0.01) | | $ | (0.20) | | $ | 0.02 |
Diluted EPS | | $ | (0.09) | | $ | (0.01) | | $ | (0.20) | | $ | 0.02 |
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | Weighted | | Average | | | | |
| | | | Average | | Remaining | | Aggregate | ||
| | | | Exercise | | Contractual | | Intrinsic | ||
|
| Options |
| Price |
| Term |
| Value | ||
Options outstanding at January 1, 2023 |
| 1,948,908 | | $ | 2.10 |
| |
| | |
Granted |
| 80,000 | | $ | 2.18 |
| |
| | |
Exercised |
| — | |
| |
| |
| | |
Cancelled/forfeited |
| — | |
| |
| |
| | |
Options outstanding at June 30, 2023 |
| 2,028,908 | | $ | 2.10 |
| 4.70 | | $ | 1,279,000 |
| | | | | | | | | | |
Options exercisable at June 30, 2023 |
| 1,903,852 | | $ | 2.09 |
| 4.04 | | $ | 1,219,000 |
StockFor our outstanding non-vested options as of June 30, 2023, the weighted average grant date fair value per share was $0.91. As of June 30, 2023, we have unrecognized stock-based compensation expense related to purchase 559,275 shares of commonunvested stock were excluded from the calculation for the three and nine months ending September 30, 2022, and 525,628 shares of common stock were excluded from the calculationoptions which is expected to be recognized as follows:
| | | |
Years Ending December 31, |
| | |
2023 | | $ | 24,000 |
2024 | |
| 49,000 |
2025 | | | 32,000 |
2026 | |
| 8,000 |
| | $ | 113,000 |
The stock-based compensation expense reported for the three months endingended June 30, 2023 and 2022 was approximately $10,000 and $6,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations. The stock-based compensation expense reported for the six months ended June 30, 2023 and 2022 was approximately $17,000 and $14,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.
14. Subsequent Events
Fantasia I JV
On July 3, 2023, the majority member in the Fantasia I JV assigned its 65% interest, for no consideration, to Summit. As such, as of July 2023, Summit will own 100% of Fantasia I JV. The assets and liabilities of the Fantasia I JV will be consolidated in our condensed consolidated financial statements beginning in July 2023. Additionally, there is an executed purchase and sale agreement for the real estate and associated facility which meets the criteria as held for sale, and is expected to close in September 30, 2021, because2023.
Executive Management Changes
On July 14, 2023 (the “Termination Date”), the effect would be antidilutive.Board of Directors (the “Board”) of the Company terminated, for cause, Kent Eikanas from his position as Chief Executive Officer and Secretary of the Company, after Mr. Eikanas was given written notice of and failed to cure various deficiencies in his performance following the expiration of a 60-day cure period. Per the terms of his employment agreement, upon Mr. Eikanas’ termination for cause, Mr. Eikanas is also deemed to have resigned, as of the Termination Date, from all positions with the Company and its subsidiaries, the Board and any boards of directors or managers of any of Company’s subsidiaries and affiliates.
Effective July 15, 2023, the Board of Directors of the Company appointed Elizabeth Pagliarini as Chief Executive Officer and Secretary. Additionally, effective July 15, 2023, the Board of Directors of the Company also appointed Sharyn Grant Chief Financial Officer and Treasurer of the Company.
2522
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, 20212022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2022.2023.
Overview
As of SeptemberJune 30, 2022,2023, our ownership interests in our 18 real estate properties of senior housing facilities was as follows: 100% ownership of 14 properties and a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds one property, 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, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties.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 18 real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, resident fees and services and asset management fees resulting from our Equity-Method 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 sustainable 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 nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities focuses on different segments of the senior population.population.Our current properties are SNF, AL, and MC facilities.
Current Market and Economic Conditions
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. Two of our tenants haveDuring 2023 and 2022, we experienced a material adverse effect on theirthe operations of two properties related to COVID-19 and that has affected their ability to make rent payments in 2022 and 2021 (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information on its impact to us)us and see below for the impact on our Equity-Method Investments). We expect the COVID-19 pandemic will continue to adversely affect our tenant’stenants’ and our Company’s financial condition and results of operations, including but not limited to, occupancy, leasingresident leases and related resident fees and service revenues, and additional labor and operating expenses. The 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 in future periods.
23
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies. The Federal Reserve has increased its targeted range for the federal funds rate, leading to increased interest rates and it foresees further interest rate increases. We currently have fixed and variable interest rates for our loans. The rise in overall interest rates has caused an increase in our variable rate borrowing costs and our overall cost of capital, resulting in an increase in interest expense. The higher interest rates imposed by the Federal Reserve to address inflation may also adversely impact real estate asset values. In addition,
26
a prolonged period of high and persistent inflation could cause an increase in our expenses. The current market and economic conditions could have a material impact on our business, cash flow and results of operations. It could also impact our ability to find suitable acquisitions, sell properties, and raise equity and debt capital.
Summit Portfolio Properties
On JulyAt June 30, 2023, our portfolio consisted of 18 real estate properties as noted above in the Overview section of this Item 2, 2021, we acquired three16 of which were 100% triple-net leased to the tenants of the related facilities. The other two properties in California (the “CA3 Properties”) for approximately $20.1 million. See Notesare each 100% leased to an affiliated subsidiary (see Note 3 and 4 to the accompanying Notes to Condensed Consolidated Financial Statements for further information regardingunder Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the purchase price and associated financing arrangements.
On December 30, 2021, we acquired eight properties in Georgia (the “GA8“Operated Properties”) for approximately $130.0 million. See Notes 3which we operate directly and 4 to the accompanying Notes to Condensed Consolidated Financial Statements for further information regarding the purchase priceearn resident fees and associated financing arrangements.services revenue.
The following table provides summary information (excluding the 35 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of SeptemberJune 30, 2022:2023:
| | | | | | | | | |
|
| |
| |
| Square |
| Purchase | |
| | Properties | | Beds | | Footage | | Price | |
SNF |
| 15 |
| 1,354 |
| 406,135 | | $ | 181,795,000 |
AL or AL/MC |
| 3 |
| 221 |
| 136,765 | |
| 25,525,000 |
Total Real Estate Properties |
| 18 |
| 1,575 |
| 542,900 | | $ | 207,320,000 |
| | | | | | | | | | | |
|
| | | |
| |
| |
| 2022 | |
| | | | | | | | | | Lease | |
Property |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) | |
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 | |
| 1,059,000 |
Pacific Health and Rehabilitation Center |
| Tigard, OR | | December 24, 2012 |
| SNF |
| 73 | |
| 726,000 |
Brookstone of Aledo |
| Aledo, IL | | July 2, 2013 |
| AL |
| 66 | |
| 573,000 |
Sundial Assisted Living (2) |
| Redding, CA | | December 18, 2013 |
| AL |
| 65 | |
| — |
Pennington Gardens (2) |
| Chandler, AZ | | July 17, 2017 |
| AL/MC |
| 90 | |
| — |
Yucaipa Hill Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 82 | | | 799,000 |
Creekside Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 59 | | | 356,000 |
University Post Acute | | Mentone, CA | | July 2, 2021 | | SNF | | 50 | | | 340,000 |
Calhoun Health Center | | Calhoun, GA | | December 30, 2021 | | SNF | | 100 | | | 359,000 |
Maple Ridge Health Care Center | | Cartersville, GA | | December 30, 2021 | | SNF | | 74 | | | 1,421,000 |
Chatsworth Health Care Center | | Chatsworth, GA | | December 30, 2021 | | SNF | | 120 | | | 2,594,000 |
East Lake Arbor | | Decatur, GA | | December 30, 2021 | | SNF | | 103 | | | 677,000 |
Fairburn Health Care Center | | Fairburn, GA | | December 30, 2021 | | SNF | | 120 | | | 1,086,000 |
Grandview Health Care Center | | Jasper, GA | | December 30, 2021 | | SNF | | 60 | | | 799,000 |
Rosemont at Stone Mountain | | Stone Mountain, GA | | December 30, 2021 | | SNF | | 149 | | | 2,051,000 |
Willowwood Nursing Center & Rehab | | Flowery Branch, GA | | December 30, 2021 | | SNF | | 100 | | | 773,000 |
Total |
| |
|
|
|
|
| 1,575 | |
| |
2724
| | | | | | | | | | | |
|
| | | |
| |
| |
| 2023 | |
| | | | | | | | | | Lease | |
Property |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) | |
Sheridan Care Center |
| Sheridan, OR | | August 3, 2012 |
| SNF |
| 51 | | $ | 246,000 |
Fernhill Care Center |
| Portland, OR | | August 3, 2012 |
| SNF |
| 63 | |
| 262,000 |
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County TX | | September 14, 2012 |
| SNF |
| 150 | |
| 706,000 |
Pacific Health and Rehabilitation Center |
| Tigard, OR | | December 24, 2012 |
| SNF |
| 73 | |
| 484,000 |
Brookstone of Aledo |
| Aledo, IL | | July 2, 2013 |
| AL |
| 66 | |
| 382,000 |
Sundial Assisted Living (2) |
| Redding, CA | | December 18, 2013 |
| AL |
| 65 | |
| — |
Pennington Gardens (2) |
| Chandler, AZ | | July 17, 2017 |
| AL/MC |
| 90 | |
| — |
Yucaipa Hill Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 82 | | | 532,000 |
Creekside Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 59 | | | 238,000 |
University Post Acute | | Mentone, CA | | July 2, 2021 | | SNF | | 50 | | | 227,000 |
Calhoun Health Center | | Calhoun, GA | | December 30, 2021 | | SNF | | 100 | | | 239,000 |
Maple Ridge Health Care Center | | Cartersville, GA | | December 30, 2021 | | SNF | | 74 | | | 947,000 |
Chatsworth Health Care Center | | Chatsworth, GA | | December 30, 2021 | | SNF | | 120 | | | 1,729,000 |
East Lake Arbor | | Decatur, GA | | December 30, 2021 | | SNF | | 103 | | | 451,000 |
Fairburn Health Care Center | | Fairburn, GA | | December 30, 2021 | | SNF | | 120 | | | 724,000 |
Grandview Health Care Center | | Jasper, GA | | December 30, 2021 | | SNF | | 60 | | | 532,000 |
Rosemont at Stone Mountain | | Stone Mountain, GA | | December 30, 2021 | | SNF | | 149 | | | 1,367,000 |
Willowwood Nursing Center & Rehab | | Flowery Branch, GA | | December 30, 2021 | | SNF | | 100 | | | 515,000 |
Total |
| |
|
|
|
|
| 1,575 | |
| |
(1) | Represents year-to-date rental revenue based on in-place leases, including straight-line rent, through |
(2) | See Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information on these two properties. |
Summit Equity-Method Investment Portfolio Properties
We continue to believe that raising institutional joint venture equitycapital to make acquisitions will be accretive to shareholder value. Our primary source of equitycapital since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is a prudent strategy for growth; however, in the future, we may raise additional equity capital through alternative methods if warranted by market conditions.
A summary of the condensed combined financial data for the balance sheets and statements of income for all unconsolidated Equity-Method Investments are as follows (see below under Indiana JV for information regarding the sale of our equity interest in the Indiana JV on June 11, 2021 and see Note 5 to the accompanying Notes to Condensed Consolidated Financial Statements; accordingly, the financial information for the Indiana JV is not included in the September 30, 2022 or December 31, 2021 condensed combined balance sheet and for the nine months ended September 30, 2021 condensed combined statement of operations below):
| | | | | | |
|
| September 30, |
| December 31, | ||
Condensed Combined Balance Sheets: | | 2022 | | 2021 | ||
Total Assets | | $ | 267,494,000 | | $ | 286,572,000 |
Total Liabilities | | $ | 189,936,000 | | $ | 213,812,000 |
Members Equity: | |
| | |
| |
Summit | | $ | 7,958,000 | | $ | 8,017,000 |
JV Partners | | $ | 69,600,000 | | $ | 64,743,000 |
Total Members Equity | | $ | 77,558,000 | | $ | 72,760,000 |
25
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
Condensed Combined Statements of Operations: | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total Revenue | | $ | 9,666,000 | | $ | 9,960,000 | | $ | 28,802,000 | | $ | 29,845,000 |
Income from Operations | | $ | 3,208,000 | | $ | 3,797,000 | | $ | 7,766,000 | | $ | 11,151,000 |
Net income | | $ | 1,606,000 | | $ | 1,660,000 | | $ | 3,015,000 | | $ | 5,243,000 |
| | | | | | | | | | | | |
Summit equity interest in Equity-Method Investments net income (loss) | | $ | 131,000 | | $ | 190,000 | | $ | (293,000) | | $ | 691,000 |
JV Partners interest in Equity-Method Investments net income | | $ | 1,475,000 | | $ | 1,470,000 | | $ | 3,308,000 | | $ | 4,552,000 |
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 our condensed consolidated financial statements.
In July 2022, the SUL JV entered into an agreement with a broker to market the property, Riverglen House of Littleton, for sale.
28
The following reconciles our 10% equity investment in the SUL JV from inception through September 30, 2022:
| | | |
JV 2 Properties (Colorado, Oregon and Virginia) – April 2015 |
| $ | 1,150,000 |
Creative Properties (Texas) – October 2015 | |
| 837,000 |
Cottage Properties (Wisconsin) – December 2015 | |
| 1,932,000 |
Riverglen (New Hampshire) – April 2016 | |
| 424,000 |
Delaware Properties – September 2016 | |
| 1,846,000 |
Total investments | |
| 6,189,000 |
Income from equity-method investee | |
| 1,663,000 |
Distributions | |
| (4,507,000) |
Total investment at September 30, 2022 | | $ | 3,345,000 |
A summary of the 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:
| | | | | | |
|
| September 30, |
| December 31, | ||
Condensed Consolidated Balance Sheets of SUL JV: | | 2022 | | 2021 | ||
Real estate properties and intangibles, net | | $ | 122,332,000 | | $ | 125,183,000 |
Cash and cash equivalents |
| | 5,368,000 |
| | 4,929,000 |
Other assets | | | 13,363,000 | | | 14,322,000 |
Total Assets: | | $ | 141,063,000 | | $ | 144,434,000 |
| | | | | | |
Loans payable, net | | $ | 90,256,000 | (1) | $ | 98,432,000 |
Other liabilities | |
| 8,280,000 | |
| 8,463,000 |
Members’ equity: | | | | | | |
Best Years | |
| 39,067,000 | |
| 34,568,000 |
Summit | |
| 3,460,000 | |
| 2,971,000 |
Total Liabilities and Members’ Equity | | $ | 141,063,000 | | $ | 144,434,000 |
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
Condensed Consolidated Statements of Income of SUL JV: | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total revenue | | $ | 5,235,000 | | $ | 5,072,000 | | $ | 15,670,000 | | $ | 15,339,000 |
Property operating expenses | |
| (2,748,000) | |
| (2,084,000) | | | (7,868,000) | | | (6,241,000) |
Net operating income | |
| 2,487,000 | |
| 2,988,000 | | | 7,802,000 | | | 9,098,000 |
General and administrative expense | |
| (104,000) | |
| (99,000) | | | (309,000) | | | (307,000) |
Depreciation and amortization expense | |
| (966,000) | |
| (1,174,000) | | | (3,009,000) | | | (3,719,000) |
Income from operations | |
| 1,417,000 | |
| 1,715,000 | | | 4,484,000 | | | 5,072,000 |
Interest expense | |
| (1,031,000) | |
| (1,149,000) | | | (3,210,000) | | | (3,463,000) |
Amortization of debt issuance costs | |
| (28,000) | |
| (49,000) | | | (293,000) | | | (153,000) |
Other income (expense) | |
| (74,000) | |
| 117,000 | | | (71,000) | | | (35,000) |
Net income | | $ | 284,000 | | $ | 634,000 | | $ | 910,000 | | $ | 1,421,000 |
| | | | | | | | | | | | |
Summit equity interest in SUL JV net income | | $ | 28,000 | | $ | 63,000 | | $ | 91,000 | | $ | 142,000 |
29
As of September 30, 2022, the 17 properties held by SUL JV, our unconsolidated 10% equity-method investment, of which 11 are 100% leased on a triple net basis and six are operated directly, are as follows:
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Equity-Method Partner – Fantasia Investment III LLC
In 2016 and 2017, through our Operating Partnership, we entered into three separate limited liability company agreements (collectively, the “Fantasia 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 (“Fantasia I”I JV”), Summit Fantasia Holdings II, LLC (“Fantasia II”II JV”) and Summit Fantasia Holdings III, LLC (“Fantasia III”III JV”) (collectively, the “Fantasia JVs”). The Fantasia JVs are not consolidated in our condensed consolidated financial statements and are accounted for under the equity-method in our condensed consolidated financial statements. Through the Fantasia JVs: we own a 35% interest in one senior housing facility located in California (in March 2022, we sold one facility located in Oregon);California; a 20% interest in two skilled nursing facilities located in Rhode Island; and a 10% interest in nine skilled nursing facilities located in Connecticut.
The following reconciles our equity investments in the Fantasia JVs from inception through September 30, 2022:
| | | |
Summit Fantasia Holdings, LLC – October 2016 |
| $ | 2,813,000 |
Summit Fantasia Holdings II, LLC – February 2017 | |
| 1,923,000 |
Summit Fantasia Holdings III, LLC – August 2017 | |
| 1,954,000 |
Total investment | |
| 6,690,000 |
Income from Fantasia JVs | |
| 688,000 |
Distributions | |
| (3,512,000) |
Total Fantasia investments at September 30, 2022 | | $ | 3,866,000 |
30
A summary of the condensed combined financial data for the balance sheets and statements of operations for the unconsolidated Fantasia JVs, of which we own a 10% to 35% equity interest, is as follows:
| | | | | | |
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| September 30, |
| December 31, | ||
Condensed Combined Balance Sheets of Fantasia JVs: | | 2022 | | 2021 | ||
Real estate properties, net (2) | | $ | 76,877,000 | | $ | 88,908,000 |
Cash and cash equivalents | |
| 5,633,000 | |
| 8,135,000 |
Assets held for sale (1) | | | 7,666,000 | | | 10,454,000 |
Other assets | |
| 7,833,000 | |
| 6,834,000 |
Total Assets: | | $ | 98,009,000 | | $ | 114,331,000 |
| | | | | | |
Loans payable, net | | $ | 58,788,000 | | $ | 67,154,000 |
Liabilities held for sale (1) | | | 4,367,000 | | | 7,537,000 |
Other liabilities | |
| 6,218,000 | |
| 8,885,000 |
Members’ equity: | |
| | |
| |
Fantasia JVs | |
| 24,567,000 | |
| 25,967,000 |
Summit | |
| 4,069,000 | |
| 4,788,000 |
Total Liabilities and Members’ Equity | | $ | 98,009,000 | | $ | 114,331,000 |
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
Condensed Combined Statements of Operations of Fantasia JVs: | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total revenue | | $ | 3,454,000 | | $ | 3,940,000 | | $ | 10,359,000 | | $ | 11,775,000 |
Property operating expenses | |
| (1,400,000) | |
| (1,509,000) | |
| (4,163,000) | |
| (4,503,000) |
Net operating income | |
| 2,054,000 | |
| 2,431,000 | |
| 6,196,000 | |
| 7,272,000 |
General and administrative expense | |
| (128,000) | |
| (121,000) | |
| (384,000) | |
| (369,000) |
Depreciation and amortization expense | |
| (554,000) | |
| (650,000) | |
| (1,787,000) | |
| (2,079,000) |
Impairment on real estate property | | | — | | | — | | | (3,242,000) | | | — |
Gain on sale of real estate | | | — | | | — | | | 1,247,000 | | | — |
Income from operations | |
| 1,372,000 | |
| 1,660,000 | |
| 2,030,000 | |
| 4,824,000 |
Interest expense | |
| (912,000) | |
| (896,000) | |
| (2,481,000) | |
| (2,682,000) |
Amortization of debt issuance costs | |
| (38,000) | |
| (16,000) | |
| (100,000) | |
| (48,000) |
Other income | |
| 8,000 | |
| 1,000 | |
| 23,000 | |
| 523,000 |
Net income (loss) | | $ | 430,000 | | $ | 749,000 | | $ | (528,000) | | $ | 2,617,000 |
| | | | | | | | | | | | |
Summit equity interest in Fantasia JVs net income (loss) | | $ | 14,000 | | $ | 99,000 | | $ | (647,000) | | $ | 428,000 |
31
As of September 30, 2022, the 12 properties in the Fantasia JVs, our unconsolidated equity-method investments, are all 100% leased on a triple net basis, and are as follows:
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Summit Fantasy Pearl Holdings, LLC
In October 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 is accounted for under the equity-method in our condensed consolidated financial statements.
During 2022, the tenant/operator of the FPH JV facilities has been experiencing cash flow issues due to the following: 1) increased expenses due to inflation, 2) workforce staffing issues, and 3) lower census from pre-pandemic levels due to COVID related issues. Summit, as the manager of the FPH JV, and the tenant are working together in various manners to help with their cash flows needs. There have been no agreements executed, however, for the months of August, September, and October 2022, the base rents were paid using the tenants' escrow and security deposits held by the FPH JV.
The following reconciles our equity investmentinvestments in the FPH JVour Equity-Method Investments from inception through SeptemberJune 30, 2022:2023 in our condensed consolidated financials statements:
| | | | | | | | | | | | | | | |
Iowa properties – November 2017 |
| $ | 929,000 | ||||||||||||
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| SUL JV |
| Fantasia JVs |
| FPH JV |
| Total | |||||||
Total investment | |
| 929,000 | | $ | 6,345,000 | | $ | 6,379,000 | | $ | 929,000 | | $ | 13,653,000 |
Income from equity-method investee | |
| 317,000 | ||||||||||||
Income (loss) from equity-method investees | | $ | 1,016,000 | | $ | (83,000) | | $ | (112,000) | | $ | 821,000 | |||
Distributions | |
| (817,000) | | $ | (4,961,000) | | $ | (3,544,000) | | $ | (817,000) | | $ | (9,322,000) |
Total FPH investment at September 30, 2022 | | $ | 429,000 | ||||||||||||
Total investment at June 30, 2023 | | $ | 2,400,000 | | $ | 2,752,000 | | $ | — | | $ | 5,152,000 | |||
Number of properties | | | 17 | | | 12 | | | 6 | | | 35 | |||
Number of beds | | | 1,408 | | | 1,650 | | | 507 | | | 3,565 |
3226
A summary of the condensed consolidatedcombined financial data for the balance sheets and statements of income (operations) for theall unconsolidated FPH JV is as follows:
| | | | | | |
Condensed Consolidated Balance Sheets of FPH JV: |
| September 30, 2022 |
| December 31, 2021 | ||
Real estate properties, net | | $ | 23,919,000 | | $ | 24,840,000 |
Cash and cash equivalents | |
| 1,239,000 | |
| 1,650,000 |
Other assets | |
| 3,264,000 | |
| 1,317,000 |
Total Assets: | | $ | 28,422,000 | | $ | 27,807,000 |
| | | | | | |
Loans payable, net | | $ | 20,422,000 | | $ | 20,764,000 |
Other liabilities | |
| 1,605,000 | |
| 2,577,000 |
Members’ equity: | |
| | |
| |
Fantasia JVs | |
| 5,966,000 | |
| 4,207,000 |
Summit | |
| 429,000 | |
| 259,000 |
Total Liabilities and Members’ Equity | | $ | 28,422,000 | | $ | 27,807,000 |
| | | | | | | | | | | | |
|
| Three Months Ended | | Nine months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
Condensed Consolidated Statements of Income of FPH JV: | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total revenue | | $ | 977,000 | | $ | 948,000 |
| $ | 2,773,000 | | $ | 2,731,000 |
Property operating expenses | | | (210,000) | | | (182,000) |
| | (486,000) | | | (445,000) |
Net operating income |
| | 767,000 |
| | 766,000 | | | 2,287,000 |
| | 2,286,000 |
General and administrative expense |
| | (41,000) |
| | (37,000) | | | (114,000) |
| | (110,000) |
Depreciation and amortization expense |
| | (307,000) |
| | (307,000) | | | (921,000) |
| | (921,000) |
Income from operations |
| | 419,000 |
| | 422,000 | | | 1,252,000 |
| | 1,255,000 |
Interest expense |
| | (247,000) |
| | (254,000) | | | (737,000) |
| | (757,000) |
Amortization of debt issuance costs |
| | (15,000) |
| | (15,000) | | | (46,000) |
| | (46,000) |
Other income |
| | 735,000 |
| | 124,000 | | | 2,164,000 | (1) | | 753,000 |
Net income | | $ | 892,000 | | $ | 277,000 | | $ | 2,633,000 | | $ | 1,205,000 |
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Summit equity interest in FPH JV net income | | $ | 89,000 | | $ | 28,000 | | $ | 263,000 | | $ | 121,000 |
As of September 30, 2022, the six properties of our unconsolidated equity-method investments in FPH JV, all of which are 100% leased on a triple net basis,Equity-Method Investments are as follows:
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(1)
Indiana JV
InAt June 2021, we sold30, 2023 and December 31, 2022, the aggregate balance of our 15% interestequity method investments in our condensed consolidated financials statements for each period presented of approximately $5.2 million is lower by approximately $0.3 million and $0.5 million, respectively, than the equity recognized in the Indiana JV for approximately $5.4 million. The Indiana JV was not consolidated in our consolidatedunderlying Equity-Method Investments financial statements due to unrecorded losses and was accounted for under the equity-method.
33
The following reconciles our equity investment in the Indiana JV from inception through June 11, 2021:impairments.
| | | |
Indiana properties – March 2019 |
| $ | 4,906,000 |
Total investment | |
| 4,906,000 |
Loss from equity-method investee | |
| (1,433,000) |
Distributions | |
| (1,577,000) |
Total Indiana JV investment at June 11, 2021 | | | 1,896,000 |
Funds received from sale of interest in equity-method investment | | | 5,411,000 |
Total gain on sale of Indiana JV equity-method investment at June 11, 2021 | | $ | 3,515,000 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
Condensed Combined Statements of Operations: |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Total Revenue | | $ | 9,186,000 | | $ | 9,536,000 | | $ | 18,006,000 | | $ | 19,136,000 |
Income (loss) from Operations | | $ | 3,524,000 | | $ | (93,000) | | $ | 6,154,000 | | $ | 4,558,000 |
Net income (loss) | | $ | 1,420,000 | | $ | (2,062,000) | | $ | 1,347,000 | | $ | 1,408,000 |
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Summit equity interest in Equity-Method Investments net income (loss) | | $ | 229,000 | | $ | (1,066,000) | | $ | 171,000 | | $ | (424,000) |
JV Partners interest in Equity-Method Investments net income (loss) | | $ | 1,191,000 | | $ | (996,000) | | $ | 1,176,000 | | $ | 1,832,000 |
Distributions from Equity-Method Investments
For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:
| | | | | | | | | | | | |
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| Nine months Ended September 30, |
| Six Months Ended June 30, | ||||||||
| | 2022 |
| 2021 | | 2023 |
| 2022 | ||||
Distributions | | $ | 875,000 | | $ | 1,429,000 | | $ | 427,000 | | $ | 610,000 |
| | | | | | | | | | | | |
Cash received for distributions | | $ | 822,000 | | $ | 1,866,000 | | $ | 413,000 | | $ | 546,000 |
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, 20212022 as filed with the SEC on March 31, 2022 except for the additional revenue recognition – resident fees and services policy included in Note 2 to the accompanying Notes to Condensed Consolidated Financial Statements.2023.
3427
Results of Operations
Our results of operations are described below:
Three Months Ended SeptemberJune 30, 20222023 Compared to Three Months Ended SeptemberJune 30, 20212022
| | | | | | | | | | | | | | | | | | |
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| Three Months Ended |
|
| |
| Three Months Ended |
|
| | ||||||||
| | September 30, | | | | | June 30, | | | | ||||||||
| | 2022 |
| 2021 |
| $ Change | | 2023 |
| 2022 |
| $ Change | ||||||
Total rental revenues | | $ | 5,416,000 | | $ | 1,853,000 | | $ | 3,563,000 | | $ | 5,380,000 | | $ | 5,435,000 | | $ | (55,000) |
Property operating costs | | | (846,000) | | | (264,000) | | | (582,000) | | | (746,000) | | | (766,000) | | | 20,000 |
Resident fees and services income |
| | 1,125,000 |
| | — |
| | 1,125,000 | |||||||||
Resident fees and services revenue |
| | 1,633,000 |
| | 863,000 |
| | 770,000 | |||||||||
Resident costs |
| | (1,281,000) |
| | — |
| | (1,281,000) |
| | (1,056,000) |
| | (818,000) |
| | (238,000) |
Net operating income (1) |
| | 4,414,000 |
| | 1,589,000 |
| | 2,825,000 |
| | 5,211,000 |
| | 4,714,000 |
| | 497,000 |
Asset management fees |
| | 165,000 |
| | 165,000 |
| | — |
| | 147,000 |
| | 165,000 |
| | (18,000) |
Interest income from notes receivable |
| | — |
| | 7,000 |
| | (7,000) | |||||||||
General and administrative |
| | (1,280,000) |
| | (933,000) |
| | (347,000) |
| | (1,091,000) |
| | (1,132,000) |
| | 41,000 |
Depreciation and amortization |
| | (1,813,000) |
| | (524,000) |
| | (1,289,000) |
| | (1,810,000) |
| | (1,848,000) |
| | 38,000 |
(Loss) income from equity-method investees | | | (7,000) | | | 191,000 | | | (198,000) | |||||||||
Income (loss) from equity-method investees | | | 117,000 | | | (1,131,000) | | 1,248,000 | ||||||||||
Other income | | | 43,000 | | | 5,000 | | | 38,000 | | | 100,000 | | | 161,000 | | (61,000) | |
Interest expense |
| | (3,498,000) |
| | (729,000) |
| | (2,769,000) |
| | (4,336,000) |
| | (3,105,000) |
| | (1,231,000) |
Net loss |
| | (1,976,000) |
| | (229,000) |
| | (1,747,000) |
| | (1,662,000) |
| | (2,176,000) |
| | 514,000 |
Noncontrolling interests’ share in (income) |
| | (12,000) |
| | (18,000) |
| | 6,000 |
| | (19,000) |
| | (18,000) |
| | (1,000) |
Net loss applicable to common stockholders |
| $ | (1,988,000) |
| $ | (247,000) |
| $ | (1,741,000) |
| $ | (1,681,000) |
| $ | (2,194,000) |
| $ | 513,000 |
(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, resident fees and |
Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from Pennington Gardens Operations (effective February 2022) and Sundial Operations (effective June 2022) (collectively the “Operated Properties”).Operated Properties. Property operating costs include insurance, and property taxes, and other operating expenses and resident costs are related to the Operated Properties. Net operating income increased approximately $2.8$0.5 million for the three months ended SeptemberJune 30, 20222023 compared to the three months ended SeptemberJune 30, 20212022 primarily due to rental revenues generated fromSundial being included in our condensed consolidated financials for one month in the GA8 acquisitionthree months ended June 30, 2022 compared to three months in December 2021.the three months ended June 30, 2023.
The net change from loss to income from equity-method investees of approximately $1.2 million is mainly due to the impairment loss of $1.2 million related to the Fantasia I JV in the three months ended June 30, 2022.
The increase in general and administrative expensesinterest expense of $0.3$1.2 million for the three months ended SeptemberJune 30, 20222023 compared to the three months ended SeptemberJune 30, 20212022 is primarily due to an increase in payroll and accounting fees of $0.3 million.
The net increase in depreciation and amortization of $1.3 million and interest expense of $2.8 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is primarily due to the GA8 acquisition December 2021 and an increaseapproximately 4% in interest rates on approximately $139.0 million of debt for boththe CA3 and GA8 portfolios.
The net change from income to loss of approximately $0.2 million from our equity-method investments for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is mainly due to a loss of $0.2 million from the Fantasia I JV impairment expense of our equity-method investment of $138,000 and reduced rental income related to the sale of the property in Fantasia I JV (rental revenue in the three months ended September 2021 and none in 2022).Properties.
3528
Nine monthsSix Months Ended SeptemberJune 30, 20222023 Compared to Nine monthsSix Months Ended SeptemberJune 30, 20212022
| | | | | | | | | | | | | | | | | ||
|
| Nine months Ended |
| |
| Six Months Ended |
| | ||||||||||
| | September 30, | | | | June 30, | | | ||||||||||
| | 2022 |
| 2021 | | $ Change | | 2023 |
| 2022 |
| $Change | ||||||
Total rental revenues | | $ | 16,392,000 | | $ | 4,061,000 | | $ | 12,331,000 | | $ | 10,747,000 | | $ | 10,976,000 | | $ | (229,000) |
Property operating costs | |
| (2,385,000) | |
| (694,000) | |
| (1,691,000) | |
| (1,552,000) | |
| (1,539,000) | |
| (13,000) |
Resident fees and services income | |
| 2,396,000 | |
| — | |
| 2,396,000 | |||||||||
Resident fees and services revenue | |
| 3,002,000 | |
| 1,271,000 | |
| 1,731,000 | |||||||||
Resident costs | |
| (2,474,000) | |
| — | |
| (2,474,000) | |
| (2,266,000) | |
| (1,193,000) | |
| (1,073,000) |
Net operating income (1) | |
| 13,929,000 | |
| 3,367,000 | |
| 10,562,000 | |
| 9,931,000 | |
| 9,515,000 | |
| 416,000 |
Asset management fees | |
| 495,000 | |
| 789,000 | |
| (294,000) | |
| 295,000 | |
| 330,000 | |
| (35,000) |
Interest income from notes receivable | |
| — | |
| 20,000 | |
| (20,000) | |||||||||
General and administrative | | | (3,460,000) | | | (3,426,000) | | (34,000) | |
| (2,200,000) | |
| (2,180,000) | |
| (20,000) | |
Depreciation and amortization | |
| (5,498,000) | |
| (1,316,000) | |
| (4,182,000) | |
| (3,615,000) | |
| (3,685,000) | |
| 70,000 |
Loss from equity-method investees | |
| (496,000) | |
| (595,000) | |
| 99,000 | |||||||||
Gain on sale of equity-method investment | |
| — | |
| 3,515,000 | |
| (3,515,000) | |||||||||
Income (loss) from equity-method investees | |
| 242,000 | |
| (489,000) | |
| 731,000 | |||||||||
Other income | |
| 206,000 | |
| 17,000 | |
| 189,000 | |
| 196,000 | |
| 163,000 | |
| 33,000 |
Interest expense | |
| (9,634,000) | |
| (1,767,000) | |
| (7,867,000) | |
| (8,470,000) | |
| (6,136,000) | |
| (2,334,000) |
Net (loss) income | |
| (4,458,000) | |
| 604,000 | |
| (5,062,000) | |||||||||
Net loss | |
| (3,621,000) | |
| (2,482,000) | |
| (1,139,000) | |||||||||
Noncontrolling interests’ share in (income) | |
| (49,000) | |
| (58,000) | |
| 9,000 | |
| (36,000) | |
| (37,000) | |
| 1,000 |
Net (loss) income applicable to common stockholders | | $ | (4,507,000) | | $ | 546,000 | | $ | (5,053,000) | |||||||||
Net loss applicable to common stockholders | | $ | (3,657,000) | | $ | (2,519,000) | | $ | (1,138,000) |
Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating and resident costs include insurance, property taxes and other operating expenses, and resident costs are related to the Operated Properties. Net operating income increased approximately $10.6$0.4 million for the ninesix months ended SeptemberJune 30, 2023 compared to the six months ended June 30, 2022 primarily due to Sundial being included in our condensed consolidated financials for one month in the six months ended June 30, 2022 compared to six months in the ninesix months ended SeptemberJune 30, 2021 primarily2023.
The net change from loss to income from equity-method investees of approximately $0.7 million is mainly due to rental revenues generated fromthe impairment loss of $1.2 million related to the Fantasia I JV in the six months ended June 30, 2022.
The increase in interest expense of $2.3 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is due to an increase of approximately 4% in interest rates on approximately $139.0 million of debt for the CA3 and GA8 acquisitions in July and December 2021, respectively.
Asset management fees decreased approximately $0.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to the sale of the Indiana JV in June 2021 (see Note 5 to the accompanying Notes to Condensed Consolidated Financial Statements).
The net increase in depreciation and amortization of $4.2 million and interest expense of $7.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is primarily due to CA3 and GA8 acquisitions in July and December 2021 and an increase in interest rates for both CA3 and GA8 portfolios.
The net decrease of approximately $0.1 million in loss from our equity-method investments for the nine months ended September 30, 2022 is primarily due to the increase in the value of the interest rate swap resulting in higher income from the FPH JV.
The net decrease in gain on sale of equity-method investment of approximately $3.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is due to the sale of our equity interest in the Indiana JV (see Note 5 to the accompanying Notes to Condensed Consolidated Financial Statements for further information related to the sale of our interest in the Indiana JV in June 2021).
The net increase in other income of $0.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is primarily due to government COVID related relief funds received by Pennington Gardens.Properties.
Liquidity and Capital Resources
As of SeptemberJune 30, 2022,2023, we had approximately $12.1$11.1 million in cash and cash equivalents on hand. During March 2023, in response to the banking crisis, we transferred cash balances in excess of FDIC-insured limits from a smaller regional bank to a multi-national bank with more liquidity and a significantly larger balance sheet. We will continue to address the banking environment and make appropriate changes as necessary. To date, we have not experienced losses or lack of access to cash in our cash and cash equivalent accounts. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.
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Going forward, we expect our primary sources of cash to be rental revenues, joint ventureequity-method investment distributions and asset management 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, making our facilities more appealing in their market.
Seven of our debt obligations are long-term, fixed rate U.S. Department of Housing and Urban Development (“HUD”)-insured loans that mature between 2039 and 2055. The other debt obligations are short-term loans that mature in July 2024 through December 2026 with variable interest rates (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements). Due to the current environment of increasing interest rates, this willmay have a negative effect on our results of operations and therefore,for that reason, we expect tomay refinance these short-term loans with long-term, fixed rate HUD-insured debt, other long-term debt, or a combination of debt and equity in 2023.
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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 the operation of properties. In regardsregard to theour Operated Properties, our intent is to stabilize the operations of the facilities and execute long-term triple-net leases with either a new or the existing manager/operator.
Credit Facilities and Loan Agreements
As of SeptemberJune 30, 2022,2023, we had debt obligations of approximately $184.0$183.2 million. The outstanding balance by lender is as follows (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements for further information regarding our refinancing arrangements):
● | Capital One Multifamily Finance, LLC (HUD-insured) – approximately $10.0 million maturing September 2053 |
● | Lument Capital (formerly ORIX Real Estate Capital, LLC) (HUD-insured) – approximately |
● | CIBC Bank, USA - approximately $106.0 million maturing from July 2024 to December 2024 |
● | Oxford Finance LLC – approximately $32.8 million maturing from March 2025 to December 2026 |
Distributions
We made no stockholder distributions during the ninesix months ended SeptemberJune 30, 2022.2023.
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.
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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 real estate 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.
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The following is the reconciliation from net income (loss) applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Net (loss) income applicable to common stockholders (GAAP) | | $ | (1,988,000) | | $ | (247,000) | | $ | (4,507,000) | | $ | 546,000 | |
Adjustments: | |
| | |
| | |
| | |
| | |
Depreciation and amortization | |
| 1,805,000 | |
| 524,000 | |
| 5,479,000 | |
| 1,316,000 | |
Depreciation and amortization related to non-controlling interests | |
| (9,000) | |
| (9,000) | |
| (31,000) | |
| (28,000) | |
Depreciation related to Equity-Method Investments | |
| 202,000 | |
| 253,000 | |
| 658,000 | |
| 1,068,000 | (1) |
Impairment on real estate property in Fantasia I (included in loss from Equity-Method Investments) | | | 138,000 | | | — | | | 1,338,000 | | | — | |
Gain on sale of property in Fantasia I (included in income from Equity-Method Investments) | | | — | | | — | | | (437,000) | | | — | |
Gain on sale of equity-method investment | | | — | | | — | | | — | | | (3,515,000) | |
Funds provided by (used in) operations (FFO) applicable to common stockholders | | $ | 148,000 | | $ | 521,000 | | | 2,500,000 | | $ | (613,000) | (1) |
Weighted-average number of common shares outstanding - basic | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | |
FFO per weighted average common shares - basic | | $ | 0.01 | | $ | 0.02 | | $ | 0.11 | | $ | (0.03) | |
Weighted-average number of common shares outstanding - diluted | |
| 23,587,253 | |
| 23,553,606 | |
| 23,587,253 | |
| 23,027,978 | |
FFO per weighted average common shares - diluted | | $ | 0.01 | | $ | 0.02 | | $ | 0.11 | | $ | (0.03) | |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net (loss) income applicable to common stockholders (GAAP) | | $ | (1,681,000) | | $ | (2,194,000) | | $ | (3,657,000) | | $ | (2,519,000) |
Adjustments: | |
| | |
| | |
| | |
| |
Depreciation and amortization | |
| 1,797,000 | |
| 1,843,000 | |
| 3,595,000 | |
| 3,674,000 |
Depreciation and amortization related to non-controlling interests | |
| (10,000) | |
| (11,000) | |
| (20,000) | |
| (22,000) |
Depreciation related to Equity-Method Investments | |
| 183,000 | |
| 226,000 | |
| 366,000 | |
| 456,000 |
Impairment on real estate property in Fantasia I (included in loss from Equity-Method Investments) | | | — | | | 1,200,000 | | | — | | | 1,200,000 |
Gain on sale of property in Fantasia I JV (included in income from Equity-Method Investments) | | | — | | | — | | | — | | | (437,000) |
Funds provided by (used in) operations (FFO) applicable to common stockholders | | $ | 289,000 | | $ | 1,064,000 | | | 284,000 | | $ | 2,352,000 |
Weighted-average number of common shares outstanding - basic | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 |
FFO per weighted average common shares - basic | | $ | 0.01 | | $ | 0.05 | | $ | 0.01 | | $ | 0.10 |
Weighted-average number of common shares outstanding – diluted | |
| 23,496,475 | |
| 23,553,606 | |
| 23,496,475 | |
| 23,553,606 |
FFO per weighted average common shares - diluted | | $ | 0.01 | | $ | 0.05 | | $ | 0.01 | | $ | 0.10 |
Subsequent Events
None.See Note 14 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 Chief Executive Officer (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 Chief Executive Officer (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.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings.
See Note 12 to the accompanying Notes to Condensed Consolidated Financial Statements for a summary of our material legal proceedings.
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Item 1A.Risk Factors.
There have been no material changes to the Risk Factors described in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part II, Item 1A, Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2022.
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. |
(b) | Not applicable. |
(c) | During the |
Item 3.Defaults Upon Senior Securities.
None.
Item 4.Mine Safety Disclosures.
None.
Item 5.Other Information.
None.
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Item 6.Exhibits.
Ex. |
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101.1 |
| The following information from the Company’s quarterly report on Form 10-Q for the quarter ended |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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SIGNATURES
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.
| SUMMIT HEALTHCARE REIT, INC. |
| |
| /s/ |
Date: |
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| Chief Executive Officer |
| (Principal Executive Officer) |
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| /s/ |
Date: |
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| Chief Financial Officer |
| (Principal Financial Officer) |
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