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)
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “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 May 8,November 6, 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)
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
ASSETS | | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 11,515,000 | | $ | 11,572,000 | | $ | 11,289,000 | | $ | 11,572,000 |
Restricted cash | |
| 2,695,000 | |
| 2,591,000 | |
| 3,199,000 | |
| 2,591,000 |
Real estate properties, net | |
| 171,697,000 | |
| 173,127,000 | |
| 158,343,000 | |
| 173,127,000 |
Intangible lease assets, net | |
| 13,459,000 | |
| 13,704,000 | |
| 11,870,000 | |
| 13,704,000 |
Tenant and other receivables, net | |
| 5,195,000 | |
| 5,020,000 | |
| 4,633,000 | |
| 5,020,000 |
Other assets, net | |
| 2,059,000 | |
| 2,107,000 | |
| 1,714,000 | |
| 2,107,000 |
Equity-method investments | |
| 5,225,000 | |
| 5,182,000 | |
| 3,394,000 | |
| 5,182,000 |
Total assets | | $ | 211,845,000 | | $ | 213,303,000 | | $ | 194,442,000 | | $ | 213,303,000 |
| | | | | | | | | | | | |
LIABILITIES AND EQUITY | |
| | |
|
| |
| | |
|
|
Accounts payable and accrued liabilities | | $ | 6,152,000 | | $ | 5,585,000 | | $ | 7,116,000 | | $ | 5,585,000 |
Security deposits | |
| 4,651,000 | |
| 4,651,000 | |
| 4,231,000 | |
| 4,651,000 |
Loans payable, net of debt issuance costs | |
| 180,113,000 | |
| 180,169,000 | |
| 179,992,000 | |
| 180,169,000 |
Total liabilities | |
| 190,916,000 | |
| 190,405,000 | |
| 191,339,000 | |
| 190,405,000 |
| | | | | | | | | | | | |
Commitments and contingencies | |
| | |
|
| |
| | |
|
|
| | | | | | | | | | | | |
Stockholders’ Equity | |
| | |
|
| |
| | |
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2023 and December 31, 2022 | |
| — | |
| — | ||||||
Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at March 31, 2023 and December 31, 2022 | |
| 23,000 | |
| 23,000 | ||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 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 September 30, 2023 and December 31, 2022 | |
| 23,000 | |
| 23,000 | ||||||
Additional paid-in capital | |
| 116,439,000 | |
| 116,432,000 | |
| 116,461,000 | |
| 116,432,000 |
Accumulated deficit | |
| (95,710,000) | |
| (93,734,000) | |
| (113,500,000) | |
| (93,734,000) |
Total stockholders’ equity | |
| 20,752,000 | |
| 22,721,000 | |
| 2,984,000 | |
| 22,721,000 |
Noncontrolling interests | |
| 177,000 | |
| 177,000 | |
| 119,000 | |
| 177,000 |
Total equity | |
| 20,929,000 | |
| 22,898,000 | |
| 3,103,000 | |
| 22,898,000 |
Total liabilities and equity | | $ | 211,845,000 | | $ | 213,303,000 | | $ | 194,442,000 | | $ | 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 | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Revenues: | | | |
| |
|
Total rental revenues | | $ | 5,366,000 | | $ | 5,541,000 |
Resident fees and services | | | 1,369,000 | | | 408,000 |
Asset management fees | |
| 147,000 | |
| 165,000 |
Total operating revenue | |
| 6,882,000 | |
| 6,114,000 |
| | | | | | |
Expenses: | |
| | |
| |
Property operating costs | |
| 806,000 | |
| 773,000 |
Resident costs | | | 1,211,000 | | | 375,000 |
General and administrative | |
| 1,104,000 | |
| 1,048,000 |
Depreciation and amortization | |
| 1,809,000 | |
| 1,837,000 |
Total operating expenses | |
| 4,930,000 | |
| 4,033,000 |
| | | | | | |
Operating income | |
| 1,952,000 | |
| 2,081,000 |
| | | | | | |
Income from equity-method investees | |
| 125,000 | |
| 642,000 |
Other income | |
| 96,000 | |
| 2,000 |
Interest expense | |
| (4,132,000) | |
| (3,031,000) |
Net loss | |
| (1,959,000) | |
| (306,000) |
Noncontrolling interests’ share in net (income) loss | |
| (17,000) | |
| (19,000) |
Net loss applicable to common stockholders | | $ | (1,976,000) | | $ | (325,000) |
| | | | | | |
Basic and diluted loss per common share: | |
| | |
| |
Net loss applicable to common stockholders | | $ | (0.09) | | $ | (0.01) |
| | | | | | |
Weighted average shares used to calculate basic and diluted earnings per common share | |
| 23,027,978 | | | 23,027,978 |
| | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Revenues: | | | |
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Total rental revenues | | $ | 4,552,000 | | $ | 5,416,000 | | $ | 15,298,000 | | $ | 16,392,000 |
Resident fees and services | | | 2,084,000 | | | 1,125,000 | | | 5,086,000 | | | 2,396,000 |
Asset management fees | | | 129,000 | | | 165,000 | | | 423,000 | | | 495,000 |
Total operating revenue | |
| 6,765,000 | |
| 6,706,000 | |
| 20,807,000 | |
| 19,283,000 |
| | | | | | | | | | | | |
Expenses: | |
| | |
| | |
| | |
| |
Property operating costs | |
| 917,000 | |
| 846,000 | |
| 2,469,000 | |
| 2,385,000 |
Resident costs | | | 2,095,000 | | | 1,281,000 | | | 4,362,000 | | | 2,474,000 |
General and administrative | |
| 1,403,000 | |
| 1,280,000 | |
| 3,598,000 | |
| 3,460,000 |
Depreciation and amortization | |
| 2,066,000 | |
| 1,813,000 | |
| 5,685,000 | |
| 5,498,000 |
Impairment of real estate properties | | | 11,387,000 | | | — | | | 11,387,000 | | | — |
Total operating expenses | |
| 17,868,000 | |
| 5,220,000 | |
| 27,501,000 | |
| 13,817,000 |
| | | | | | | | | | | | |
Operating (loss) income | |
| (11,103,000) | |
| 1,486,000 | |
| (6,694,000) | |
| 5,466,000 |
| | | | | | | | | | | | |
Loss from equity-method investees | |
| (1,671,000) | |
| (7,000) | |
| (1,429,000) | |
| (496,000) |
Other income | |
| 103,000 | |
| 43,000 | |
| 299,000 | |
| 206,000 |
Interest expense | |
| (4,542,000) | |
| (3,498,000) | |
| (13,010,000) | |
| (9,634,000) |
Gain on consolidation of interest in unconsolidated equity-method investment | | | 1,066,000 | | | — | | | 1,066,000 | | | — |
| | | | | | | | | | | | |
Net loss | |
| (16,147,000) | |
| (1,976,000) | |
| (19,768,000) | |
| (4,458,000) |
Noncontrolling interests’ share in net (income) loss | |
| 38,000 | |
| (12,000) | |
| 2,000 | |
| (49,000) |
Net loss applicable to common stockholders | | $ | (16,109,000) | | $ | (1,988,000) | | $ | (19,766,000) | | $ | (4,507,000) |
| | | | | | | | | | | | |
Basic and diluted loss per common share: | |
| | |
| | |
| | |
| |
Net loss applicable to common stockholders | | $ | (0.70) | | $ | (0.09) | | $ | (0.86) | | $ | (0.20) |
| | | | | | | | | | | | |
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 | | | | | | | | | | | | | | | | |
| | Number | | Stock | | Additional | | | | | Total | | | | | | | |||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||
|
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity | ||||||
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 |
| — | |
| — | |
| 7,000 | |
| — | |
| 7,000 | |
| — | |
| 7,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (17,000) | |
| (17,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (1,976,000) | |
| (1,976,000) | |
| 17,000 | |
| (1,959,000) |
Balance — March 31, 2023 | | 23,027,978 | | $ | 23,000 | | $ | 116,439,000 | | $ | (95,710,000) | | $ | 20,752,000 | | $ | 177,000 | | $ | 20,929,000 |
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | | ||||||
| | | | Common | | | | | | | | | | | | | | | | |
| | Number | | Stock | | Additional | | | | | Total | | | | | | | |||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||
|
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity | ||||||
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 |
| — | |
| — | |
| 7,000 | |
| — | |
| 7,000 | |
| — | |
| 7,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (17,000) | |
| (17,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (1,976,000) | |
| (1,976,000) | |
| 17,000 | |
| (1,959,000) |
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 | | — | | | — | | | 10,000 | | | — | | | 10,000 | | | — | | | 10,000 |
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (19,000) | | | (19,000) |
Net (loss) income | | — | | | — | | | — | | | (1,681,000) | | | (1,681,000) | | | 19,000 | | | (1,662,000) |
Balance — June 30, 2023 | | 23,027,978 | | $ | 23,000 | | $ | 116,449,000 | | $ | (97,391,000) | | $ | 19,081,000 | | $ | 177,000 | | $ | 19,258,000 |
Stock-based compensation | | — | | | — | | | 12,000 | | | — | | | 12,000 | | | — | | | 12,000 |
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (20,000) | | | (20,000) |
Net (loss) income | | — | | | — | | | — | | | (16,109,000) | | | (16,109,000) | | | (38,000) | | | (16,147,000) |
Balance — September 30, 2023 |
| 23,027,978 | | $ | 23,000 | | $ | 116,461,000 | | $ | (113,500,000) | | $ | 2,984,000 | | $ | 119,000 | | $ | 3,103,000 |
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | | ||||||
| | | | Common | | | | | | | | | | | | | | | | |
| | Number | | Stock | | Additional | | | | | Total | | | | | | | |||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||
|
| 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 |
Stock-based compensation |
| — | |
| — | |
| 8,000 | |
| — | |
| 8,000 | |
| — | |
| 8,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (18,000) | |
| (18,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (325,000) | |
| (325,000) | |
| 19,000 | |
| (306,000) |
Balance — March 31, 2022 | | 23,027,978 | | $ | 23,000 | | $ | 116,409,000 | | $ | (85,366,000) | | $ | 31,066,000 | | $ | 172,000 | | $ | 31,238,000 |
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | | ||||||
| | | | Common | | | | | | | | | | | | | | | | |
| | Number | | Stock | | Additional | | | | | Total | | | | | | | |||
| | of | | Par | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | Total | ||||||
|
| 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 |
Stock-based compensation |
| — | |
| — | |
| 8,000 | |
| — | |
| 8,000 | |
| — | |
| 8,000 |
Distributions paid to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| (18,000) | |
| (18,000) |
Net (loss) income |
| — | |
| — | |
| — | |
| (325,000) | |
| (325,000) | |
| 19,000 | |
| (306,000) |
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 | | — | | | — | | | 6,000 | | | — | | | 6,000 | | | — | | | 6,000 |
Distributions paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (18,000) | | | (18,000) |
Net (loss) income | | — | | | — | | | — | | | (2,194,000) | | | (2,194,000) | | | 18,000 | | | (2,176,000) |
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 |
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)
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (1,959,000) | | $ | (306,000) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
| |
Amortization of debt issuance costs | |
| 228,000 | |
| 227,000 |
Depreciation and amortization | |
| 1,809,000 | |
| 1,831,000 |
Amortization of above-market lease intangible | | | 16,000 | | | 16,000 |
Straight-line rents | |
| (303,000) | |
| (374,000) |
Stock-based compensation expense | |
| 7,000 | |
| 8,000 |
Income from equity-method investees | |
| (125,000) | |
| (642,000) |
Change in operating assets and liabilities: | |
| | |
| |
Tenant and other receivables, net | |
| 251,000 | |
| 184,000 |
Other assets, net | |
| 17,000 | |
| (135,000) |
Accounts payable and accrued liabilities | |
| 597,000 | |
| 2,660,000 |
Net cash provided by operating activities | |
| 538,000 | |
| 3,469,000 |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
Additions to real estate and other assets | |
| (145,000) | |
| — |
Investment in equity-method investees | |
| (156,000) | |
| (69,000) |
Distributions received from equity-method investees | |
| 115,000 | |
| 133,000 |
Net cash (used in) provided by investing activities | |
| (186,000) | |
| 64,000 |
| | | | | | |
Cash flows from financing activities: | |
| | |
| |
Payments of loans payable | |
| (284,000) | |
| (275,000) |
Distributions paid to noncontrolling interests | |
| (17,000) | | | (18,000) |
Deferred financing costs | | | (4,000) | | | — |
Net cash used in financing activities | |
| (305,000) | |
| (293,000) |
| | | | | | |
Net increase in cash, cash equivalents and restricted cash | |
| 47,000 | |
| 3,240,000 |
Cash, cash equivalents and restricted cash – beginning of period | |
| 14,163,000 | |
| 13,161,000 |
Cash, cash equivalents and restricted cash – end of period | | $ | 14,210,000 | | $ | 16,401,000 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| |
Cash paid for interest | | $ | 3,795,000 | | $ | 2,000,000 |
| | | | | | |
| | Nine months Ended September 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (19,768,000) | | $ | (4,458,000) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |
| | |
| |
Amortization of debt issuance costs | |
| 685,000 | |
| 684,000 |
Depreciation and amortization | |
| 5,430,000 | |
| 5,498,000 |
Amortization of above-market lease intangible | | | 48,000 | | | 47,000 |
Straight-line rents | |
| (920,000) | |
| (1,108,000) |
Write off of straight-line rent receivables | |
| 1,300,000 | | | — |
Stock-based compensation expense | |
| 29,000 | |
| 23,000 |
Write-off of leasing commissions | | | 255,000 | | | — |
Impairment of real estate properties | | | 11,387,000 | | | — |
Gain on consolidation of interest in unconsolidated equity-method investment | | | (1,066,000) | | | — |
Loss from equity-method investees | |
| 1,429,000 | |
| 496,000 |
Change in operating assets and liabilities: | |
| | |
| |
Tenant and other receivables, net | |
| 45,000 | |
| 274,000 |
Other assets, net | |
| 232,000 | |
| (98,000) |
Accounts payable and accrued liabilities | |
| 1,148,000 | |
| 2,620,000 |
Security deposits | | | (420,000) | | | — |
Net cash (used in) provided by operating activities | |
| (186,000) | |
| 3,978,000 |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
Proceeds from sale of real estate properties assigned | | | 3,839,000 | | | — |
Cash assumed in assignment of interest in unconsolidated equity-method investment | | | 770,000 | | | — |
Additions to real estate and other assets | |
| (243,000) | |
| (483,000) |
Investment in equity-method investees | |
| (230,000) | |
| (1,111,000) |
Distributions received from equity-method investees | |
| 550,000 | |
| 422,000 |
Net cash provided by (used in) investing activities | |
| 4,686,000 | |
| (1,172,000) |
| | | | | | |
Cash flows from financing activities: | |
| | |
| |
Payments of loans payable | |
| (862,000) | |
| (831,000) |
Repayment of loan payable assigned | | | (3,171,000) | | | — |
Distributions paid to noncontrolling interests | |
| (56,000) | | | (49,000) |
Deferred financing costs | | | (86,000) | | | (173,000) |
Net cash used in financing activities | |
| (4,175,000) | |
| (1,053,000) |
| | | | | | |
Net increase in cash, cash equivalents and restricted cash | |
| 325,000 | |
| 1,753,000 |
Cash, cash equivalents and restricted cash – beginning of period | |
| 14,163,000 | |
| 13,161,000 |
Cash, cash equivalents and restricted cash – end of period | | $ | 14,488,000 | | $ | 14,914,000 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| |
Cash paid for interest | | $ | 12,007,000 | | $ | 7,864,000 |
Supplemental disclosure of non-cash financing and investing activities: | | | | | | |
Consolidation of assets, net, in connection with our acquisition of partner's interest in unconsolidated equity-method investment | | $ | 313,000 | | $ | — |
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
MARCH 31,SEPTEMBER 30, 2023
(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 nineeight properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties. 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 March 31,September 30, 2023 and December 31, 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 March 31,September 30, 2023 and December 31, 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, in which we had a 35% interest. As of June 30,2023, the Fantasia I JV iswas not consolidated in our condensed consolidated financial statements and iswas accounted for under the equity-method in our condensed consolidated financial statements. As of March 31,
On July 3, 2023, and December 31, 2022, we have a 35% interestthe majority member in the Fantasia I JV which owns one property.assigned its 65% interest, for no consideration, to Summit. As such, as of July 2023, Summit owned 100% of Fantasia I JV. See Note 3 under Fantasia I JV Transfer of Interest and Sale for further information.
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 March 31,September 30, 2023 and December 31, 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 March 31,September 30, 2023 and December 31, 2022, we have a 10% interest in the Fantasia III JV. The Fantasia III JV which ownsowned eight properties as of September 30, 2023 and owned nine properties.properties as of December 31, 2022.
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 March 31,September 30, 2023 and December 31, 2022, we have a 10% interest in the FPH JV which owns six properties.
Taxable REIT Subsidiaries
Summit Healthcare Asset Management, LLC
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 (through July 2, 2023), Fantasia II JV, Fantasia III JV, and FPH JV (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, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023.
The accompanying condensed consolidated balance sheet at December 31, 2022 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, 2022 consolidated financial statements and contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023 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
8
substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2022 have been omitted in this report.
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 nine months ended March 31,September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
8
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Cash and cash equivalents | | $ | 11,515,000 | | $ | 11,572,000 | | $ | 11,289,000 | | $ | 11,572,000 |
Restricted cash | |
| 2,695,000 | |
| 2,591,000 | |
| 3,199,000 | |
| 2,591,000 |
Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows | | $ | 14,210,000 | | $ | 14,163,000 | | $ | 14,488,000 | | $ | 14,163,000 |
3. Investments in Real Estate Properties
As of March 31,September 30, 2023 and December 31, 2022, our investments in real estate properties, including those held by our consolidated subsidiaries (excluding the 3533 properties owned by our unconsolidated Equity-Method Investments), are set forth below:
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Land | | $ | 15,565,000 | | $ | 15,565,000 | | $ | 14,905,000 | | $ | 15,565,000 |
Buildings and improvements | |
| 166,989,000 | |
| 166,989,000 | |
| 157,833,000 | |
| 166,989,000 |
Less: accumulated depreciation | |
| (17,125,000) | |
| (15,985,000) | |
| (19,403,000) | |
| (15,985,000) |
Buildings and improvements, net | |
| 149,864,000 | |
| 151,004,000 | |
| 138,430,000 | |
| 151,004,000 |
Furniture and fixtures | |
| 12,560,000 | |
| 12,440,000 | |
| 12,121,000 | |
| 12,440,000 |
Less: accumulated depreciation | |
| (6,292,000) | |
| (5,882,000) | |
| (7,113,000) | |
| (5,882,000) |
Furniture and fixtures, net | |
| 6,268,000 | |
| 6,558,000 | |
| 5,008,000 | |
| 6,558,000 |
Real estate properties, net | | $ | 171,697,000 | | $ | 173,127,000 | | $ | 158,343,000 | | $ | 173,127,000 |
For the three months ended March 31,September 30, 2023 and 2022, depreciation expense (excluding lease intangibles amortization and leasing commission amortization) was approximately $1.6 million and $1.6 million, respectively. For the nine months ended September 30, 2023 and 2022, depreciation expense (excluding intangible lease amortization and leasing commission amortization) was approximately $4.7 million and $4.8 million, respectively.
As of March 31,September 30, 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 2022,Fantasia I JV Transfer of Interest and Sale
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 owned 100% of Fantasia I JV. The Fantasia I JV consists of the real estate of Summit Citrus Heights, LLC, our tenants forwholly-owned subsidiary (“Summit Citrus Heights”) as of July 3, 2023, and the Pennington Gardensoperating assets and Sundialliabilities of its associated senior housing facility, Sun Oak Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19(“Sun Oak" or "CH TRS”).The following summarizes the fair value of the assets and liabilities consolidated in our condensed consolidated financial statements beginning in July 2023: cash of $0.8 million, real estate of $3.8 million, other assets of $0.1 million, loan payable of $3.2 million and other operator issues that affected their ability to make their rent paymentsliabilities of $0.4 million. The Fantasia I JV was considered a variable interest entity and the consolidation of the entity resulted in 2022. As a result,gain of approximately $1.1 million, which is recorded in gain on consolidation of interest in unconsolidated equity-method investment in the condensed consolidated statements of operations. Additionally, on September 29, 2023, we experiencedsold the following impacts:real estate of Summit Citrus Heights, including the Sun Oak facility for net cash of approximately $0.6 million (which consists of the $3.8 million sale price and the payoff of the loan payable of approximately $3.2 million) and recorded a loss of approximately $0.01 million, which is recorded in gain on consolidation of interest in unconsolidated equity-method investment in the condensed consolidated statements of operations. See below under CH TRS LLC for additional information regarding the operations of Sun Oak.
9
CH TRS LLC (Sun Oak Assisted Living)
In July 2023, as noted above under Fantasia I JV Transfer of Interest and Sale, we acquired the Fantasia I JV. Summit Citrus Heights was the sole member of CH TRS LLC, the operating company for Sun Oak. As such, the operations of Sun Oak are consolidated in our financial statements beginning July 3, 2023, through September 29, 2023 (date of the sale), and all intercompany transactions have been eliminated. For the three months ended September 30, 2023, revenues from Sun Oak are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
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 nine months ended March 31,September 30, 2023 and for the period from February 11, 2022 through March 31,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 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 nine months ended March 31,September 30, 2023 and for the period from June 7, 2022 through September 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 3533 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 March 31,September 30, 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 | | $ | 3,959,000 | ||||||||||||
Rivers Edge Rehabilitation and Care (f/k/a) Sheridan Care Center)) |
| Sheridan, OR | | August 3, 2012 |
| SNF | | $ | 4,100,000 | | $ | 3,873,000 | ||||||||||||
Fernhill Care Center |
| Portland, OR | | August 3, 2012 |
| SNF | |
| 4,500,000 | |
| 3,473,000 |
| Portland, OR | | August 3, 2012 |
| SNF | |
| 4,500,000 | |
| 3,397,000 |
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County, TX | | September 14, 2012 |
| SNF | |
| 15,000,000 | |
| 11,274,000 |
| Galveston County, TX | | September 14, 2012 |
| SNF | |
| 15,000,000 | |
| 11,164,000 |
Pacific Health and Rehabilitation Center |
| Tigard, OR | | December 24, 2012 |
| SNF | |
| 8,140,000 | |
| 5,790,000 |
| Tigard, OR | | December 24, 2012 |
| SNF | |
| 8,140,000 | |
| 5,664,000 |
Brookstone of Aledo |
| Aledo, IL | | July 2, 2013 |
| AL | |
| 8,625,000 | |
| 6,565,000 |
| Aledo, IL | | July 2, 2013 |
| AL | |
| 8,625,000 | |
| 6,496,000 |
Sundial Assisted Living |
| Redding, CA | | December 18, 2013 |
| AL | |
| 3,500,000 | |
| 3,670,000 |
| Redding, CA | | December 18, 2013 |
| AL | |
| 3,500,000 | |
| 3,641,000 |
Pennington Gardens |
| Chandler, AZ | | July 17, 2017 |
| AL/MC | |
| 13,400,000 | |
| 10,000,000 |
| Chandler, AZ | | July 17, 2017 |
| AL/MC | |
| 13,400,000 | |
| 9,918,000 |
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 | | $ | 170,731,000 | | | | |
| | | $ | 207,320,000 | | $ | 170,153,000 |
(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
AL is an abbreviation for assisted living facility.
MC is an abbreviation for memory care facility.
Tenant/Operator Changes
In September 2023, three of our wholly-owned properties and their related facilities, Rivers Edge Rehabilitation and Care, Fernhill Care Center, and Pacific Health and Rehabilitation Center, replaced the tenant/operator. The previous tenant requested the lease be terminated and on September 1, 2023, HUD approved the change. As a result of the lease termination, we wrote off the straight-line rent receivable of approximately $1.3 million, which is included in rental revenues in our condensed consolidated statements of operations, wrote off leasing commissions of approximately $0.3 million, which is included in depreciation and amortization in our condensed consolidated statements of operations, and recorded income from security deposits of approximately $0.4 million, which is included in total rental revenue in our condensed consolidated statements of operations. The new tenant leases are structured under a master lease at the same lease rates for a 10-year term through August 2033, with two five-year renewal options.
Future Minimum Lease Payments
The future minimum lease payments to be received under our existing tenant operating leases (excluding the 3533 properties owned by our unconsolidated Equity-Method Investments and the intercompany lease between our wholly-owned subsidiaries: Summit Chandler LLC and Pennington Gardens, and HP Redding LLC and Sundial) as of March 31,September 30, 2023, for the period from AprilOctober 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
Years ending |
| | |
| | |
April 1, 2023 to December 31, 2023 | | $ | 13,494,000 | |||
October 1, 2023 to December 31, 2023 | | $ | 4,504,000 | |||
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 | |
| 19,168,000 |
Thereafter | |
| 146,294,000 | |
| 155,908,000 |
| | $ | 234,659,000 | | $ | 235,283,000 |
2023 Acquisitions
None.
2022 Acquisitions
None.
Impairment of Real Estate Properties
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.
During the three and nine months ended September 30, 2023, we recorded an impairment of $11.4 million related to eight real estate properties, which is included in impairment of real estate properties in the condensed consolidated statements of operations. The impairment was recorded due to the tenants experiencing issues affecting their ability to continue to pay their lease obligations. We utilized a market approach for the fair value estimate of the real estate properties and based our impairment on an estimated yield of 10.8%. We considered these inputs as Level 3 measurements within the fair value hierarchy.
No impairments were recorded during the threenine months ended March 31, 2023 orSeptember 30, 2022.
11
4. Loans Payable
As of March 31,September 30, 2023 and December 31, 2022, our loans payable consisted of the following:
. | | | | | | | ||||||
|
| March 31, 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 March 31, 2023 and December 31, 2022, collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial and Friendship Haven. | | $ | 34,731,000 | | $ | 34,976,000 | ||||||
|
| September 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, 2023 and December 31, 2022, collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial and Friendship Haven. | | $ | 34,235,000 | | $ | 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. | | | 10,000,000 | | | 10,039,000 | | | 9,918,000 | | | 10,039,000 |
| | | | | | | | | | | | |
Loan payable to CIBC Bank, USA in monthly installments of approximately of $133,000 including cash collateral fund payments, variable interest rate (8.7% and 8.2% at March 31, 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 of $133,000 including cash collateral fund payments, variable interest rate (9.4% and 8.2% at September 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 $600,000 (interest only through December 2023) variable interest rate (8.2% and 7.7% at March 31, 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 CIBC Bank, USA in monthly installments of approximately $600,000 (interest only through December 2023) variable interest rate (8.8% and 7.7% at September 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 $260,000 (interest only through maturity), variable interest rate (15.7% and 15.1% at March 31, 2023 and December 31, 2022, respectively) due in March 2025, collateralized in second position by the GA8 Properties. | | | 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 (16.4% and 15.1% at September 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 $168,000 (interest only through maturity), variable interest rate (15.7% and 15.1% at March 31, 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 | ||||||
Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $168,000 (interest only through maturity), variable interest rate (16.4% and 15.1% at September 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 | ||||||
| |
| 183,481,000 | |
| 183,765,000 | |
| 182,903,000 | |
| 183,765,000 |
Less debt issuance costs | |
| (3,368,000) | |
| (3,596,000) | |
| (2,911,000) | |
| (3,596,000) |
Total loans payable | | $ | 180,113,000 | | $ | 180,169,000 | | $ | 179,992,000 | | $ | 180,169,000 |
As of March 31,September 30, 2023, we have total debt obligations of approximately $183.5$182.9 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 March 31,September 30, 2023, we were in compliance with all of our debt covenants orexcept for our GA8 Properties which were out of compliance with their consolidated minimum EBITDAR covenant. We have requested ora waiver. Additionally, in October 2023 and November 2023, Oxford agreed to defer a portion of our interest payments on the mezzanine loan payable (see table above) until we can confirm a plan of action. We have not received a waiver.any notice of default for this deferral, however, we are including it in the current period in the principal payments due on the loans payable table below.
During the three months ended March 31,September 30, 2023 and 2022, we incurred approximately $3.9$4.3 million and $2.6$3.2 million of interest expense, respectively, excluding 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 nine months ended September 30, 2023 and 2022, we incurred
12
approximately $12.3 million and $8.4 million, respectively, of interest expense (excluding debt issuance costs, amortization and interest expense related to the Oxford Monthly Fee) related to our loans payable.
In connection with our loans payable, we incurred debt issuance costs. As of March 31,September 30, 2023 and December 31, 2022, the unamortized balance of the debt issuance costs was approximately $3.4$2.9 million and $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 March 31,September 30, 2023 and 2022, $0.2 million of debt issuance costs were amortized and $0.2included in interest expense in our condensed consolidated statements of operations. For each of the nine months ended September 30, 2023 and 2022, $0.7 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 March 31,September 30, 2023 and 2022, we incurred approximately $0 million and $0.2$0.1 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 nine months ended September 30, 2023 and 2022, we incurred approximately $0 million and $0.5 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) for the period from AprilOctober 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
| | Principal | | Principal | ||
Years Ending |
| Amount |
| Amount | ||
April 1, 2023 to December 31, 2023 | | $ | 872,000 | |||
October 1, 2023 to December 31, 2023 | | $ | 13,044,000 | |||
2024 | |
| 107,201,000 | |
| 107,201,000 |
2025 | |
| 21,246,000 | |
| 21,246,000 |
2026 | |
| 14,042,000 | |
| 1,292,000 |
2027 | |
| 1,341,000 | |
| 1,341,000 |
Thereafter | |
| 38,779,000 | |
| 38,779,000 |
| | $ | 183,481,000 | | $ | 182,903,000 |
The following information notes our loan activity:
CA3 Properties
In 2021, we entered into a first priority $15.0 million mortgage loan collateralized by the CA3 Properties with CIBC Bank, USA (“CIBC”). See table above listing loans payable for futherfurther information.
GA8 Properties
In 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 $20.0 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. See table above listing loans payable for futherfurther 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
Master Letter of Credit Agreement
In June 2023, we entered into $1.0 million Master Letter of Credit Agreement with CIBC. As of September 30, 2023, there are no outstanding letters of credit under this agreement.
5. Equity-Method Investments
As of March 31,September 30, 2023 and December 31, 2022, the balances of our Equity-Method Investments were approximately $5.2$3.4 million and $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”).
13
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, 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 threenine months ended March 31,September 30, 2023 and 2022, we invested approximately $156,000$230,000 and $0,$821,000, respectively, related to capital calls for the SUL JV. During 2022,the three months ended September 30, 2023, the SUL JV entered into agreements with brokers to market three properties for sale, however, no agreements for such sales have been executedrecorded an impairment of approximately $1.1 million on one property in this JV and due to the provisions under the HUD-insured loans payable, nonewe recorded our 10% share of the properties are considered held for sale asimpairment of March 31, 2023 and December 31, 2022.approximately $0.1 million in loss from equity-method investees in the condensed consolidated statements of operations.
As of March 31,September 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the SUL JV was approximately $2.5$2.2 million and $2.4 million, respectively.
Summit Fantasia Holdings, LLC
The Fantasia JV will exist until an event of dissolution occurs, as definedOn July 3, 2023, the majority member in the limited liability company agreementFantasia I JV assigned its 65% interest, for no consideration, to Summit. As such, as of theJuly 2023, Summit owned 100% of Fantasia I JV. See Note 3 under Fantasia I JV (the “Fantasia LLC Agreement”).
Under the Fantasia LLC Agreement, net operating cash flowTransfer of the Fantasia JV is distributed quarterly, first to the Operating PartnershipInterest 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 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.Sale for further information.
For the threeperiod ended July 2, 2023 and the nine months ended March 31, 2023 andSeptember 30, 2022, we invested approximately $0 and $69,000,$290,000, respectively, related to capital calls for the Fantasia I JV. In AugustSeptember 2022, we determined the Fantasia JV agreed to sell its remaining property, Sun Oak Assisted Living; therefore the property is considered as held for salefair value of our investment in the Fantasia I JV to be impaired and asrecorded a $0.1 million impairment charge which is recorded in the loss from equity-method investees in the condensed consolidated statements of March 31, 2023,operations for the property has not been sold.three and nine months ended September 30, 2022.
As of March 31,July 2, 2023 and December 31, 2022, our equity-method investment related to the Fantasia I JV was $0.$0 due to the transfer and impairment noted above, respectively.
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”).
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.
14
In June 2023, the tenant for the two properties in the Fantasia II JV filed for receivership. The two properties are currently being operated by the receivership estate in conjunction with a third-party manager under a one-year management agreement. As of September 30, 2023, there has been no termination of the tenant leases and the Fantasia II JV is currently communicating with the receiver regarding ongoing lease terms and payments. The Fantasia II JV has not received any rent payments since May 2023. During the three months ended September 30, 2023, the Fantasia II JV recorded an impairment of approximately $1.6 million on the two properties and we recorded our 20% share of the impairment of approximately $0.3 million in loss from equity-method investees in the condensed consolidated statements of operations. Additionally, in September 2023, due to the ongoing issues with the receivership, we determined the fair value of our investment in the Fantasia II JV to be impaired and recorded a $0.5 million impairment charge which is recorded in the loss from equity-method investees in the condensed consolidated statements of operations.
As of March 31,September 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.2$0 million and $1.2 million, respectively.
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,
14
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.
During the three months ended September 30, 2023, the Fantasia III JV deeded the ownership in a transfer of one of the properties in the Fantasia III JV to the tenant for no contractual consideration, however as part of the settlement agreement, the Fantasia III JV will receive a monthly payment of the base rent of the transferred property that was in place at the time of the transfer, through the end of the lease term, August 2032, from one of the other tenants in the JV. The Fantasia III JV recorded a loss of approximately $3.9 million on the transaction and we recorded our 10% share of the loss of approximately $0.4 million in loss from equity-method investees in the condensed consolidated statements of operations.
As of March 31,September 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.5$1.2 million and $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.
In December 2022, Summit recorded an impairment of approximately $0.2 million of our equity-method investment balance in the FPH JV due to issues related to tenant operations, and consequently, reduced our equity-method investment balance to $0.
As of March 31,September 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the FPH JV was $0.
Summarized Financial Data for Equity-Method Investments
Our Equity-Method Investments are significant in the aggregate.
The results of operations of our Equity-Method Investments for the three months ended March 31, 2023 are summarized below:
| | | | | | | | | | | | | | | | | | |
| | | | | Fantasia | | Fantasia | | Fantasia | | FPH | | Combined | |||||
|
| SUL JV |
| JV |
| II JV |
| III JV |
| JV |
| Total | ||||||
Revenue | | $ | 5,369,000 | | $ | 485,000 | | $ | 716,000 | | $ | 2,092,000 | | $ | 158,000 | | $ | 8,820,000 |
Income (loss) from operations | | $ | 1,472,000 | | $ | (195,000) | | $ | 513,000 | | $ | 1,038,000 | | $ | (198,000) | | $ | 2,630,000 |
Net income (loss) | | $ | 413,000 | | $ | (317,000) | | $ | 288,000 | | $ | 256,000 | | $ | (713,000) | | $ | (73,000) |
Summit interest in Equity-Method Investments net income (loss) | | $ | 41,000 | | $ | (112,000) | (1) | $ | 58,000 | | $ | 26,000 | | $ | (71,000) | (1) | $ | (58,000) |
|
|
The results of operations of our Equity-Method Investments for the three months ended March 31, 2022 are summarized below:
| | | | | | | | | | | | | | | | | | |
|
| | |
| Fantasia |
| Fantasia |
| Fantasia |
| FPH |
| Combined | |||||
| | SUL JV |
| JV |
| II JV |
| III JV |
| JV | | Total | ||||||
Revenue | | $ | 5,195,000 | | $ | 729,000 | | $ | 716,000 | | $ | 2,062,000 | | $ | 898,000 | | $ | 9,600,000 |
Income from operations | | $ | 1,598,000 | | $ | 1,172,000 | | $ | 490,000 | | $ | 971,000 | | $ | 420,000 | | $ | 4,651,000 |
Net income | | $ | 447,000 | | $ | 1,076,000 | | $ | 260,000 | | $ | 477,000 | | $ | 1,211,000 | | $ | 3,471,000 |
Summit interest in Equity-Method Investments net income | | $ | 45,000 | | $ | 376,000 | | $ | 52,000 | | $ | 48,000 | | $ | 121,000 | | $ | 642,000 |
15
Distributions from Equity-Method Investments
As of March 31,September 30, 2023 and December 31, 2022, we have distributions receivable, which are included in tenant and other receivables in our condensed consolidated balance sheets, as follows:
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
SUL JV | | $ | 257,000 | | $ | 259,000 | | $ | 269,000 | | $ | 259,000 |
Fantasia JV | |
| — | |
| — | ||||||
Fantasia II JV | |
| 58,000 | |
| 55,000 | |
| 30,000 | |
| 55,000 |
Fantasia III JV | |
| 33,000 | |
| 22,000 | |
| 69,000 | |
| 22,000 |
FPH JV | |
| 64,000 | |
| 64,000 | |
| 64,000 | |
| 64,000 |
Total | | $ | 412,000 | | $ | 400,000 | | $ | 432,000 | | $ | 400,000 |
For the threenine months ended March 31,September 30, 2023 and 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | Nine months Ended September 30, 2023 | | Nine months Ended September 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 | | $ | 134,000 | | $ | 42,000 | | $ | 92,000 | | $ | 152,000 | | $ | 44,000 | | $ | 108,000 | | $ | 408,000 | | $ | 6,000 | | $ | 402,000 | | $ | 434,000 | | $ | 91,000 | | $ | 343,000 |
Fantasia JV | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | ||||||||||||||||||
Fantasia II JV | |
| 80,000 | |
| 57,000 | |
| 23,000 | |
| 77,000 | |
| 52,000 | |
| 25,000 | |
| 136,000 | |
| — | |
| 136,000 | |
| 237,000 | |
| 158,000 | |
| 79,000 |
Fantasia III JV | |
| 12,000 | |
| 12,000 | |
| — | |
| 44,000 | |
| 44,000 | |
| — | |
| 12,000 | |
| — | |
| 12,000 | |
| 95,000 | |
| 95,000 | |
| — |
FPH JV | |
| — | |
| — | |
| — | |
| 41,000 | |
| 41,000 | |
| — | |
| — | |
| — | |
| — | |
| 56,000 | |
| 56,000 | |
| — |
Total | | $ | 226,000 | | $ | 111,000 | | $ | 115,000 | | $ | 314,000 | | $ | 181,000 | | $ | 133,000 | | $ | 556,000 | | $ | 6,000 | | $ | 550,000 | | $ | 822,000 | | $ | 400,000 | | $ | 422,000 |
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 March 31,September 30, 2023 and 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 nine months ended September 30, 2023 and 2022, we recorded approximately $0.4 million and $0.5 million, respectively, in asset management fees from our Equity-Method Investments (see Note 7).
6. Receivables
Tenant and Other Receivables, Net
Tenant and other receivables, net consists of:
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Straight-line rent receivables | | $ | 4,165,000 | | $ | 3,862,000 | | $ | 3,482,000 | | $ | 3,862,000 |
Distribution receivables from Equity-Method Investments | |
| 412,000 | |
| 400,000 | |
| 432,000 | |
| 400,000 |
Asset management fees | |
| 265,000 | |
| 375,000 | |
| 290,000 | |
| 375,000 |
Other receivables | |
| 353,000 | |
| 383,000 | |
| 429,000 | |
| 383,000 |
Total | | $ | 5,195,000 | | $ | 5,020,000 | | $ | 4,633,000 | | $ | 5,020,000 |
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.
16
8. Intangible Lease Assets
Intangible lease assets are as follows:
| | | | | | | | | | | | |
|
| March 31, |
| December 31, |
| September 30, |
| December 31, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
In-place leases | | $ | 13,778,000 | | $ | 13,778,000 | | $ | 12,680,000 | | $ | 13,778,000 |
Less: accumulated amortization | |
| (1,166,000) | |
| (937,000) | |
| (1,625,000) | |
| (937,000) |
In-place leases, net | |
| 12,612,000 | |
| 12,841,000 | |
| 11,055,000 | |
| 12,841,000 |
Above-market leases | |
| 959,000 | |
| 959,000 | |
| 959,000 | |
| 959,000 |
Less: accumulated amortization | |
| (112,000) | |
| (96,000) | |
| (144,000) | |
| (96,000) |
Above-market leases, net | |
| 847,000 | |
| 863,000 | |
| 815,000 | |
| 863,000 |
Total intangible lease assets, net | | $ | 13,459,000 | | $ | 13,704,000 | | $ | 11,870,000 | | $ | 13,704,000 |
For each of the three months ended March 31,September 30, 2023 and 2022, amortization expense for intangible lease assets was approximately $0.2 million of which approximately $16,000 relates to the amortization of above market leases which is included within rental revenues in the accompanying condensed consolidated statements of operations. For each of the nine months ended September 30, 2023 and 2022, amortization expense for intangible lease assets was approximately $0.7 million of which approximately $48,000 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 March 31,September 30, 2023, for the period from AprilOctober 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | | | | |
Years ending December 31, |
|
| |
|
| |
April 1, 2023 to December 31, 2023 | | $ | 738,000 | |||
October 1, 2023 to December 31, 2023 | | $ | 224,000 | |||
2024 | |
| 980,000 | |
| 896,000 |
2025 | |
| 980,000 | |
| 896,000 |
2026 | |
| 980,000 | |
| 896,000 |
2027 | |
| 980,000 | |
| 896,000 |
Thereafter | |
| 8,801,000 | |
| 8,062,000 |
| | $ | 13,459,000 | | $ | 11,870,000 |
9. Right of Use (ROU) Asset - Operating
In November 2022, we entered into an operating lease for office space (“Office Lease”) for a period of sixty-six (66) months, with a five-year renewal option. The office space subject to the Office Lease is located in Laguna Hills, California. The Office 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 (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 Office Lease.
The Office Lease is classified as an operating lease. A “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 Office 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. The Office Lease does not contain material residual value guarantees or material restrictive covenants.
Supplemental balance sheet information related to the Office Lease are as follows:
| | | | | | | | | | | | | | | | |
Component |
| Consolidated Balance Sheet Caption |
| March 31, 2023 |
| December 31, 2022 |
| Consolidated Balance Sheet Caption |
| September 30, 2023 |
| December 31, 2022 | ||||
Right of use asset - operating |
| Other assets, net | | $ | 800,000 | | $ | 833,000 |
| Other assets, net | | $ | 732,000 | | $ | 833,000 |
Lease liability - operating |
| Accounts payable and accrued liabilities | | $ | 945,000 | | $ | 933,000 |
| Accounts payable and accrued liabilities | | $ | 918,000 | | $ | 933,000 |
17
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 March 31,September 30, 2023, we recognized approximately $45,000 in lease expense and for the nine months ended September 30, 2023, we were not required to make any rent payments.recognized approximately $135,000 in lease expense. The lease payments will be classified within operating activities in the consolidated
17
statements of cash flows. As of March 31,September 30, 2023, we had not made any lease payments and the weighted average remaining lease term is 5.04.4 years.
Lease payments on the Office Lease for the period from AprilOctober 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
| | | |
Year |
| Lease payments | |
April 1, 2023 to December 31, 2023 | | $ | 103,000 |
2024 | |
| 211,000 |
2025 | |
| 217,000 |
2026 | |
| 224,000 |
2027 | |
| 231,000 |
Thereafter | |
| 99,000 |
Total lease payments | | $ | 1,085,000 |
Less imputed interest | |
| (140,000) |
Total lease liability | | $ | 945,000 |
| | | |
Year |
| Lease payments | |
October 1, 2023 to December 31, 2023 | | $ | 52,000 |
2024 | |
| 211,000 |
2025 | |
| 217,000 |
2026 | |
| 224,000 |
2027 | |
| 231,000 |
Thereafter | |
| 99,000 |
Total lease payments | | $ | 1,034,000 |
Less imputed interest | |
| (116,000) |
Total lease liability | | $ | 918,000 |
10. Concentration of Risk
Our cash is generally invested in short-term money market instruments. As of March 31,September 30, 2023, we had cash accounts in excess of FDIC-insured limits. 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. 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.
As of March 31,September 30, 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 3533 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 March 31,September 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 March 31,September 30, 2022, we leased16 of our 17 real estate properties were leased to 1514 different tenants under long-term triple net leases, and three of the 1514 tenants each represented more than 10% of our rental revenue.
For the nine months ended September 30, 2023, 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, 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.
As of March 31,September 30, 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.
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 loans payable discussed below, we consider the carrying values to approximate fair value (categorized within Level 1 of the fair value hierarchy) for such financial instruments because of the short period of time between origination of the instruments and their expected payment.
As of March 31,September 30, 2023 and December 31, 2022, the fair value of our HUD-insured loans payable was $36.7$36.6 million and $38.9 million, compared to the principal balance (excluding debt discount) of $44.7$44.1 million and $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. The fair value of
18
our fixed and variable rate debt was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for 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 of March 31,September 30, 2023 and December 31, 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.
See Note 3 for disclosure regarding fair value of impaired real estate properties.
As of March 31,September 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.
18
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.
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. Trial in the Bankruptcy Court was conducted on January 9 and 10, 2023, with final concluding arguments presented on January 19, 2023. AtOn May 12, 2023, the conclusionCourt issued an opinion to award the plaintiffs $75,000 for reimbursement of legal fees related to the filing of the trial,involuntary bankruptcy petition plus $517,000 for reimbursement of attorney’s fees related to the stay violation. Several additional motions have been filed and were heard in September 2023. The Bankruptcy Court tookhas not yet ruled on the matter under advisementmotions and has not yet issuedindicated when a decision.decision will be issued. Based on the assessment by management, as of September 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’ Amended and Restated Employment Agreement, dated October 19, 2021. On July 14, 2023 (the “Termination Date”), the Board of Directors (the “Board”) of the Company terminated, for cause, Mr. 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.
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. The parties are currently engaged in written discovery and related motion practice. The parties have also started depositions. 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 March 31,September 30, 2023, and December 31, 2022, no accrual has been made with regard to the claim.
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, effectiveEffective October 19, 2021, we entered into a new employment agreementsagreement with our executive officersElizabeth Pagliarini (Chief Financial Officer at the time and current Chief Executive Officer), for a term of three years. TheseThe employment agreements includeagreement includes 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.agreement.
We previously had entered into an employment agreement, dated October 19, 2021, with Mr. Eikanas, which was terminated on July 14, 2023 in connection with his removal as Chief Executive Officer.
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.Investments (see Note 5 for capital call activity).
19
13. Equity
Share-Based Compensation Plans
The following table summarizes ourUpon the grant of stock options, as of March 31, 2023:
| | | | | | | | | | |
| | | | | | | 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 |
| — | |
| |
| |
| | |
Exercised |
| — | |
| |
| |
| | |
Cancelled/forfeited |
| — | |
| |
| |
| | |
Options outstanding at March 31, 2023 |
| 1,948,908 | | $ | 2.10 |
| 4.75 | | $ | 1,235,000 |
| | | | | | | | | | |
Options exercisable at March 31, 2023 |
| 1,892,963 | | $ | 2.09 |
| 4.62 | | $ | 1,214,000 |
Forwe determine the exercise price by using our outstanding non-vested options as of March 31, 2023,estimated per-share value, which is calculated by aggregating the weighted average grant dateestimated fair value per share was $0.91. As of March 31, 2023, we have unrecognized stock-based compensation expense related to unvested stockour 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 which is expected to be recognized as follows:were granted.
| | | |
Years Ending December 31, |
| | |
2023 | |
| 18,000 |
2024 | |
| 25,000 |
2025 | |
| 8,000 |
| | $ | 51,000 |
The stock-based compensationfair 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 reported for employee stock options is recognized ratably over the three months ended March 31, 2023vesting 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 2022 was approximately $7,000 and $8,000, respectively, and is included in general and administrative expense in the condensed consolidated statementsexpected life of operations.
14. Subsequent Events
Stock Optionsan option.
On April 1, 2023, we granted 80,000 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, 2023 and continuing over a three-year period through April 1, 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:
| | | | |
|
| 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 | |
2021
The following table summarizes our stock options as of September 30, 2023:
| | | | | | | | | | |
| | | | | | | 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 September 30, 2023 |
| 2,028,908 | | $ | 2.10 |
| 4.45 | | $ | 1,279,000 |
| | | | | | | | | | |
Options exercisable at September 30, 2023 |
| 1,917,268 | | $ | 2.09 |
| 4.18 | | $ | 1,225,000 |
For our outstanding non-vested options as of September 30, 2023, the weighted average grant date fair value per share was $0.91. As of September 30, 2023, we have unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized as follows:
| | | |
Years Ending December 31, |
| | |
2023 | | $ | 12,000 |
2024 | |
| 49,000 |
2025 | | | 32,000 |
2026 | |
| 8,000 |
| | $ | 101,000 |
The stock-based compensation expense reported for the three months ended September 30, 2023 and 2022 was approximately $12,000 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, 2023 and 2022 was approximately $29,000 and $23,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.
14. Subsequent Events
None.
22
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, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Overview
As of March 31,September 30, 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 nineeight properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six 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 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. During 2023 and 2022, we experienced a material adverse effect on the operations of two properties related to COVID-19 (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information on its impact to us and see below for the impact on our Equity-Method Investments). We expect the COVID-19 pandemic will continue to adversely affect our tenants’ and our Company’s financial condition and results of operations, including but not limited to, occupancy, resident 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.an extended period of these higher rates. 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,
21
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
At March 31,September 30, 2023, our portfolio consisted of 18 real estate properties as noted above in the Overview section of this Item 2, 16 of which were 100% triple-net leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the “Operated(“Operated Properties”) for which we operate directly and earn resident fees and services revenue.
The following table provides summary information (excluding the 3533 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of March 31,September 30, 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 |
2224
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | |
| |
| |
| 2023 |
| | | |
| |
| |
| 2023 | ||
| | | | | | | | | | Lease | | | | | | | | | | Lease | ||
Property |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) | ||
Sheridan Care Center |
| Sheridan, OR | | August 3, 2012 |
| SNF |
| 51 | | $ | 123,000 |
| Sheridan, OR | | August 3, 2012 |
| SNF |
| 51 | | $ | 375,000 |
Fernhill Care Center |
| Portland, OR | | August 3, 2012 |
| SNF |
| 63 | |
| 131,000 |
| Portland, OR | | August 3, 2012 |
| SNF |
| 63 | |
| 400,000 |
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County TX | | September 14, 2012 |
| SNF |
| 150 | |
| 353,000 |
| Galveston County TX | | September 14, 2012 |
| SNF |
| 150 | |
| 1,059,000 |
Pacific Health and Rehabilitation Center |
| Tigard, OR | | December 24, 2012 |
| SNF |
| 73 | |
| 242,000 |
| Tigard, OR | | December 24, 2012 |
| SNF |
| 73 | |
| 738,000 |
Brookstone of Aledo |
| Aledo, IL | | July 2, 2013 |
| AL |
| 66 | |
| 191,000 |
| Aledo, IL | | July 2, 2013 |
| AL |
| 66 | |
| 573,000 |
Sundial Assisted Living (2) |
| Redding, CA | | December 18, 2013 |
| AL |
| 65 | |
| — |
| Redding, CA | | December 18, 2013 |
| AL |
| 65 | |
| — |
Pennington Gardens (2) |
| Chandler, AZ | | July 17, 2017 |
| AL/MC |
| 90 | |
| — |
| Chandler, AZ | | July 17, 2017 |
| AL/MC |
| 90 | |
| — |
Yucaipa Hill Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 82 | | | 266,000 | | Yucaipa, CA | | July 2, 2021 | | SNF | | 82 | | | 799,000 |
Creekside Post Acute | | Yucaipa, CA | | July 2, 2021 | | SNF | | 59 | | | 119,000 | | Yucaipa, CA | | July 2, 2021 | | SNF | | 59 | | | 356,000 |
University Post Acute | | Mentone, CA | | July 2, 2021 | | SNF | | 50 | | | 113,000 | | Mentone, CA | | July 2, 2021 | | SNF | | 50 | | | 340,000 |
Calhoun Health Center | | Calhoun, GA | | December 30, 2021 | | SNF | | 100 | | | 120,000 | | Calhoun, GA | | December 30, 2021 | | SNF | | 100 | | | 359,000 |
Maple Ridge Health Care Center | | Cartersville, GA | | December 30, 2021 | | SNF | | 74 | | | 474,000 | | Cartersville, GA | | December 30, 2021 | | SNF | | 74 | | | 1,421,000 |
Chatsworth Health Care Center | | Chatsworth, GA | | December 30, 2021 | | SNF | | 120 | | | 865,000 | | Chatsworth, GA | | December 30, 2021 | | SNF | | 120 | | | 2,594,000 |
East Lake Arbor | | Decatur, GA | | December 30, 2021 | | SNF | | 103 | | | 226,000 | | Decatur, GA | | December 30, 2021 | | SNF | | 103 | | | 677,000 |
Fairburn Health Care Center | | Fairburn, GA | | December 30, 2021 | | SNF | | 120 | | | 362,000 | | Fairburn, GA | | December 30, 2021 | | SNF | | 120 | | | 1,086,000 |
Grandview Health Care Center | | Jasper, GA | | December 30, 2021 | | SNF | | 60 | | | 266,000 | | Jasper, GA | | December 30, 2021 | | SNF | | 60 | | | 799,000 |
Rosemont at Stone Mountain | | Stone Mountain, GA | | December 30, 2021 | | SNF | | 149 | | | 684,000 | | Stone Mountain, GA | | December 30, 2021 | | SNF | | 149 | | | 2,051,000 |
Willowwood Nursing Center & Rehab | | Flowery Branch, GA | | December 30, 2021 | | SNF | | 100 | | | 258,000 | | Flowery Branch, GA | | December 30, 2021 | | SNF | | 100 | | | 773,000 |
Total |
| |
|
|
|
|
| 1,575 | |
| |
| |
|
|
|
|
| 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. Lease revenue due under the Pennington Gardens and Sundial intercompany leases are eliminated in consolidation and revenue is reflected in resident fees and services in the accompanying condensed consolidated statements of operations for the Operated Properties. |
Summit Equity-Method Investment Portfolio Properties
We continue to believe that raising institutional capital to make acquisitions will be accretive to shareholder value. Our primary source of capital 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.
25
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”).
23
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.
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”).
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 owned 100% of Fantasia I JV. The assets and liabilities of the Fantasia I JV, consisting of the real estate of Summit Citrus Heights LLC, its wholly-owned subsidiary as of July 3, 2023, and the operations of its associated senior housing facility, Sun Oak Assisted Living, were consolidated in our condensed consolidated financial statements beginning in July 2023 and no longer considered an equity-method investment as of September 30, 2023.
In September 2023, due to the ongoing receivership issues in the Fantasia II JV, the Fantasia II JV recorded an impairment of approximately $1.6 million on the two properties and we recorded our 20% share of the impairment of approximately $0.3 million. Additionally, as of September 30, 2023, due to the continuing issues, we determined the fair value of our investment in the Fantasia II JV to be impaired and recorded a $0.5 million impairment charge which is recorded in the loss from equity-method investees in the accompanying condensed consolidated statements of operations.
On September 29, 2023, the Fantasia III JV executed a transfer agreement for one of the properties in the Fantasia III JV, transferring the real estate to the tenant in return for a monthly payment of the transferred property’s base rent through August 2032 to be received from one of the other properties in the portfolio. The JV member interest and debt was transferred to the same property in the portfolio. The Fantasia III JV recorded a net loss on the transfer of the real estate of approximately $3.9 million and our share of the net loss was $0.4 million.
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:JVs as of September 30, 2023: we own a 20% interest in two skilled nursing facilities located in Rhode Island; and a 10% interest in eight skilled nursing facilities located in Connecticut. Through the Fantasia JVs as of December 31, 2022: we own a 35% interest in one senior housing facility located in California;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.
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.
26
The following reconciles our equity investments in our Equity-Method Investments from inception through March 31,September 30, 2023 in our condensed consolidated financialsfinancial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| SUL JV |
| Fantasia JVs |
| FPH JV |
| Total |
| SUL JV |
| Fantasia II JV |
| Fantasia III JV |
| FPH JV |
| Total | |||||||||
Total investment | | $ | 6,345,000 | | $ | 6,690,000 | | $ | 929,000 | | $ | 13,964,000 | | $ | 6,420,000 | | $ | 1,923,000 | | $ | 1,954,000 | | $ | 929,000 | | $ | 11,226,000 |
Income (loss) from equity-method investees | | $ | 965,000 | | $ | (225,000) | | $ | (112,000) | | $ | 628,000 | | $ | 929,000 | | $ | (82,000) | | $ | 546,000 | | $ | (112,000) | | $ | 1,281,000 |
Distributions | | $ | (4,820,000) | | $ | (3,730,000) | | $ | (817,000) | | $ | (9,367,000) | | $ | (5,106,000) | | $ | (1,841,000) | | $ | (1,349,000) | | $ | (817,000) | | $ | (9,113,000) |
Total investment at March 31, 2023 | | $ | 2,490,000 | | $ | 2,735,000 | | $ | — | | $ | 5,225,000 | |||||||||||||||
Total investment at September 30, 2023 | | $ | 2,243,000 | | $ | — | | $ | 1,151,000 | | $ | — | | $ | 3,394,000 | ||||||||||||
Number of properties | | | 17 | | | 12 | | | 6 | | | 35 | | | 17 | $ | | 2 | | | 8 | | | 6 | | | 33 |
Number of beds | | | 1,408 | | | 1,681 | | | 511 | | | 3,600 | | | 1,408 | | | 318 | | | 1,149 | | | 449 | | | 3,324 |
A summary of the condensed combined financial data for the balance sheets and statements of income (operations) for all unconsolidated Equity-Method Investments are as follows:
| | | | | | | | | | | | |
| | March 31, | | December 31, | | September 30, | | December 31, | ||||
Condensed Combined Balance Sheets: |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Total Assets | | $ | 245,754,000 | | $ | 249,540,000 | | $ | 232,374,000 | | $ | 249,540,000 |
Total Liabilities | | $ | 182,476,000 | | $ | 185,857,000 | | $ | 178,309,000 | | $ | 185,857,000 |
Members Equity: |
| | |
| | |
| | |
| | |
Summit |
| $ | 5,537,000 | (1) | $ | 5,676,000 |
| $ | 4,226,000 | (1) | $ | 5,676,000 |
JV Partners |
| $ | 57,741,000 |
| $ | 58,007,000 |
| $ | 49,839,000 |
| $ | 58,007,000 |
Total Members Equity |
| $ | 63,278,000 |
| $ | 63,683,000 |
| $ | 54,065,000 |
| $ | 63,683,000 |
(1)At March 31,September 30, 2023 and December 31, 2022, the aggregate balance of our equity method investments in our condensed consolidated financialsfinancial statements for each period presented of approximately $5.2$3.4 million is lower by approximately $0.3$0.8 million and $0.5 million, respectively, than the equity recognized in the underlying Equity-Method Investments financial statements due to unrecordedimpairment losses and impairments.we have recorded on our basis in the the joint venture that are not reflected in members equity at the underlying equity-method investment level.
24
| | | | | | |
| | Three Months Ended | | Three Months Ended | ||
| | March 31, | | March 31, | ||
Condensed Combined Statements of Income (Operations): |
| 2023 |
| 2022 | ||
Total revenue: | | $ | 8,820,000 | | $ | 9,600,000 |
Income from operations | | $ | 2,630,000 | | $ | 4,651,000 |
Net income | | $ | (73,000) | | $ | 3,471,000 |
| |
| | |
| |
Summit equity interest in Equity-Method Investments net income | | $ | (58,000) | | $ | 642,000 |
JV Partners interest in Equity-Method Investments net income | | $ | (15,000) | | $ | 2,829,000 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
Condensed Combined Statements of Operations: |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Total Revenue | | $ | 6,680,000 | | $ | 9,666,000 | | $ | 24,686,000 | | $ | 28,802,000 |
Income (loss) from Operations | | $ | (5,521,000) | | $ | 3,208,000 | | $ | 633,000 | | $ | 7,766,000 |
Net (loss) income | | $ | (7,675,000) | | $ | 1,606,000 | | $ | (6,328,000) | | $ | 3,015,000 |
| |
| | |
| | |
| | |
| |
Summit equity interest in Equity-Method Investments net (loss) income | | $ | (1,110,000) | | $ | 131,000 | | $ | (939,000) | | $ | (293,000) |
JV Partners interest in Equity-Method Investments net (loss) income | | $ | (6,565,000) | | $ | 1,475,000 | | $ | (5,389,000) | | $ | 3,308,000 |
Distributions from Equity-Method Investments
For the threenine months ended March 31,September 30, 2023 and 2022, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:
| | | | | | | | | | | | |
|
| Three Months Ended March 31, |
| Nine months Ended September 30, | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Distributions | | $ | 238,000 | | $ | 310,000 | | $ | 588,000 | | $ | 875,000 |
| | | | | | | | | | | | |
Cash received for distributions | | $ | 226,000 | | $ | 314,000 | | $ | 555,000 | | $ | 822,000 |
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, 2022 as filed with the SEC on March 31, 2023.
27
Results of Operations
Our results of operations are described below:
Three Months Ended March 31,September 30, 2023 Compared to Three Months Ended March 31,September 30, 2022
| | | | | | | | | | | | | | | | | ||
|
| Three Months Ended |
|
| |
| Three Months Ended |
|
| | ||||||||
| | March 31, | | | | | September 30, | | | | ||||||||
| | 2023 |
| 2022 |
| $ Change | | 2023 |
| 2022 |
| $ Change | ||||||
Total rental revenues | | $ | 5,366,000 | | $ | 5,541,000 | | $ | (175,000) | |||||||||
Total rental revenues (excludes security deposits below) | | $ | 4,132,000 | | $ | 5,416,000 | | $ | (1,284,000) | |||||||||
Property operating costs | | $ | (806,000) | | $ | (773,000) | | $ | (33,000) | | | (917,000) | | | (846,000) | | | (71,000) |
Resident fees and services revenue |
| | 1,369,000 |
| | 408,000 |
| | 961,000 |
| | 2,084,000 |
| | 1,125,000 |
| | 959,000 |
Resident costs |
| | (1,211,000) |
| | (375,000) |
| | (836,000) |
| | (2,095,000) |
| | (1,281,000) |
| | (814,000) |
Net operating income (1) |
| | 4,718,000 |
| | 4,801,000 |
| | (83,000) |
| | 3,204,000 |
| | 4,414,000 |
| | (1,210,000) |
Asset management fees |
| | 147,000 |
| | 165,000 |
| | (18,000) |
| | 129,000 |
| | 165,000 |
| | (36,000) |
Security deposits from terminated leases | | | 420,000 | | | — | | 420,000 | ||||||||||
General and administrative |
| | (1,104,000) |
| | (1,048,000) |
| | (56,000) |
| | (1,403,000) |
| | (1,280,000) |
| | (123,000) |
Depreciation and amortization |
| | (1,809,000) |
| | (1,837,000) |
| | 28,000 |
| | (2,066,000) |
| | (1,813,000) |
| | (253,000) |
Income from equity-method investees | | | 125,000 | | | 642,000 | | (517,000) | ||||||||||
Loss from equity-method investees | | | (1,671,000) | | | (7,000) | | (1,664,000) | ||||||||||
Impairment of real estate properties | | | (11,387,000) | | | — | | (11,387,000) | ||||||||||
Gain on consolidation of interest in unconsolidated equity-method investment | | | 1,066,000 | | | — | | 1,066,000 | ||||||||||
Other income | | | 96,000 | | | 2,000 | | 94,000 | | | 103,000 | | | 43,000 | | 60,000 | ||
Interest expense |
| | (4,132,000) |
| | (3,031,000) |
| | (1,101,000) |
| | (4,542,000) |
| | (3,498,000) |
| | (1,044,000) |
Net loss |
| | (1,959,000) |
| | (306,000) |
| | (1,653,000) |
| | (16,147,000) |
| | (1,976,000) |
| | (14,171,000) |
Noncontrolling interests’ share in (income) |
| | (17,000) |
| | (19,000) |
| | 2,000 | |||||||||
Noncontrolling interests’ share in loss (income) |
| | 38,000 |
| | (12,000) |
| | 50,000 | |||||||||
Net loss applicable to common stockholders |
| $ | (1,976,000) |
| $ | (325,000) |
| $ | (1,651,000) |
| $ | (16,109,000) |
| $ | (1,988,000) |
| $ | (14,121,000) |
(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 services revenue less property operating and resident costs. NOI excludes asset management fees, security deposits from terminated leases, general and administrative expense, depreciation and amortization, income (loss) from equity-method investees, impairment of real estate properties, other income, and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of the REIT’s real estate at the property level on an unleveraged basis. We use NOI |
25
to make decisions about resource allocations and to assess and compare property-level performance. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect the aforementioned excluded items. Additionally, NOI as we define it may not be comparable to NOI as defined by other REITs or companies, as they may use different methodologies for calculating NOI. |
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 costs include insurance, and property taxes, and resident costs are related to the Operated Properties. Net operating income decreased approximately $1.2 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to the $1.3 million write off of straight-line rents related to the change in three tenants in September 2023.
The increase in general and administrative expenses of $0.1 million for the three months ended March 31,September 30, 2023 compared to the three months ended March 31,September 30, 2022 primarilyis mainly due to recording the $0.2 million settlement agreement for a terminated leasean increase in legal fees in the three months ended March 31, 2022.September 30, 2023.
The net decreaseincrease in incomedepreciation and amortization for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 is mainly due to the write off of the leasing commissions related to the change in the three tenants during the three months ended September 30, 2023.
The increase in loss from equity-method investees of approximately $0.5$1.7 million is mainly due to no activity from twothe impairment loss and write off of the equity method investees (See Note 5equity-method investment of $1.2 million related to the accompanying notes to condensed consolidated financials)Fantasia II JV, our share of the impairment in one property in the SUL JV of $0.1 million, and loss from the Fantasia III JV for $0.4 million in the three months ended March 31, 2023 and recording a gain from the saleSeptember 30, 2023.
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The impairment of real estate properties for the three months ended March 31, 2022.September 30, 2023 of $11.4 million is related to the GA8 properties. See Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information.
The increase in gain on consolidation of interest in unconsolidated equity-method investment of approximately $1.1 million is due to the consolidation of a variable interest entity (Fantasia I JV) in July 2023 and the related gain and then the subsequent sale of the real estate in September 2023.
The increase in interest expense of $1.1$1.0 million for the three months ended March 31,September 30, 2023 compared to the three months ended March 31,September 30, 2022 is due to an increase of approximately 0.5%3% in interest rates on approximately $119.0$139.0 million of debt for the CA3 and GA8 Properties.
Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022
| | | | | | | | | |
|
| Nine months Ended |
|
| | ||||
| | September 30, | | | | ||||
| | 2023 |
| 2022 |
| $ Change | |||
Total rental revenues (excludes security deposits below) | | $ | 14,878,000 | | $ | 16,392,000 | | $ | (1,514,000) |
Property operating costs | |
| (2,469,000) | |
| (2,385,000) | |
| (84,000) |
Resident fees and services revenue | |
| 5,086,000 | |
| 2,396,000 | |
| 2,690,000 |
Resident costs | |
| (4,362,000) | |
| (2,474,000) | |
| (1,888,000) |
Net operating income (1) | |
| 13,133,000 | |
| 13,929,000 | |
| (796,000) |
Security deposits from terminated leases | | | 420,000 | | | — | | | 420,000 |
Asset management fees | |
| 423,000 | |
| 495,000 | |
| (72,000) |
General and administrative | |
| (3,598,000) | |
| (3,460,000) | |
| (138,000) |
Depreciation and amortization | |
| (5,685,000) | |
| (5,498,000) | |
| (187,000) |
Loss from equity-method investees | |
| (1,429,000) | |
| (496,000) | |
| (933,000) |
Impairment of real estate properties | | | (11,387,000) | | | — | | | (11,387,000) |
Gain on consolidation of interest in unconsolidated equity-method investment | | | 1,066,000 | | | — | | | 1,066,000 |
Other income | |
| 299,000 | |
| 206,000 | |
| 93,000 |
Interest expense | |
| (13,010,000) | |
| (9,634,000) | |
| (3,376,000) |
Net loss | |
| (19,768,000) | |
| (4,458,000) | |
| (15,310,000) |
Noncontrolling interests’ share in loss (income) | |
| 2,000 | |
| (49,000) | |
| 51,000 |
Net loss applicable to common stockholders | | $ | (19,766,000) | | $ | (4,507,000) | | $ | (15,259,000) |
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 resident costs are related to the Operated Properties. Net operating income decreased approximately $0.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to the $1.3 million write off of straight-line rents related to the change in three tenants in September 2023 and Sundial being included in our condensed consolidated financials for four months in the nine months ended September 30, 2022 compared to nine months in the nine months ended September 30, 2023.
The increase in general and administrative expenses of $0.1 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is mainly due to an increase in legal fees and payroll offset by accounting fees.
The increase in depreciation and amortization of $0.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is mainly due to the write off the leasing commissions related to the change in the three tenants in September 2023.
The increase in loss from equity-method investees of approximately $1.0 million is mainly due to the impairment loss and write off of the equity-method investment of $1.1 million related to the Fantasia II JV, impairment in one property in the SUL JV of $0.01 million, and loss from the Fantasia III JV for $0.3 million in September 30, 2023 compared to income of $0.6 million from the Fantasia II, III and FPH JVs and $0.1 million from the SUL JV offset by the loss from the Fantasia I JV of $1.2 million in the nine months ended September 30, 2022.
29
The impairment of real estate properties for the nine months ended September 30, 2023 of $11.4 million is related to the GA8 properties. See Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information.
The increase in gain on consolidation and sale of real estate property of approximately $1.1 million is due to the consolidation of a variable interest entity (Fantasia I JV) in July 2023 and the related gain and then the subsequent sale of the real estate in September 2023.
The increase in interest expense of $3.4 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is due to an increase of approximately 3% in interest rates on approximately $139.0 million of debt for the CA3 and GA8 Properties.
Liquidity and Capital Resources
As of March 31,September 30, 2023, we had approximately $11.5$11.3 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.
Going forward, we expect our primary sources of cash to be rental revenues, equity-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 may have a negative effect on our results of operations, which could result in foreclosure if our cash is insufficient to meet our obligations under our loans payable, and for that reason, we may refinance these short-term loans with long-term, fixed rate HUD-insured debt, other long-term debt, or a combination of debt and equity or sale of the real estate in 2023.
2023 or 2024. Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties. In regard to our Operated Properties, our intent is to stabilize the operations of the facilities and market them for sale due to the significantly reduced willingness of AL manager/operators to execute long-term triple-net leases with either a new or the existing manager/operator.leases.
Credit Facilities and Loan Agreements
As of March 31,September 30, 2023, we had debt obligations of approximately $183.5$182.9 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 |
● | Lument Capital (formerly ORIX Real Estate Capital, LLC) (HUD-insured) – approximately |
26
● | 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 |
● | CIBC Bank, USA - Master Letter of Credit Agreement for $1.0 million |
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Distributions
We made no stockholder distributions during the threenine months ended March 31,September 30, 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.
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.
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 nine months ended March 31,September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Nine months Ended | ||||||||||||
| | March 31, | | March 31, | | September 30, | | September 30, | ||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net loss applicable to common stockholders (GAAP) | | $ | (1,976,000) | | $ | (325,000) | | $ | (16,109,000) | | $ | (1,988,000) | | $ | (19,766,000) | | $ | (4,507,000) |
Adjustments: | |
| | |
| | |
| | | | | | | | | | |
Depreciation and amortization | |
| 1,798,000 | |
| 1,831,000 | |
| 2,049,000 | |
| 1,805,000 | |
| 5,644,000 | |
| 5,479,000 |
Depreciation and amortization related to non-controlling interests | |
| (10,000) | |
| (11,000) | |
| (23,000) | |
| (9,000) | |
| (43,000) | |
| (31,000) |
Depreciation related to Equity-Method Investments | |
| 183,000 | |
| 230,000 | |
| 183,000 | |
| 202,000 | |
| 549,000 | |
| 658,000 |
Gain on sale of property in Fantasia I (included in income from Equity-Method Investments) | | | — | | | (437,000) | ||||||||||||
Impairment on real estate property in Equity-Method Investments (included in loss from Equity-Method Investments) | | | 423,000 | | | 138,000 | | | 423,000 | | | 1,338,000 | ||||||
Impairment on real estate properties | | | 11,387,000 | | | — | | | 11,387,000 | | | — | ||||||
Gain on sale of property in Fantasia I JV (included in income from Equity-Method Investments) | | | — | | | — | | | — | | | (437,000) | ||||||
Gain on consolidation of interest in unconsolidated equity-method investment | | | (1,066,000) | | | — | | | (1,066,000) | | | | ||||||
Funds provided by (used in) operations (FFO) applicable to common stockholders | | $ | (5,000) | | $ | 1,288,000 | | $ | (3,156,000) | | $ | 148,000 | | | (2,872,000) | | $ | 2,500,000 |
Weighted-average number of common shares outstanding - basic | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 | | | 23,027,978 |
FFO per weighted average common shares - basic | | $ | 0.00 | | $ | 0.06 | | $ | (0.14) | | $ | 0.01 | | $ | (0.12) | | $ | 0.11 |
Weighted-average number of common shares outstanding - diluted | |
| 23,027,978 | |
| 23,570,998 | ||||||||||||
Weighted-average number of common shares outstanding – diluted | |
| 23,027,978 | |
| 23,587,253 | |
| 23,027,978 | |
| 23,587,253 | ||||||
FFO per weighted average common shares - diluted | | $ | 0.00 | | $ | 0.06 | | $ | (0.14) | | $ | 0.01 | | $ | (0.12) | | $ | 0.11 |
Subsequent Events
See Note 14 to the accompanying Notes to Condensed Consolidated Financial Statements.
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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.
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, 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.
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Item 5.Other Information.
Effective May 10, 2023, J. Steven Roush, the Chairman of the Company’s Board of Directors was appointed as Principal Executive Officer on an interim basis.
J. Steven Roush, CPA, age 76, serves on the Company’s Audit, Independent Directors, Compensation and Investment Committees and chairs the Company’s Audit Committee. Mr. Roush retired from PricewaterhouseCoopers (PWC) in 2007 after 39 years, 30 of those as a Partner. Mr. Roush brings experience in a diverse number of industries ranging from manufacturing, non-profits and retail (restaurants) with concentrations in real estate (office, residential, hospitality and commercial) telecommunications and pharmaceutical. He has a background in dealing with both private and public company boards of directors. Mr. Roush has a Bachelor of Science Degree in Accounting from Drake University and an Executive Masters Professional Director Certification from the American College of Corporate Directors. Mr. Roush has served on the Company’s Board since 2014.
Mr. Roush brings to the Company’s Board years of dealing with the SEC and its various regulatory filings, Sarbanes Oxley (SOX 404) implementation and maintenance and the experience of working with many diverse boards running across varied industries. Over the years, he has served as an office managing partner, an SEC Review Partner (over 20 years) and a Risk Management Partner. Mr. Roush currently serves as Chairman of the Board and Chairman of the Audit Committee of W.E. Hall Company, a privately held manufacturer and distributor of corrugated pipe and related drainage products. He also is Chairman of the Board and Chairman of the Audit Committee for Fieldpiece Instruments, Inc., a privately held manufacturer of hand held instruments for HVAC/R field service. Mr. Roush also serves on the Board of Trustees of the Orange County Museum of Art and is the Treasurer and the Chairman of the Finance Committee. He is on the Board of Directors of the American Heart Association - Orange County and previously served six years on the Audit Committee of the National American Heart Association. Mr. Roush serves on the Corporate Cabinet of the Tocqueville Society of United Way – Orange County. Mr. Roush is a founding member of the Private Directors Association-Southern California chapter. He previously served as a member of the Board and Chairman of the Audit committee of AirTouch Communications, Inc., a public telecommunication device company and Staar Surgical Company, a public manufacturer of implantable lenses for the eye.None.
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Item 6.Exhibits.
Ex. |
| Description |
3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1 |
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4.4 |
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31.1 |
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31.2 |
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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. |
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| /s/ |
Date: |
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| (Principal Executive Officer) |
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| /s/ |
Date: |
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| Chief Financial Officer |
| (Principal Financial Officer) |
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