NORTHSTAR HEALTHCARE INCOME, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part I, Item 1. "Financial Statements" and the risk factors in Part II, Item 1A. "Risk Factors." References to "we," "us," "our," or "NorthStar Healthcare " refer toNorthStar Healthcare Income, Inc. and its subsidiaries unless the context specifically requires otherwise.
Overview
We were formed to acquire, originate and asset manage a diversified portfolio of equity, debt and securities investments in healthcare real estate, directly or through joint ventures, with a focus on the mid-acuity seniors housing sector, which we define as assisted living, memory care, skilled nursing and independent living facilities and continuing care retirement communities. We also invest in other healthcare property types, including medical office buildings, hospitals, rehabilitation facilities and ancillary healthcare services businesses. Our investments are predominantly inthe United States , but we also selectively make international investments. We were formed inOctober 2010 as aMaryland corporation and commenced operations inFebruary 2013 . We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with the taxable year endedDecember 31, 2013 . We conduct our operations so as to continue to qualify as a REIT forU.S. federal income tax purposes. We are externally managed and have no employees. OnFebruary 28, 2022 , our former Sponsor,DigitalBridge Group, Inc. (NYSE: DBRG), or our Former Sponsor, completed the previously announced disposition of its wellness infrastructure platform, or the Sponsor Transaction. Following completion of the Sponsor Transaction,NRF Holdco, LLC , or NRF or our New Sponsor (and together with our Former Sponsor, our Sponsor as the context requires), ownsCNI NSHC Advisors, LLC , or our Advisor, as well as its own diversified portfolio of medical office buildings, senior housing facilities, skilled nursing facilities and specialty hospitals. NRF is wholly owned byCWP Bidco LP , an entity affiliated with Highgate, a privately held real estate investment and hospitality management company, andAurora Health Network LLC , a privately held healthcare-focused investment firm. In addition, upon completion of the Sponsor Transaction, employees of our Former Sponsor focused on the wellness infrastructure platform became employees of our New Sponsor. Our Advisor, now a subsidiary of our New Sponsor, continues to manage our day-to-day operations pursuant to an advisory agreement. From inception throughJune 30, 2022 , we raised$2.0 billion in total gross proceeds from the sale of shares of our common stock in our continuous, public offerings, including$232.6 million pursuant to our distribution reinvestment plan, or our DRP, collectively referred to as our Offering.
Significant Developments
Operating Performance
The following is a summary of the performance of our investment segments for the three months endedJune 30, 2022 as compared to the three months endedMarch 31, 2022 . The world continues to experience the broad effects of the COVID-19 pandemic. Our healthcare real estate business and investments have been challenged by suboptimal occupancy levels, lower labor force participation rates, which have driven increased labor costs, and inflationary pressures on other operating expenses. We continue to monitor the progression of the economic recovery from COVID-19 and its effects on our results of operations and assess recoverability of value across our assets as conditions change. For additional information on financial results, refer to "-Results of Operations."
Direct Investments - Operating
During the three months endedJune 30, 2022 , our direct operating investments experienced a 2.4% increase in the number of resident move-ins over the three months endedMarch 31, 2022 , while the number of move-outs decreased 7.0% over the same period. A summary of average occupancy by manager is as follows: Average Monthly Occupancy Average Quarterly Occupancy Operator / Manager June 2022 March 2022 Variance Q2 2022 Q1 2022 Variance Solstice Senior Living 82.4 % 78.4 % 4.0 % 81.4 % 78.0 % 3.4 % Watermark Retirement Communities 77.0 % 77.0 % - % 76.9 % 77.4 % (0.5) % Avamere Health Services 88.5 % 86.8 % 1.7 % 87.7 % 85.4 % 2.3 % Integral Senior Living 97.5 % 97.5 % - % 99.2 % 96.7 % 2.5 % Direct Investments - Operating 81.4 % 78.7 % 2.7 % 80.7 % 78.5 % 2.2 % 33
--------------------------------------------------------------------------------
Table of Contents On a same store basis, rental and resident fee income of our direct operating investments increased to$45.0 million for the three months endedJune 30, 2022 as compared to$43.1 million for the three months endedMarch 31, 2022 as a result of improved occupancy. On a same store basis, property operating expenses of our direct operating investments increased to$33.1 million for the three months endedJune 30, 2022 as compared to$32.8 million for the three months endedMarch 31, 2022 . The increase was attributable to additional repairs and maintenance projects, inflationary pressures on operating costs and staffing challenges, which have resulted in increased use of agency labor. The overall increase in operating expenses was partially offset by lower utilities costs due to seasonality. Overall, on a same store basis, rental and resident fee income, net of property operating expenses, of our direct operating investments increased to$11.9 million for the three months endedJune 30, 2022 as compared to$10.3 million for the three months endedMarch 31, 2022 .
Direct Investments -
The operator of our Arbors portfolio continues to make partial contractual rental payments based on availability of cash and liquidity and has not satisfied full contractual rent obligations. We have recorded rental income to the extent rental payments were received during the three months endedJune 30, 2022 . The Arbors portfolio recognized rental income of$0.2 million for the three months endedJune 30, 2022 andMarch 31, 2022 .
Unconsolidated Investments
Equity in earnings recognized from our unconsolidated investments, totaled$34.1 million for the three months endedJune 30, 2022 as compared to$2.5 million for the three months endedMarch 31, 2022 . The increase was primarily a result of net gains recognized from sub-portfolio sales within the Espresso joint venture, of which our proportionate share totaled$31.2 million for the three months endedJune 30, 2022 . During the three months endedJune 30, 2022 , we received distributions from our unconsolidated investments, which totaled$31.1 million as compared to$7.1 million for the three months endedMarch 31, 2022 . The increase in distributions was a result of sales transactions in the Espresso joint venture completed during the three months endedJune 30, 2022 . Distributions continued to be limited by reinvestment and development in the Trilogy joint venture and operational challenges in the Diversified US/UK and Eclipse joint ventures.
The following is a summary of operations and performance for the Trilogy,
Diversified US/
•Trilogy: The joint venture's facilities experienced improvements to resident occupancy and revenues, however, its operating margin continues to be impacted by the effects of labor shortages and inflationary pressures. Additionally, the joint venture recognized federal and state COVID-19 provider relief grants as income. •Diversified US/UK : The joint venture continues to receive substantially all contractual monthly rent from its MOB tenants. The operators of the joint venture's net lease portfolios, including its portfolio in theUnited Kingdom , continue to face occupancy and expense pressures, which impacted certain operator's ability to pay contractual rent during the quarter. CCRC, SNF and ALF operating portfolios continue to sustain suboptimal occupancy levels, and experienced staffing challenges. These factors, along with rising interest rates have reduced the joint venture's net cash flows. •Espresso: The joint venture received full contractual rent from its net lease operators. During the three months endedJune 30, 2022 , the joint venture distributed proceeds from the sales of two sub-portfolios and excess cash flows from operations, of which our proportionate share totaled$28.8 million . Rental income collected has declined as a result of the sub-portfolio sales and the joint venture continues to hold its remaining 62 properties as held for sale as ofJune 30, 2022 .
Investments, Financings and Disposition Activities
•During the six months ended
•In
•We recorded impairment losses totaling
34
--------------------------------------------------------------------------------
Table of Contents Special Distribution
•On
Recent Developments
The following is a discussion of material events which have occurred subsequent
to
Borrowings
InJuly 2022 , we exercised our option to extend the maturity date of a mortgage note payable collateralized by a property within the Rochester portfolio fromAugust 2022 toAugust 2023 and made a$0.2 million principal repayment toward the outstanding principal balance.
Resignation of Chief Executive Officer, President and Vice Chairman; Appointment of Interim Chief Executive Officer and President
OnJuly 29, 2022 ,Ronald J. Jeanneault provided notice of his resignation as our Chief Executive Officer, President and Vice Chairman and as a member of our board of directors, effective as ofAugust 12, 2022 . OnAugust 3, 2022 , our board of directors appointedAnn B. Harrington as our Interim Chief Executive Officer and President, effective uponMr. Jeanneault's resignation. Refer to our Form 8-K filed on August, 4, 2022 for additional information.
Our Investments
We have invested in independent living facilities, or ILFs, assisted living facilities, or ALFs, memory care facilities, or MCFs, and continuing care retirement communities, or CCRCs, which we collectively refer to as seniors housing facilities, skilled nursing facilities, or SNFs, medical office buildings, or MOBs, and hospitals.
Our investments are categorized as follows:
•Direct Investments - Operating - Healthcare properties operated pursuant to management agreements with healthcare managers.
•Direct Investments -
•Unconsolidated Investments - Healthcare joint ventures, including properties operated under net leases with an operator or pursuant to management agreements with healthcare managers, in which we own a minority interest. We generate revenues from resident fees and rental income. Resident fee income from our seniors housing facilities is recorded when services are rendered and includes resident room and care charges and other resident charges. Rental income is generated from our real estate for the leasing of space to various types of healthcare operators/tenants/residents. Additionally, we report our proportionate interest of revenues and expenses from unconsolidated joint ventures, which own healthcare real estate, through equity in earnings (losses) of unconsolidated ventures on our consolidated statements of operations.
For financial information regarding our reportable segments, refer to Note 11, "Segment Reporting" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
35--------------------------------------------------------------------------------
Table of Contents
The following table presents a summary of investments as of
Properties(1)(2)
Ownership
Investment Type / Portfolio Amount(2)(3) Seniors Housing MOB SNF Hospitals Total Primary Locations Interest
Direct Investments -
Operating
Winterfell $ 904,985 32 - - - 32 Various 100.0%
Rochester 219,518 10 - - - 10 Northeast 97.0%
Watermark Aqua 77,521 4 - - - 4 Southwest/Midwest 97.0%
Avamere 99,438 5 - - - 5 Northwest 100.0%
Oak Cottage 19,427 1 - - - 1 West 100.0%
Other(4) 2,030 - - - - - West 97.0%
Subtotal $ 1,322,919 52 - - - 52
Direct Investments -
Net Lease
Arbors $ 126,825 4 - - - 4 Northeast 100.0%
Unconsolidated Investments
Diversified US/UK $ 445,855 92 106 39 9 246 Various 14.3%
Trilogy(5) 420,689 22 - 73 - 95 Southwest/Midwest 23.2%
Eclipse 37,291 42 - 9 - 51 Various 5.6%
Espresso(6) - - - - - - Midwest 36.7%
Solstice(7) - - - - - - 20.0%
Subtotal $ 903,835 156 106 121 9 392
Total Investments $ 2,353,579 212 106 121 9 448
_______________________________________
(1)Classification based on predominant services provided, but may include other services. (2)Excludes properties held for sale. (3)Based on cost for real estate equity investments, which includes purchase price allocations related to net intangibles, deferred costs, other assets, if any, and adjusted for subsequent capital expenditures. For real estate equity investments, includes cost associated with purchased land parcels that are not included in the count. (4)Represents seven condominium units for which we hold future interests. (5)Includes institutional pharmacy, therapy businesses and lease purchase buy-out options in connection with the Trilogy investment, which are not subject to property count. (6)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 62 properties are classified as held for sale as ofJune 30, 2022 . (7)Represents our investment inSolstice Senior Living, LLC , or Solstice, the manager of the Winterfell portfolio. Solstice is a joint venture between affiliates ofIntegral Senior Living, LLC , or ISL, a management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and us, who owns 20.0%. 36
--------------------------------------------------------------------------------
Table of Contents
The following presents our real estate equity portfolio diversity across property type and geographic location based on cost:
Real Estate Equity by Property Type(1) Real Estate Equity by Geographic Location
[[Image Removed: nshi-20220630_g1.jpg]] [[Image Removed: nshi-20220630_g2.jpg]]
_______________________________________
(1)Classification based on predominant services provided, but may include other services.
Our investments include the following types of healthcare facilities as of
•Seniors Housing Facilities. We define seniors housing facilities to include
ILFs, ALFs, MCFs and CCRCs, as described in further detail below. Revenues
generated by seniors housing facilities typically come from private pay sources,
including private insurance, and to a much lesser extent government
reimbursement programs, such as Medicare and Medicaid.
•Assisted living facilities. ALFs provide services that include minimal
assistance for activities in daily living and permit residents to maintain some
of their privacy and independence as they do not require constant supervision
and assistance. Services bundled within one regular monthly fee usually include
three meals per day in a central dining room, daily housekeeping, laundry,
medical reminders and 24-hour availability of assistance with the activities of
daily living, such as eating, dressing and bathing. Professional nursing and
healthcare services are usually available at the facility on call or at
regularly scheduled times. ALFs typically are comprised of one and two bedroom
suites equipped with private bathrooms and efficiency kitchens.
•Independent living facilities. ILFs are age-restricted multi-family properties
with central dining facilities that provide services that include security,
housekeeping, nutrition and limited laundry services. ILFs are designed
specifically for independent seniors who are able to live on their own, but
desire the security and conveniences of community living. ILFs typically offer
several services covered under a regular monthly fee.
•Memory care facilities. MCFs offer specialized options for seniors with
Alzheimer's disease and other forms of dementia. Purpose built, free-standing
MCFs offer an attractive alternative for private-pay residents affected by
memory loss in comparison to other accommodations that typically have been
provided within a secured unit of an ALF or SNF. These facilities offer
dedicated care and specialized programming for various conditions relating to
memory loss in a secured environment that is typically smaller in scale and more
residential in nature than traditional ALFs. Residents require a higher level of
care and more assistance with activities of daily living than in ALFs.
Therefore, these facilities have staff available 24 hours a day to respond to
the unique needs of their residents.
•Continuing care retirement community. CCRCs provide, as a continuum of care,
the services described for ILFs, ALFs and SNFs in an integrated campus. CCRCs
can be structured to offer services covered under a regular monthly rental fee
or under a one-time upfront entrance fee, which is partially refundable in
certain circumstances.
37--------------------------------------------------------------------------------
Table of Contents
•Skilled Nursing Facilities. SNFs provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. A typical SNF includes mostly one and two bed units, each equipped with a private or shared bathroom and community dining facilities. Revenues generated from SNFs typically come from government reimbursement programs, including Medicare and Medicaid, as well as private pay sources, including private insurance. •Medical Office Buildings. MOBs are typically either single-tenant properties associated with a specialty group or multi-tenant properties leased to several unrelated medical practices. Tenants include physicians, dentists, psychologists, therapists and other healthcare providers, who require space devoted to patient examination and treatment, diagnostic imaging, outpatient surgery and other outpatient services. MOBs are similar to commercial office buildings, although they require greater plumbing, electrical and mechanical systems to accommodate physicians' requirements such as sinks in every room, brighter lights and specialized medical equipment. •Hospitals. Services provided by operators and tenants in hospitals are paid for by private sources, third-party payers (e.g., insurance and Health Maintenance Organizations), or through the Medicare and Medicaid programs. Our hospital properties typically will include acute care, long-term acute care, specialty and rehabilitation hospitals and generally are leased to operators under triple-net lease structures.
Direct Investments - Operating
For our operating properties, we enter into management agreements that generally provide for the payment of a fee to a manager, typically 4-5% of gross revenues with the potential for certain incentive compensation, and have direct exposure to the revenues and operating expenses of a property. As a result, our operating properties allow us to participate in the risks and rewards of the operations of healthcare facilities. Revenue derived from ILFs within our direct operating investments is classified as rental income on our consolidated statements of operations. Revenue derived from ALFs and MCFs within our direct operating investments is classified as resident fee income on our consolidated statements of operations.
The weighted average resident occupancy of our operating properties was 80.7%
for the three months ended
Direct Investments -
For our net lease properties, we enter into net leases that generally provide for fixed rental payments, subject to periodic increases based on certain percentages or the consumer price index, and obligate the operator to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. Revenue derived from our net lease properties is classified as rental income on our consolidated statements of operations. Our remaining four net lease properties are leased and operated byArcadia Management with a lease term that expires inAugust 2029 . However, the operator has failed to remit contractual rent and comply with other contractual terms of its lease agreements, which resulted in defaults under the operator's leases as ofJune 30, 2022 . 38
--------------------------------------------------------------------------------
Table of Contents Operators and Managers
The following table presents the operators and managers of our direct investments (dollars in thousands):
As of June 30, 2022 Six Months Ended June 30, 2022
Units Under Property and Other % of Total Property
Operator / Manager Properties Under Management Management(1) Revenues(2) and Other Revenues
Solstice Senior Living(3) 32 4,000 $ 53,612 60.4 %
Watermark Retirement
Communities 14 1,753 22,360 25.2 %
Avamere Health Services 5 453 9,657 10.9 %
Integral Senior Living 1 44 2,424 2.7 %
Arcadia Management(4) 4 572 496 0.6 %
Other(5) - - 157 0.2 %
Total 56 6,822 $ 88,706 100.0 %
_______________________________________
(1)Represents rooms for ALFs and ILFs and beds for MCFs and SNFs, based on predominant type. (2)Includes rental income received from our net lease properties as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from our ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges. (3)Solstice is a joint venture of which affiliates of ISL own 80%. (4)During the six months endedJune 30, 2022 , we recorded rental income to the extent rental payments were received. (5)Consists primarily of interest income earned on corporate-level cash accounts.Watermark Retirement Communities and Solstice, together with their affiliates, manage substantially all of our operating properties. As a result, we are dependent upon their personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our properties efficiently and effectively. Through our 20.0% ownership of Solstice, we are entitled to certain rights and minority protections. As Solstice is a joint venture formed exclusively to operate the Winterfell portfolio, Solstice has generated, and may continue to generate, operating losses if declines in occupancy and operating revenues at our Winterfell portfolio continue.
Unconsolidated Investments
The following table presents our unconsolidated investments (dollars in
thousands):
Properties as of June 30, 2022 (1)
Equity
Portfolio Partner Acquisition Date Ownership AUM(2) Investment(3) Seniors Housing Facilities MOB SNF Hospitals TotalDiversified US/UK NRF and Partner Dec-2014 14.3 %$ 445,855 $ 243,544 92 106 39 9 246 American Healthcare REIT / Management Team of TrilogyTrilogy Investors, LLC Dec-2015 23.2 % 420,689 189,032 22 - 73 - 95 NRF and Partner/ Formation Capital, Eclipse LLC May-2014 5.6 % 37,291 23,400 42 - 9 - 51 Formation Capital, LLC/Safanad Espresso(4)Management Limited Jul-2015 36.7 % - 55,146 - - - - - Subtotal$ 903,835 $ 511,122 156 106 121 9 392 Solstice Jul-2017 20.0 % - 402 - - - - - Total$ 903,835 $ 511,524 156 106 121 9 392
_______________________________________
(1)Excludes properties classified as held for sale. (2)Represents our proportionate share of assets under management based on cost, which includes purchase price allocations related to net intangibles, deferred costs, other assets, if any, and adjusted for subsequent capital expenditures. Does not include cost of properties held for sale. (3)Represents initial and subsequent contributions to the underlying joint venture throughJune 30, 2022 . (4)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 62 properties are classified as held for sale as ofJune 30, 2022 . 39
--------------------------------------------------------------------------------
Table of Contents
•Diversified US/
•Trilogy. Portfolio of predominantly SNFs located in the Midwest and operated pursuant to management agreements withTrilogy Health Services , as well as ancillary services businesses, including a therapy business and a pharmacy business.American Healthcare REIT, Inc. , or AHR, and management of Trilogy own the remaining 76.8% of this portfolio. •Eclipse. Portfolio of SNFs and ALFs leased to, or managed by, a variety of different operators/managers acrossthe United States . Our Sponsor and other minority partners andFormation Capital, LLC , or Formation, own 86.4% and 8.0% of this portfolio, respectively. •Espresso. Portfolio of predominantly SNFs located in the Midwest and organized in sub-portfolios under net leases. An affiliate of Formation acts as the general partner and manager of this investment.Formation and Safanad Management Limited own the remaining 63.3% of this portfolio.
•Solstice. Operator platform joint venture established to manage the operations of the Winterfell portfolio. An affiliate of ISL owns the remaining 80.0%.
Our Strategy
Our primary objective is to maximize value and generate liquidity for
shareholders. Although our short-term strategy may continue to be impacted by
the effects of the COVID-19 pandemic, inflation, rising interest rates and other
economic industry conditions, the key elements of our strategy include:
•Grow the Operating Income Generated by Our Portfolio. Through active portfolio
management, we will continue to review and implement operating strategies and
initiatives in order to enhance the performance of our existing investment
portfolio.
•Deploy Strategic Capital Expenditures. We will continue to invest capital into
our operating portfolio in order to maintain market position, functional and
operating standards, and provide an optimal mix of services and enhance the
overall value of our assets.
•Pursue Dispositions and Opportunities for Asset Repositioning and Other
Strategic Initiatives to Maximize Value. We will actively pursue dispositions of
assets and portfolios where we believe the disposition will achieve a desired
return and generate value for shareholders. Additionally, we will continue to
assess the need for strategic repositioning or sale of assets, joint ventures,
operators and markets to position our portfolio for optimal performance. We will
also opportunistically explore other strategic initiatives to create value for
shareholders.
Portfolio Management
Our Advisor and its affiliates maintain a comprehensive portfolio management
process that generally includes oversight by asset management and capital
markets teams, regular management meetings and operating results review process.
These processes are designed to enable management to evaluate and proactively
identify asset-specific issues and trends on a portfolio-wide, sub-portfolio or
asset type basis. Nevertheless, we cannot be certain that our Advisor's review
will identify all issues within our portfolio due to, among other things,
adverse economic conditions or events adversely affecting specific assets;
therefore, potential future losses may also stem from issues that are not
identified during these portfolio reviews or the asset and portfolio management
process.
Our Advisor's asset management and capital markets teams are experienced and use
many methods to actively manage our asset base to enhance or preserve our
income, value and capital and mitigate risk. Our Advisor's asset management and
capital markets teams seek to identify opportunities for our investments that
may involve replacing, converting or renovating facilities in our portfolio
which, in turn, would allow us to provide optimal mix of services and enhance
the overall value of our assets. To manage risk, our Advisor's asset management
and capital markets teams engage in frequent review and dialogue with
operators/managers/borrowers/third party advisors and periodic inspections of
our owned properties and collateral. During the COVID-19 pandemic, we performed
virtual site tours of our properties in order to comply with safety measures and
restrictions and began resuming in person inspections as conditions have
allowed. In addition, our Advisor's asset management and capital market teams
consider the impact of regulatory changes on the performance of our portfolio.
We will continue to monitor the performance of, and actively manage, all of our
investments. However, there can be no assurance that our investments will
continue to perform in accordance with the contractual terms of the governing
documents or underwriting and we may, in the future, record impairment, as
appropriate, if required.
40--------------------------------------------------------------------------------
Table of Contents Outlook and Recent Trends The healthcare industry, which includes ILFs, ALFs, MCFs, CCRCs, SNFs, MOBs and hospitals, continues to be impacted by the effects of COVID-19, along with inflation, rising interest rates and other economic market conditions. While the healthcare industry continues to experience occupancy recovery, operating margins will continue to be impacted by cost inflation, labor pressures, additional staffing needs and related cost burdens. The healthcare industry's operational and financial recovery will depend on a variety of factors, which may differ considerably across regions, fluctuate over time and are highly uncertain. The healthcare industry experienced a higher pace of move-ins during the second quarter of 2022 as compared to the first quarter of 2022. As a result of overall increase in resident demand, improving consumer sentiment and easing restrictions on visitation and admissions, the seniors housing industry occupancy average rose to 81.4% during the second quarter of 2022 from 80.5% in the first quarter of 2022. In addition, annual inventory growth decreased to 1.7% during the second quarter of 2022, while construction versus inventory ratio of 5.1% remained elevated in the second quarter of 2022 (source:The National Investment Centers for Seniors Housing & Care , or NIC). The CARES Act has provided over$100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. Licensed assisted living providers became eligible to apply for funding under the Provider Relief Fund Phase 2 General Distribution allocation and remain eligible under the Provider Relief Fund Phase 3 and Phase 4 General Distributions. In addition, the CMS has provided accelerated and advance payments to Medicare providers. Operators continue to evaluate their options for financial assistance, such as utilizing programs within the CARES Act as well as other state and local government relief programs. However, the uncertainty regarding future availability of such relief, and its ultimate impact, including the extent to which relief funds from such programs will provide meaningful support for lost revenue and increasing costs, is uncertain. Additionally, although we continue to evaluate and monitor the terms and conditions associated with relief programs, we cannot ensure ultimate compliance with all the requirements related to the assistance received. If any of our operators fail to comply with all of the terms and conditions, they may be required to repay some or all of the grants received and may be subject to other enforcement action, which could have a material adverse impact on our business and financial condition.Seniors Housing Notwithstanding the demographics and forecasted spending growth, economic and healthcare market uncertainty, development, and competitive pressures have had a negative impact on the seniors housing industry, weakening the market's fundamentals and ultimately reducing operating income for managers and operators. Supply growth, which has outpaced demand, has challenged the seniors housing industry over the past several years. New inventory, coupled with the average move-in age of seniors housing residents increasing over time, has resulted in declining occupancy for the industry on average. Further, to remain competitive with the new supply, owners and operators of older facilities have increased capital expenditure spending, which in turn has negatively affected cash flow. While off its peak of 7.7% in the fourth quarter of 2017, seniors housing under construction as a share of inventory was 5.1% in the second quarter of 2022 (source: NIC). It is expected that, as demographics and demand continue to increase long-term, supply growth will follow. As a result of increased supply, the seniors housing industry has experienced competitive pressures that have limited rent growth over the past several years. Average market rent growth reached its peak of 4.2% in 2016 and has since decreased to 3.7% as of the second quarter of 2022, with pressures caused by the COVID-19 pandemic contributing to the decline (source: NIC). Limited future supply growth and reestablishing normal operations in a post-pandemic environment will be factors in achieving near and long term revenue growth for the industry. Further, prior to the COVID-19 pandemic, a tight labor market and competition to attract quality staff had resulted in increased wages and personnel costs, resulting in lower margins. The COVID-19 pandemic has further exacerbated operating expense growth, with increased staffing needs and personal protective equipment requirements. While it is expected that the increases in expenses to combat the effects of the COVID-19 pandemic will be temporary, wage and benefits increases may continue to impact the industry's margins in the future, as labor represents 60% of the seniors housing industry's operating expenses (source:Green Street ). SkilledNursing While generally impacted by the same conditions as the seniors housing industry, SNF operators are currently facing various operational, reimbursement, legal and regulatory challenges. Increased wages and labor costs, narrowing of referral networks, shorter lengths of stay, staffing shortages, expenses associated with inspections, enforcement proceedings and legal actions related to professional and general liability claims have contributed to compressed margins and declines in cash flow. 41
--------------------------------------------------------------------------------
Table of Contents
SNF operators receive a majority of their revenues from governmental payors, primarily Medicare and Medicaid. With a dependence on government reimbursement as the primary source of their revenues, SNF operators are also subject to intensified efforts to impose pricing pressures and more stringent cost controls, through value-based payments, managed care and similar programs, which could result in lower daily reimbursement rates, lower lease coverage, decreased occupancy and declining operating margins, liquidity and financial conditions. Regulatory initiatives announced in 2022 and aimed at improving safety and quality of nursing home care could further increase the cost burdens for our SNF operators and expose them to financial penalties.The Biden Administration announced its focus on establishing a minimum nursing home staffing requirement, reducing resident room crowding and reinforcing safeguards against unnecessary medications and treatments. These reforms might result in increased government inspections, financial penalties and other enforcement sanctions against facilities not meeting the set standards.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's subjective and complex judgments, and for which the impact of changes in estimates and assumptions could have a material effect on our financial statements. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time.
For a summary of our accounting policies, refer to Note 2, "Summary of Significant Accounting Policies" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
We believe impairment to be a critical accounting estimate based on the nature of our operations and/or require significant management judgment and assumptions. Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including healthcare sector conditions, together with asset and market specific circumstance, among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. Fair values can be estimated based upon the income capitalization approach, using net operating income for each property and applying indicative capitalization and discount rates or sales comparison approach, using what other purchasers and sellers in the market have agreed to as price for comparable properties.
Impairment
During the six months endedJune 30, 2022 , we recorded impairment losses on our operating real estate totaling$13.0 million . We recorded impairment losses of$8.5 million and$3.9 million for facilities in our Winterfell and Rochester portfolios, respectively, as a result of declining operating margins and lower projected future cash flows. In addition, we recorded impairment losses totaling$0.6 million for property damage sustained by facilities in our Winterfell portfolio. Accumulated impairment losses for operating real estate that we continue to hold as ofJune 30, 2022 totaled$162.7 million . Refer to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and 2020 for additional information regarding impairment recorded in prior years. During the six months endedJune 30, 2022 , we did not impair any of our investments in unconsolidated ventures, however, our unconsolidated ventures have recorded impairments and reserves on properties in their respective portfolios, which have been recognized through our equity in earnings (losses), of which our proportionate share was de minimis. At this time, it is difficult to assess and estimate the continuing impact of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions with any meaningful precision. As the future impact will depend on many factors beyond our control and knowledge, the resulting effect on impairment of our operating real estate and investments in unconsolidated ventures may materially differ from our current expectations and further impairment charges may be recorded in the future. 42
--------------------------------------------------------------------------------
Table of Contents Results of Operations Comparison of the Three Months EndedJune 30, 2022 toJune 30, 2021 (dollars in thousands) Three Months Ended June 30, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 10,958 $ 28,254 $ (17,296) (61.2) % Rental income 34,277 35,612 (1,335) (3.7) % Other revenue 139 41 98 239.0 % Total property and other revenues 45,374 63,907 (18,533) (29.0) % Interest income Interest income on debt investments - 1,387 (1,387) (100.0) %
Expenses
Property operating expenses 33,230 45,101 (11,871) (26.3) % Interest expense 10,554 15,962 (5,408) (33.9) % Asset management fees - related party 2,457 2,769 (312) (11.3) % General and administrative expenses 3,755 3,079 676 22.0 % Depreciation and amortization 9,540 15,557 (6,017) (38.7) % Impairment loss 13,002 - 13,002 NA Total expenses 72,538 82,468 (9,930) (12.0) % Other income, net 5 (468) 473 (101.1) % Realized gain (loss) on investments and other (252) (111) (141) 127.0 % Equity in earnings (losses) of unconsolidated ventures 34,053 10,766 23,287 216.3 % Income tax expense (15) (11) (4) 36.4 % Net income (loss)$ 6,627 $ (6,998) $ 13,625 (194.7) % Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 10,958 $ 9,995 $ 963 9.6 %
Properties sold - 18,259 (18,259) (100.0) %
Total resident fee income $ 10,958 $ 28,254 $ (17,296) (61) %
Resident fee income decreased $17.3 million as a result of property sales during
2021. The Watermark Fountains portfolio sold in December 2021 , the Kansas City
portfolio in June 2021 and a property within the Aqua portfolio sold in March
2021 .
Excluding properties sold, resident fee income increased by
Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 34,030 $ 29,907 $ 4,123 13.8 %
Same store net lease properties (excludes
properties sold)
Rental payments 247 830 (583) (70.2) %
Properties sold - 4,875 (4,875) (100.0) %
Total rental income $ 34,277 $ 35,612 $ (1,335) (3.7) %
Rental income decreased by
43--------------------------------------------------------------------------------
Table of Contents
On a same store basis, rental income at our ILFs increased by$4.1 million as a result of improved occupancy, while rental payments from our net lease properties decreased due to the operator of our Arbors net lease portfolio remitting less contractual rent as compared to the three months endedJune 30, 2021 .
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the three
months ended
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 8,587 $ 7,609 $ 978 12.9 %
ILF properties 24,479 21,961 2,518 11.5 %
Net lease properties 11 - 11 NA
COVID-19 related expenses 102 556 (454) (81.7) %
Properties sold 51 14,975 (14,924) (99.7) %
Total property operating expenses $ 33,230 $ 45,101 $ (11,871) (26.3) %
Overall, total operating expenses decreased
Excluding properties sold, operating expenses increased$3.1 million primarily as a result of our operators experiencing staffing challenges, which has increased salaries and wages due to additional overtime hours and use of agency and contract labor to fill open positions. In addition, sales and marketing expenses have increased with the improved volume of resident move-ins, while the resumption of normalized business operations has allowed our managers to complete deferred repairs and maintenance projects.
Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,435 $ 1,395 $ 40 2.9 %
ILF properties 8,216 8,285 (69) (0.8) %
Net lease properties 903 925 (22) (2.4) %
Properties sold - 5,038 (5,038) (100.0) %
Corporate - 319 (319) (100.0) %
Total interest expense $ 10,554 $ 15,962 $ (5,408) (33.9) %
Interest expense decreased $5.4 million primarily as a result of the repayment
of mortgage notes payable which were collateralized by properties sold during
the year ended December 31, 2021 and the repayment of the borrowings under our
revolving line of credit from an affiliate of our Sponsor, or the Sponsor Line,
in July 2021 .
While average mortgage notes principal balances have decreased as compared to
June 30, 2021 due to continued principal amortization, interest expense on our
floating rate debt has increased as a result of a higher London Interbank
Offered Rate, or LIBOR.
Asset Management Fees -
Our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value. EffectiveJanuary 1, 2022 , according to the amendment to our advisory agreement, the monthly management fee is reduced if our corporate cash balances exceed$75.0 million , resulting in a$0.3 million decrease in asset management fees. 44
--------------------------------------------------------------------------------
Table of Contents
General and Administrative Expenses
General and administrative expenses increased$0.7 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to our Advisor over the term of the policy, beginning inDecember 2021 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,815 $ 1,729 $ 86 5.0 %
ILF properties 6,857 7,290 (433) (5.9) %
Net lease properties 868 861 7 0.8 %
Properties sold - 5,677 (5,677) (100.0) %
Total depreciation and amortization $ 9,540 $ 15,557 $ (6,017) (38.7) %
Depreciation and amortization expense decreased
Impairment Loss
During the three months ended
During the three months ended
Other Income, Net
Other income, net for the three months ended
Realized Gain (Loss) on Investments and Other
During the three months endedJune 30, 2022 , we recognized losses on investment activity, which were partially offset by a gain recognized on the Oak Cottage portfolio discounted financing payoff. During the three months endedJune 30, 2021 , we recognized a$0.2 million loss on the sale of the Smyrna property, which was partially offset by a gain on the sale of theKansas City portfolio.
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars in thousands):
Three Months Ended June 30 , Three Months Ended June 30,
2022 2021 2022 2021 2022 2021 2022 2021
Equity in Earnings, after FFO
Portfolio Equity in Earnings (Losses) FFO and MFFO adjustments(1) and MFFO adjustments Increase (Decrease) Cash DistributionsEclipse $ (301)$ 4,073 $ 279$ (3,931) $ (22) $ 142 $ (164) (115.5) % $ - $ - Envoy - 740 - (744) - (4) 4 (100.0) % - 739 Diversified US/UK (301) 641 1,568 2,993 1,267 3,634 (2,367) (65.1) % - 1,431 Espresso 31,999 5,686 (30,215) (3,399) 1,784 2,287 (503) (22.0) % 28,788 - Trilogy 2,678 (325) 4,200 3,575 6,878 3,250 3,628 111.6 % 2,299 - Subtotal$ 34,075 $ 10,815 $ (24,168) $ (1,506) $ 9,907 $ 9,309 $ 598 6.4 %$ 31,087 $ 2,170 Solstice (22) (49) - 1 (22) (48) 26 (54.2) % - - Total$ 34,053 $ 10,766 $ (24,168) $ (1,505) $ 9,885 $ 9,261 $ 624 6.7 %$ 31,087 $ 2,170
_______________________________________
(1)Represents our proportionate share of revenues and expenses excluded from the
calculation of FFO and MFFO for unconsolidated investments. Refer to "-Non-GAAP
Financial Measures" for additional discussion.
45--------------------------------------------------------------------------------
Table of Contents
Our equity in earnings generated by our unconsolidated investments increased by$23.3 million primarily due to gains recognized on property sales in the Espresso joint venture during the three months endedJune 30, 2022 exceeding the gains recognized on property sales in the Espresso and Eclipse joint ventures during the three months endedJune 30, 2021 . Equity in earnings, after FFO and MFFO adjustments, increased by$0.6 million as a result of the operational and financial performance improvements in the Trilogy joint venture, partially offset by lower rental income recognized by the Diversified US/UK and Espresso joint ventures during the three months endedJune 30, 2022 . Comparison of the Six Months EndedJune 30, 2022 toJune 30, 2021 (dollars in thousands) Six Months Ended June 30, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 21,713 $ 56,536 $ (34,823) (61.6) % Rental income 66,836 64,663 2,173 3.4 % Other revenue 157 42 115 273.8 % Total property and other revenues 88,706 121,241 (32,535) (26.8) % Interest income Interest income on debt investments - 3,600 (3,600) (100.0) % Expenses Property operating expenses 66,124 90,719 (24,595) (27.1) % Interest expense 20,863 31,987 (11,124) (34.8) % Transaction costs - 54 (54) (100.0) % Asset management fees - related party 5,104 5,538 (434) (7.8) % General and administrative expenses 7,441 6,112 1,329 21.7 % Depreciation and amortization 19,463 30,944 (11,481) (37.1) % Impairment loss 13,002 786 12,216 1,554.2 % Total expenses 131,997 166,140 (34,143) (20.6) % Other income, net 77 6,892 (6,815) (98.9) % Realized gain (loss) on investments and other 335 7,404 (7,069) (95.5) % Equity in earnings (losses) of unconsolidated ventures 36,555 9,876 26,679 270.1 % Income tax expense (30) (26) (4) 15.4 % Net income (loss)$ (6,354) $ (17,153) $ 10,799 (63.0) % Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 21,713 $ 19,910 $ 1,803 9.1 %
Properties sold - 36,626 (36,626) (100.0) %
Total resident fee income $ 21,713 $ 56,536 $ (34,823) (62) %
Resident fee income decreased $34.8 million as a result of property sales during
2021. The Watermark Fountains portfolio sold in December 2021 , the Kansas City
portfolio in June 2021 and a property within the Aqua portfolio sold in March
2021 .
Excluding properties sold, resident fee income increased by
46
--------------------------------------------------------------------------------
Table of Contents
Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 66,340 $ 59,732 $ 6,608 11.1 %
Same store net lease properties (excludes
properties sold)
Rental payments 496 1,830 (1,334) (72.9) %
Straight-line rental income (loss) - (7,350) 7,350 (100.0) %
Properties sold - 10,451 (10,451) (100.0) %
Total rental income $ 66,836 $ 64,663 $ 2,173 3.4 %
Overall, rental income increased by
Excluding properties sold, rental income increased by$12.6 million primarily as a result of the write-off of straight-line rent receivables at our Arbors portfolio during 2021 and improved occupancy at our ILFs during the six months endedJune 30, 2022 . The increase was partially offset by the loss of revenues from properties sold in 2021 as compared to the six months endedJune 30, 2021 .
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the six
months ended
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 17,067 $ 14,402 $ 2,665 18.5 %
ILF properties 48,676 43,236 5,440 12.6 %
Net lease properties 35 25 10 40.0 %
COVID-19 related expenses 259 1,561 (1,302) (83.4) %
Properties sold 87 31,495 (31,408) (99.7) %
Total Property operating expenses $ 66,124 $ 90,719 $ (24,595) (27.1) %
Overall, total operating expenses decreased
Excluding properties sold, operating expenses increased$6.8 million , primarily as a result of the impact of inflation and the labor market conditions. These factors resulted in additional overtime hours and use of staffing agencies due to labor shortages, as well as utilities and other operating expense costs pressures. Additionally, sales and marketing activities have increased expenses, while the resumption of normalized business operations has allowed our managers to complete deferred repairs and maintenance projects. 47
--------------------------------------------------------------------------------
Table of Contents
Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 2,813 $ 2,768 $ 45 1.6 %
ILF properties 16,249 16,531 (282) (1.7) %
Net lease properties 1,801 1,845 (44) (2.4) %
Properties sold - 10,207 (10,207) (100.0) %
Corporate - 636 (636) (100.0) %
Total interest expense $ 20,863 $ 31,987 $ (11,124) (34.8) %
Interest expense decreased $11.1 million primarily as a result of the repayment
of mortgage notes payable which were collateralized by properties sold during
the year ended December 31, 2021 . In addition, average mortgage notes principal
balances decreased as compared to June 30, 2021 due to continued principal
amortization, partially offset by increase in interest expense on our floating
rate debt, as a result of higher LIBOR. Corporate interest expense represents
interest resulting from the borrowings under our revolving line of credit from
an affiliate of our Sponsor, or the Sponsor Line, which was repaid in full in
July 2021 .
Asset Management Fees -
Our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value. EffectiveJanuary 1, 2022 , according to the amendment to our advisory agreement, the monthly management fee is reduced if our corporate cash balances exceed$75.0 million , resulting in a$0.4 million decrease in asset management fees.
General and Administrative Expenses
General and administrative expenses increased$1.3 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to our Advisor over the term of the policy, beginning inDecember 2021 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 3,628 $ 3,457 $ 171 4.9 %
ILF properties 14,104 14,536 (432) (3.0) %
Net lease properties 1,731 1,722 9 0.5 %
Properties sold - 11,229 (11,229) (100.0) %
Total depreciation and amortization $ 19,463 $ 30,944 $ (11,481) (37.1) %
Depreciation and amortization expense decreased
Impairment Loss
During the six months ended
During the six months endedJune 30, 2021 , impairment losses on operating real estate totaled$0.8 million for our Smyrna net lease property, which was sold inMay 2021 . 48
--------------------------------------------------------------------------------
Table of Contents Other Income, Net Other income, net for the six months endedJune 30, 2022 consisted of$0.1 million in COVID-19 testing reimbursements received and recognized at our Avamere portfolio. For the six months endedJune 30, 2021 , other income, net consisted of$7.4 million in federal COVID-19 provider relief grants from DHHS, partially offset by a$0.5 million non-operating loss recognized at a property within the Watermark Fountains.
Realized Gain (Loss) on Investments and Other
During the six months ended
During the six months ended
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Six Months Ended June 30 , Six Months Ended June 30,
2022 2021 2022 2021 2022 2021 2022 2021
Equity in Earnings, after FFO
Portfolio Equity in Earnings (Losses) FFO and MFFO adjustments(1) and MFFO adjustments Increase (Decrease) Cash Distributions
Eclipse $ (596) $ 3,933 $ 567 $ (3,592) $ (29) $ 341 $ (370) (108.5) % $ 620 $ -
Envoy - 740 - (744) - (4) 4 (100.0) % - 739
Diversified US/UK (1,449) (2,057) 5,378 9,989 3,929 7,932 (4,003) (50.5) % 1,932 2,290
Espresso 33,953 10,943 (29,738) (5,717) 4,215 5,226 (1,011) (19.3) % 30,988 -
Trilogy 4,705 (3,602) 8,168 7,602 12,873 4,000 8,873 221.8 % 4,600 -
Subtotal $ 36,613 $ 9,957 $ (15,625) $ 7,538 $ 20,988 $ 17,495 $ 3,493 20.0 % $ 38,140 $ 3,029
Solstice (58) (81) - 1 (58) (80) 22 (27.5) % - -
Total $ 36,555 $ 9,876 $ (15,625) $ 7,539 $ 20,930 $ 17,415 $ 3,515 20.2 % $ 38,140 $ 3,029 _______________________________________
(1)Represents our proportionate share of revenues and expenses excluded from the calculation of FFO and MFFO for unconsolidated investments. Refer to "-Non-GAAP Financial Measures" for additional discussion. Our equity in earnings generated by our unconsolidated investments increased by$26.7 million primarily due to gains recognized on property sales in the Espresso joint venture during the six months endedJune 30, 2022 exceeding the gains recognized on property sales in the Espresso and Eclipse joint ventures during the six months endedJune 30, 2021 . Additionally, operational performance in the Trilogy joint venture improved during the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . Equity in earnings, after FFO and MFFO adjustments, increased by$3.5 million as a result of the improvements in the Trilogy joint venture, partially offset by lower rental income recognized in the Diversified US/UK and Espresso joint ventures during the six months endedJune 30, 2022 .
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or NAREIT, as net income (loss) (computed in accordance withU.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures. Changes in the accounting and reporting rules underU.S. GAAP that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being expensed. Additionally, publicly registered, non-traded REITs are typically different from traded REITs because they generally 49
--------------------------------------------------------------------------------
Table of Contents
have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their initial public offering have been fully invested and when they may seek to implement a liquidity event or other exit strategy. However, it is likely that we will make investments past the acquisition and development stage, albeit at a substantially lower pace. Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments have been amortized over the life of the investment as an adjustment to interest income, while fees paid to our Advisor in connection with the acquisition of equity investments were generally expensed underU.S. GAAP. In both situations, the fees were included in the computation of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures underU.S. GAAP. We adjusted MFFO for the amortization of acquisition fees in the period when such amortization was recognized underU.S. GAAP or in the period in which the acquisition fees were expensed. Acquisition fees were paid in cash that would otherwise have been available to distribute to our stockholders. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties. However, in general, we earned origination fees for debt investments from our borrowers in an amount equal to the acquisition fees paid to our Advisor. EffectiveJanuary 1, 2018 , our Advisor no longer receives an acquisition fee in connection with our acquisition of real estate properties or debt investments. Due to certain of the unique features of publicly-registered, non-traded REITs, theInstitute for Portfolio Alternatives , or IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO adjustments for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither theU.S. Securities and Exchange Commission , orSEC , nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, theSEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO. MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined underU.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, since impairment is taken into account in determining net asset value but not in determining MFFO. We define MFFO in accordance with the concepts established by the IPA, and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. Similarly, we adjust for the non-cash effect of unrealized gains or losses on unconsolidated ventures. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's operating performance. The IPA's definition of MFFO excludes from FFO the following items:
•acquisition fees and expenses;
•non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting underU.S. GAAP to a cash basis of accounting);
•amortization of a premium and accretion of a discount on debt investments;
•non-recurring impairment of real estate-related investments that meet the
specified criteria identified in the rules and regulations of the
•realized gains (losses) from the early extinguishment of debt;
•realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
50--------------------------------------------------------------------------------
Table of Contents
•unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•adjustments related to contingent purchase price obligations; and
•adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments. MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the consolidated balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property's value is considered impaired if a triggering event is identified and our estimate of the aggregate future undiscounted cash flow to be generated by the property is less than the carrying value of the property. The value of our investments may be impaired and their carrying values may not be recoverable due to our limited life. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT's anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event. We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering, and acquisition and development stages are complete. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy. However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on debt investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions. Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance withU.S. GAAP and should not be construed to be more relevant or accurate than theU.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance. 51
--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of net income (loss) attributable
to common stockholders to FFO and MFFO attributable to common stockholders
(dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Funds from operations:
Net income (loss) attributable to NorthStar
Healthcare Income, Inc. common stockholders $ 6,807
9,540 15,557 19,463 30,944
Depreciation and amortization related to
non-controlling interests (72) (144) (144) (289)
Depreciation and amortization related to
unconsolidated ventures 6,926 7,592 14,096 15,400
Realized (gain) loss from sales of property 454 111 425 (7,417)
Realized gain (loss) from sales of property
related to non-controlling interests (7) - (6) 226
Realized (gain) loss from sales of property
related to unconsolidated ventures(1) (41,591) (14,857) (43,902) (21,379)
Impairment losses of depreciable real estate 13,002 - 13,002 786
Impairment loss on real estate related to
non-controlling interests (117) - (117) -
Impairment losses of depreciable real estate
held by unconsolidated ventures - (327) 20 (327)
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (5,058) $ 1,069 $ (3,292) $ 618
Modified funds from operations:
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (5,058)
- - - 54
Straight-line rental (income) loss - (554) - 7,085
Amortization of premiums, discounts and fees on
investments and borrowings 975 1,151 1,944 2,303
Realized (gain) loss on investments and other (202) - (760) 13
Adjustments related to unconsolidated
ventures(1)(2) 10,497 6,087 14,161 13,845
Adjustments related to non-controlling interests (3) (26) 4 (40)
Modified funds from operations attributable to
NorthStar Healthcare Income, Inc. common
stockholders $ 6,209 _______________________________________
(1)Certain prior period amounts related to gains from sales of property have been reclassified to a FFO adjustment from a MFFO adjustment as previously presented for the three and six months endedJune 30, 2021 . (2)Primarily represents our proportionate share of liability extinguishment gains, loan loss reserves, transaction costs and amortization of above/below market debt adjustments, straight-line rent adjustments, debt extinguishment losses and deferred financing costs, incurred through our investments in unconsolidated ventures.
Liquidity and Capital Resources
Our current principal liquidity needs are to fund: (i) operating expenses, including corporate general and administrative expenses; (ii) principal and interest payments on our borrowings and other commitments; and (iii) capital expenditures, including capital calls in connection with our unconsolidated joint venture investments.
Our current primary sources of liquidity include the following: (i) cash on hand; (ii) proceeds from full or partial realization of investments; (iii) cash flow generated by our investments, both from our operating activities and distributions from our unconsolidated joint ventures; and (iv) secured or unsecured financings from banks and other lenders, including investment-level financing and/or a corporate credit facility. We generated significant liquidity in 2021 from proceeds from asset sales and other realization events. As a result, onApril 20, 2022 , our board of directors declared the Special Distribution of$0.50 per share for each stockholder of record onMay 2, 2022 . The Special Distribution paid in cash on or aroundMay 5, 2022 totaled$97.0 million . While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our management and board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives.
As of
52--------------------------------------------------------------------------------
Table of Contents Cash From Operations We primarily generate cash flow from operations through net operating income from our operating properties and rental income from our net lease properties. In addition, we received distributions from our investments in unconsolidated ventures, which are classified as cash flows from investing activities on our consolidated statements of cash flows. Net cash used in operating activities was$12.1 million for the six months endedJune 30, 2022 . During the six months endedJune 30, 2022 , debt service payments, which include principal amortization, on our borrowings exceeded our cash flow from operations. We have utilized cash reserves generated from asset realizations to fund debt service payments, which is expected to continue until the operating margins of our direct investments improve from current levels. A substantial majority of our direct investments are operating properties whereby we are directly exposed to various operational risks. While our direct operating investments have not experienced any significant issues collecting rents or other fees from residents as a result of COVID-19, cash flow has continued to be negatively impacted by suboptimal occupancy levels, rate pressures, cost inflation, rising interest rates and other economic market conditions. We expect that these factors will continue to materially impact our revenues, expenses and cash flow generated by the communities of our direct operating investments. The operator of our Arbors net lease portfolio has been impacted by the same factors discussed above, which has and will continue to affect its ability and willingness to pay rent. The operator continues to make partial contractual rental payments based on availability of cash and liquidity and has not satisfied full contractual rent obligations. The operator has applied for and benefited from federal relief assistance, however, the operator's ability to pay rent in the future is currently unknown. Numerous state, local, federal and industry-initiated efforts have also affected or may affect the landlord and its ability to collect rent and/or enforce remedies for the failure to pay rent. We have significant joint ventures and will not be able to control the timing of distributions, if any, from these investments. As ofJune 30, 2022 , our unconsolidated joint ventures and consolidated joint ventures represented 38.4% and 12.7%, respectively, of our total real estate equity investments, based on cost. Our unconsolidated joint ventures, which have been similarly impacted as our direct investments by the COVID-19 pandemic, inflation, rising interest rates and other economic market conditions, may continue to limit distributions to preserve liquidity. Borrowings We use asset-level financing as part of our investment strategy to leverage our investments while managing refinancing and interest rate risk. We typically finance our investments with medium to long-term, non-recourse mortgage loans, though our borrowing levels and terms vary depending upon the nature of the assets and the related financing. In addition, our Sponsor has made available our Sponsor Line to provide additional short-term liquidity as needed. We are required to make recurring principal and interest payments on our borrowings. As ofJune 30, 2022 , we had$931.6 million of consolidated asset-level borrowings outstanding and paid$27.1 million in recurring principal and interest payments on borrowings during the six months endedJune 30, 2022 . Our unconsolidated joint ventures also have significant asset level borrowings, which may restrict cash distributions from the joint ventures if certain lender requirements are not met and may require capital to be funded if favorable refinancing is not obtained. The operator for the Arbors portfolio has failed to remit contractual rent and satisfy other conditions under its leases, which resulted in defaults under the operator's leases, and in turn, resulted in a non-monetary default under the mortgage notes collateralized by the properties as ofJune 30, 2022 . We have remitted contractual debt service and are in compliance with the other contractual terms under the mortgage notes collateralized by the properties. As the impact of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic market conditions continue to influence our investments' performance, we may experience defaults in the future and it may have a negative impact on our ability to service or refinance our borrowings. Our charter limits us from incurring borrowings that would exceed 300.0% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by a majority of our independent directors. We would need to disclose any such approval to our stockholders in our next quarterly report along with the justification for such excess. An approximation of this leverage limitation, excluding indirect leverage held through our unconsolidated joint venture investments and any securitized mortgage obligations to third parties, is 75.0% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofJune 30, 2022 , our leverage was 55.8% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofJune 30, 2022 , indirect leverage on assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation, held through our unconsolidated joint ventures was 58.2%.
For additional information regarding our borrowings, including principal repayments, timing of maturities and loans currently in
53--------------------------------------------------------------------------------
Table of Contents
default, refer to Note 5, "Borrowings" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
Capital Expenditures Activities
We are responsible for capital expenditures for our operating properties and, from time to time, may also fund capital expenditures for certain net lease properties. We continue to invest capital into our operating portfolio in order to maintain market position, functional and operating standards, increase operating income, achieve property stabilization and enhance the overall value of our assets. However, there can be no assurance that these initiatives will achieve these intended results. We are also party to certain agreements that contemplate development of healthcare properties funded by us and our joint venture partners. Although we may not be obligated to fund such capital contributions or capital projects, we may be subject to adverse consequences under our joint venture governing documents for any such failure to fund.
Realization and Disposition of Investments
We will actively pursue dispositions of assets and portfolios where we believe the disposition will achieve a desired return, improve our liquidity position and generate value for shareholders. As the impact of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic market conditions continue to influence the properties' performance, it may have a negative impact on our ability to generate desired returns on dispositions. We have made significant investments through both consolidated and unconsolidated joint ventures with third parties. We may share decision-making authority for these joint ventures that could prevent us from selling properties or our interest in the joint venture. During the six months endedJune 30, 2022 , our Espresso joint venture distributed the net proceeds generated from sub-portfolios sales, of which our proportionate share totaled$27.4 million .
Distributions
To continue to qualify as a REIT, we are required to distribute annually dividends equal to at least 90% of our taxable income, subject to certain adjustments, to stockholders. We have generated net operating losses for tax purposes and, accordingly, are currently not required to make distributions to our stockholders to qualify as a REIT. Refer to "-Distributions Declared and Paid" for further information regarding our distributions.
Repurchases
We adopted a share repurchase program, or the Share Repurchase Program, effectiveAugust 7, 2012 , which enabled stockholders to sell their shares to us in limited circumstances. Our board of directors may amend, suspend or terminate our Share Repurchase Program at any time, subject to certain notice requirements. InOctober 2018 , our board of directors approved an amended and restated Share Repurchase Program, under which we only repurchased shares in connection with the death or qualifying disability of a stockholder. OnApril 7, 2020 , our board of directors suspended all repurchases under our existing Share Repurchase Program effectiveApril 30, 2020 in order to preserve capital and liquidity. Other Commitments We expect to continue to make payments to our Advisor, or its affiliates, pursuant to our advisory agreement, as applicable, in connection with the management of our assets and costs incurred by our Advisor in providing services to us. In connection with the Sponsor Transaction, our advisory agreement was renewed for an additional one-year term commencing onFebruary 28, 2022 . Refer to "-Related Party Arrangements" for further information regarding our advisory fees. 54
--------------------------------------------------------------------------------
Table of Contents
Cash Flows
The following presents a summary of our consolidated statements of cash flows
(dollars in thousands):
Six Months Ended June 30,
2022 vs. 2021
Cash flows provided by (used in): 2022 2021 Change
Operating activities $ (12,102) $ (2,813) $ (9,289)
Investing activities 27,480 67,954 (40,474)
Financing activities (109,239) (28,361) (80,878)
Net increase (decrease) in cash, cash
equivalents and restricted cash $ (93,861) $ 36,780 $ (130,641)
Operating Activities
Net cash used in operating activities totaled $12.1 million for the six months
ended June 30, 2022 , as compared to $2.8 million for the six months ended
June 30, 2021 . The change in cash flow from operating activities was a result of
recognizing $7.4 million in federal COVID-19 provider relief grants from HHS
during the six months ended June 30, 2021 and lower rental and resident fee
income, net of property operating expenses during the six months ended June 30,
2022 as a result of portfolio sales during the year ended December 31, 2021 .
Investing Activities
Our cash flows from investing activities are primarily proceeds from investment dispositions, net of any capital expenditures. Net cash provided by investing activities was$27.5 million for the six months endedJune 30, 2022 as compared to$68.0 million for the six months endedJune 30, 2021 . Cash flows provided by investing activities for the six months endedJune 30, 2022 were from distributions received from our unconsolidated investments. Cash inflows were used to fund recurring capital expenditures and operating shortfalls for existing investments and to pay corporate general and administrative expenses. Cash flows provided by investing activities for the six months endedJune 30, 2021 were from collections of outstanding principal on our real estate debt investment and proceeds from property sales.
On a same store basis, capital expenditures increased during the six months
ended
The following table presents cash used for capital expenditures, excluding our unconsolidated ventures (dollars in thousands):
Six Months Ended June 30,
2022 2021 2022 vs. 2021 Change
Same store (excludes properties sold)
ALF/MCF properties $ 627 $ 989 $ (362)
ILF properties 9,782 5,325 4,457
Net lease properties 251 - 251
Properties sold - 3,779 (3,779)
Total capital expenditures $ 10,660 $ 10,093 $ 567
Financing Activities
Cash flows used in financing activities were $109.2 million for the six months
ended June 30, 2022 compared to $28.4 million for the six months ended June 30,
2021 . For the six months ended June 30, 2022 , net cash flows used in financing
activities were primarily attributable to the payment of the Special
Distribution to stockholders, repayment of the financing on the Oak Cottage
portfolio and continued principal amortization on our mortgage notes. Cash flows
used in financing activities during the six months ended June 30, 2021
represented principal amortization and the repayment of the mortgage note
payable that was collateralized by the property sold within our Aqua portfolio,
partially offset by the refinancing of a mortgage note for a property within the
Aqua portfolio.
55--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
As ofJune 30, 2022 , we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in unconsolidated ventures. Refer to Note 4, "Investments inUnconsolidated Ventures " in Part I. Item 1. "Financial Statements" for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.
Inflation
Macroeconomic trends such as increases in inflation and rising interest rates can have a substantial impact on our business and financial results. Many of our costs are subject to inflationary pressures. These include labor, repairs and maintenance, food costs, utilities, insurance and other operating costs. Our managers' ability to offset increased costs by increasing the rates charged to residents may be limited, therefore, cost inflation may substantially affect the net operating income of our operating properties as well as the ability of our net lease operator to make payments to us.
Distributions Declared and Paid
Since inception of our first investment, throughJune 30, 2022 , we declared$530.9 million in distributions, inclusive of the recent Special Distribution, and generated cumulative FFO of$128.6 million . From the date of our first investment onApril 5, 2013 throughDecember 31, 2017 , we declared an annualized distribution amount of$0.675 per share of our common stock. FromJanuary 1, 2018 throughJanuary 31, 2019 , we declared an annualized distribution amount of$0.3375 per share of our common stock. EffectiveFebruary 1, 2019 , our board of directors suspended recurring distributions in order to preserve capital and liquidity. OnApril 20, 2022 , our board of directors declared the Special Distribution of$0.50 per share for each stockholder of record onMay 2, 2022 totaling$97.1 million . On or aroundMay 5, 2022 ,$97.0 million of the Special Distribution was paid in cash from sources other than our cash flow provided by operations, including cash proceeds generated from asset sales and realizations during the year endedDecember 31, 2021 . While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our management and board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives. To the extent distributions are paid from sources other than FFO, the ownership interest of our public stockholders may be diluted. Future distributions declared and paid may exceed FFO and cash flow provided by operations. FFO, as defined, may not reflect actual cash available for distributions.
Related Party Arrangements
Advisor
Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on our behalf. Our Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws ofthe United States or foreign jurisdictions. References to our Advisor include our Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, our Advisor receives fees and reimbursements from us. Pursuant to our advisory agreement, our Advisor may defer or waive fees in its discretion. Below is a description and table of the fees and reimbursements incurred to our Advisor. In connection with the Sponsor Transaction, our advisory agreement was renewed for an additional one-year term commencing onFebruary 28, 2022 , upon terms identical to those in effect throughFebruary 28, 2022 , but for certain updates to remove our Former Sponsor and add NRF as our New Sponsor for certain limited provisions. Fees to Advisor Asset Management Fee EffectiveJanuary 1, 2018 , our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value, as may be subsequently adjusted for any special distribution declared by our board of directors in connection with a sale, transfer or other disposition of a substantial portion of our assets. EffectiveJuly 1, 2021 , the asset management fee is paid entirely in shares of our common stock at a price per share equal to the most recently published net asset value per share, and effectiveJanuary 1, 2022 , the fee is reduced if our corporate cash balances exceed$75.0 million , subject to the terms and conditions set forth in the advisory agreement. 56
--------------------------------------------------------------------------------
Table of Contents
Incentive Fee
Our Advisor is entitled to receive distributions equal to 15.0% of our net cash flows, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 6.75% cumulative, non-compounded annual pre-tax return on such invested capital. From inception throughJune 30, 2022 , our Advisor has not received any incentive fees.
Acquisition Fee
Effective
Disposition Fee
EffectiveJune 30, 2020 , our Advisor no longer has the potential to receive a disposition fee in connection with the sale of real estate properties or debt investments. Reimbursements to Advisor Operating Costs Our Advisor is entitled to receive reimbursement for direct and indirect operating costs incurred by our Advisor in connection with administrative services provided to us. Our Advisor allocates, in good faith, indirect costs to us related to our Advisor's and its affiliates' employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with our Advisor. The indirect costs include our allocable share of our Advisor's compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing our affairs, based upon the percentage of time devoted by such personnel to our affairs. The indirect costs also include rental and occupancy, technology, office supplies and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to our executive officers (although there may be reimbursement for certain executive officers of our Advisor) and other personnel involved in activities for which our Advisor receives an acquisition fee or a disposition fee. Our Advisor allocates these costs to us relative to its and its affiliates' other managed companies in good faith and has reviewed the allocation with our board of directors, including our independent directors. Our Advisor updates our board of directors on a quarterly basis of any material changes to the expense allocation and provides a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. We reimburse our Advisor quarterly for operating costs (including the asset management fee) based on a calculation, or the 2%/25% Guidelines, for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of our average invested assets; or (ii) 25.0% of our net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, we may reimburse our Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. We calculate the expense reimbursement quarterly based upon the trailing twelve-month period. As ofJune 30, 2022 , our Advisor did not have any unreimbursed operating costs which remained eligible to be allocated to us.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred and paid to our Advisor (dollars in thousands):
Due to Related
Due to Related Six Months Ended June 30, 2022 Party as of
Party as of June 30, 2022
Type of Fee or Reimbursement Financial Statement Location December 31, 2021 Incurred Paid (Unaudited)
Fees to Advisor Entities
Asset management Asset management fees-related
party
$ 937
Operating costs General and administrative
expenses 6,401 6,256 (9,685) 2,972
Total $ 7,338 $ 11,360 $ (14,929) $ 3,769
Pursuant to our advisory agreement, for the six months ended June 30, 2022 , we
issued 1.3 million shares totaling $5.2 million based on the estimated value per
share on the date of each issuance, to an affiliate of our Advisor as part of
its asset management fee. As of June 30, 2022 , our Advisor, our Sponsor and
their affiliates owned a total of 8.7 million shares, or $34.2 million of our
common stock based on our most recent estimated value per share. As of June 30,
2022 , our Advisor, our Sponsor and their affiliates owned 4.5% of the total
outstanding shares of our common stock.
57--------------------------------------------------------------------------------
Table of Contents
Investments in Joint Ventures
Solstice, the manager of the Winterfell portfolio, is a joint venture between affiliates of ISL, who owns 80.0%, and us, who owns 20.0%. For the six months endedJune 30, 2022 , we recognized property management fee expense of$2.7 million paid to Solstice related to the Winterfell portfolio.
The below table indicates our investments for which our Sponsor is also an
equity partner in the joint venture. Each investment was approved by our board
of directors, including all of its independent directors. Refer to Note 4,
"Investments in
Portfolio Partner(s) Acquisition Date Ownership
NRF and Partner/
Eclipse Formation Capital, LLC May 2014 5.6%
Diversified US/UK NRF and Partner December 2014 14.3%
Line of Credit -
InOctober 2017 , we obtained our Sponsor Line, which was approved by our board of directors, including all of our independent directors. InApril 2020 , we borrowed$35.0 million under the Sponsor Line to improve our liquidity position in response to the COVID-19 pandemic. InJuly 2021 , we repaid, in full, the$35.0 million outstanding borrowing and as ofJune 30, 2022 , we had no outstanding borrowings under our Sponsor Line. Our Sponsor Line has a borrowing capacity of$35.0 million at an interest rate of 3.5% plus LIBOR and has a maturity date ofFebruary 2024 .
© Edgar Online, source