STRAWBERRY FIELDS REIT, INC. Forward-Looking Statements
Certain statements in this report may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations,
including, but not limited to, statements regarding: future financing plans,
business strategies, growth prospects and operating and financial performance;
expectations regarding the making of distributions and the payment of dividends;
and compliance with and changes in governmental regulations.
Words such as "anticipate(s)," "expect(s)," "intend(s)," "plan(s),"
"believe(s)," "may," "will," "would," "could," "should," "seek(s)" and similar
expressions, or the negative of these terms, are intended to identify such
forward-looking statements. These statements are based on management's current
expectations and beliefs and are subject to a number of risks and uncertainties
that could lead to actual results differing materially from those projected,
forecasted or expected. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, we can give no assurance that our
expectations will be attained. Factors which could have a material adverse
effect on our operations and future prospects or which could cause actual
results to differ materially from our expectations include, but are not limited
to: (i) the COVID-19 pandemic and the measures taken to prevent its spread and
the related impact on our business or the businesses of our tenants; (ii) the
ability and willingness of our tenants to meet and/or perform their obligations
under the triple-net leases we have entered into with them, including, without
limitation, their respective obligations to indemnify, defend and hold us
harmless from and against various claims, litigation and liabilities; (iii) the
ability of our tenants to comply with applicable laws, rules and regulations in
the operation of the properties we lease to them; (iv) the ability and
willingness of our tenants to renew their leases with us upon their expiration,
and the ability to reposition our properties on the same or better terms in the
event of nonrenewal or in the event we replace an existing tenant, as well as
any obligations, including indemnification obligations, we may incur in
connection with the replacement of an existing tenant; (v) the availability of
and the ability to identify (a) tenants who meet our credit and operating
standards, and (b) suitable acquisition opportunities, and the ability to
acquire and lease the respective properties to such tenants on favorable terms;
(vi) the ability to generate sufficient cash flows to service our outstanding
indebtedness; (vii) access to debt and equity capital markets; (viii)
fluctuating interest rates; (ix) the ability to retain our key management
personnel; (x) the ability to maintain our status as a real estate investment
trust ("REIT"); (xi) changes in the U.S. tax law and other state, federal or
local laws, whether or not specific to REITs; (xii) other risks inherent in the
real estate business, including potential liability relating to environmental
matters and illiquidity of real estate investments; and (xiii) any additional
factors included under "Risk Factors" in our Registration Statement on Form 10
dated July 12, 2022 , including in the section entitled "Risk Factors" in Item 1A
of Part I of such report, as such risk factors may be amended, supplemented or
superseded from time to time by other reports we file with the Securities and
Exchange Commission (the "SEC").
Forward-looking statements speak only as of the date of this report. Except in
the normal course of our public disclosure obligations, we expressly disclaim
any obligation to release publicly any updates or revisions to any
forward-looking statements to reflect any change in our expectations or any
change in events, conditions or circumstances on which any statement is based.
Overview
Strawberry Fields REIT, Inc. (the "Company") is engaged in the ownership, acquisition, financing and triple-net leasing of skilled nursing facilities and other post-acute healthcare properties. Currently, our portfolio consists of 79 healthcare properties with an aggregate of 10,426 licensed beds. We hold fee title to 78 of these properties and hold one property under a long term lease. These properties are located inArkansas ,Illinois ,Indiana ,Kentucky ,Michigan ,Ohio ,Oklahoma ,Tennessee andTexas . We generate substantially all our revenues by leasing our properties to tenants under long-term leases primarily on a triple-net basis, under which the tenant pays the cost of real estate taxes, insurance and other operating costs of the facility and capital expenditures. Each healthcare facility located at our properties is managed by a qualified operator with an experienced management team. 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview (continued) We employ a disciplined approach in our investment strategy by investing in healthcare real estate assets. We seek to invest in assets that will provide attractive opportunities for dividend growth and appreciation in asset value, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value. We expect to grow our portfolio by diversifying our investments by tenant, facility type and geography. We are entitled to monthly rent paid by the tenants and we do not receive any income or bear any expenses from the operations of such facilities. As ofSeptember 30, 2022 , the aggregate annualized average base rent under the leases for our properties was approximately$82.3 million . We intend to elect to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endingDecember 31, 2022 . We are organized in an UPREIT structure in which we own substantially all of our assets and conduct substantially all of our business through theOperating Partnership . We are the general partner of theOperating Partnership and as of the date of the report own approximately 11.3% of the outstanding OP units.
Recent Developments
COVID-19 Update
The pandemic caused by the coronavirus known as COVID-19 has not had a material adverse effect on the Company's financial performance, results of operations, liquidity or access to financing. However, the Company's operations and financial performance are dependent on the ability of its tenants to meet their lease obligations to the Company. To the Company's knowledge and based on information provided to the Company by our tenants, the financial effects of the pandemic on the Company's tenants have increased operating costs resulting from the implementation of safety protocols and procedures our tenants are taking to prevent and mitigate the potential outbreak and spread of COVID-19 at their facilities. Our tenants are also experiencing labor shortages resulting in limited admissions, reduced occupancy and higher agency expenses. The Company believes that the declines in occupancy were primarily due to declining referrals as a result of hospitals postponing elective surgeries as well as patients' concerns regarding the risk of infection from COVID-19. As a result of the COVID-19 pandemic, our tenants have received financial support under several government programs. These programs consisted of forgivable loans under Paycheck Protection Program, grants to operators under the Coronavirus Aid, Relief and Economic Security (CARES) Act in an amount equal to 2% of their historical annual revenues, accelerated payments under Medicare, and increased funding for Medicaid patients by some state governments. The Company's management does not expect that the discontinuation of these government programs will have a material adverse effect on the tenants' ability to pay rent for four reasons. First, the Company's management believes that most nursing home residents inthe United States have received vaccines for COVID-19, which have been highly effective in preventing cases of COVID-19. Second, occupancy significantly increased betweenApril 2021 andOctober 2022 . Third, the source of the tenants' revenues has partially shifted from Medicaid to Medicare because more patients have become eligible for Medicare due to changes in the eligibility criteria. The tenants receive larger payments from Medicare than Medicaid. Fourth, most of the Company's tenants have the ability to maintain profitability notwithstanding the decrease in revenues because approximately 85% to 90% of their operating costs are variable items (such as labor costs, food, drugs and supplies, including personal protection equipment and cleaning supplies) that can be reduced when occupancy decreases.
To the Company's knowledge, its tenants are complying with all applicable
governmental requirements and guidelines for addressing the risks posed by
COVID-19. Although there have been a limited number of confirmed cases of
COVID-19 at the facilities operated by the Company's tenants, to its knowledge,
other than our tenants operating under a master lease for six facilities in
central
38
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Recent developments (continued)
OnApril 4, 2022 , we were notified that the tenants under the master leases for 6 facilities located in centralIllinois intended to default with respect to their lease agreements due to operating losses. The tenants indicated that their operating losses were due in part to decreased occupancy caused by COVID-19. The tenants are affiliates ofSteven Blisko , who is the brother ofMichael Blisko , one of our directors. These leases provided for a combined rent of$225,000 per month, or$2.7 million per year. All payments due under these leases were paid throughmid-June 2022 . OnJuly 1, 2022 , the Company entered into new lease agreements with an unaffiliated third-party operator to lease these properties. The new leases have terms of 10 years each and provide for combined average base rent of$180,000 per month, or$2.3 million per year over the life of the leases. The Company recognized a loss of approximately$1,075,000 in the second quarter of 2022 due to the write-off of straight-line rent receivable related to the former leases.
In
InAugust 2022 , the Company executed a contract to sell one of its assets used as a skilled nursing facility and a long-term acute care facility located inPlano, Texas to a third party for a purchase price of$12 million . The anticipated gain on sale is approximately$5.1 million and the transaction is expected to close in earlyDecember 2022 . InOctober 2022 , the Company executed a line of credit with a value of$2.5 million with the new tenants of theSouthern Illinois properties. This line of credit is collateralized against tenant accounts receivable. Interest on this line of credit is Prime Rate of no less than 4% plus margin of 2.75% and maturity is throughAugust 31, 2024 . As of the date of this report, none of the Company's tenants are delinquent on the payment of rent, and none of them have requested the Company to amend the terms of their leases to reduce current or future lease payments.
Related Party Tenants
As a landlord, the Company does not control the operations of its tenants, including related party tenants, and is not able to cause its tenants to take any specific actions to address trends in occupancy at the facilities operated by its tenants, other than to monitor occupancy and income of its tenants, discuss trends in occupancy with tenants and possible responses, and, in the event of a default, to exercise its rights as a landlord. However,Moishe Gubin , our Chairman and Chief Executive Officer, andMichael Blisko , one of our directors, as the controlling members of 41 of our tenants and related operators, have the ability to obtain information regarding these tenants and related operators and cause the tenants and operators to take actions, including with respect to occupancy. 39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations Operating Results Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 : Three Months Ended September 30, Increase / Percentage (dollars in thousands) 2022 2021 (Decrease) Difference Revenues: Rental revenues$ 24,235 $ 23,548 $ 687 2.9 % Expenses: Depreciation 6,335 6,069 266 4.4 % Amortization 757 757 - 0.0 % General and administrative expenses 730 2,388 (1,658 ) (69.4 %) Property and other taxes 3,873 3,350 523 15.6 % Facility rent expenses 139 357 (218 ) (61.1 %) Credit for doubtful accounts (5,100 ) - (5,100 ) 100 % Total Expenses 6,734 12,921 (6,187 ) (47.9 %) Interest expense, net 6,863 5,473 1,390 25.4 %
Amortization of interest expense 129 75
54 72 % Mortgage Insurance Premium 426 466 (40 ) (8.6 )% Total Interest Expenses 7,418 6,014 1,404 23.3 % Other loss Foreign currency transaction loss (833 ) (1,931 ) 1,098 56.9 % Net Income 9,250 2,682 6,568 244.9 % Net income attributable to noncontrolling interest (8,232 ) (2,390 ) (5,842 ) 244.4 % Net Income attributable to common stockholders 1,018 292 726 248.6 % Basic and diluted income per common share$ 0.17 $ 0.05
Rental revenues: Rental revenues for the three months ended
Depreciation and Amortization: Increase in depreciation of$0.27 million or 4.4% is primarily due to an increase in new real estate investments made in the third quarter of 2021.
General and administrative expenses: Decrease in general and administrative
expenses of
Property and other Taxes: Increase in property taxes of
(Credit) Provision for Doubtful Accounts: In the third quarter of 2022, the
Company recognized income of
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations (continued)
Interest expense, net: The increase in interest expense of
Foreign currency transaction loss: Decrease in realized foreign currency transaction loss of$1.1 million was due to lower foreign currency transaction losses incurred in connection with bond payments in the third quarter of 2022 compared to losses incurred from bond repayments that occurred during the nine months endedSeptember 30, 2021 as a result of changes in the value of theU.S. dollar relative to the New Israeli Shekel. Net Income: Increase in net income from$2.7 million during the third quarter of 2021, to$9.2 million during the third quarter of 2022 (244.9%) is primarily result of recoveries recognized from the successful foreclosure of mortgages in the third quarter of 2022. Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 : Nine Months Ended September 30, Increase / Percentage (dollars in thousands) 2022 2021 (Decrease) Difference Revenues: Rental revenues$ 68,972 $ 64,051 $ 4,921 7.7 % Expenses: Depreciation 19,386 17,855 1,531 8.6 % Amortization 2,271 2,271 - 0.0 % General and administrative expenses 4,150 4,674 (524 ) (11.2 %) Property and other taxes 9,494 7,892 1,602 20.3 % Facility rent expenses 398 603 (205 ) (34.0 % (Credit) Provision for doubtful accounts (4,437 ) 93 (4,530 ) (4,871.0 %) Total Expenses 31,262 33,388 (2,126 ) (6.4 %) Interest expense, net 15,902 15,479 423 2.7 %
Amortization of interest expense 317 227
90 39.6 % Mortgage Insurance Premium 1,287 1,294 (7 ) (0.5 %) Total Interest Expenses 17,506 17,000 506 3.0 % Other (loss) income Gain from sale of real estate investments - 3,842 (3,842 ) - Foreign currency transaction loss (10,932 ) (8,775 ) (2,157 ) 24.6 % Net Income 9,272 8,730 542 6.2 % Net income attributable to noncontrolling interest (8,252 ) (3,368 ) (4,884 ) 145.0 % Net income attributable to predecessor - (4,943 ) 4,943 - Net Income Attributable to common stockholders 1,020 419 601 143.4 % Basic and diluted income per common share$ 0.17 $ 0.07 Rental revenues: Rental revenues during the first nine months of 2022 increased by$4.9 million or 7.7% due to the six new properties acquired in in August of 2021. This increase was offset by a one-time loss of$1.1 million in the second quarter of 2022 due to the write-offs of straight-line rent receivables related to certain defaulted leases. Additionally, revenue was increased by$1.1 million due to additional property taxes being reimbursed by the tenants. 41
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations (continued)
Depreciation and Amortization: Increase in depreciation of
General and Administrative Expense: Decrease in general and administrative expenses of$0.5 million or 11.2% is primarily due to costs incurred related to the Series C Bonds and the acquisition of the newTennessee properties in the third quarter of 2021.
Property and other Taxes: The increase in property taxes of
(Credit) Provision for Doubtful Accounts: In the third quarter of 2022, the Company recognized$4.4 million in income from the successful foreclosure of mortgages held by the Company on properties located inMassachusetts with respect to loans written off atDecember 31, 2021 . The decrease in the provision for doubtful accounts of$4.5 million or 4,871% is primarily related to this recovery. Interest expense, net: The increase in interest expense of$0.4 million or 2.7% is primarily related to increases in floating rate interest on mortgage loan facility. Gain from Sale of Real Estate Investments: There were no gains from the sale of real estate during the first nine months of 2022 because there were no asset dispositions during this period.
Foreign Currency Transaction Loss: Increase in realized foreign currency
transaction loss of
Net Income: The increase in net income from$8.7 million during the nine months endedSeptember 30, 2021 to$9.3 million in the nine months endedSeptember 30, 2022 is mainly due to a decrease in total expenses as a result of the aforementioned mortgage recoveries, the increase in foreign currency transaction losses of$2.2 million , and the absence of the$3.8 million in gain from sale of real estate investments recorded in 2021.
Liquidity and Capital Resources
To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors. As ofSeptember 30, 2022 , we had cash and cash equivalents and restricted cash and equivalents of$37.2 million . We also had the ability to offer additional Series C Bonds from the current outstanding of$53.9 million up to$177 million subject to compliance with covenants and market conditions. Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. Our primary sources of cash include operating cash flows, stock sales and borrowings. Our primary uses of cash include funding acquisitions and investments consistent with our investment strategy, repaying principal and interest on any outstanding borrowings, making distributions to our equity holders, funding our operations and paying accrued expenses. Our long-term liquidity needs consist primarily of funds necessary to pay for the costs of acquiring additional healthcare properties and principal and interest payments on our debt. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances or debt offerings, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings. 42
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources (continued)
We may utilize various types of debt to finance a portion of our acquisition activities, including long-term, fixed-rate mortgage loans, variable-rate term loans and secured revolving lines of credit. As ofSeptember 30, 2022 , on a consolidated basis, we had total indebtedness of approximately$459.0 million , consisting of$277.6 million in HUD guaranteed debt,$75.3 million in net Series A Bonds and Series C Bonds outstanding and$106.1 million in commercial mortgages. Under our Bonds and our commercial mortgages, we are subject to continuing covenants, and future indebtedness that we may incur, may contain similar provisions. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations, and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our stockholders. Our debt arrangements may require us to make a lump-sum or "balloon" payment at maturity. Our ability to make the balloon payments due under our existing and future indebtedness will depend on our working capital at the time of repayment, our ability to obtain additional financing or our ability to sell any property securing such indebtedness. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original bond or loan or sell any related property at a price sufficient to make the balloon payment. In addition, balloon payments and payments of principal and interest on our indebtedness may leave us with insufficient cash to pay the distributions that we are required to pay to qualify and maintain our qualification as a REIT. Through 2027 there are two balloon payment obligations consisting of a payment of$44.6 million due under the Series C Bonds in 2026 and a payment of$86.0 million due under our commercial bank term loan due in 2027. We may also obtain additional financing that contains balloon payment obligations. These types of obligations may materially adversely affect us, including our cash flows, financial condition and ability to make distributions. The Company believes that its overall level of indebtedness is appropriate for the Company's business in light of its cash flow from operations and value of its properties and is generally typical for owners of multiple healthcare properties. The Company expects to generate sufficient positive cash flow from operations to meet its ongoing debt service obligations and the distribution requirements for maintaining REIT status commencing in 2022.
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the periods presented:
Nine Months Ended
September 30,
2022 2021
(Predecessor)
(dollars in thousands)Net cash provided by operating activities$ 37,421 $
31,244
Net cash used in investing activities (8,469 ) (63,350 ) Net cash (used in) provided by financing activities (43,850 )
25,596
Net decrease in cash and cash equivalents and restricted cash and cash equivalents (14,898 ) (6,510 ) Cash and cash equivalents, and restricted cash and cash equivalents beginning of period 52,128
42,059
Cash and cash equivalents and restricted cash and cash equivalents, end of period$ 37,230 $
35,549 43
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cash Flows (continued) Net cash provided by operating activities increased$4.8 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to a decrease of$5.9 million in accounts payable and accrued liabilities as well as an increase in foreign currency transaction losses and the absence of the gain on real estate sale during the nine month period ended onSeptember 30, 2022 . Cash used in investing activities for the nine months endedSeptember 30, 2022 was comprised of a net increase in notes receivable of$8.5 million , of which$8.0 million is a result of a note purchased related to ourArkansas properties and a note receivable of$1.0 million made by an unaffiliated nursing home operator inKentucky in favor of the Company in the third quarter 2022. The decrease of$54.9 million compared to the nine months endedSeptember 30, 2021 is due to the decrease in real estate purchases. Cash flows used in financing activities for the nine months endedSeptember 30, 2022 were primarily comprised of$14.2 million in principal bond payments, a$10.9 million in distribution to the non-controlling holders and a decrease of$17.4 million in net borrowings as a result of$105.0 million new borrowing under a mortgage loan facility that was used to repay$91.8 million in Series B bonds and non-HUD bank debt of$29.1 million . Cash flows used in financing activities for the nine months endedSeptember 30, 2021 were primarily comprised of$63 million in new bond proceeds,$22.5 million in principal bond payments,$15.1 million of repayment of senior debt and payment of preferred dividends of$1.5 million . These uses were offset by proceeds from the sale of bonds held by a subsidiary of$1.7 million .
Indebtedness
Mortgage Loans Guaranteed by HUD
As of
Each loan is secured by first mortgages on certain specified properties, interests in the leases for these properties and second liens on the operator's assets. In the event of default on any single loan, the loan agreement provides that the applicable lender may require the tenants for the property securing the loan to make all rental payments directly to the lender. In exchange for the HUD guarantee, we pay HUD, on an annual basis, 0.65% of the principal balance of each loan as mortgage insurance premium, in addition to the interest rate denominated in each loan agreement. As a result, the overall average interest rate paid with respect to the HUD guaranteed loans as ofSeptember 30, 2022 , was 3.88% per annum (including the mortgage insurance payments). The loans have an average maturity of 25.0 years.
Commercial Bank Term Loan
OnMarch 21, 2022 , the Company closed a mortgage loan facility with a commercial bank pursuant to which the Company borrowed approximately$105 million . The facility provides for monthly payments of principal based on a 20-year amortization with a balloon payment due inMarch 2027 . The rate is based on the one-month Secured Overnight Financing Rate ("SOFR") plus a margin of 3.5% and a floor of 4% (as of theSeptember 30, 2022 the rate was 6.1%). As ofSeptember 30, 2022 , total outstanding principal amount was$103.26 million . This loan is collateralized by 21 properties owned by the Company. The new loan proceeds were used to repay the Series B Bonds and prepay commercial loans not secured by HUD guarantees. The Company recognized a foreign currency transaction loss of approximately$10.1 million in connection with the repayment of the Series B Bonds. The new credit facility financial covenants consist of (i) a covenant that the ratio of the Company's indebtedness to its EBITDA cannot exceed 8.0 to 1, (ii) a covenant that the ratio of the Company's net operating income to its debt service before dividend distribution is at least 1.20 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement (iii) a covenant that the ratio of the Company's net operating income to its debt service after dividend distribution is at least 1.05 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, and (iii) a covenant that the Company's GAAP equity is at least$20,000,000 . As ofSeptember 30, 2022 , the Company is in compliance with the loan covenants.
Other Debt
As of
44
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Indebtedness (continued) Outstanding Bond Debt
The Company has issued Series A Bonds and Series C Bonds.
Series A Bonds
InNovember 2015 ,Strawberry Fields REIT, Ltd. , a wholly owned subsidiary of the Company ("BVI Company ") issued Series A Bonds in the face amount of New Israeli Shekels ("NIS") 265.2 million ($68 million ) and received the net amount, after issuance costs,NIS 251.2 million ($64.3 million ). DuringSeptember 2016 , theBVI Company issued additional Series A Bonds in the face amount ofNIS 70.0 million ($18.6 million ) and raised a net amount ofNIS 70.8 million ($18.8 million ). These Series A Bonds were issued at a premium of 103.6%. DuringMay 2017 , theBVI Company issued additional Series A Bonds in the face amount ofNIS 39.0 million ($10.7 million ) and raised a net amount ofNIS 40.9 million ($11.3 million ). These Series A Bonds were issued at a premium of 105.9%. A portion of the Series A Bonds have been repurchased by a subsidiary of theBVI Company . As ofSeptember 30, 2022 , the aggregate principal amount of the Series A Bonds wasNIS 74.9 million ($21.1 million ). As ofSeptember 30, 2022 we heldNIS 3.7 million ($1.0 million ) of these Bonds that we have repurchased. OnJuly 4, 2022 ,Standard & Poor's upgraded the rating on Bond A from ilA- to ilA, and interest rate was decreased from 6.9% to 6.4%. The Series A Bonds are traded on the Tel Aviv Stock Exchange Ltd. ("TASE").
Series C Bonds
InJuly 2021 , the Company completed an initial offering of Series C Bonds with a par value ofNIS 208.0 million ($64.7 million ). The Series C Bonds were issued at par.
As of
The Series C Bonds are traded on the TASE.
Summary of fixed and variable loans
September 30, December 31,
2022 2021
(Amounts in $000s)
Fixed rate loans $ 352,912 $ 479,388
Variable rate loans 106,111 24,789
Gross Notes Payable and other Debt
45
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Funds From Operations ("FFO")
The Company believes that net income as defined by GAAP is the most appropriate
earnings measure. We also believe that funds from operations ("FFO"), as defined
in accordance with the definition used by the National Association of Real
Estate Investment Trusts ("NAREIT"), and adjusted funds from operations ("AFFO")
are important non-GAAP supplemental measures of our operating performance.
Because the historical cost accounting convention used for real estate assets
requires straight-line depreciation (except on land), such accounting
presentation implies that the value of real estate assets diminishes predictably
over time. However, since real estate values have historically risen or fallen
with market and other conditions, presentations of operating results for a REIT
that use historical cost accounting for depreciation could be less informative.
Thus, NAREIT created FFO as a supplemental measure of operating performance for
REITs that excludes historical cost depreciation and amortization, among other
items, from net income, as defined by GAAP. FFO is defined as net income,
computed in accordance with GAAP, excluding gains or losses from real estate
dispositions, plus real estate depreciation and amortization. AFFO is defined as
FFO excluding the impact of straight-line rent, above-/below-market leases,
non-cash compensation and certain non-recurring items. For the nine and three
months ended September 30, 2022 and 2021, we excluded as non-recurring items the
amount of $10.9 million , $8.8 million , $0.8 million and $1.9 million ,
respectively, in reclassification of foreign currency transaction losses the
Company recorded with respect to foreign currency fluctuations that the Company
realized at the time of bond principal payment. We believe that the use of FFO,
combined with the required GAAP presentations, improves the understanding of our
operating results among investors and makes comparisons of operating results
among REITs more meaningful. We consider FFO and AFFO to be useful measures for
reviewing comparative operating and financial performance because, by excluding
the applicable items listed above, FFO and AFFO can help investors compare our
operating performance between periods or as compared to other companies.
While FFO and AFFO are relevant and widely used measures of operating
performance of REITs, they do not represent cash flows from operations or net
income as defined by GAAP and should not be considered an alternative to those
measures in evaluating our liquidity or operating performance. FFO and AFFO also
do not consider the costs associated with capital expenditures related to our
real estate assets nor do they purport to be indicative of cash available to
fund our future cash requirements. Further, our computation of FFO and AFFO may
not be comparable to FFO and AFFO reported by other REITs that do not define FFO
in accordance with the current NAREIT definition or that interpret the current
NAREIT definition or define AFFO differently than we do.
The following table reconciles our calculations of FFO and AFFO for the nine and
three months ended September 30, 2022 and 2021, to net income, the most directly
comparable GAAP financial measure, for the same periods (in thousands):
FFO and AFFO
Nine Months Ended Three Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in $1 ,000s) (Predecessor) (Predecessor)
Net income $ 9,272 $ 8,730 $ 9,250 $ 2,682
Depreciation and amortization 21,657 20,126 7,092 6,826
(Credit) Provision for doubtful
accounts* (4,437 ) - (5,100 ) -
Gain from Sale of Real Estate
Investments - (3,842 ) - -
Funds from Operations 26,492 25,014 11,242 9,508
Adjustments to FFO:
Straight-line rent (2,138 ) (1,724 ) (2,284 ) (1,022 )
Straight-line rent receivable
write-off** 1,075 - 1,075 -
Foreign currency transaction
loss 10,932 8,775 833 1,931
Funds from Operations, as
Adjusted $ 36,361 $ 32,065 $ 10,866 $ 10,417
* The Company recovered $4.4 million with respect to foreclosure sales of assets
in Massachusetts .
** The Company recognized a loss of $1,075,000 in the second quarter of 2022 due
to the write-off of straight-line rent receivables related to the Western
Illinois facilities
46
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Subsequent Events
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP for interim financial information set forth in the Accounting Standards Codification, as published by theFinancial Accounting Standards Board . GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to "Critical Accounting Policies and Estimates" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Registration Statement on Form 10, filed with theSEC onJuly 12, 2022 , for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes in such critical accounting policies during the nine months endedSeptember 30, 2022 .
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