What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-13 compared with 2020-05-14 · 136 added, 100 removed, 320 unchanged (42% of the section changed)

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The following discussion should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our 2019 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 19, 2020.

Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of March 31, 2020 and December 31, 2019 , together with our results of operations and cash flows for the three months ended March 31, 2020 and 2019.

Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of June 30, 2020 and December 31, 2019 , together with our results of operations and cash flows for the three and six months ended June 30, 2020 and 2019.

Forward-Looking Statements

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We commenced offering shares pursuant to the 2019 DRIP Offering on March 1, 2019, following the termination of our initial offering on February 15, 2019.

As of June 30, 2020 , a total of $33,043,000 in distributions were reinvested that resulted in 3,458,656 shares of our common stock being issued pursuant to the 2019 DRIP Offering.

We collectively refer to the DRIP portion of our initial offering and the 2019 DRIP Offering as our DRIP Offerings.

As of March 31, 2020 , a total of $28,046,000 in distributions were reinvested that resulted in 2,934,920 shares of our common stock being issued pursuant to the 2019 DRIP Offering.

The COVID-19 pandemic is dramatically impacting the United States and has resulted in an aggressive worldwide effort to contain the spread of the virus.

These efforts have significantly and adversely disrupted economic markets and impacted commercial activity worldwide, including markets in which we own and/or operate properties, and the prolonged economic impact is uncertain.

Considerable uncertainty still surrounds the COVID-19 pandemic and its effects on the population, as well as the effectiveness of any responses taken on a national and local level by government authorities and businesses.

In addition, the rapidly evolving nature of the COVID-19 pandemic makes it difficult to ascertain the long-term impact it will have on real estate markets and our portfolio of investments.

In particular, government-imposed business closures and re-opening restrictions have dramatically impacted the operations of our real estate investments and our tenants across the country, such as creating declines in resident occupancy.

Further, our senior housing facilities are also experiencing dramatic increases in costs to care for residents, particularly labor costs to maintain staffing levels to care for the aged population during this crisis, costs of COVID-19 testing of employees and residents and costs to procure the volume of personal protective equipment, or PPE, and other supplies required.

We have not received or recognized in our consolidated financial statements any stimulus funds from federal, state or local governments or from any healthcare-related regulators related to the COVID-19 pandemic.

However, we have taken actions to strengthen our balance sheet and preserve liquidity in response to the COVID-19 pandemic risks.

Since March 2020, we have postponed non-essential capital expenditures, reduced the stockholder distribution rate and partially suspended our share repurchase plan.

We are continuously monitoring the impact of the COVID-19 pandemic on our business, residents, tenants, operating partners, managers, portfolio of investments and on the United States and global economies.

While the results of our current analyses did not result in any material adjustments to our condensed consolidated financial statements as of and during the three months ended March 31, 2020, the prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and impact our financial performance.

See “Factors That May Influence Our Results of Operations” and “Liquidity and Capital Resources” sections below for a further discussion.

While there were no material adjustments to our condensed consolidated financial statements as of and during the six months ended June 30, 2020 , the prolonged duration and impact of the COVID-19 pandemic could materially affect our financial performance.

See the “Factors Which May Influence Results of Operations,” “Results of Operations” and “Liquidity and Capital Resources” sections below for a further discussion.

On April 2, 2020, our board of directors, or our board, at the recommendation of the audit committee of our board, comprised solely of independent directors, and after considering the uncertainties presented by the COVID-19 pandemic, unanimously approved and established an estimated per share net asset value, or NAV, of our common stock of $9.54.

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The Advisory Agreement was last renewed pursuant to the mutual consent of the parties on February 12, 2020 and expires on February 16, 2021.

Our advisor uses its best efforts, subject to the oversight and review of our board, to, among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives.

Our advisor uses its best efforts, subject to the oversight and review of our board, to,

among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives.

Our advisor performs its duties and responsibilities under the Advisory Agreement as our fiduciary.

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medical office buildings, senior housing, senior housing — RIDEA and skilled nursing facilities.

As of March 31, 2020 , we had completed 46 property acquisitions whereby we owned 89 properties, comprising 94 buildings, or approximately 4,863,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $1,087,588,000 .

As of March 31, 2020 , we also owned a 6.0% interest in a joint venture which owns a portfolio of integrated senior health campuses and ancillary businesses.

As of June 30, 2020 , we had completed 46 property acquisitions whereby we owned 89 properties, comprising 94 buildings, or approximately 4,863,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $1,089,071,000 .

As of June 30, 2020 , we also owned a 6.0% interest in a joint venture which owns a portfolio of integrated senior health campuses and ancillary businesses.

Critical Accounting Policies

The complete listing of our Critical Accounting Policies was previously disclosed in our 2019 Annual Report on Form 10-K, as filed with the SEC on March 19, 2020, and there have been no material changes to our Critical Accounting Policies as disclosed therein, except as included within Note 2, Summary of Significant Accounting Policies , to our accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncement

For a discussion of recently issued accounting pronouncement, see Note 2, Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncement, to our accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements, to our accompanying condensed consolidated financial statements.

Acquisitions in 2020

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Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, including the ongoing COVID-19 pandemic, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the management and operation of our properties other than those listed in Part II, Item 1A.

Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2019 Annual Report on Form 10-K, as filed with the SEC on March 19, 2020.

Due to the ongoing COVID-19 pandemic in the United States and globally, our residents, tenants, managers and operating partners may be materially impacted.

The situation presents a meaningful challenge for us as an owner and operator of healthcare facilities, as the impact of the virus has resulted in a massive strain throughout the healthcare system.

COVID-19 is particularly dangerous among the senior population and results in heightened risk to our senior housing and skilled nursing facilities, and we continue to work diligently to implement appropriate protocols at such facilities in line with the Centers for Disease Control and Prevention and Centers for Medicare and Medicaid Services guidelines to limit the exposure and spread of COVID-19.

However, we have experienced a decline in our occupancies at our senior housing — RIDEA facilities due in large part to decreased move-ins of prospective residents because of shelter in place and other quarantine restrictions.

Our operators have also experienced increased costs to procure personal protective equipment and other supplies for which there are shortages and to maintain staffing levels to care for the aged population during this crisis.

Managers of our RIDEA properties are evaluating their options for financial assistance utilizing programs within the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by the federal government on March 27, 2020, as well as other state and local government programs.

COVID-19 is particularly dangerous among the senior population and results in heightened risk to our senior housing facilities, and we continue to work diligently to implement aggressive safety and infection control protocols at such facilities in line with the Centers for Disease Control and Prevention and Centers for Medicare and Medicaid Services guidelines to limit the exposure and spread of COVID-19.

Each type of real estate asset we own has been impacted by COVID-19 to varying degrees.

The COVID-19 pandemic has negatively impacted the businesses of our medical office tenants and their ability to pay rent on a timely basis.

In the early months of the pandemic when many of the states had implemented “stay at home” orders, in excess of 50.0% of our tenants in medical office buildings had been classified by state governments as “non-essential” and were ordered to either shut down entirely, or significantly limit hours of operations, which prevented or significantly limited our tenants from seeing patients in their offices and thereby creating unprecedented revenue pressure on such tenants.

Substantially all of our physician practices and other medical service providers of non-essential and elective services in our medical office buildings are now open.

However, the number of patients returning to such offices varies across practice types and geographic markets as people continue to delay office visits indefinitely due to the fears or uncertainties associated with COVID-19 despite the availability of services.

Additionally, while restrictions have been at least partially lifted in many states, there remains a risk of reclosures in states where infection rates are on the rise, which may put additional pressure on our operations.

For our managed senior housing — RIDEA facilities, based on preliminary information available to management as of July 31, 2020, we have experienced an approximate 9.0% decline in our resident occupancies since February 2020 largely due to a decline in move-ins of prospective residents because of shelter-in-place, re-opening and other quarantine restrictions imposed by government regulations and guidelines.

In addition, prospective residents in our senior housing — RIDEA facilities may choose to delay moving into communities until the threat posed by the virus has declined.

Our facilities have adopted phased-in approaches to facility operations depending on the market in which they operate, which range from stringent restrictions of essential visitors and frequent testing of staff and residents to allowing screened visitors and limited activities.

At the same time that our senior housing — RIDEA facilities are facing a reduction in revenue associated with lower resident

occupancies, they are also experiencing up to a 30.0% increase in costs to care for residents, particularly increased labor costs to maintain staffing levels to care for the aged population during this crisis, costs of testing employees and residents for COVID-19 and costs to procure the volume of PPE and other supplies required.

Our leased, non-RIDEA senior housing and skilled nursing facilities are also experiencing and may continue to experience similar pressures related to occupancy declines and expense increases, which may impact their ability to pay rent and have an adverse effect on our operations.

Therefore, our immediate focus is on resident occupancy recovery and operating expense management.

The impacts of the COVID-19 pandemic have been significant, rapidly evolving and may continue into the future.

Managers of our RIDEA properties continue to evaluate their options for financial assistance such as utilizing programs within the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, passed by the federal government on March 27, 2020, as well as other state and local government relief programs.

The CARES Act includes multiple opportunities for immediate cash relief in the form of grants and tax benefits.

Some of our tenants within our non-RIDEA properties are also seeking financial assistance from the CARES Act through programs such as the Payroll Protection Program and deferral of payroll tax payments.

However, there is no assurance that our managers and tenants will receive approval under such financial assistance programs and the ultimate impact of such relief from the CARES Act and other enacted and future legislation and regulation is uncertain.

The COVID-19 pandemic has also negatively impacted the businesses of our medical office tenants, including physician practices and other medical service providers of non-essential and elective services, and their ability to pay rent on a timely basis.

However, the ultimate impact of such relief from the CARES Act and other enacted and future legislation and regulation, including the extent to which relief funds from such programs will provide meaningful support for lost revenue and increasing costs, is uncertain.

We are closely monitoring COVID-19 developments and continuously assessing the implications to our business, residents, tenants, operating partners, managers and our portfolio of investments.

While we have yet to experience a material impact to our operations as a result of the COVID-19 pandemic, we anticipate that this may change as the virus continues to spread.

The impact of the COVID-19 pandemic on our future results could be significant and will largely depend on future developments, including the duration of the crisis and the success of efforts to contain it, which are highly uncertain and cannot be predicted at this time.

While the impacts of COVID-19 have had an adverse effect on our business, financial condition and results of operations, we are unable to predict the full extent or nature of these impacts at this time.

See the “Liquidity and Capital Resources” section below and Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q for a further discussion.

We anticipate that the government-imposed or self-imposed lockdowns have created pent-up demand for doctors’ visits and move-ins into senior housing facilities.

While the impact of the COVID-19 pandemic has had an adverse effect on the operations of our business, we are unable to predict the full extent or nature of the future impact to our financial condition and results of operations at this time.

The lasting impact of the COVID-19 pandemic on our future results could be significant and will largely depend on future developments, including the duration of the crisis and the success of efforts to contain it, which are highly uncertain and cannot be predicted at this time.

See the “Results of Operations” and “Liquidity and Capital Resources” sections below, as well as Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q for a further discussion.

Scheduled Lease Expirations

Excluding our senior housing — RIDEA facilities, as of March 31, 2020 , our properties were 95.6% leased and during the remainder of 2020, 2.6% of the leased GLA is scheduled to expire.

Excluding our senior housing — RIDEA facilities, as of June 30, 2020 , our properties were 95.5% leased and during the remainder of 2020, 1.5% of the leased GLA is scheduled to expire.

Our leasing strategy focuses on negotiating renewals for leases scheduled to expire during the next 12 months.

In the future, if we are unable to negotiate renewals, we will try to identify new tenants or collaborate with existing tenants who are seeking additional space to occupy.

As of March 31, 2020 , our remaining weighted average lease term was 8.8 years, excluding our senior housing — RIDEA facilities.

For the three months ended March 31, 2020 , our senior housing — RIDEA facilities were 81.7% leased.

As of June 30, 2020 , our remaining weighted average lease term was 8.6 years, excluding our senior housing — RIDEA facilities.

For the three and six months ended June 30, 2020 , our senior housing — RIDEA facilities were 77.4% and 79.8% leased, respectively.

Substantially all of our leases with residents at such properties are for a term of one year or less.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

Comparison of the Three and Six Months Ended June 30, 2020 and 2019

Our operating results are primarily comprised of income derived from our portfolio of properties and expenses in connection with the acquisition and operation of such properties.

In general, we expect amounts related to our portfolio of operating properties to increase in the future based on a full year of operations of newly acquired properties.

In general, we expect amounts related to our portfolio of operating properties to increase in the future based on a full year of operations of recently acquired properties.

We segregate our operations into reporting segments in order to assess the performance of our business in the same way that management reviews our performance and makes operating decisions.

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and skilled nursing facility in March 2018, we added a new reporting segment at each such time.

As of March 31, 2020 , we operated through four reportable business segments, with activities related to investing in medical office buildings, senior housing, senior housing — RIDEA and skilled nursing facilities.

Changes in our consolidated operating results are primarily due to owning 94 buildings as of March 31, 2020 , as compared to owning 71 buildings as of March 31, 2019.

In addition, there are changes in our operating results by reporting segment due to transitioning the operations of two senior housing facilities within Lafayette Assisted Living Portfolio to a RIDEA structure in February 2019 and five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020.

As of March 31, 2020 and 2019, we owned the following types of properties:

As of June 30, 2020 , we operated through four reportable business segments, with activities related to investing in medical office buildings, senior housing, senior housing — RIDEA and skilled nursing facilities.

The COVID-19 pandemic has had a significant impact on the operations of our real estate portfolio.

Although we have experienced a delay in receiving rent payments from our tenants, as of June 30, 2020, we have collected 100% of contractual rent from our leased, non-RIDEA senior housing and skilled nursing facility tenants.

Most of our skilled nursing facilities provide behavioral health services with resident occupancies that are less impacted by either the COVID-19 pandemic or restrictions on elective surgeries than traditional skilled nursing facilities.

In addition, substantially all of the contractual rent through June 2020 from our medical office building tenants has been received.

However, given the significant uncertainty of the impact of COVID-19, we are unable to predict the impact it will have on such tenants’ continued ability to pay rent.

Therefore, information provided regarding rent collections through June 2020 should not serve as an indication of expected future rent collections.

We received lease concession requests from some of our medical office building tenants primarily

during the second quarter of 2020 that resulted in an insignificant number of concessions granted, such as in the form of rent abatements with a lease term extension for up to five years and rent payment deferrals requiring repayment within one year.

Such lease concessions granted do not have a material impact to our consolidated financial statements.

No contractual rent for our medical office building tenants was forgiven.

Changes in our consolidated operating results are primarily due to owning 94 buildings as of June 30, 2020 , as compared to owning 78 buildings as of June 30, 2019.

In addition, there are changes in our operating results by reporting segment due to transitioning the operations of the two senior housing facilities within Lafayette Assisted Living Portfolio to a RIDEA structure in February 2019 and the five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020.

As of June 30, 2020 and 2019, we owned the following types of properties:

Purchase Price

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1,089,071,000

For the three months ended March 31, 2020 and 2019, the leased percentage for the resident units of our senior housing — RIDEA facilities was 81.7% and 82.2%, respectively, based on daily average occupancy of licensed beds/units.

Includes a $1,483,000 earn-out paid in June 2020 in connection with our property acquisition of Overland Park MOB in August 2019.

See Note 3, Real Estate Investments, Net , to our accompanying condensed consolidated financial statements for a further discussion of such earn-out.

For the three months ended June 30, 2020 and 2019, the leased percentage for the resident units of our senior housing — RIDEA facilities was 77.4% and 82.0%, respectively, and for the six months ended June 30, 2020 and 2019, the leased percentage for the resident units of our senior housing — RIDEA facilities was 79.8% and 82.1%, respectively, based on daily average occupancy of licensed beds/units.

Leased percentage excludes our senior housing — RIDEA facilities.

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Revenue by reportable segment consisted of the following for the periods then ended:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Real Estate Revenue

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Total revenues

For the three months ended March 31, 2020 and 2019, real estate revenue primarily comprised of base rent of $15,860,000 and $12,428,000, respectively, and expense recoveries of $4,422,000 and $3,002,000, respectively.

For the three months ended March 31, 2020 and 2019, resident fees and services consisted of rental fees related to resident leases and extended health care fees.

The increase in resident fees and services for the three months ended March 31, 2020 , compared to the corresponding prior period, is primarily due to the acquisition of seven senior housing — RIDEA facilities subsequent to March 31, 2019 and the transition of five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020.

For the three months ended June 30, 2020 and 2019, real estate revenue was primarily comprised of base rent of $15,837,000 and $14,028,000, respectively, and expense recoveries of $4,700,000 and $3,669,000, respectively.

For the six months ended June 30, 2020 and 2019, real estate revenue was primarily comprised of base rent of $31,697,000 and $26,456,000, respectively, and expense recoveries of $9,122,000 and $6,671,000, respectively.

For the three and six months ended June 30, 2020 and 2019, resident fees and services consisted of rental fees related to resident leases and extended health care fees.

The increase in resident fees and services for the three and six months ended June 30, 2020 , compared to the corresponding prior period, is primarily due to the acquisition of seven senior housing — RIDEA facilities subsequent to June 30, 2019 and the transition of five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020.

Rental Expenses and Property Operating Expenses

Rental expenses and rental expenses as a percentage of real estate revenue, as well as property operating expenses and property operating expenses as a percentage of resident fees and services, by reportable segment consisted of the following for the periods then ended:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Rental Expenses

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Senior housing — RIDEA

Total property operating expenses

For the three months ended March 31, 2020 and 2019, property operating expenses primarily consisted of administration and benefits expense of $7,152,000 and $4,677,000, respectively.

Senior housing — RIDEA facilities typically have a higher percentage of direct operating expenses to revenue than medical office buildings, senior housing facilities and skilled nursing facilities due to the nature of RIDEA facilities where we conduct day-to-day operations.

Total property

operating expenses

For the three months ended June 30, 2020 and 2019, property operating expenses primarily consisted of administration and benefits expense of $7,897,000 and $5,277,000, respectively, and for the six months ended June 30, 2020 and 2019, property operating expenses primarily consisted of administration and benefits expense of $15,049,000 and $9,954,000, respectively.

Overall, property operating expenses have significantly increased due to labor costs, the single largest expense line item for skilled nursing and senior housing facilities, as well as the costs of COVID-19 testing of employees and residents and the costs of PPE and other supplies required as a result of the COVID-19 pandemic.

For the three and six months ended June 30, 2020 , we recognized approximately $639,000 of additional property operating expenses in response to the COVID-19 pandemic.

Senior housing — RIDEA facilities typically have a higher percentage of direct operating expenses to revenue than medical office buildings, senior housing and skilled nursing facilities due to the nature of RIDEA facilities where we conduct day-to-day operations.

General and Administrative

General and administrative expenses consisted of the following for the periods then ended:

Three Months Ended March 31,

Asset management fees — affiliates

Three Months Ended June 30,

Six Months Ended June 30,

Asset management and property management oversight fees — affiliates

Professional and legal fees

Transfer agent services

Franchise taxes

Board of directors fees

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Restricted stock compensation

Franchise taxes

Bad debt expense

The increase in general and administrative expenses for the three months ended March 31, 2020 , compared to the corresponding prior year period, is primarily due to the purchase of additional properties in 2019 and 2020 and thus, incurring higher asset management fees to our advisor or its affiliates and higher professional and legal fees.

The increase in general and administrative expenses for the three and six months ended June 30, 2020 , compared to the corresponding prior year period, is primarily due to the purchase of additional properties in 2019 and 2020 and thus, incurring higher asset management and property management oversight fees to our advisor or its affiliates, as well as additional expenses incurred in connection with transitioning the operations of two senior housing facilities within Lafayette Assisted Living Portfolio and Northern California Senior Housing Portfolio to a RIDEA structure.

Such increases in general and administrative expenses were partially offset by a decrease in bad debt expense for our accounts receivable as a result of a change in lease accounting guidance in 2019.

Depreciation and Amortization

For the three months ended March 31, 2020 and 2019, depreciation and amortization was $12,530,000 and $16,078,000, respectively, and consisted primarily of depreciation on our operating properties of $7,839,000 and $6,960,000, respectively, and amortization on our identified intangible assets of $4,646,000 and $9,095,000, respectively.

Included during the three months ended March 31, 2019 is $6,226,000 of amortization expense and $1,013,000 of depreciation expense related to the write-off of lease commissions and tenant improvements, respectively, in connection with the termination of a management services agreement with an operator in February 2019.

For the three months ended June 30, 2020 and 2019, depreciation and amortization was $12,720,000 and $9,931,000 , respectively, and consisted primarily of depreciation on our operating properties of $7,893,000 and $6,490,000, respectively, and amortization on our identified intangible assets of $4,767,000 and $3,412,000, respectively.

For the six months ended June 30, 2020 and 2019, depreciation and amortization was $25,250,000 and $26,009,000 , respectively, and consisted primarily of depreciation on our operating properties of $15,732,000 and $13,450,000, respectively, and amortization on our identified intangible assets of $9,413,000 and $12,507,000, respectively.

Included during the six months ended June 30, 2019 is $6,226,000 of amortization expense and $1,013,000 of depreciation expense related to the write-off of lease commissions and tenant improvements, respectively, in connection with the termination of a management services agreement with an operator in February 2019.

Interest Expense

Interest expense, including gain or loss in fair value of derivative financial instruments, consisted of the following for the periods then ended:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Interest expense:

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Mortgage loans payable

Loss in fair value of derivative financial instruments

(Gain) loss in fair value of derivative financial instruments

Amortization of debt discount/premium

The increase in interest expense in 2020 as compared to 2019 was primarily related to the increase in debt balances on our line of credit and term loans, as well as interest expense and loss in fair value recognized on our derivative financial instruments we entered into in February 2019.

The decrease in interest expense for the three months ended June 30, 2020, compared to the corresponding prior year period, is primarily related to the gain in fair value recognized on our derivative financial instruments that we entered into in February 2019, partially offset by an increase in debt balances on our line of credit and term loans.

The increase in interest expense for the six months ended June 30, 2020, compared to the corresponding prior year period, is primarily related to the increase in debt balances on our line of credit and term loans, partially offset by the decrease of the loss in fair value recognized on our derivative financial instruments that we entered into in February 2019.

See Note 6, Mortgage Loans Payable, Net , Note 7, Line of Credit and Term Loans and Note 8, Derivative Financial Instruments , to our accompanying condensed consolidated financial statements, for a further discussion.

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In the normal course of business, our principal demands for funds are for payment of operating expenses, capital improvement expenditures, interest on our indebtedness, distributions to our stockholders and repurchases of our common stock.

We estimate that we will require approximately $11,565,000 to pay interest on our outstanding indebtedness for the remainder of 2020, based on interest rates in effect as of March 31, 2020, and that we will require $448,000 to pay principal on our outstanding indebtedness for the remainder of 2020.

We estimate that we will require approximately $5,603,000 to pay interest on our outstanding indebtedness for the remainder of 2020, based on interest rates in effect as of June 30, 2020 , and that we will require $301,000 to pay principal on our outstanding indebtedness for the remainder of 2020.

We also require resources to make certain payments to our advisor and its affiliates.

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Our total capacity to pay operating expenses, capital improvement expenditures, interest, distributions and repurchases is a function of our current cash position, our borrowing capacity on our line of credit, as well as any future indebtedness that we may incur.

As of March 31, 2020 , our cash on hand was $20,516,000 and we had $56,900,000 available on our line of credit and term loans.

Due to the impact the COVID-19 pandemic has had on the United States and globally, and the uncertainty of the severity and duration of the COVID-19 pandemic and its effects, our board decided to take steps to protect our capital and maximize our liquidity in an effort to strengthen our long-term financial prospects by decreasing our distributions to stockholders and partially suspending our share repurchase plan.

Consequently, our board approved a daily distribution rate for April and May 2020 equal to $0.001095890 per share of our Class T and Class I common stock, which is equal to an annualized distribution rate of $0.40 per share, a decrease from the annualized rate of $0.60 per share previously paid by us.

Consequently, our board approved a daily distribution rate for April 2020 through August 2020 equal to $0.001095890 per share of our Class T and Class I common stock, which is equal to an annualized distribution rate of $0.40 per share, a decrease from the annualized rate of $0.60 per share previously paid by us.

See the “Distributions” section below for a further discussion.

In addition, effective with respect to share repurchase requests submitted for repurchase during the second quarter 2020, on March 31, 2020 our board suspended our share repurchase plan with respect to all repurchase requests other than repurchases resulting from the death or qualifying disability of stockholders.

In addition, on March 31, 2020, our board suspended our share repurchase plan with respect to all repurchase requests other than repurchases resulting from the death or qualifying disability of stockholders, beginning with share repurchase requests submitted for repurchase during the second quarter of 2020.

Our board shall determine if and when it is in the best interest of our company and stockholders to reinstate our share repurchase plan for additional stockholders.

Furthermore, subsequent to March 31, 2020, we borrowed all of the remaining availability on our line of credit as a precautionary measure to strengthen our liquidity and preserve financial flexibility.

We believe that such proceeds of cash from our line of credit will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other sources within the next 12 months.

As of June 30, 2020, our cash on hand was $20,585,000 and we had $50,500,000 available on our line of credit and term loans.

We believe that these resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other sources within the next 12 months.

A capital plan for each investment is established upon acquisition that contemplates the estimated capital needs of that investment, including costs of refurbishment, tenant improvements or other major capital expenditures.

The capital plan also sets forth the anticipated sources of the necessary capital, which may include operating cash generated by the investment, capital reserves, a line of credit or other loan established with respect to the investment, other borrowings or additional equity investments from us or joint venture partners.

As of March 31, 2020, we had $227,000 of restricted cash in loan impounds and reserve accounts to fund a portion of such capital expenditures.

As of June 30, 2020 , we had $373,000 of restricted cash in loan impounds and reserve accounts to fund a portion of such capital expenditures.

The capital plan for each investment is adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs.

Based on the budget for the properties we own as of March 31, 2020, we originally estimated that our discretionary expenditures for capital and tenant improvements could have required up to $10,946,000 for the remaining nine months of 2020.

However, in light of the COVID-19 pandemic and to further preserve cash, we suspended all non-essential, discretionary expenditures for capital improvements that were anticipated during 2020 throughout our portfolio.

Based on the budget for the properties we own as of June 30, 2020 , we originally estimated that our discretionary expenditures for capital and tenant improvements could have required up to $3,898,000 for the remaining six months of 2020.

However, in light of the COVID-19 pandemic and to further preserve cash, since March 2020, we suspended all non-essential, discretionary expenditures for capital improvements that were anticipated during 2020 throughout our portfolio.

In particular, we suspended capital expenditures that are not directly associated with the maintenance or expansion of tenant occupancy and the enhancement of net operating income.

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We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties.

In addition, we are continuously monitoring the impact the COVID-19 pandemic is having on our business, residents, tenants, operating partners and on the United States and global economies.

Due to the COVID-19 pandemic, there is risk and uncertainty in the financial and debt markets.

The impact of the COVID-19 pandemic on our portfolio of investments may be significant and its impact on our operations and liquidity will largely depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets.

and their ability to pay rent on a timely basis.

To the extent that our residents, tenants, operating partners and managers continue to be impacted by the COVID-19 pandemic, or by the risks disclosed in our SEC filings, this could materially disrupt our business operations.

The following table sets forth changes in cash flows:

Three Months Ended March 31,

Six Months Ended June 30,

Cash, cash equivalents and restricted cash — beginning of period

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Operating Activities

For the three months ended March 31, 2020 and 2019, cash flows provided by operating activities primarily related to the cash flows provided by our property operations, offset by payments of general and administrative expenses.

For the six months ended June 30, 2020 and 2019, cash flows provided by operating activities primarily related to the cash flows provided by our property operations, offset by payments of general and administrative expenses.

See the “Results of Operations” section above for a further discussion.

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Investing Activities

For the three months ended March 31, 2020 , cash flows used in investing activities related to our property acquisitions in the amount of $65,531,000 and the payment of $2,766,000 for capital expenditures.

For the three months ended March 31, 2019, cash flows used in investing activities related primarily to our property acquisitions in the amount of $18,653,000 and the payment of $1,615,000 for capital expenditures.

For the six months ended June 30, 2020 , cash flows used in investing activities related to our property acquisitions in the amount of $67,932,000 and the payment of $4,616,000 for capital expenditures.

For the six months ended June 30, 2019, cash flows used in investing activities related primarily to our property acquisitions in the amount of $66,749,000 and the payment of $2,216,000 for capital expenditures.

We anticipate that cash flows used in investing activities will primarily be affected by the timing of capital expenditures, and generally will decrease as compared to prior years as a result of the termination of our initial offering in February 2019.

Financing Activities

For the three months ended March 31, 2020 , cash flows provided by financing activities related primarily to net borrowings on our line of credit and term loans of $76,300,000 , partially offset by the January 2020 payoff of one mortgage loan payable with a principal balance of $7,738,000 and $5,561,000 in distributions to our common stockholders.

For the three months ended March 31, 2019, cash flows provided by financing activities related primarily to funds raised from investors in our initial offering in the amount of $90,477,000, partially offset by net payments on our line of credit and term loan of $25,000,000, the payment of offering costs of $14,038,000 in connection with our initial offering and 2019 DRIP offering and $4,706,000 in distributions to our common stockholders.

For the six months ended June 30, 2020 , cash flows provided by financing activities related primarily to net borrowings on our line of credit and term loans of $82,700,000 , partially offset by $10,042,000 in distributions to our common stockholders, the January 2020 payoff of one mortgage loan payable with a principal balance of $7,738,000 and share repurchases of $4,643,000 .

For the six months ended June 30, 2019, cash flows provided by financing activities related primarily to funds raised from investors in our initial offering in the amount of $90,477,000, partially offset by the payment of offering costs of $15,787,000 in connection with our initial offering and 2019 DRIP Offering, $10,039,000 in distributions to our common stockholders and net payments on our line of credit and term loans of $6,100,000.

Overall, we anticipate cash flows from financing activities to decrease in the future since we terminated our initial offering in February 2019.

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Our board authorized, on a quarterly basis, a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on May 1, 2016 and ending on March 31, 2020.

The daily distributions were calculated based on 365 days in the calendar year and are equal to $0.001643836 per share of our Class T and Class I common stock, which is equal to an annualized distribution of $0.60 per share.

The daily distributions were calculated based on 365 days in the calendar year and were equal to $0.001643836 per share of our Class T and Class I common stock, which was equal to an annualized distribution of $0.60 per share.

These distributions were aggregated and paid monthly in arrears in cash or shares of our common stock pursuant to our DRIP Offerings, only from legally available funds.

Consequently, our board authorized a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on April 1, 2020 and ending on May 31, 2020.

The daily distributions were or will be calculated based on 365 days in the calendar year and are equal to $0.001095890 per share of our Class T and Class I common stock, which is

equal to an annualized distribution rate of $0.40 per share.

Consequently, our board authorized a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on April 1, 2020 and ending on August 31, 2020, which was or will be calculated based on 365 days in the calendar year and is equal to $0.001095890 per share of our Class T and Class I common stock.

Such daily distribution is equal to an annualized distribution rate of $0.40 per share.

The distributions were or will be aggregated and paid in cash or shares of our common stock pursuant to the DRIP, on a monthly basis, in arrears, only from legally available funds.

The amount of distributions paid to our stockholders is determined by our board and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT under the Code.

distribution requirements needed to maintain our qualification as a REIT under the Code.

We have not established any limit on the amount of offering proceeds that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would:

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or (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences.

The distributions paid for the three months ended March 31, 2020 and 2019, along with the amount of distributions reinvested pursuant to our DRIP Offerings and the sources of distributions as compared to cash flows from operations were as follows:

Three Months Ended March 31,

The distributions paid for the six months ended June 30, 2020 and 2019, along with the amount of distributions reinvested pursuant to our DRIP Offerings and the sources of distributions as compared to cash flows from operations were as follows:

Six Months Ended June 30,

Distributions paid in cash

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Offering proceeds

As of March 31, 2020 , any distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and all or any portion of a distribution to our stockholders may have been paid from net offering proceeds and borrowings.

As of June 30, 2020 , any distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and all or any portion of a distribution to our stockholders may have been paid from net offering proceeds and borrowings.

The payment of distributions from our net offering proceeds and borrowings have reduced the amount of capital we ultimately invested in assets and negatively impacted the amount of income available for future distributions.

As of March 31, 2020 , we had an amount payable of $966,000 to our advisor or its affiliates primarily for asset management fees, which will be paid from cash flows from operations in the future as it becomes due and payable by us in the ordinary course of business consistent with our past practice.

As of June 30, 2020 , we had an amount payable of $1,015,000 to our advisor or its affiliates primarily for asset management fees, which will be paid from cash flows from operations in the future as it becomes due and payable by us in the ordinary course of business consistent with our past practice.

See Note 13, Related Party Transactions — Operational Stage, to our accompanying condensed consolidated financial statements, for a further discussion.

The distributions paid for the three months ended March 31, 2020 and 2019, along with the amount of distributions reinvested pursuant to our DRIP Offerings and the sources of our distributions as compared to funds from operations attributable to controlling interest, or FFO, were as follows:

Three Months Ended March 31,

The distributions paid for the six months ended June 30, 2020 and 2019, along with the amount of distributions reinvested pursuant to our DRIP Offerings and the sources of our distributions as compared to funds from operations attributable to controlling interest, or FFO, were as follows:

Six Months Ended June 30,

Distributions paid in cash

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We anticipate that our overall leverage will not exceed 50.0% of the combined market value of all of our properties and other real estate-related investments, as determined at the end of each calendar year.

For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal of the asset.

For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or, if the asset was appraised subsequent to the date of

purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal of the asset.

Our policies do not limit the amount we may borrow with respect to any individual investment.

As of March 31, 2020 , our aggregate borrowings were 40.0% of the combined market value of all of our real estate investments.

As of June 30, 2020 , our aggregate borrowings were 39.3% of the combined market value of all of our real estate investments.

Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300% of our net assets without the approval of a majority of our independent directors.

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In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real estate or for working capital.

We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual taxable income, excluding net capital gains, to our stockholders.

Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes.

As of May 14, 2020 and March 31, 2020 , our leverage did not exceed 300% of the value of our net assets.

As of August 13, 2020 and June 30, 2020 , our leverage did not exceed 300% of the value of our net assets.

Mortgage Loans Payable, Net

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REIT Requirements

In order to maintain our qualification as a REIT for federal income tax purposes, we are required to make distributions to our stockholders of at least 90.0% of our annual taxable income, excluding net capital gains.

In order to maintain our qualification as a REIT for federal income tax purposes, we are required to distribute to our stockholders a minimum percentage of our annual taxable income, excluding net capital gains.

Such distributions are required to be paid at least 20.0% in cash and 80.0% in stock.

In response to the COVID-19 pandemic, the Internal Revenue Service, or IRS, temporarily reduced the cash distribution requirement from a minimum of 90.0% of our taxable income to a minimum of 10.0%, which is applicable with respect to the aggregate distributions declared on or after April 1, 2020 until December 31, 2020.

In the event that there is a shortfall in net cash available due to factors including, without limitation, the timing of such distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured and unsecured debt financing through one or more unaffiliated third parties.

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A significant liquidity need is the payment of principal and interest on our outstanding indebtedness.

As of March 31, 2020 , we had $19,229,000 ( $18,233,000 , net of discount/premium and deferred financing costs) of fixed-rate mortgage loans payable outstanding secured by our properties.

As of March 31, 2020 , we had $473,100,000 outstanding, and $56,900,000 remained available under our line of credit and term loans.

As of June 30, 2020 , we had $19,082,000 ( $18,104,000 , net of discount/premium and deferred financing costs) of fixed-rate mortgage loans payable outstanding secured by our properties.

As of June 30, 2020 , we had $479,500,000 outstanding and $50,500,000 remained available under our line of credit and term loans.

See Note 6, Mortgage Loans Payable, Net , and Note 7, Line of Credit and Term Loans , to our accompanying condensed consolidated financial statements.

We are required by the terms of certain loan documents to meet certain reporting requirements and covenants, such as leverage ratios, net worth ratios, debt service coverage ratios and fixed charge coverage ratios.

As of March 31, 2020 , we were in compliance with all such covenants and requirements on our mortgage loans payable and our line of credit and term loans.

As of March 31, 2020 , the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 3.59% per annum.

As of June 30, 2020 , we were in compliance with all such covenants and requirements on our mortgage loans payable and our line of credit and term loans.

As of June 30, 2020 , the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 3.37% per annum.

Contractual Obligations

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(ii) interest payments on our mortgage loans payable and our line of credit and term loans;

and (iii) ground lease obligations as of March 31, 2020 :

and (iii) ground lease obligations as of June 30, 2020 :

Payments Due by Period

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Principal payments — variable-rate debt

Interest payments — variable-rate debt (based on rates in effect as of March 31, 2020)

Interest payments — variable-rate debt (based on rates in effect as of June 30, 2020)

Ground lease obligations

Off-Balance Sheet Arrangements

As of March 31, 2020 , we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

During the three months ended March 31, 2020 and 2019, inflation has not significantly affected our operations because of the moderate inflation rate;

As of June 30, 2020 , we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

During the six months ended June 30, 2020 and 2019, inflation has not significantly affected our operations because of the moderate inflation rate;

however, we expect to be exposed to inflation risk as income from future long-term leases will be the primary source of our cash flows from operations.

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Our MFFO calculation complies with the IPA’s Practice Guideline described above.

In calculating MFFO, we exclude acquisition related expenses, amortization of above- and below-market leases, change in deferred rent, fair value adjustments of derivative financial instruments and the adjustments of such items related to our investment in an unconsolidated entity and noncontrolling interests.

In calculating MFFO, we exclude acquisition related expenses, amortization of above- and below-market leases, change in deferred rent, fair value adjustments of derivative financial instruments and the adjustments of such items related to our joint venture investment in an unconsolidated entity and noncontrolling interests.

The other adjustments included in the IPA’s Practice Guideline are not applicable to us for the periods presented in the table below.

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The following is a reconciliation of net income or loss, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the periods presented below:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Depreciation and amortization related to real estate — consolidated properties

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Change in deferred rent(3)

Loss in fair value of derivative financial instruments(4)

(Gain) loss in fair value of derivative financial instruments(4)

Adjustments for unconsolidated entity(5)

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NOI is not equivalent to our net income (loss) as determined under GAAP and may not be a useful measure in measuring operational income or cash flows.

Furthermore, NOI is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders.

Furthermore, NOI should not be considered as an alternative to net income (loss) as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders.

NOI should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance.

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To facilitate understanding of this financial measure, the following is a reconciliation of net income or loss, which is the most directly comparable GAAP financial measure, to NOI for the periods presented below:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

General and administrative

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis