What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-13 compared with 2020-08-13 · 184 added, 126 removed, 330 unchanged (48% 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 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.

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

As of September 30, 2020, a total of $37,290,000 in distributions were reinvested that resulted in 3,903,895 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.

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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 remains uncertain.

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.

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 continuously 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.

Further, our senior housing facilities have also experienced dramatic increases and continue to experience 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 received and recognized in our accompanying condensed consolidated financial statements stimulus funds through economic relief programs of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as discussed at Note 2, Summary of Significant Accounting Policies — Government Grants, to our accompanying condensed consolidated financial statements.

We have also 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 believe that the long-term stability of our portfolio will return once the virus has been controlled.

In states where lockdown orders have been lifted, the downward trends in our portfolio appear to have somewhat moderated, but we have not yet witnessed a significant rebound.

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 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.

The prolonged duration and impact of the COVID-19 pandemic has materially disrupted, and may continue to materially disrupt, our business operations and impact 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.

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The valuation was calculated as of December 31, 2019, prior to the reported emergence of COVID-19 in the United States.

The impact of the COVID-19 pandemic on the value of our assets may be significant and 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.

Therefore, although we intend to publish an updated estimated per share NAV on at least an annual basis, we may be required to reevaluate the estimated per share NAV sooner if the COVID-19 pandemic has a material adverse impact on our residents, tenants, operating partners, managers or portfolio of investments or us.

The impact of the COVID-19 pandemic on the value of our assets may be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence 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.

The estimated per share NAV of our common stock of $9.54 is within the range of estimated values, but lower than the mid-point of $9.75 provided by the independent third party valuation firm that conducted a valuation analysis of our assets, and is the same estimated per share NAV previously determined by the board on April 4, 2019 and calculated as of December 31, 2018.

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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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We are not affiliated with Griffin Capital, Griffin Capital Securities, LLC, or our dealer manager, Colony Capital or Mr.

however, we are affiliated with Griffin-American Healthcare REIT IV Advisor, LLC, American Healthcare Investors and AHI Group Holdings.

however, we are affiliated with our advisor, American Healthcare Investors and AHI Group Holdings.

We currently operate through four reportable business segments:

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

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.

As of September 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 September 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

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Factors Which May Influence Results of Operations

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.

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

The situation continues to present a meaningful challenge for us as an owner and operator of healthcare facilities, as the impact of the virus continues to result 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 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.

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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.

Additionally, while restrictions have been at least partially lifted in many states, there remains a risk of reclosures in states where infection rates continue to 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 October 31, 2020, we have experienced an approximate 14.4% 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, we continue to experience challenges in attracting prospective residents to our senior housing — RIDEA facilities because they are choosing 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.

At the same time that our managed 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 to maintain health and safety measures and protocols.

Such costs have begun to moderate somewhat during the third quarter 2020.

Our leased, non-RIDEA senior housing and skilled nursing facility tenants have also experienced 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 continues to be 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.

Managers of our RIDEA properties continue to evaluate their options for financial assistance such as utilizing programs within 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, 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.

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.

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

However, these government assistance programs are not expected to fully offset the negative financial impact of the COVID-19 pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded.

Therefore, 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.

The information in this Quarterly Report on Form 10-Q is based on data currently available to us and will likely change as the COVID-19 pandemic progresses.

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

We anticipate that the government-imposed or self-imposed lockdowns and restrictions have created pent-up demand for doctors’ visits and move-ins into senior housing facilities, however, we cannot predict with reasonable certainty when such demand will return to pre-COVID-19 levels.

The COVID-19 pandemic has had, and may continue to have, an adverse effect on the operations of our business, and therefore, 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.

We expect the trends discussed above with respect to the impact of the COVID-19 pandemic to continue.

Thus, 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 with confidence 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 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.

Excluding our senior housing — RIDEA facilities, as of September 30, 2020, our properties were 95.4% leased and during the remainder of 2020, 0.7% 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 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.

As of September 30, 2020, our remaining weighted average lease term was 8.4 years, excluding our senior housing — RIDEA facilities.

For the three and nine months ended September 30, 2020, our senior housing — RIDEA facilities were 71.6% and 77.2% 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 and Six Months Ended June 30, 2020 and 2019

Comparison of the Three and Nine Months Ended September 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.

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

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.

As of September 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.

Although we have experienced a delay in receiving rent payments from our tenants, as of September 30, 2020, we have collec ted 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.

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

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

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, in conjunction with a lease term extension for up to five years, or 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.

Changes in our consolidated operating results are primarily due to owning 94 buildings as of September 30, 2020, as compared to owning 83 buildings as of September 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

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

September 30,

Buildings Aggregate

Purchase Price Leased % Number

Buildings Aggregate

Purchase Price Leased %

Medical office buildings

43 $ 605,122,000 (1) 93.0 % 39 $ 562,439,000 92.5 %

Senior housing — RIDEA 26 264,349,000 (2) 14 153,850,000 (2)

Senior housing

14 101,800,000 100 % 19 147,600,000 100 %

Skilled nursing facilities

11 117,800,000 100 % 11 117,800,000 100 %

Total/weighted average(3)

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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.

(2) For the three months ended September 30, 2020 and 2019, the leased percentage for the resident units of our senior housing — RIDEA facilities was 71.6% and 84.2%, respectively, and for the nine months ended September 30, 2020 and 2019, the leased percentage for the resident units of our senior housing — RIDEA facilities was 77.2% and 82.8%, respectively, based on daily average occupancy of licensed beds/units.

(3) Leased percentage excludes our senior housing — RIDEA facilities.

Revenues and Grant Income

Our primary sources of revenue include rent and resident fees and services from our properties.

The amount of revenue generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease available space at the then existing market rates.

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

Three Months Ended June 30,

Six Months Ended June 30,

Revenues and grant income by reportable segment consisted of the following for the periods then ended:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Real Estate Revenue

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Total resident fees and services 18,948,000 11,865,000 51,863,000 34,053,000

Total revenues

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.

Senior housing — RIDEA 864,000 — 864,000 —

Total grant income 864,000 — 864,000 —

Total revenues and grant income $ 41,331,000 $ 31,118,000 $ 117,551,000 $ 87,333,000

For the three months ended September 30, 2020 and 2019, real estate revenue was primarily comprised of base rent of $15,847,000 and $14,240,000, respectively, and expense recoveries of $4,575,000 and $3,701,000, respectively.

For the nine months ended September 30, 2020 and 2019, real estate revenue was primarily comprised of base rent of $47,544,000 and $40,696,000, respectively, and expense recoveries of $13,697,000 and $10,372,000, respectively.

For the three and nine months ended September 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 nine months ended September 30, 2020, compared to the corresponding prior period, is primarily due to the acquisition of seven senior housing — RIDEA facilities subsequent to September 30, 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 and nine months ended September 30, 2020, we recognized $864,000 of grant income at our senior housing — RIDEA facilities related to government grants through CARES Act economic stimulus programs.

See Note 2, Summary of Significant Accounting Policies — Government Grants, to our accompanying condensed consolidated financial statements for a further discussion.

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 June 30,

Six Months Ended June 30,

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 and grant income, by reportable segment consisted of the following for the periods then ended:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Rental Expenses

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Senior housing — RIDEA $ 17,397,000 87.8 % $ 9,884,000 83.3 % $ 44,856,000 85.1 % $ 28,194,000 82.8 %

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.

Total property operating expenses $ 17,397,000 87.8 % $ 9,884,000 83.3 % $ 44,856,000 85.1 % $ 28,194,000 82.8 %

For the three months ended September 30, 2020 and 2019, property operating expenses primarily consisted of administration and benefits expense of $8,634,000 and $5,359,000, respectively, and for the nine months ended September 30, 2020 and 2019, property operating expenses primarily consisted of administration and benefits expense of $23,683,000 and $15,313,000, respectively.

The increase in property operating expenses for the three and nine months ended September 30, 2020, compared to the corresponding prior year period, is primarily due to the acquisition of seven senior housing — RIDEA facilities subsequent to September 30, 2019 and the transition of five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020.

Overall, property operating expenses have also 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.

Senior housing — RIDEA facilities typically have a higher percentage of direct operating expenses to revenue than medical office buildings, skilled nursing facilities and leased, non-RIDEA senior housing 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Asset management and property management oversight fees — affiliates

$ 2,529,000 $ 2,120,000 $ 7,539,000 $ 6,012,000

Professional and legal fees 566,000 1,147,000 2,664,000 2,974,000

183,000 58,000 501,000 168,000

Transfer agent services

Franchise taxes

Board of directors fees

Directors’ and officers’ liability insurance

119,000 138,000 368,000 402,000

Restricted stock compensation

73,000 72,000 171,000 164,000

Directors’ and officers’ liability insurance

65,000 62,000 194,000 181,000

Board of directors fees 64,000 60,000 206,000 194,000

Franchise taxes

54,000 96,000 170,000 174,000

Bad debt expense

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.

— 201,000 — 982,000

19,000 28,000 147,000 162,000

$ 3,672,000 $ 3,982,000 $ 11,960,000 $ 11,413,000

The decrease in general and administrative expenses for the three months ended September 30, 2020, compared to the corresponding prior year period, is primarily due to the decrease in professional and legal fees and a decrease in bad debt expense for our accounts receivable as a result of a change in lease accounting guidance in 2019.

Such decreases in general and administrative expenses were partially offset by 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.

The increase in general and

administrative expenses for the nine months ended September 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.

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 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.

For the three months ended September 30, 2020 and 2019, depreciation and amortization was $12,669,000 and $9,552,000, respectively, and consisted primarily of depreciation on our operating properties of $7,966,000 and $6,806,000, respectively, and amortization on our identified intangible assets of $4,619,000 and $2,717,000, respectively.

For the nine months ended September 30, 2020 and 2019, depreciation and amortization was $37,919,000 and $35,561,000, respectively, and consisted primarily of depreciation on our operating properties of $23,698,000 and $20,256,000, respectively, and amortization on our identified intangible assets of $14,032,000 and $15,224,000, respectively.

Included during the nine months ended September 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Interest expense:

Line of credit and term loans and derivative financial instruments

$ 4,145,000 $ 3,334,000 $ 13,053,000 $ 9,097,000

Mortgage loans payable 204,000 291,000 590,000 742,000

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Amortization of debt discount/premium 12,000 12,000 37,000 29,000

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.

$ 3,389,000 $ 4,542,000 $ 17,425,000 $ 16,933,000

The decrease in interest expense for the three months ended September 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 and August 2020, compared to a loss in the prior year period, as well as a decline in interest rates on our line of credit and term loans, partially offset by an increase in debt balances on our line of credit and term loans.

The increase in interest expense for the nine months ended September 30, 2020, compared to the corresponding prior year period, is primarily related to an increase in debt balances on our line of credit and term loans, partially offset by the decrease in loss in fair value recognized on our derivative financial instruments that we entered into in February 2019 and August 2020, the January 2020 payoff of one mortgage loan payable with a principal balance of $7,738,000 and a decline in interest rates on our line of credit and term loans.

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.

Impairment of Real Estate Investments

For both the three and nine months ended September 30, 2020, we recognized an aggregate impairment charge of $3,064,000 on two senior housing facilities within Northern California Senior Housing Portfolio.

The remaining carrying values of such facilities were then reclassified to properties held for sale.

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

No impairment charges on real estate investments were recognized for both the three and nine months ended September 30, 2019.

Liquidity and Capital Resources

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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 $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 estimate that we will require approximately $2,760,000 to pay interest on our outstanding indebtedness for the remainder of 2020, based on interest rates in effect as of September 30, 2020, and that we will require $151,000 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.

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 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.

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, beginning in March 2020, 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 2020 through November 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 fur ther discussion.

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.

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.

As of September 30, 2020, our cash on hand was $22,690,000 and we had $50,500,000 available on our line of credit.

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.

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

As of September 30, 2020, we had $413,000 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 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.

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, or NOI.

The duration of our suspension of capital expenditures is uncertain and an update to the actual amounts forecasted to be expended for the remainder of the year cannot be estimated at this time.

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The following table sets forth changes in cash flows:

Six Months Ended June 30,

Nine Months Ended September 30,

Cash, cash equivalents and restricted cash — beginning of period $ 15,846,000 $ 14,590,000

Net cash provided by operating activities

29,943,000 30,432,000

Net cash used in investing activities

(74,761,000) (155,530,000)

Net cash provided by financing activities

52,368,000 133,376,000

Cash, cash equivalents and restricted cash — end of period $ 23,396,000 $ 22,868,000

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Operating Activities

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.

For the nine months ended September 30, 2020 and 2019, cash flows provided by operating activities primarily related to the cash flows provided by our property operations and $864,000 of grant income, 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 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.

For the nine months ended September 30, 2020, cash flows used in investing activities related to our property acquisitions in the amount of $68,032,000 and the payment of $6,729,000 for capital expenditures.

For the nine months ended September 30, 2019, cash flows used in investing activities related primarily to our property acquisitions in the amount of $153,923,000 and the payment of $4,388,000 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 we have completed the acquisition phase of our real estate investment strategy.

Financing Activities

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.

For the nine months ended September 30, 2020, cash flows provided by financing activities related primarily to net borrowings on our line of credit of $82,700,000, partially offset by $13,932,000 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 $5,349,000.

For the nine months ended September 30, 2019, cash flows provided by financing activities related primarily to funds raised from investors in our initial offering in the amount of $90,438,000 as well as net borrowings on our line of credit of $82,500,000, partially offset by the payment of offering costs of $17,457,000 in connection with our initial offering and 2019 DRIP Offering, $15,446,000 in distributions to our common stockholders and $6,192,000 in share repurchases.

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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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.

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 November 30, 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.

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 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,

The distributions paid for the nine months ended September 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:

Nine Months Ended September 30,

Distributions paid in cash $ 13,932,000 $ 15,446,000

Distributions reinvested 15,681,000 19,056,000

$ 29,613,000 $ 34,502,000

Sources of distributions:

Cash flows from operations $ 29,613,000 100 % $ 29,106,000 84.4 %

Proceeds from borrowings

Offering proceeds — — 5,396,000 15.6

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.

$ 29,613,000 100 % $ 34,502,000 100 %

As of September 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 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.

As of September 30, 2020, we had an amount payable of $956,000 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 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,

The distributions paid for the nine months ended September 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:

Nine Months Ended September 30,

Distributions paid in cash $ 13,932,000 $ 15,446,000

Distributions reinvested 15,681,000 19,056,000

$ 29,613,000 $ 34,502,000

Sources of distributions:

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Offering proceeds — — 13,053,000 37.8

$ 29,613,000 100 % $ 34,502,000 100 %

The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

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

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

As of November 13, 2020 and September 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 distribute to our stockholders a minimum percentage 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 of 90.0% 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 response to the COVID-19 pandemic, the Internal Revenue Service, or IRS, temporarily reduced the cash distribution requirement 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 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.

As of September 30, 2020, we had $18,933,000 ($17,974,000, net of discount/premium and deferred financing costs) of fixed-rate mortgage loans payable outstanding secured by our properties.

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

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 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.

As of September 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 September 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 June 30, 2020 :

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

Payments Due by Period

2020 2021-2022 2023-2024 Thereafter Total

Principal payments — fixed-rate debt

$ 151,000 $ 1,273,000 $ 1,391,000 $ 16,118,000 $ 18,933,000

Interest payments — fixed-rate debt 186,000 1,429,000 1,309,000 5,443,000 8,367,000

Principal payments — variable-rate debt

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

— 479,500,000 — — 479,500,000

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

2,574,000 9,474,000 — — 12,048,000

Ground lease obligations 212,000 1,049,000 1,064,000 47,103,000 49,428,000

Total $ 3,123,000 $ 492,725,000 $ 3,764,000 $ 68,664,000 $ 568,276,000

Off-Balance Sheet Arrangements

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;

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

During the nine months ended September 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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In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

For both the three and nine months ended September 30, 2020, we recognized government grants through economic stimulus programs of the CARES Act as grant income and within income or loss from an unconsolidated entity.

Such amounts were established for eligible healthcare providers to preserve liquidity in response to the COVID-19 pandemic.

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

The government grants helped mitigate some of the negative impact that the COVID-19 pandemic had on our financial condition and results of operations.

Without such relief proceeds, the COVID-19 pandemic impact would have had a material adverse impact to our FFO and MFFO.

For the three and nine months ended September 30, 2020, FFO would have been approximatel y $10,662,000 and $26,563,000, respectively, excluding government grants recognized.

For the three and nine months ended September 30, 2020, MFFO would have been approximately $8,200,000 and $26,028,000, respectively, excluding government grants recognized.

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net loss $ (5,152,000) $ (1,918,000) $ (14,240,000) $ (20,168,000)

Depreciation and amortization related to real estate — consolidated properties 12,669,000 9,552,000 37,919,000 35,561,000

Depreciation and amortization related to real estate — unconsolidated entity 880,000 846,000 2,640,000 2,539,000

Impairment of real estate investments — consolidated properties 3,064,000 — 3,064,000 —

Impairments and gain on disposition of real estate investments, net — unconsolidated entity 99,000 — 99,000 —

Net loss attributable to noncontrolling interests 232,000 19,000 608,000 76,000

Depreciation and amortization related to noncontrolling interests

Depreciation, amortization and impairments —noncontrolling interests (250,000) (23,000) (729,000) (89,000)

FFO attributable to controlling interest $ 11,542,000 $ 8,476,000 $ 29,361,000 $ 17,919,000

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As a lessee, we record amortization of right-of-use assets and accretion of lease liabilities for our operating leases.

This may result in income or expense recognition that is significantly different than the underlying contract terms.

This may result in income or expense recognition that is significantly different than the underlying

contract terms.

By adjusting for such amounts, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns results with management’s analysis of operating performance.

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Net Operating Income

Net operating income, or NOI, is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense, income or loss from unconsolidated entity, other income and income tax benefit or expense.

NOI is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense, impairment of real estate investments, income or loss from unconsolidated entity, other income and income tax benefit or expense.

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.

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However, our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

For both the three and nine months ended September 30, 2020, we recognized government grants through economic stimulus programs of the CARES Act as grant income.

The government grants helped mitigate some of the negative impact that the COVID-19 pandemic had on our financial condition.

Without such relief proceeds, the negative impact of the COVID-19 pandemic would have had a material adverse impact to our NOI.

For the three and nine months ended September 30, 2020, NOI would have been approximately $17,165,000 and $54,108,000, respectively, excluding government grants recognized.

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net loss $ (5,152,000) $ (1,918,000) $ (14,240,000) $ (20,168,000)

General and administrative

3,672,000 3,982,000 11,960,000 11,413,000

Acquisition related expenses 57,000 74,000 74,000 1,492,000

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Interest expense 3,389,000 4,542,000 17,425,000 16,933,000

Income from unconsolidated entity

Income tax expense

Impairment of real estate investments 3,064,000 — 3,064,000 —

Loss (income) from unconsolidated entity 377,000 79,000 (952,000) (185,000)

Other income (8,000) (13,000) (278,000) (162,000)

Income tax (benefit) expense (39,000) 7,000 — 17,000

Net operating income $ 18,029,000 $ 16,305,000 $ 54,972,000 $ 44,901,000

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