American Healthcare REIT, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The use of the words “we,” “us” or “our” refers to American Healthcare REIT, Inc. (formerly known as Griffin-American Healthcare REIT IV, Inc. ) and its subsidiaries, including Griffin-American Healthcare REIT IV Holdings, LP, except where otherwise noted. Capitalized terms related to the merger with Griffin-American Healthcare REIT III, Inc., or GAHR III, are defined and further discussed below in the “Overview and Background” section. 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 2020 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 26, 2021. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of September 30, 2021 and December 31, 2020, together with our results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. Forward-Looking Statements Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “expect,” “project,” “may,” “will,” “should,” “could,” “would,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “opinion,” “predict,” “potential,” “seek” and any other comparable and derivative terms or the negatives thereof. Our ability to predict results or the actual effect of future plans and strategies is inherently uncertain. Factors which could have a material adverse effect on our operations on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; the effects of the coronavirus, or COVID-19, pandemic, including its effects on the healthcare industry, senior housing and skilled nursing facilities and the economy in general; legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs; the availability of capital; changes in interest rates; risks related to disruption of management’s attention from the ongoing business operations due to the Merger; uncertainty from the expected discontinuance of the London Inter-bank Offered Rate, or LIBOR, and the transition to any other interest rate benchmark; competition in the real estate industry; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to REITs; the success of our investment strategy; and the availability of financing. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and undue reliance should not be placed on such statements. We undertake no obligation to update any such statements that may become untrue because of subsequent events. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Overview and Background American Healthcare REIT, Inc. (formerly known as Griffin-American Healthcare REIT IV, Inc.), a Maryland corporation, invests in a diversified portfolio of healthcare real estate properties, focusing primarily on medical office buildings, skilled nursing facilities and senior housing facilities that produce current income. We also operate healthcare-related facilities utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a “RIDEA” structure (the provisions of the Internal Revenue Code of 1986, as amended, or the Code, authorizing the RIDEA structure were enacted as part of the Housing and Economic Recovery Act of 2008). We qualified to be taxed as a real estate investment trust, or REIT, under the Code for federal income tax purposes beginning with our taxable year ended December 31, 2016, and we intend to continue to qualify to be taxed as a REIT. We raised $754,118,000 through a best efforts initial public offering, or our initial offering, that commenced on February 16, 2016, and issued 75,639,681 aggregate shares of our Class T and Class I common stock. In addition, during our initial offering, we issued 3,253,535 aggregate shares of our Class T and Class I common stock pursuant to our distribution reinvestment plan, as amended, or the DRIP, for a total of $31,021,000 in distributions reinvested. Following the termination of our initial offering on February 15, 2019, we continued issuing shares of our common stock pursuant to the DRIP through a subsequent offering, or the 2019 DRIP Offering, which commenced on March 1, 2019. On March 18, 2021, our board of directors, or our board, authorized the suspension of the DRIP, effective as of April 1, 2021. As of September 30, 2021, a total of $46,970,000 in distributions were reinvested that resulted in 4,923,550 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. See Note 20, Subsequent Events — Reinstatement of the DRIP, to our accompanying condensed consolidated financial statements. 36 Table of Contents Until October 2021, we conducted substantially all of our operations through Griffin-American Healthcare REIT IV Holdings, LP, or our operating partnership. Through September 30, 2021, we were externally advised by Griffin-American Healthcare REIT IV Advisor, LLC, or our advisor, pursuant to an advisory agreement, as amended, or the Advisory Agreement, between us, our operating partnership and our advisor. The Advisory Agreement was effective as of February 16, 2016 and had a one-year initial term, subject to successive one-year renewals upon the mutual consent of the parties. The Advisory Agreement was last renewed pursuant to the mutual consent of the parties on February 11, 2021. On June 23, 2021, in anticipation of the Merger, as defined and discussed below, we entered into an amendment to the Advisory Agreement, whereby it was agreed that any acquisition fee due to our advisor is to be waived in connection with the REIT Merger, as defined and discussed below. Except as set forth in such amendment to the Advisory Agreement, the terms of the Advisory Agreement continued in full force and effect. Our advisor used its best efforts, subject to the oversight and review of our board, to, among other things, provide asset management, property management, acquisition, disposition and other advisory services on our behalf consistent with our investment policies and objectives. Our advisor performed its duties and responsibilities under the Advisory Agreement as our fiduciary. Prior to the Merger, our advisor was 75.0% owned and managed by wholly owned subsidiaries of American Healthcare Investors, LLC, or American Healthcare Investors, and 25.0% owned by a wholly owned subsidiary of Griffin Capital Company, LLC, or Griffin Capital, or collectively, our co-sponsors. American Healthcare Investors was 47.1% owned by AHI Group Holdings, LLC, or AHI Group Holdings, 45.1% indirectly owned by Digital Bridge Group, Inc. (NYSE: DBRG) (formerly known as Colony Capital, Inc.), or Digital Bridge, and 7.8% owned by James F. Flaherty III, a former partner of Colony Capital, Inc. We were not affiliated with Griffin Capital, Griffin Capital Securities, LLC, or our dealer manager, Digital Bridge or Mr. Flaherty; however, we were affiliated with our advisor, American Healthcare Investors and AHI Group Holdings. Please see the “Merger with Griffin-American Healthcare REIT III, Inc.” and “AHI Acquisition” sections below for a further discussion of our operations effective October 1, 2021. We operate through four reportable business segments: medical office buildings, senior housing, senior housing — RIDEA and skilled nursing facilities. As of September 30, 2021, we owned 87 properties, comprising 92 buildings, or approximately 4,799,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $1,080,381,000. As of September 30, 2021, we also owned a 6.0% interest in a joint venture which owned a portfolio of integrated senior health campuses and ancillary businesses. On March 18, 2021, our board, at the recommendation of the audit committee of our board, comprised solely of independent directors, unanimously approved and established an updated estimated per share net asset value, or NAV, of our common stock of $9.22 calculated as of September 30, 2020. We provide this updated estimated per share NAV to assist broker-dealers in connection with their obligations under Financial Industry Regulatory Authority, or FINRA, Rule 2231 with respect to customer account statements. The updated estimated per share NAV is based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares of Class T and Class I common stock outstanding on a fully diluted basis. The valuation was performed in accordance with the methodology provided in Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs , or the Practice Guideline, issued by the Institute for Portfolio Alternatives, or the IPA, in April 2013, in addition to guidance from the SEC. On April 2, 2020, the board previously determined an estimated per share NAV of our common stock of $9.54 calculated as of December 31, 2019. See our Current Report on Form 8-K filed with the SEC on March 19, 2021 for more information on the methodologies and assumptions used to determine, and the limitations and risks of, our updated estimated per share NAV. Merger with Griffin-American Healthcare REIT III, Inc. On June 23, 2021, we, our operating partnership, our wholly owned subsidiary, Continental Merger Sub, LLC, or merger sub, Griffin-American Healthcare REIT III, Inc., or GAHR III, and American Healthcare REIT Holdings, LP (formerly known as Griffin-American Healthcare REIT III Holdings, LP), or the surviving partnership, entered into an Agreement and Plan of Merger, or the Merger Agreement. On October 1, 2021, pursuant to the Merger Agreement, (i) GAHR III merged with and into merger sub, with merger sub being the surviving company, or the REIT Merger, and (ii) our operating partnership merged with and into the surviving partnership, with the surviving partnership being the surviving entity and being renamed American Healthcare REIT Holdings, LP, or the Partnership Merger, and, together with the REIT Merger, the Merger. As a result of and at the effective time of the Merger, the separate corporate existence of GAHR III and our operating partnership ceased. At the effective time of the REIT Merger, each issued and outstanding share of GAHR III’s common stock, $0.01 par value per share, converted into the right to receive 0.9266 shares of our Class I common stock, $0.01 par value per share. Further, at the effective time of the Partnership Merger, (i) each unit of limited partnership interest in the surviving partnership outstanding as of immediately prior to the effective time of the Partnership Merger was converted automatically into the right to receive 0.9266 of a Partnership Class I Unit, as defined in the agreement of limited partnership, as amended, of the surviving partnership and (ii) each unit of limited partnership interest in our operating partnership outstanding as of immediately prior to the effective time of the Partnership Merger was converted automatically into the right to receive one unit of limited partnership interest of the surviving partnership of like class. 37 Table of Contents Following the Merger, our company, combined with GAHR III, or the Combined Company, was renamed “American Healthcare REIT, Inc.” The REIT Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Code. Based on data as of September 30, 2021, the Combined Company has a healthcare real estate portfolio consisting of 311 buildings and campuses in 36 states (as well as the United Kingdom & Isle of Man). On a pro forma basis, the Combined Company portfolio would have a leased percentage rate as of September 30, 2021 of approximately 94.1% for its leased, non-RIDEA assets, 78.1% for its senior housing-RIDEA assets and 77.8% for its integrated senior health campuses. AHI Acquisition Also on June 23, 2021, the surviving partnership, our co-sponsors, Platform Healthcare Investor T-II, LLC, Flaherty Trust, Jeffrey T. Hanson, our former Chief Executive Officer and Chairman of the Board of Directors, Danny Prosky, our President and former Chief Operating Officer, and Mathieu B. Streiff, our former Executive Vice President, General Counsel, entered into a contribution and exchange agreement, or the Contribution Agreement, pursuant to which, among other things, the surviving partnership agreed to acquire a newly formed entity, or NewCo, which we refer to as the AHI Acquisition, that owned substantially all of the business and operations of one of our co-sponsors, American Healthcare Investors, as well as all of the equity interests in (i) Griffin-American Healthcare REIT III Advisor, LLC, or GAHR III Advisor, a subsidiary of American Healthcare Investors that served as the external advisor of GAHR III, and (ii) our advisor. On October 1, 2021, the AHI Acquisition closed immediately prior to the consummation of the Merger. Following the consummation of the Merger, the Combined Company has become a self-managed company. The AHI Acquisition will be treated as a business combination for accounting purposes, with GAHR III as both the legal and accounting acquiror of NewCo. While we are the legal acquiror of GAHR III in the REIT Merger, GAHR III was determined to be the accounting acquiror in the REIT Merger transaction in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations , after considering the relative share ownership and the composition of the governing body of the Combined Company. As a result of the completion of the Merger and the AHI Acquisition, the historical information regarding our company’s structure, agreements and financial information presented within this Item 2 has materially changed; however, such information did apply to us as of September 30, 2021. See Note 20, Subsequent Events — Merger with Griffin-American Healthcare REIT III, Inc. and AHI Acquisition, to our accompanying condensed consolidated financial statements and our Current Report on Form 8-K filed with the SEC on October 1, 2021, for additional information regarding the Merger and the AHI Acquisition. Critical Accounting Policies The complete listing of our Critical Accounting Policies was previously disclosed in our 2020 Annual Report on Form 10-K, as filed with the SEC on March 26, 2021, 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. Interim Unaudited Financial Data For a discussion of interim unaudited financial data, see Note 2, Summary of Significant Accounting Policies — Interim Unaudited Financial Data, to our accompanying condensed consolidated financial statements. Our accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K, as filed with the SEC on March 26, 2021. Acquisition and Disposition in 2021 For a discussion of our acquisition and disposition in 2021, See Note 3, Real Estate Investments, Net, to our accompanying condensed consolidated financial statements. Factors Which May Influence Results of Operations Other than the effects of the COVID-19 pandemic discussed below, as well as other national economic conditions affecting real estate generally, we are not aware of any material trends or uncertainties that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, disposition, management and operation of our properties. In addition, see Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2020 Annual Report on Form 10-K, as filed with the SEC on March 26, 2021. Ongoing Impact of the COVID-19 Pandemic Due to the ongoing COVID-19 pandemic in the United States and globally, since March 2020, our residents, tenants, operating partners and managers have been materially impacted, and the prolonged economic impact remains uncertain. As the COVID-19 pandemic is still impacting the healthcare system to a degree, it continues to present challenges for us as an owner and operator of healthcare facilities. Since its outset, the impacts of the COVID-19 pandemic have been significant, rapidly and continuously evolving and may continue into the future, especially due to the emergence of the Delta variant which has caused 38 Table of Contents COVID-19 cases and deaths to increase significantly in the third quarter of 2021, making it difficult to ascertain the long-term impact the COVID-19 pandemic will have on real estate markets in which we own and/or operate properties and our portfolio of investments. 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 and maintain aggressive protocols at such facilities as well as actively collaborate with our tenants, operating partners and managers to respond and take action to mitigate the impact of the COVID-19 pandemic. We have evaluated the impacts of the COVID-19 pandemic on our business thus far and incorporated information concerning the impact of COVID-19 into our assessments of liquidity, impairment and collectability from tenants and residents as of September 30, 2021. We will continue to monitor such impacts and will adjust our estimates and assumptions based on the best available information. Since March 2020, we have taken actions to strengthen our balance sheet and preserve liquidity in response to the COVID-19 pandemic, including reducing the stockholder distribution rate and temporarily suspending our share repurchase plan. We believe that the long-term stability of our portfolio of investments will return once the virus has been controlled. Each type of real estate asset we own has been impacted by the COVID-19 pandemic to varying degrees. In the early months of the pandemic, the businesses of our medical office tenants were negatively impacted when many of the states had implemented “stay at home” orders, thereby creating unprecedented revenue pressure on such tenants and their ability to pay rent on a timely basis. 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 and as a result, our medical office building segment rebounded quickly from the initial shock of the pandemic and has demonstrated remarkable resilience. This trend has continued despite the emergence of the Delta variant. The COVID-19 pandemic has resulted in a significant decline in the resident occupancies of our senior housing and skilled nursing facilities and an increase in COVID-19 related operating expenses, especially in our skilled nursing segment where personal protective equipment, or PPE, costs and the shortage of healthcare personnel resulting in more costly short-term hires, present ongoing challenges. Therefore, our immediate focus at such properties continues to be on resident occupancy recovery and operating expense management. While we experienced steady recovery in early 2021, the emergence of the Delta variant has slowed the recovery in our senior housing and skilled nursing segments as we are seeing case counts reach levels not seen since January 2021. In addition, since the fourth quarter of 2020, COVID-19 vaccines have become available to certain parts of the population, which we believe will be important to a rebound in our resident occupancy levels over time. As of November 1, 2021, based on information provided by our operators, the majority of our residents have been fully vaccinated. 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. Despite improving macroeconomic conditions and the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, such as those experienced in Europe and the U.S., could slow down the recovery of the U.S. and the global economy. 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 believe 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 pandemic levels. The medical community understands COVID-19 far better today than it did at the onset of the pandemic, and we are now equipped with greater therapeutics and other treatments to mitigate its impact. Likewise, we are optimistic about the favorable reports regarding the efficacy of vaccines. 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 over the next 12 months could be significant and will largely depend on future developments, including the duration of the crisis and the success of efforts to contain or treat COVID-19 and its variants, such as the use of effective vaccines and availability of vaccine boosters, which cannot be predicted with confidence at this time. See the “Results of Operations” and “Liquidity and Capital Resources” sections below for a further discussion. Scheduled Lease Expirations Excluding our senior housing — RIDEA facilities, as of September 30, 2021, our properties were 95.7% leased and during the remainder of 2021, 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 September 30, 2021, our remaining weighted average lease term was 7.8 years, excluding our senior housing — RIDEA facilities. For the three and nine months ended September 30, 2021, our senior housing — RIDEA facilities were 71.1% and 69.7% leased, respectively. Substantially all of our leases with residents at such properties are for a term of one year or less. 39 Table of Contents Results of Operations Comparison of the Three and Nine Months Ended September 30, 2021 and 2020 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, and under a normal operating environment without the disruption of the COVID-19 pandemic, we expect amounts related to our portfolio of operating properties to increase in the future due to fixed annual rent escalations on our portfolio of 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. As of September 30, 2021, 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 adverse impact on the operations of our real estate portfolio. Although we have experienced some delays in receiving rent payments from our tenants, as of September 30, 2021, 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 September 2021 from our medical office building tenants has been received. However, given the significant ongoing uncertainty of the impact of the COVID-19 pandemic over the next 12 months, we are unable to predict the impact it will have on such tenants’ continued ability to pay rent. Except where otherwise noted, the changes in our condensed consolidated results of operations for 2021 as compared to 2020 are primarily due to the disruption to our normal operations as a result of the COVID-19 pandemic, grant income received and costs incurred related to the Merger. As of September 30, 2021 and 2020, we owned the following types of properties: September 30, 2021 2020 Number of Buildings Aggregate Contract Purchase Price Leased % Number of Buildings Aggregate Contract Purchase Price Leased % Medical office buildings 43 $ 608,072,000 93.2 % 43 $ 605,122,000 93.0 % Senior housing — RIDEA 24 252,709,000 (1) 26 264,349,000 (1) Senior housing 14 101,800,000 100 % 14 101,800,000 100 % Skilled nursing facilities 11 117,800,000 100 % 11 117,800,000 100 % Total/weighted average(2) 92 $ 1,080,381,000 95.7 % 94 $ 1,089,071,000 95.4 % ___________ (1) For the three months ended September 30, 2021 and 2020, the leased percentage for the resident units of our senior housing — RIDEA facilities was 71.1% and 71.6%, respectively, and for the nine months ended September 30, 2021 and 2020, the leased percentage for the resident units of our senior housing — RIDEA facilities was 69.7% and 77.2%, respectively, based on daily average occupancy of licensed beds or units. (2) Leased percentage excludes our senior housing — RIDEA facilities. 40 Table of Contents Revenues and Grant Income Our primary sources of revenue include rent generated by our leased, non – RIDEA properties, and resident fees and services revenue from our RIDEA 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 market rates. Revenues and grant income by reportable segment consisted of the following for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Real Estate Revenue Medical office buildings $ 16,921,000 $ 16,338,000 $ 50,478,000 $ 49,184,000 Skilled nursing facilities 2,996,000 2,979,000 8,987,000 8,984,000 Senior housing 2,203,000 2,202,000 6,589,000 6,656,000 Total real estate revenue 22,120,000 21,519,000 66,054,000 64,824,000 Resident Fees and Services Revenue Senior housing — RIDEA 15,090,000 18,948,000 46,179,000 51,863,000 Total resident fees and services 15,090,000 18,948,000 46,179,000 51,863,000 Grant Income Senior housing — RIDEA — 864,000 — 864,000 Total grant income — 864,000 — 864,000 Total revenues and grant income $ 37,210,000 $ 41,331,000 $ 112,233,000 $ 117,551,000 For the three months ended September 30, 2021 and 2020, real estate revenue was primarily comprised of base rent of $16,520,000 and $15,847,000, respectively, and expense recoveries of $4,963,000 and $4,575,000, respectively. For the nine months ended September 30, 2021 and 2020, real estate revenue was primarily comprised of base rent of $48,581,000 and $47,544,000, respectively, and expense recoveries of $14,566,000 and $13,697,000, respectively. For the three and nine months ended September 30, 2021 and 2020, resident fees and services revenue consisted of rental fees related to resident leases and extended health care fees. The decrease in resident fees and services for both the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, is primarily related to lower occupancy rates in our facilities due to the prolonged operational disruption as a result of the COVID-19 pandemic. The decrease in resident fees and services for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 was partially offset by the impact of the transition of five senior housing facilities within Northern California Senior Housing Portfolio to a RIDEA structure in March 2020 resulting in higher resident fees and services in the comparable period. For both the three and nine months ended September 30, 2021, we did not recognize any government grants. For both 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 the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, economic stimulus programs. 41 Table of Contents 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 revenue and grant income, by reportable segment consisted of the following for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Rental Expenses Medical office buildings $ 6,072,000 35.9 % $ 5,607,000 34.3 % $ 17,503,000 34.7 % $ 16,616,000 33.8 % Senior housing 172,000 7.8 % 173,000 7.9 % 569,000 8.6 % 648,000 9.7 % Skilled nursing facilities 145,000 4.8 % 125,000 4.2 % 470,000 5.2 % 459,000 5.1 % Total rental expenses $ 6,389,000 28.9 % $ 5,905,000 27.4 % $ 18,542,000 28.1 % $ 17,723,000 27.3 % Property Operating Expenses Senior housing — RIDEA $ 14,540,000 96.4 % $ 17,397,000 87.8 % $ 44,179,000 95.7 % $ 44,856,000 85.1 % Total property operating expenses $ 14,540,000 96.4 % $ 17,397,000 87.8 % $ 44,179,000 95.7 % $ 44,856,000 85.1 % For the three months ended September 30, 2021 and 2020, property operating expenses primarily consisted of administration and benefits expense of $10,921,000 and $8,634,000, respectively, and for the nine months ended September 30, 2021 and 2020, property operating expenses primarily consisted of administration and benefits expense of $33,320,000 and $23,683,000, respectively. The decrease in property operating expenses for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, is primarily because we experienced a significant increase in labor costs, as well as the costs of COVID-19 testing of employees and residents in our facilities and the costs of PPE and other supplies required as a result of the COVID-19 pandemic in the prior year, which decreased in the current year in line with the normalization of such costs and with the decline in COVID-19 case counts and increase in vaccination rates. 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 presented: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Asset management and property management oversight fees — affiliates $ 2,540,000 $ 2,529,000 $ 7,616,000 $ 7,539,000 Professional and legal fees 1,278,000 566,000 2,433,000 2,664,000 Bank charges 175,000 183,000 534,000 501,000 Transfer agent services 118,000 119,000 362,000 368,000 Directors’ and officers’ liability insurance 89,000 65,000 254,000 194,000 Board of directors fees 64,000 64,000 194,000 206,000 Restricted stock compensation 21,000 73,000 105,000 171,000 Franchise taxes 15,000 54,000 125,000 170,000 Other 4,000 19,000 87,000 147,000 Total $ 4,304,000 $ 3,672,000 $ 11,710,000 $ 11,960,000 The increase in general and administrative expenses for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, is primarily due to an increase in professional and legal fees from transitioning the operator at Central Florida Senior Housing Portfolio in September 2021. Business Acquisition Expenses For the three months ended September 30, 2021 and 2020, business acquisition expenses were $3,800,000 and $57,000, respectively, and for the nine months ended September 30, 2021 and 2020, business acquisition expenses were $6,552,000 and $74,000, respectively. The increase in such expenses for the nine months ended September 30, 2021, compared to the nine 42 Table of Contents months ended September 30, 2020, was primarily due to $6,753,000 in third-party legal costs and professional services fees incurred related to the Merger. Such increase was partially offset by the recovery of costs of $400,000 during the nine months ended September 30, 2021 that were incurred in prior periods in the pursuit of a portfolio of properties that did not result in an acquisition. Depreciation and Amortization For the three months ended September 30, 2021 and 2020, depreciation and amortization was $10,746,000 and $12,669,000, respectively, and consisted primarily of depreciation on our operating properties of $8,181,000 and $7,966,000, respectively, and amortization on our identified intangible assets of $2,261,000 and $4,619,000, respectively. For the nine months ended September 30, 2021 and 2020, depreciation and amortization was $33,745,000 and $37,919,000, respectively, and consisted primarily of depreciation on our operating properties of $24,025,000 and $23,698,000, respectively, and amortization on our identified intangible assets of $9,199,000 and $14,032,000, respectively. Approximately $3,333,000 of the decrease in amortization expense on our identified intangible assets for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 is related to in-place leases recognized in January 2020 and totaling $8,974,000 that were fully amortized during the nine months ended September 30, 2021. Interest Expense Interest expense, including gain or loss in fair value of derivative financial instruments, consisted of the following for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest expense: Line of credit and term loans and derivative financial instruments $ 4,274,000 $ 4,145,000 $ 12,492,000 $ 13,053,000 Mortgage loans payable 198,000 204,000 596,000 590,000 Amortization of deferred financing costs: Line of credit and term loans 470,000 471,000 1,411,000 1,410,000 Mortgage loans payable 7,000 7,000 20,000 33,000 (Gain) loss in fair value of derivative financial instruments (1,514,000) (1,450,000) (4,431,000) 2,302,000 Amortization of debt discount/premium 12,000 12,000 37,000 37,000 Total $ 3,447,000 $ 3,389,000 $ 10,125,000 $ 17,425,000 The decrease in interest expense for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is primarily related to a change to a gain in fair value recognized on our derivative financial instruments from a loss in fair value recognized on our derivative financial instruments, respectively, as such instruments approach maturity in November 2021, as well as 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. Liquidity and Capital Resources Our sources of funds primarily consist of operating cash flows and borrowings. 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. Upon consummation of the Merger, on October 1, 2021, we assumed GAHR III's obligations, through the surviving partnership, with respect to a credit facility with a maximum principal amount of $480,000,000, or the 2019 Corporate Line of Credit. In addition, on October 1, 2021, upon consummation of the Merger, we assumed GAHR III's obligations under an amended and restated loan agreement regarding a senior secured revolving credit facility with an aggregate maximum principal amount of $360,000,000, or the 2019 Trilogy Credit Facility. We also entered into an amendment to our credit agreement for our line of credit and term loans, as amended, or the 2018 Credit Facility. We refer to the 2019 Corporate Line of Credit, 2019 Trilogy Credit Facility and the 2018 Credit Facility as the Credit Facilities. See Note 20, Subsequent Events — Lines of Credit and Term Loans, to our accompanying condensed consolidated financial statements, for a further discussion, and our Current Report on Form 8-K filed with the SEC on October 5, 2021 for more information on the amendments to or assumption of the Credit Facilities. 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 Credit Facilities, as well as any future indebtedness that we may incur. 43 Table of Contents As of October 31, 2021, the Combined Company’s aggregate borrowing capacity under the Credit Facilities was $1,370,000,000. As of October 31, 2021, the Combined Company’s aggregate borrowings outstanding under the Credit Facilities was $1,205,634,000. The 2018 Credit Facility is scheduled to mature on November 19, 2021. We intend to extend the maturity date of the 2018 Credit Facility for an additional 12 months pursuant to the terms of the 2018 Credit Agreement, as amended, and expect to pay an extension fee of approximately $795,000. The 2019 Corporate Line of Credit is scheduled to mature on January 25, 2022; however, we intend to combine our 2019 Corporate Line of Credit and the 2018 Credit Facility into one joint credit facility and pay any related fees. As of October 31, 2021, we had an aggregate of $164,366,000 available on the Credit Facilities. We believe that these resources will be sufficient to satisfy our cash requirements for the foreseeable future. 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 temporarily suspending our share repurchase plan. Consequently, our board approved a reduced distribution rate for April 2020 through October 2021 for 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, 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. Furthermore, in connection with our special committee’s strategic alternative review process and in order to facilitate a strategic transaction, on March 18, 2021, our board authorized the suspension of the DRIP, effective as of April 1, 2021, and also approved the suspension of our share repurchase plan with respect to all repurchase requests received by us after February 28, 2021, including repurchases resulting from the death or qualifying disability of stockholders. For a further discussion, see our Current Report on Form 8-K filed with the SEC on March 19, 2021. On October 4, 2021, our board authorized the reinstatement of the DRIP and a partial reinstatement of our share repurchase plan with respect to repurchase requests resulting from the death or qualifying disability of stockholders. See Note 20, Subsequent Events — Reinstatement of the DRIP and — Amendments to and Partial Reinstatement of Share Repurchase Plan, to our accompanying condensed consolidated financial statements for a further discussion, and our Current Report on Form 8-K filed with the SEC on October 5, 2021 for more information on the reinstatement of the DRIP and partial reinstatement of our share repurchase plan. 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. 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 of the Combined Company, we estimate that our discretionary expenditures for capital and tenant improvements could require up to $33,809,000 for the remaining three months of 2021. Other Liquidity Needs In the event that there is a shortfall in net cash available due to various factors, including, without limitation, the timing of distributions or the collection of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured debt financing through one or more third parties, or our advisor or its affiliates. There are currently no limits or restrictions on the use of proceeds from our advisor or its affiliates which would prohibit us from making the proceeds available for distribution. We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties. Cash Flows The following table sets forth changes in cash flows: Nine Months Ended September 30, 2021 2020 Cash, cash equivalents and restricted cash — beginning of period $ 18,125,000 $ 15,846,000 Net cash provided by operating activities 16,556,000 29,943,000 Net cash used in investing activities (1,573,000) (74,761,000) Net cash (used in) provided by financing activities (15,939,000) 52,368,000 Cash, cash equivalents and restricted cash — end of period $ 17,169,000 $ 23,396,000 44 Table of Contents The following summary discussion of our changes in our cash flows is based on our accompanying condensed consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. Operating Activities For the nine months ended September 30, 2021, cash flows provided by operating activities was $16,556,000, compared to cash flows provided by operating activities of $29,943,000 for the nine months ended September 30, 2020. The decrease in cash provided by operating activities of $13,387,000 was primarily due to payments of general and administrative expenses, interest payments on our outstanding indebtedness and payment of costs related to the Merger of $6,753,000 during the nine months ended September 30, 2021, as well as grant income of $864,000 recognized during the nine months ended September 30, 2020 . Investing Activities For the nine months ended September 30, 2021 and 2020, cash flows used in investing activities related to our property acquisitions in the amount of $3,385,000 and $68,032,000, respectively, and the payment of $4,384,000 and $6,729,000, respectively, for capital expenditures. For the nine months ended September 30, 2021, cash flows used in investing activities were offset by $6,196,000 in net proceeds from the sale of two senior housing facilities, which were part of the Northern California Senior Housing Portfolio. 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 substantially completed the acquisition phase of our real estate investment strategy. Financing Activities For the nine months ended September 30, 2021, cash flows used in financing activities was $15,939,000, compared to cash flows provided by financing activities of $52,368,000 for the nine months ended September 30, 2020. The $68,307,000 change from cash provided by financing activities to cash used in financing activities was primarily due to the decrease in net borrowing proceeds on our 2018 Credit Facility of $70,700,000 and an increase of $7,768,000 in distributions paid to our common stockholders, partially offset by the January 2020 payoff of one mortgage loan payable with a principal balance of $7,738,000 and a decrease in share repurchases of $3,475,000. The increase in distributions paid in cash for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to the suspension of the DRIP by our board on March 18, 2021, resulting in no further issuances of shares pursuant to the DRIP, and stockholders who were participants in the DRIP received cash distributions instead beginning with the May 2021 payment date. The decrease in share repurchases paid in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily related to the partial suspension of our share repurchase plan in March 2020 by our board to protect our capital and maximize our liquidity in response to the impact of the COVID-19 pandemic. See Note 12, Equity, and Note 20, Subsequent Events — Reinstatement of the DRIP and — Amendments to and Partial Reinstatement of Share Repurchase Plan, to our accompanying condensed consolidated financial statements, for a further discussion regarding our share repurchase plan and DRIP distributions. Overall, we anticipate cash flows from financing activities to decrease in the future. Distributions Prior to March 31, 2020, 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 May 1, 2016 and ending on March 31, 2020. 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 rate 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. In response to the COVID-19 pandemic and its effects to our business and operations, at the end of the first quarter of 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 reducing our distribution payments to stockholders. 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, 2021, which was calculated based on 365 days in the calendar year and was equal to $0.001095890 per share of our Class T and Class I common stock. Such daily distribution was equal to an annualized distribution rate of $0.40 per share. The distributions were 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. Our board of directors also authorized distributions to our Class T and Class I stockholders of record as of the close of business on September 17, 2021 and October 27, 2021. The distributions were equal to $0.0328767 and $0.033333333 per share of our common stock for the months of September 2021 and October 2021, respectively, which was equal to an annualized distribution of $0.40 per share. The distributions were paid in cash in September 2021 and November 2021, respectively, only from legally available funds. 45 Table of Contents As discussed above, in connection with our special committee’s strategic alternative review process, on March 18, 2021, our board authorized the suspension of the DRIP, effective as of April 1, 2021. As a result, beginning with the April 2021 distributions, which were paid in May 2021, there were no further issuances of shares pursuant to the DRIP, and stockholders who are participants in the DRIP received or will receive cash distributions instead. As also discussed above, on October 4, 2021, our board authorized the reinstatement of the DRIP and as a result, beginning with the October 2021 distribution, which were paid in November 2021, stockholders who previously enrolled as participants in the DRIP (including former GAHR III stockholders who participated in the GAHR III distribution reinvestment plan) received distributions in shares of our common stock pursuant to the terms of the DRIP, instead of cash distributions. See Note 20, Subsequent Events — Reinstatement of the DRIP, to our accompanying condensed consolidated financial statements, for a further discussion, and our Current Report on Form 8-K filed with the SEC on October 5, 2021 for more information on the reinstatement of the DRIP and the declaration of October 2021 distribution. 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 borrowings 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: (i) cause us to be unable to pay our debts as they become due in the usual course of business; 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 nine months ended September 30, 2021 and 2020, 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, 2021 2020 Distributions paid in cash $ 21,700,000 $ 13,932,000 Distributions reinvested 5,499,000 15,681,000 $ 27,199,000 $ 29,613,000 Sources of distributions: Cash flows from operations $ 16,556,000 60.9 % $ 29,613,000 100 % Proceeds from borrowings 10,643,000 39.1 — — $ 27,199,000 100 % $ 29,613,000 100 % As of September 30, 2021, 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. The distributions paid for the nine months ended September 30, 2021 and 2020, 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, 2021 2020 Distributions paid in cash $ 21,700,000 $ 13,932,000 Distributions reinvested 5,499,000 15,681,000 $ 27,199,000 $ 29,613,000 Sources of distributions: FFO attributable to controlling interest $ 23,126,000 85.0 % $ 29,361,000 99.1 % Proceeds from borrowings 4,073,000 15.0 252,000 0.9 $ 27,199,000 100 % $ 29,613,000 100 % 46 Table of Contents 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. For a further discussion of FFO, a non-GAAP financial measure, including a reconciliation of our GAAP net income (loss) to FFO, see the “Funds from Operations and Modified Funds from Operations” section below. Financing We anticipate that our overall leverage will not exceed 50.0% of the combined market value of all of our properties, including the properties acquired as part of the Merger, 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. Our policies do not limit the amount we may borrow with respect to any individual investment. As of September 30, 2021, our aggregate borrowings were 40.5% 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. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. 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. Furthermore, we may borrow if we otherwi se deem it necessary or advisa ble to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of September 30, 2021, our leverage did not exceed 300% of the value of our net assets. Mortgage Loans Payable, Net For a discussion of our mortgage loans payable, net, see Note 6, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial statements. Lines of Credit and Term Loans For a discussion of our line of credit and term loans, see Note 7, Line of Credit and Term Loans and Note 20, Subsequent Events — Lines of Credit and Term Loans, to our accompanying condensed consolidated financial statements. 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 of 90.0% of our annual taxable income, excluding net capital gains. Existin g Internal Revenue Service, or IRS, guidance includes a safe harbor pursuant to which publicly offered REITs ca n satisfy the distribution requirement by distributing a combination of cash and stock to stockholders. In general, to qualify under the safe harbor, each stockholder must elect to receive either cash or stock, and the aggregate cash component of the distribution to stockholders must represent at least 20.0% of the total distribution . 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. We may also pay distributions from cash from capital transactions including, without limitation, the sale of one or more of our properties. Commitments and Contingencies For a discussion of our commitments and contingencies, see Note 10, Commitments and Contingencies, to our accompanying condensed consolidated financial statements. Debt Service Requirements A significant liquidity need is the payment of principal and interest on our outstanding indebtedness. As of September 30, 2021, we had $18,291,000 ($17,409,000, net of discount/premium and deferred financing costs) of fixed-rate mortgage loans payable outstanding secured by our properties. As of September 30, 2021, we had $488,900,000 outstanding and $41,100,000 remained available under the 2018 Credit Facility. 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 September 30, 2021, we 47 Table of Contents were in compliance with all such covenants and requirements on our Combined Company mortgage loans payable and the Credit Facilities. As of September 30, 2021, the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 3.32% per annum. Contractual Obligations The following table provides information with respect to: (i) the maturity and scheduled principal repayment of our secured mortgage loans payable and the 2018 Credit Facility; (ii) interest payments on our mortgage loans payable and the 2018 Credit Facility; and (iii) ground lease obligations as of September 30, 2021: Payments Due by Period 2021 2022-2023 2024-2025 Thereafter Total Principal payments — fixed-rate debt $ 132,000 $ 1,331,000 $ 6,589,000 $ 10,239,000 $ 18,291,000 Interest payments — fixed-rate debt 179,000 1,370,000 1,113,000 4,970,000 7,632,000 Principal payments — variable-rate debt 488,900,000 — — — 488,900,000 Interest payments — variable-rate debt (based on rates in effect as of September 30, 2021) 1,691,000 — — — 1,691,000 Ground lease obligations 213,000 1,056,000 1,072,000 46,565,000 48,906,000 Total $ 491,115,000 $ 3,757,000 $ 8,774,000 $ 61,774,000 $ 565,420,000 Off-Balance Sheet Arrangements As of September 30, 2021, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations. Inflation During the nine months ended September 30, 2021 and 2020, 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 tenant leases will be the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that will protect us from the impact of inflation. These provisions include negotiated rental increases, reimbursement billings for operating expense pass-through charges and real estate tax and insurance reimbursements. However, due to the long-term nature of the anticipated leases, among other factors, the leases may not re-set frequently enough to cover inflation. Related Party Transactions For a summary of related party transactions, see Note 13, Related Party Transactions, to our accompanying condensed consolidated financial statements and Note 13, Related Party Transactions of our 2020 Annual Report on Form 10-K, as filed with the SEC on March 26, 2021. Funds from Operations and Modified Funds from Operations Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, a non-GAAP measure, which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. The use of funds from operations is recommended by the REIT industry as a supplemental performance measure, and our management uses FFO to evaluate our performance over time. FFO is not equivalent to our net income (loss) as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on funds from operations approved by the Board of Governors of NAREIT, or the White Paper. The White Paper defines funds from operations as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of certain real estate assets and impairment writedowns of certain real estate assets and investments, plus depreciation and amortization related to real estate, and after adjustments for unconsolidated partnerships and joint ventures. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that impairments are based on estimated future undiscounted cash flows. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations. Our FFO calculation complies with NAREIT’s policy described above. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate 48 Table of Contents valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization and impairments, provides a further understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, which may not be immediately apparent from net income (loss). However, FFO and modified funds from operations attributable to controlling interest, or MFFO, as described below, 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. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. The IPA, an industry trade group, has standardized a measure known as modified funds from operations, which the IPA has recommended as a supplemental performance measure for publicly registered, non-listed REITs and which we believe to be another appropriate supplemental performance measure to reflect the operating performance of a publicly registered, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes expensed acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our initial offering stage has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our initial offering stage and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our initial offering stage has been completed and properties have been acquired, as it excludes expensed acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired. We define MFFO, a non-GAAP measure, consistent with the Practice Guideline issued by the IPA. The Practice Guideline defines modified funds from operations as funds from operations further adjusted for the following items included in the determination of GAAP net income (loss): expensed acquisition fees and costs; amounts relating to deferred rent and amortization of above- and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting; and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect modified funds from operations on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline described above. Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence, that the use of such measures may be useful to investors. Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate funds from operations and modified funds from operations the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are 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, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating 49 Table of Contents periods, and in particular, after the offering and acquisition stages are complete. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO. Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. 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 or 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. 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 funds, the COVID-19 pandemic impact would have had a material adverse impact to our FFO and MFFO. For the three months ended September 30, 2021 and 2020, FFO would have been approximately $5,809,000 and $10,662,000, respectively, and for the nine months ended September 30, 2021 and 2020, FFO would have been approximately $22,522,000 and $26,563,000, respectively, excluding government grants recognized. For the three months ended September 30, 2021 and 2020, MFFO would have been approximately $7,659,000 and $8,200,000, respectively, and for the nine months ended September 30, 2021 and 2020, MFFO would have been approximately $22,531,000 and $26,028,000, respectively, excluding government grants recognized. 50 Table of Contents 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net loss $ (5,898,000) $ (5,152,000) $ (13,782,000) $ (14,240,000) Add: Depreciation and amortization related to real estate — consolidated properties 10,746,000 12,669,000 33,745,000 37,919,000 Depreciation and amortization related to real estate — unconsolidated entity 977,000 880,000 2,889,000 2,640,000 Impairment of real estate investments — consolidated properties — 3,064,000 — 3,064,000 (Gain) loss on disposition of real estate investments — consolidated properties (15,000) — 184,000 — Impairments and gain or loss on disposition of real estate investments, net — unconsolidated entity 4,000 99,000 7,000 99,000 Net loss attributable to noncontrolling interests 121,000 232,000 489,000 608,000 Less: Depreciation, amortization and loss on disposition — noncontrolling interests (72,000) (250,000) (406,000) (729,000) FFO attributable to controlling interest $ 5,863,000 $ 11,542,000 $ 23,126,000 $ 29,361,000 Business acquisition expenses(1) $ 3,800,000 $ 57,000 $ 6,552,000 $ 74,000 Amortization of above- and below-market leases(2) 38,000 31,000 115,000 90,000 Change in deferred rent(3) (523,000) (1,009,000) (2,500,000) (3,232,000) (Gain) loss in fair value of derivative financial instruments(4) (1,514,000) (1,450,000) (4,431,000) 2,302,000 Adjustments for unconsolidated entity(5) 49,000 (91,000) 273,000 237,000 Adjustments for noncontrolling interests(5) — — — (6,000) MFFO attributable to controlling interest $ 7,713,000 $ 9,080,000 $ 23,135,000 $ 28,826,000 Weighted average Class T and Class I common shares outstanding — basic and diluted 81,704,261 80,788,359 81,635,053 80,498,693 Net loss per Class T and Class I common share — basic and diluted $ (0.07) $ (0.06) $ (0.17) $ (0.18) FFO attributable to controlling interest per Class T and Class I common share — basic and diluted $ 0.07 $ 0.14 $ 0.28 $ 0.36 MFFO attributable to controlling interest per Class T and Class I common share — basic and diluted $ 0.09 $ 0.11 $ 0.28 $ 0.36 ___________ (1) In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding business acquisition expenses that have been deducted as expenses in the determination of GAAP net income or loss, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Business acquisition expenses include payments to our advisor or its affiliates and third parties. (2) Under GAAP, above- and below-market leases are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, we believe that by excluding charges relating to the amortization of above- and below-market leases, MFFO may provide useful supplemental information on the performance of the real estate. (3) Under GAAP, as a lessor, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays). As a lessee, we record amortization of right-of-use assets and accretion of lease liabilities for 51 Table of Contents our operating leases. 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. (4) Under GAAP, we are required to include changes in fair value of our derivative financial instruments in the determination of net income or loss. We believe that adjusting for the change in fair value of our derivative financial instruments to arrive at MFFO is appropriate because such adjustments may not be reflective of on-going operations and reflect unrealized impacts on value based only on then current market conditions, although they may be based upon general market conditions. The need to reflect the change in fair value of our derivative financial instruments is a continuous process and is analyzed on a quarterly basis in accordance with GAAP. (5) Includes all adjustments to eliminate the unconsolidated entity’s share or noncontrolling interests’ share, as applicable, of the adjustments described in notes (1) – (4) above to convert our FFO to MFFO. Net Operating Income 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, business acquisition expenses, depreciation and amortization, interest expense, loss on disposition of real estate investments, income or loss from unconsolidated entity, other income and income tax 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. 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. Investors are also cautioned that NOI should only be used to assess our operational performance in periods in which we have not incurred or accrued any business acquisition expenses. We believe that NOI is an appropriate supplemental performance measure to reflect the performance of our operating assets because NOI excludes certain items that are not associated with the operations of the properties. We believe that NOI is a widely accepted measure of comparative operating performance in the real estate community. 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, 2021, we did not recognize any government grants. 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net loss $ (5,898,000) $ (5,152,000) $ (13,782,000) $ (14,240,000) General and administrative 4,304,000 3,672,000 11,710,000 11,960,000 Business acquisition expenses 3,800,000 57,000 6,552,000 74,000 Depreciation and amortization 10,746,000 12,669,000 33,745,000 37,919,000 Interest expense 3,447,000 3,389,000 10,125,000 17,425,000 Impairment of real estate investments — 3,064,000 — 3,064,000 (Gain) loss on disposition of real estate investments (15,000) — 184,000 — (Income) loss from unconsolidated entity (70,000) 377,000 1,027,000 (952,000) Other income (33,000) (8,000) (49,000) (278,000) Income tax benefit — (39,000) — — Net operating income $ 16,281,000 $ 18,029,000 $ 49,512,000 $ 54,972,000 52 Table of Contents Subsequent Events For a discussion of subsequent events, see Note 20, Subsequent Events, to our accompanying condensed consolidated financial statements.