National Healthcare Properties, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K for a description of these risks and uncertainties. Overview We are an externally managed real estate investment trust for U.S. federal income tax purposes (“REIT”) that focuses on acquiring and managing a diversified portfolio of healthcare-related real estate focused on medical office and other healthcare-related buildings and senior housing operating properties. Prior to December 31, 2021, we had three reportable segments 1) Former MOBs, 2) Former NNN and 3) SHOPs. As a result of strategic property divestitures in our Former NNN segment, and transitions of certain properties reported in our Former NNN segment into our SHOP segment, we have combined the properties in our Former NNN segment with the properties in our Former MOB segment to form a single set of MOBs. As a result, effective December 31, 2021 we have determined that we have two reportable segments, with activities related to investing in MOBs and SHOPs. All prior periods presented in this Annual Report on Form 10-K have been conformed to the presentation of our new reportable segment structure. As of December 31, 2021, we owned 202 properties located in 33 states and comprised of 9.2 million rentable square feet. Substantially all of our business is conducted through the OP, a Delaware limited partnership, and its wholly owned subsidiaries. Our Advisor manages our day-to-day business with the assistance of our Property Manager. Our Advisor and Property Manager are under common control with AR Global and these related parties receive compensation and fees for providing services to us. We also reimburse these entities for certain expenses they incur in providing these services to us. The Special Limited Partner, which is also under common control with AR Global, also has an interest in us through ownership of interests in our OP. We operate in two reportable business segments for management and internal financial reporting purposes: MOBs and SHOPs. In our MOB operating segment, we own, manage, and lease single and multi-tenant MOBs where tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. Our Property Manager or third party managers manage our MOBs. In our SHOP segment, we invest in seniors housing properties using the RIDEA structure. As of December 31, 2021, we had six eligible independent contractors operating 54 SHOPs (not including two land parcels). All of our properties across both business segments are located throughout the United States. Subsequent to December 31, 2021, we terminated one of our independent contractors who managed 20 SHOPs and those management duties were assumed by other existing eligible independent contractors effective March 1, 2022 which reduced our active independent contractors to five. We have declared quarterly dividends entirely in shares of our common stock equal to 0.01349 shares of our common stock on each share of our outstanding common stock on October 1, 2020 and January 4, 2021. These stock dividends were issued on October 15, 2020 and January 15, 2021 to holders of record of our common stock at the close of business on October 8, 2020 and January 11, 2021, respectively. We have declared quarterly dividends entirely in shares of our common stock equal to 0.014655 shares of our common stock on each share of our outstanding common stock on April 2, 2021, July 1, 2021, October 1, 2021, and January 3, 2022. These stock dividends were issued on April 15, 2021, July 15, 2021, October 15, 2021, and January 15, 2022 to holders of record of our common stock at the close of business on April 8, 2021, July 8, 2021, October 8, 2021, and January 8, 2022, respectively. Dividends payable entirely in shares of our common stock are treated in a fashion similar to a stock split for accounting purposes specifically related to per-share calculations for the current and prior periods. The aggregate impact of these stock dividends was an increase of 0.08871 shares, cumulatively, for every one share of common stock. No additional shares, except for the dividends paid in the form of additional shares of common stock, were issued during the year ended December 31, 2021. Additionally, other references to weighted-average shares outstanding and per-share amounts have been retroactively adjusted for the stock dividends and are noted as such throughout the accompanying financial statements and footnotes. On March 31, 2021, we published a new Estimated Per-Share NAV equal to $14.50 as of December 31, 2020. Our previous Estimated Per-Share NAV was equal to $15.75 as of December 31, 2019. The Estimated Per-Share NAV has not been adjusted since publication and will not be adjusted until the Board determines a new Estimated Per-Share NAV which is expected in early April 2022. Dividends paid in the form of additional shares of common stock will, all things equal, cause the value of each share of common stock to decline because the number of shares outstanding will increase when dividends paid in stock are issued; however, each stockholder will receive the same number of new shares, the total value of our common stockholder’s investment, all things equal, will not change assuming no sales or other transfers. We intend to publish Estimated Per-Share NAV periodically at the discretion of the Board, provided that such estimates will be made at least once annually. 54 Table of Contents Management Update on the Impacts of the COVID-19 Pandemic The COVID-19 global pandemic has created several risks and uncertainties that have had and may continue to have an impact on our business, including our financial condition, future results of operations and our liquidity. Negative impacts of the COVID-19 pandemic have caused some of our tenants to be unable to make rent payments to us timely, or at all. There may be a decline in the demand for tenants to lease real estate, as well as a negative impact on rental rates. The extent to which the ongoing global COVID-19 pandemic, including the outbreaks that have occurred and may occur in markets where we own properties, impacts our operations and those of our tenants and third-party operators, will continue to depend on future developments, including the scope, severity and duration of the pandemic, and the actions taken to contain the COVID-19 or treat its impact, among others, which are highly uncertain and cannot be predicted with confidence, but could be material. As of December 31, 2021, our MOB segment had an occupancy of 91.5% with a weighted-average remaining lease term of 4.9 years, (based on annualized straight-line rent as of December 31, 2021), and our SHOP segment had an occupancy of 74.1% weighted by unit count. During the second, third and fourth quarters of 2021, we experienced relative stability in occupancy and operating costs in our SHOP portfolio, although future developments in the course of the pandemic may cause further adverse impacts on our occupancy and cost levels. Occupancy and operating costs in our MOB segment was relatively stable during these quarters. The negative impact of the pandemic on our results of operations and cash flows has impacted and could continue to impact our ability to comply with covenants in our Credit Facility, and the amount available for future borrowings thereunder. We would have been in default of a covenant contained in the Credit Facility requiring us to maintain a certain minimum fixed charge coverage ratio for the four fiscal quarter period ended September 30, 2021. We entered into an amendment to our Credit Facility on November 12, 2021, in which the lenders waived any defaults or event of defaults under the covenant requiring us to maintain a fixed charge coverage ratio of 1.60 to 1.00 for the quarter ended September 30, 2021 and reduced this covenant to 1.50 to 1.00 until the earlier of December 31, 2022 and the date on which we elect to terminate this relief, among other changes (see Liquidity and Capital Resources section below and see Note 5 — Credit Facilities, Net to our consolidated financial statements included in this Annual Report on Form 10-K for additional Information). For additional information on the risks and uncertainties associated with the COVID-19 pandemic, please see Item 1A . “Risk Factors — We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic” included in this Annual Report on Form 10-K for the year ended December 31, 2021. Rent Collections We experienced delays in rent collection in the second, third and fourth quarters of 2020 and the first quarter of 2021. We have taken several steps to mitigate the impact of the pandemic on our business. We have been in direct contact with our tenants and operators since the crisis began, cultivating open dialogue and deepening the fundamental relationships that we have carefully developed through prior transactions and historic operations. We have achieved mutually agreeable solutions with our tenants and in some cases, during the year ended December 31, 2020, we executed lease amendments wherein we agreed to defer payment. Based on this approach and the overall financial strength and creditworthiness of our tenants, we believe that we have had positive results in our cash rent collections during this pandemic. During the year ended December 31, 2021, we did not enter into any rent deferral agreements with any of our tenants and all amounts previously deferred under prior rent deferral agreements have been collected. We collected approximately 100% of the original cash rent due for the fourth quarter of 2020 and throughout 2021 in our MOB segment. Cash rental payments for our 54 SHOPs is primarily paid by the residents through private payer insurance or directly, and to a lesser extent, by government reimbursement programs such as Medicaid and Medicare, therefore we have not provided the amount of quarterly cash rent collected for our SHOP segment. “Original cash rent” refers to contractual rents on a cash basis due from tenants as stipulated in their original executed lease agreement at inception or as amended, prior to any rent deferral agreement. We calculate “original cash rent collections” by comparing the total amount of rent collected during the period to the original cash rent due. Total rent collected during the period includes both original cash rent due and payments made by tenants pursuant to rent deferral agreements. Eliminating the impact of deferred rent paid, we collected nearly 100% of original cash rent due for each quarter of 2021. A deferral agreement is an executed or approved amendment to an existing lease to defer a certain portion of cash rent due to a future period. During the year ended December 31, 2020, we granted rent deferrals for an aggregate of $0.4 million or less than 1% of original cash rent due for the year. No additional rent was deferred during the year ended December 31, 2021. We have also granted rent concessions which serve to reduce revenue in our SHOP segment. We offered $0.1 million and $0.4 million of rent concessions during the years ended December 31, 2021 and 2020, respectively. Seniors Housing Properties 55 Table of Contents In early March 2020, we implemented preventative actions at all our seniors housing properties in our SHOP segment, including restrictions on visitation except in very limited and controlled circumstances, social distancing measures, and the screening of all persons entering these facilities. Some of the additional steps we have taken to address the COVID-19 pandemic include, enhanced training for staff members, the implementation of Telehealth to help residents be safe while keeping appointments with important, but non-emergency, health providers, virtual tours for potential new residents, and agreements between some of our facilities and local lab partners to provide testing services. Starting in March 2020, the COVID-19 pandemic and measures to prevent its spread began to affect us in a number of ways. Occupancy in our SHOP portfolio has trended lower since the second half of March 2020 to a low of 72.0% as of March 31, 2021 and has subsequently begun to recover, reaching 74.1% as of December 31, 2021, as government policies and implementation of infection control best practices and prospective residents’ concerns about communal-setting COVID-19 spread limited resident move-ins. We have also continued to experience lower inquiry volumes and reduced in-person tours. These and other impacts of the COVID-19 pandemic have affected and could continue to affect our ability to fill vacancies. The below table presents SHOP occupancy since the onset of the COVID-19 pandemic in March 2020: As of Number of Properties [1] Rentable Units Percentage Leased December 31, 2019 59 4,926 85.1% March 31, 2020 63 5,198 84.4% June 30, 2020 63 5,198 79.2% September 30, 2020 67 5,350 77.4% December 31, 2020 59 4,878 74.5% March 31, 2021 55 4,682 72.0% June 30, 2021 54 4,530 73.2% September 30, 2021 54 4,494 74.3% December 31, 2021 54 4,494 74.1% ________ [1] Exclusive of two land parcels. The declines in revenue we experienced during the year ended December 31, 2021 and 2020, as compared to the year ended December 31, 2019, were primarily attributable to the decline in occupancy in or SHOP segment, noted in the table above, and our SHOP disposals which reduced the average number of rentable units over the periods. In addition, starting in mid-March of 2020, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers. At the SHOP facilities, we generally bear these cost increases, which were partially offset by funds received under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and to a lesser extent, cost recoveries for personal protective equipment from residents. See below for additional information on the CARES Act. There can be no assurance, however, that future developments in the course of the pandemic will not cause further adverse impacts to our occupancy and cost levels, and these trends may continue to impact us and have a material adverse effect on our revenues and income in the other quarters. We believe that our vaccination participation achieved in 2021 for both residents and staff populations have mitigated certain adverse impacts of COVID-19. Furthermore, as infections decline and more vaccinations and boosters are administered during 2022, our occupancy may further increase. However, there can be no assurance as to when or if we will be able to approach pre-pandemic levels of occupancy due to, among other factors, the ongoing vaccine hesitancy and resistance in certain segments of the population and the recent spread of more transmissible COVID-19 variants such as the Delta and Omicron variants. The pandemic raises the risk of an elevated level of resident exposure to illness and restrictions on move-ins at our SHOPs, which has and could also continue to adversely impact occupancy and revenues as well as increase costs. We believe that the actions we have taken help reduce the incidences of COVID-19 at our properties, but there can be no assurance in this regard. There have been some incidences of COVID-19 among the residents and staff at certain of our seniors housing properties. Further incidences, or the perception that outbreaks may occur, could materially and adversely affect our revenues and income , as well as cause reputational harm to us and our tenants, managers and operators. The extent to which the ongoing global COVID-19 pandemic, including the outbreaks that have occurred and may occur in markets where we own properties, impacts our operations and those of our tenants and third-party operators, will continue to depend on future developments, including the scope, severity and duration of the pandemic, and the actions taken to contain the COVID-19 or treat its impact, among others, which are highly uncertain and cannot be predicted with confidence, but could be material. 56 Table of Contents On March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and it provides funding to Medicare providers in order to provide financial relief during the COVID-19 pandemic. Funds provided under the program were to be used for the preparation, prevention, and medical response to COVID-19, and were designated to reimburse providers for healthcare related expenses and lost revenues attributable to COVID-19. During the year ended December 31, 2021 we received $5.1 million from CARES Act grants. Previously, we received $3.6 million in grants during the year ended December 31, 2020. We have applied for additional funds under the CARES Act, however, there can be no assurance that any funds requested will actually be received. We consider the funds to be a grant contribution from the government and the full amount was recognized as a reduction of property operating expenses in our consolidated statement of operations during the years ended December 31, 2021 and 2020. There can be no assurance that the program will be extended or any further amounts received under currently effective or potential future government programs. Significant Accounting Estimates and Critical Accounting Policies Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include: Impacts of the COVID-19 Pandemic As discussed above we have taken a proactive approach to achieve mutually agreeable solutions with its tenants and in some cases, in the second, third and fourth quarters of 2020, we executed lease amendments providing for deferral of rent. For accounting purposes, in accordance with ASC 842: Leases, normally a company would be required to assess a lease modification to determine if the lease modification should be treated as a separate lease and if not, modification accounting would be applied which would require a company to reassess the classification of the lease (including leases for which the prior classification under ASC 840 was retained as part of the election to apply the package of practical expedients allowed upon the adoption of ASC 842, which doesn’t apply to leases subsequently modified). However, in light of the COVID-19 pandemic in which many leases are being modified, the FASB and SEC have provided relief that allows companies to make a policy election as to whether they treat COVID-19 related lease amendments as a provision included in the pre-concession arrangement, and therefore, not a lease modification, or to treat the lease amendment as a modification. In order to be considered COVID-19 related, cash flows must be substantially the same or less than those prior to the concession. For COVID-19 relief qualified changes, there are two methods to potentially account for such rent deferrals or abatements under the relief, (1) as if the changes were originally contemplated in the lease contract or (2) as if the deferred payments are variable lease payments contained in the lease contract. For all other lease changes that did not qualify for FASB relief, we would be required to apply modification accounting including assessing classification under ASC 842. Some, but not all of our lease modifications qualify for the FASB relief. In accordance with the relief provisions, instead of treating these qualifying leases as modifications, we elected to treat the modifications as if previously contained in the lease and recast rents receivable prospectively (if necessary). Under that accounting, for modifications that were deferrals only, there would be no impact on overall rental revenue and for any abatement amounts that reduced total rent to be received, the impact would be recognized ratably over the remaining life of the lease. For leases not qualifying for this relief, we applied modification accounting and determined that there were no changes in the current classification of its leases impacted by negotiations with its tenants. Revenue Recognition Our revenues, which are derived primarily from lease contracts, include rent received from tenants in our triple-net MOBs. As of December 31, 2021 these leases had a weighted average remaining lease term of 4.9 years. Rent from tenants in our MOB segment (as discussed below) is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable for, and include in revenue from tenants on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease modification is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Under ASC 842, we have elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For comparative purposes, we have also elected to reflect prior revenue and reimbursements reported under ASC 842 also on a single line. For expenses paid directly by the tenant, under both ASC 842 and 840, we have reflected them on a net basis. 57 Table of Contents Our revenues also include resident services and fee income primarily related to rent derived from lease contracts with residents in the Company’s SHOPs held using a structure permitted by RIDEA and to fees for ancillary services performed for SHOP residents, which are generally variable in nature. Rental income from residents in our SHOP segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed. We defer the revenue related to lease payments received from tenants and residents in advance of their due dates. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses related to non-SHOP assets (recorded in revenue from tenants), in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Under ASC 842, we have elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For expenses paid directly by the tenant, under both ASC 842 and 840, we have reflected them on a net basis. We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Under leasing standards, we are required to assess, based on credit risk only, if it is probable that we will collect virtually all of the lease payments at lease commencement date and it must continue to reassess collectability periodically thereafter based on new facts and circumstances affecting the credit risk of the tenant. Partial reserves, or the ability to assume partial recovery are no longer permitted. If we determine that it is probable it will collect virtually all of the lease payments (rent and common area maintenance), the lease will continue to be accounted for on an accrual basis (i.e. straight-line). However, if we determine it is not probable that we will collect virtually all of the lease payments, the lease will be accounted for on a cash basis and a full reserve would be recorded on previously accrued amounts in cases where it was subsequently concluded that collection was not probable. Cost recoveries from tenants are included in operating revenue from tenants beginning on January 1, 2019, in accordance with accounting rules adopted after that date, on the accompanying consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable. Under ASC 842, which was adopted effective on January 1, 2019, uncollectable amounts are reflected as reductions in revenue. Under ASC 840, we recorded such amounts as bad debt expense as part of property operating expenses. During the years ended December 31, 2021, 2020 and 2019 such amounts were $1.1 million, $2.7 million, and $6.5 million, respectively, which include bad debt expense related to the NuVista and LaSalle Tenants (see Note 3 — Real Estate Investments, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). Investments in Real Estate Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred. At the time an asset is acquired, we evaluate the inputs, processes and outputs of the asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets. See the “ Purchase Price Allocation” section below for a discussion of the initial accounting for investments in real estate. Disposal of real estate investments that represent a strategic shift in operations that will have a major effect on our operations and financial results are required to be presented as discontinued operations in the consolidated statements of operations. No properties were presented as discontinued operations during the years ended December 31, 2020, 2019 or 2018. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale, most significantly that the sale is probable within one year. We evaluate probability of sale based on specific facts including whether a sales agreement is in place and the buyer has made significant non-refundable deposits. Properties are no longer depreciated when they are classified as held for sale. There were $0.1 million in real estate investments held for sale as of December 31, 2020 and none as of December 31, 2021 (see Note 3 — Real Estate Investments, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). All of our leases as lessor prior to the adoption of new lease accounting rules on January 1, 2019, were accounted for as operating leases and they continue to be accounted for as operating leases under the transition guidance. We evaluate new leases originated after the adoption date (by us or by a predecessor lessor/owner) pursuant to the new guidance where a lease for some or all of a building is classified by a lessor as a sales-type lease if the significant risks and rewards of ownership reside with the tenant. This situation is met if, among other things, there is an automatic transfer of title during the lease, a bargain purchase option, the non-cancelable lease term is for more than major part of remaining economic useful life of the asset (e.g., 58 Table of Contents equal to or greater than 75%), if the present value of the minimum lease payments represents substantially all (e.g., equal to or greater than 90%) of the leased property’s fair value at lease inception, or if the asset so specialized in nature that it provides no alternative use to the lessor (and therefore would not provide any future value to the lessor) after the lease term. Further, such new leases would be evaluated to consider whether they would be failed sale-leaseback transactions and accounted for as financing transactions by the lessor. For the three-year period ended December 31, 2021, we have no leases as a lessor that would be considered as sales-type leases or financings under sale-leaseback rules. We are also the lessee under certain land leases which were previously classified prior to adoption of lease accounting and will continue to be classified as operating leases under transition elections unless subsequently modified. These leases are reflected on the balance sheet and the rent expense is reflected on a straight-line basis over the lease term. We generally determine the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion. Purchase Price Allocation In both a business combination and an asset acquisition, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements on an as if vacant basis. Intangible assets may include the value of in-place leases and above-and below-market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the years ended December 31, 2020, 2019 and 2018 were accounted for as asset acquisitions. For acquired properties with leases classified as operating leases, we allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed, based on their respective fair values. In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. We estimate fair value using data from appraisals, comparable sales, discounted cash flow analysis and other methods. Fair value estimates are also made using significant assumptions such as capitalization rates, fair market lease rates and land values per square foot. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses. Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. We did not record any intangible asset amounts related to customer relationships during the years ended December 31, 2021 and 2020. Impairment of Long-Lived Assets When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment 59 Table of Contents exists, due to the inability to recover the carrying value of a property, we would recognize an impairment loss in the consolidated statement of operations and comprehensive (loss) to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings. Depreciation and Amortization Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, 7 to 10 years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests. Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion. The value of certain other intangibles such as certificates of need in certain jurisdictions are amortized over the expected period of benefit (generally the life of the related building). The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases. The value of customer relationship intangibles, if any, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages. Above-and Below-Market Lease Amortization Capitalized above-market lease values are amortized as a reduction of revenue from tenants over the remaining terms of the respective leases and the capitalized below-market lease values are amortized as an increase to revenue from tenants over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time. Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods. Equity-Based Compensation The Company has a stock-based incentive award program for its directors, which is accounted for under the guidance of share based payments. The cost of services received in exchange for these stock awards is measured at the grant date fair value of the award and the expense for such awards is included in general and administrative expenses and is recognized over the service period (i.e., vesting) required or when the requirements for exercise of the award have been met. CARES Act Grants On March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and it provides funding to Medicare providers in order to provide financial relief during the COVID-19 pandemic. Funds provided under the program were to be used for the preparation, prevention, and medical response to COVID-19, and were designated to reimburse providers for healthcare related expenses and lost revenues attributable to COVID-19. We received $5.1 million and $3.6 million in these funds during the years ended December 31, 2021 and 2020, respectively, related to four of our SHOPs and considered the funds to be a grant contribution from the government. The full amounts received were recognized as a reduction of property operating expenses in the Company’s consolidated statement of operations for the years ended December 31, 2021 and 2020, respectively, to offset the incurred COVID-19 expenses. There can be no assurance that the program will be extended or any further amounts received. Recently Issued Accounting Pronouncements See Note 2 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to the consolidated financial statements included in this Annual Report on Form 10-K for further discussion. Results of Operations Same Store Properties 60 Table of Contents Information based on Same Store, Acquisitions and Dispositions (as each are defined below) allows us to evaluate the performance of our portfolio based on a consistent population of properties owned for the entire period of time covered. As of December 31, 2021, we owned 202 properties. There were 176 properties (our “Same Store” properties) owned for the entire years ended December 31, 2021 and 2020, including two vacant land parcels. Since January 1, 2020 and through December 31, 2021, we acquired 26 properties (our “Acquisitions”) and disposed of 17 properties (our “Dispositions”). The following table presents a roll-forward of our properties owned from January 1, 2020 to December 31, 2021: MOB SHOP Total Number of properties, December 31, 2019 132 61 193 Acquisition activity during the year ended December 31, 2020 5 4 9 Disposition activity during the year ended December 31, 2020 (1) (8) (9) Transition activity during the year ended December 31, 2020 (4) 4 — Number of properties, December 31, 2020 132 61 193 Acquisition activity during the year ended December 31, 2021 17 — 17 Disposition activity during the year ended December 31, 2021 (3) (5) (8) Number of properties, December 31, 2021 146 56 202 Number of Same Store Properties (1) 124 52 176 _______________ (1) Includes the acquisition of a land parcel adjacent to an existing property which is not considered an Acquisition. In addition to the comparative period-over-period discussions below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s responses. Below is a discussion of our results of operations for the years ended December 31, 2021 and 2020. Please see the “Results of Operations” section located in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 for a comparison of our results of operations for the year ended December 31, 2020 and 2019. 61 Table of Contents Comparison of the Years Ended December 31, 2021 and 2020 Net loss attributable to common stockholders was $92.9 million and $78.8 million for the years ended December 31, 2021 and 2020, respectively. The following table shows our results of operations for the years ended December 31, 2021 and 2020 and the year to year change by line item of the consolidated statements of operations: Year Ended December 31, Increase (Decrease) (Dollar amounts in thousands) 2021 2020 $ Revenue from tenants $ 329,355 $ 381,612 $ (52,257) Operating expenses: Property operating and maintenance 205,813 243,548 (37,735) Impairment charges 40,951 36,446 4,505 Operating fees to related parties 24,206 23,922 284 Acquisition and transaction related 2,714 173 2,541 General and administrative 16,828 21,572 (4,744) Depreciation and amortization 79,926 81,053 (1,127) Total expenses 370,438 406,714 (36,276) Operating loss before gain on sale of real estate investments (41,083) (25,102) (15,981) Gain on sale of real estate investments 3,648 5,230 (1,582) Operating loss (37,435) (19,872) (17,563) Other income (expense): Interest expense (47,900) (51,519) 3,619 Interest and other income 61 44 17 Loss on non-designated derivatives 37 (102) 139 Total other expenses (47,802) (51,577) 3,775 Loss before income taxes (85,237) (71,449) (13,788) Income tax expense (203) (4,061) 3,858 Net loss (85,440) (75,510) (9,930) Net (income) loss attributable to non-controlling interests 260 (303) 563 Allocation for preferred stock (7,762) (2,968) (4,794) Net loss attributable to common stockholders $ (92,942) $ (78,781) $ (14,161) __________ NM — Not Meaningful Net Operating Income NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other financial statement amounts included in net income (loss) attributable to common stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” below for additional disclosure and a reconciliation, in the aggregate, of the NOI for the segments presented below to our net income (loss) attributable to common stockholders. 62 Table of Contents Segment Results — Medical Office Buildings The following table presents the components of NOI and the period to period change within our MOB segment for the years ended December 31, 2021 and 2020: Segment Same Store (1) Acquisitions (2) Dispositions (3) Segment Total (4) Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) (Dollar amounts in thousands) 2021 2020 $ 2021 2020 $ 2021 2020 $ 2021 2020 $ Revenue from tenants $ 110,609 $ 112,987 $ (2,378) $ 8,325 $ 2,057 $ 6,268 $ 3,933 $ 4,779 $ (846) $ 122,867 $ 119,823 $ 3,044 Less: Property operating and maintenance 30,131 30,173 (42) 1,819 360 1,459 2,530 2,278 252 34,480 32,811 1,669 NOI $ 80,478 $ 82,814 $ (2,336) $ 6,506 $ 1,697 $ 4,809 $ 1,403 $ 2,501 $ (1,098) $ 88,387 $ 87,012 $ 1,375 _______________ (1) Our MOB segment included 124 Same Store properties. (2) Our MOB segment included 22 Acquisition properties. (3) Our MOB segment included four Disposition properties. (4) Our MOB segment consisted of 146 properties. NM — Not Meaningful Revenue from tenants is primarily related to contractual rent received from tenants in our MOBs. It also includes operating expense reimbursements which generally increase with the increase in property operating and maintenance expenses in our MOB segment. In addition to base rent, dependent on the specific lease, tenants are generally required to pay either (i) their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors or (ii) their share of increases in property operating and maintenance expenses to the extent they exceed the properties’expenses for the base year of the respective leases. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, and unaffiliated third party property management fees. During the year ended December 31, 2021, the MOB segment contributed a $1.4 million increase in NOI as compared to the year ended December 31, 2020. Of our 26 Acquisitions, during the period from January 1, 2020 through December 31, 2021, 22 were MOBs which contributed a $4.8 million increase in NOI, and our Disposition properties contributed a $1.1 million decrease in NOI, while NOI from our Same Store properties contributed a $2.3 million decrease in NOI as compared to the year ended December 31, 2020. The decrease in NOI from our Same Store properties is due to one-time expense recoveries which occurred in the year ended December 31, 2020 which did not occur in the year ended December 31, 2021. Segment Results — Seniors Housing Operating Properties The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the years ended December 31, 2021 and 2020: Segment Same Store (1) Acquisitions (2) Dispositions (3) Segment Total Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) (Dollar amounts in thousands) 2021 2020 $ 2021 2020 $ 2021 2020 $ 2021 2020 $ Revenue from tenants $ 186,359 $ 204,932 $ (18,573) $ 14,667 $ 12,780 $ 1,887 $ 5,462 $ 44,076 $ (38,614) $ 206,488 $ 261,788 $ (55,300) Less: Property operating and maintenance 154,080 160,406 (6,326) 11,941 10,418 1,523 5,312 39,912 (34,600) 171,333 210,736 (39,403) NOI $ 32,279 $ 44,526 $ (12,247) $ 2,726 $ 2,362 $ 364 $ 150 $ 4,164 $ (4,014) $ 35,155 $ 51,052 $ (15,897) __________ (1) Our SHOP segment included 52 Same Store properties, including two land parcels. (2) Our SHOP segment included four Acquisitions properties. (3) Our SHOP segment included 13 Dispositions properties. (4) Our SHOP segment included 56 properties, including two land parcels. NM — Not Meaningful Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance expenses relates to the costs associated with staffing to provide care for the residents in our SHOPs, as well as food, marketing, real estate taxes, management fees paid to our third party operators, and costs associated with maintaining the physical site. 63 Table of Contents During the year ended December 31, 2021, revenue from tenants decreased by $55.3 million in our SHOP segment as compared to the year ended December 31, 2020 primarily giving effect to a $38.6 million decrease from our Disposition properties, and a decrease of $18.6 million from our Same Store properties. These decreases were partially offset by $1.9 million of additional revenue through our Acquisition properties. For the year ended December 31, 2021, an additional $0.8 million was generated through COVID-19 surcharges for PPE as compared to $1.1 million in PPE billings during the year ended December 31, 2020. We also offered $0.1 million of rent concessions related to COVID-19 in the year ended December 31, 2021 as compared to $0.4 million of rent concessions granted during the year ended December 31, 2020. Revenues declined in our Same Store SHOPs primarily due to a decrease in occupancy as a result of COVID-19 as discussed in Management Update on the Impacts of the COVID-19 Pandemic . Regulatory and government-imposed restrictions and infectious disease protocols have hindered our ability to accommodate and conduct in-person tours and process and attract new move-ins at our SHOPs which has affected and could continue to affect our ability to fill vacancies. We also generated a portion of our SHOP revenue from skilled nursing facilities (which include ancillary revenue from non-residents) at two of our Same Store SHOPs and two of our Disposition SHOPs. This revenue declined $9.8 million from $13.3 million during the year ended December 31, 2020 to $3.5 million during the year ended December 31, 2021 as a result of limiting the services we offered at our skilled nursing facilities during the COVID-19 pandemic to protect our residents and on-site staff, as well as from disposing of our two largest SNFs in Lutz and Wellington, Florida in December 2020 and May 2021, respectively. The property in Wellington, Florida generated ancillary revenues of $1.6 million and $3.9 million in the years ended December 31, 2021 and 2020, respectively. The property in Lutz, Florida generated ancillary revenue of $4.0 million in the year ended December 31, 2020. These properties’ results are presented in Disposition properties in the table above. As a result of these dispositions, we expect ancillary revenue to continue to decline in future quarters relative to prior quarters where we owned these properties. Our remaining SNFs generated ancillary revenue of $1.9 million and $5.4 million in the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, property operating and maintenance expenses decreased $39.4 million in our SHOP segment as compared to the year ended December 31, 2020, primarily due to a decrease of $34.6 million from our Dispositions and a decrease of $6.3 million in our Same Store properties. These increases were partially offset by an increase in property operating and maintenance expenses from our Acquisitions of $1.5 million. Our property operating and maintenance expenses for our Same Store properties decreased due to $5.1 million in CARES Act funds received, $4.4 million of which related to our Same Store properties. We received $3.6 million of CARES Act funds in 2020, $0.9 million of which related to our Same Store properties. We consider the receipt of CARES Act funds as government grants which reduce property operating and maintenance expenses for the period in which they are received. In addition, we had lower operating costs as a result of lower occupancy levels as well as some lessening of COVID-related costs in the year ended December 31, 2021 as compared to the year ended December 31, 2020. There can be no assurance that the program will be extended or any further amounts received. See the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response. Other Results of Operations Impairment Charges We incurred $41.0 million of impairment charges for the year ended December 31, 2021. The impairment charges for the year ended December 31, 2021 related to a $0.9 million impairment on our Wellington property, which was recorded to adjust the carrying value to its fair value as determined by its purchase and sale agreement, a $6.1 million impairment related to an MOB property located in Sun City, Arizona, and $34.0 million related to our LaSalle properties. We incurred $36.4 million of impairment charges for the year ended December 31, 2020. We recorded $19.6 million of impairment charges related to the 11 Michigan SHOPs, which was recognized after an amendment to the PSA for the sale of these properties in April 2020 which reduced the number of properties under consideration as well as the contract purchase price. We recorded $16.9 million of impairment charges related to the two Florida properties in Jupiter and Wellington as a result of our marketing efforts during the COVID-19 pandemic which concluded with a PSA in August 2020, for which the contract purchase was less than the carrying values of the properties, as well as expected closing costs that were not previously anticipated, which reduced the net amount expected to be realized on the sale of properties. See Note 3 — Real Estate Investments to our consolidated financial statements in this Annual Report on Form 10-K for additional information on impairment charges. Operating Fees to Related Parties Operating fees to related parties increased $0.3 million to $24.2 million for the year ended December 31, 2021 from $23.9 million for the year ended December 31, 2020. 64 Table of Contents Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. The fixed portion of the base management fee we pay for asset management services is equal to $1.6 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth per month of 1.25% of the cumulative net proceeds of any equity the we raise. Asset management fees increased $0.7 million to $20.7 million for the year ended December 31, 2021, due to the increase in the variable portion of the base management fee related to the issuance and sale of Series B Preferred Stock in October 2021. Property management fees decreased $0.4 million to $3.7 million, inclusive of $0.3 million of leasing commissions paid, during the year ended December 31, 2021 from $4.2 million during the year ended December 31, 2020. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed. See Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements found in this Annual Report on Form 10-K which provides detail on our asset and property management fees. Acquisition and Transaction Related Expenses Acquisition and transaction related expenses were $2.7 million for the year ended December 31, 2021 and $0.2 million for the year ended December 31, 2020. The increase is mainly due to $1.2 million of costs incurred from our terminated Preferred Stock Equity Line, $0.8 million from litigation costs related to our Michigan dispositions which occurred in the first quarter of 2021, $0.2 million from a legal settlement related to our Jupiter, Florida disposition which occurred in the second quarter of 2021, and $0.3 million of increased costs related to dead deal and other miscellaneous costs incurred in the year ended December 31, 2021 as compared to the year ended December 31, 2020. The expenses in both periods primarily related to indirect costs associated with potential acquisitions. General and Administrative Expenses General and administrative expenses decreased $4.7 million to $16.8 million for the year ended December 31, 2021 compared to $21.6 million for the year ended December 31, 2020. For the year ended December 31, 2021 and 2020, incurred expense reimbursements and distributions on partnership units of the OP designated as Class B Units to related parties were $8.4 million and $11.1 million, respectively. Class B Units will not receive cash distributions, and no further expense will be incurred, for so long as we pay distributions to our common stockholders in stock instead of cash. The decrease in expense reimbursements to related parties was primarily due to $2.2 million of costs incurred in the year ended December 31, 2020 related to severance payments to our former chief executive officer and related legal costs which did not occur in the year ended December 31, 2021. Both the years ended December 31, 2021 and 2020 include reductions of expenses related to 2020 and 2019 employee bonuses, respectively, of $1.0 million and $1.2 million of professional fee credits from the Advisor. For additional details on the 2020 and 2019 bonus awards (see Note 9 – Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K). In addition to lower expense reimbursements, the decrease was primarily due the decrease in distributions on Class B Units of $0.2 million, lower legal expenses of $0.9 million, lower auditing expenses of $0.4 million, lower printing expenses of $0.6 million, and lower transfer agent expenses of $0.2 million. The aforementioned professional reimbursement fees to the Advisor are subject to a cap which is equal to the greater of a fixed or variable component. We did not meet the cap for the years ended December 2021 and 2020. The fixed component increases by an annual cost of living adjustment equal to the greater of (x) 3.0% and (y) the CPI, as defined in the Advisory Agreement Amendment for the prior year ended December 31st. See Note 9 – Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Depreciation and Amortization Expenses Depreciation and amortization expense decreased marginally to $79.9 million for the year ended December 31, 2021 from $81.1 million for the year ended December 31, 2020 as decreases from property dispositions were largely offset by increases from acquisitions. Gain on Sale of Real Estate Investments During the year ended December 31, 2021, we disposed of eight properties. The properties were sold for an aggregate contract price of $133.6 million, which resulted in an aggregate gain on sale of $3.6 million. See N ote 3 — Real Estate Investments, Net to our consolidated financial statements in this Annual Report on Form 10-K for additional information. Interest Expense Interest expense decreased by $3.6 million to $47.9 million for the year ended December 31, 2021 from $51.5 million for the year ended December 31, 2020. The decrease in interest expense resulted from lower interest rates as well as lower average outstanding debt in 2021 compared to 2020. As of December 31, 2021 our outstanding debt obligations were $1.1 billion at a weighted average interest rate of 3.44% per year. As of December 31, 2020, we had total borrowings of $1.2 billion, at a weighted average interest rate of 3.58% per year. 65 Table of Contents Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings among other factors. Interest and Other Income Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. Interest and other income was approximately $61,000 for the year ended December 31, 2021. Interest and other income was approximately $44,000 for the year ended December 31, 2020. Loss on Non-Designated Derivatives Loss on non-designated derivative instruments for the years ended December 31, 2021 and 2020 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. Loss on derivative instruments for the years ended December 31, 2021 and 2020 were $37,000 and $0.1 million, respectively. Income Tax Benefit (Expense) We recorded income tax expense of $0.2 million and $4.1 million for the years ended December 31, 2021 and 2020, respectively, related to deferred tax assets generated by temporary differences and current period net operating income associated with our TRS. During the year ended December 31, 2020, we recorded an initial $4.6 million valuation allowance against our net deferred tax assets. During the year ended December 31, 2021, we continue to maintain a full valuation allowance against our net deferred tax assets. Income taxes generally relate to our SHOPs, which are leased by our TRS. Because of our TRS recent operating history of losses and the on-going impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, we are not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets; thus we have recorded a 100% valuation allowance in the year ended December 31, 2020 and we have continued to maintain this valuation allowance through December 31, 2021. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statements of comprehensive income (loss). As of December 31, 2021, our consolidated TRS had net operating loss carryforwards for federal income tax purposes of approximately $13.3 million at December 31, 2021 (of which $7.6 million were incurred prior to January 1, 2018). For losses incurred prior to January 1, 2018, if unused, these will begin to expire in 2035. For net operating losses incurred subsequent to December 31, 2017, there is no expiration date. Net Income/Loss Attributable to Non-Controlling Interests Net loss attributable to non-controlling interests was approximately $0.3 million and net income attributable non-controlling interests was $0.3 million for the years ended December 31, 2021 and 2020, respectively. These amounts represent the portion of our net loss that is related to the OP Units and non-controlling interest holders in our subsidiaries that own certain properties. 66 Table of Contents Cash Flows from Operating Activities During the year ended December 31, 2021, net cash provided by operating activities was $38.9 million. The level of cash flows provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $38.8 million (net loss of $85.4 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges). In addition, cash provided by operating activities was impacted by an increase in accounts payable and accrued expenses of $1.3 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees, a net decrease in prepaid expenses and other assets of $2.1 million, and by an increase in deferred rent of $1.7 million. These cash inflows were partially offset by a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $0.8 million. During the year ended December 31, 2020, net cash provided by operating activities was $41.8 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $50.4 million (net loss of $75.5 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges). These inflows were partially offset by a decrease in accounts payable and accrued expenses of $4.6 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees, a net increase in prepaid expenses and other assets of $0.1 million, a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $2.4 million and by a decrease in deferred rent of $1.6 million. Cash Flows from Investing Activities Net cash used in investing activities during the year ended December 31, 2021 was $47.9 million. The cash used in investing activities included $159.3 million for the acquisition of 17 properties and $19.1 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $130.4 million. Net cash used in investing activities during the year ended December 31, 2020 was $82.5 million. The cash used in investing activities included $95.0 million for the acquisition of nine properties and $21.9 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $34.4 million. Cash Flows from Financing Activities Net cash provided by financing activities of $4.1 million during the year ended December 31, 2021 related to net proceeds from the issuance of Series A preferred stock of $56.3 million, net proceeds from the issuance of Series B preferred stock of $86.9 million and proceeds from a mortgage note payable of $42.8 million. These cash inflows were partially offset by net repayments under our Revolving Credit Facility of $173.8 million, payment for deferred financing costs of $1.5 million and payments of preferred stock dividends of $5.1 million. Net cash provided by financing activities of $19.4 million during the year ended December 31, 2020 included proceeds of $95.0 million from our Revolving Credit Facility. These cash inflows were partially offset by distributions to stockholders of $31.4 million, common stock repurchases of $10.5 million, payments for deferred financing costs of $2.2 million, the buyout of a non-controlling interest of $0.6 million and dividends paid to preferred stockholders $2.4 million. Liquidity and Capital Resources Our principal demands for cash are for acquisitions, capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), and dividends to holders of our Series A Preferred Stock and holders of Series B Preferred Stock. We closely monitor our current and anticipated liquidity position relative to our current and anticipated demands for cash and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as the on-going impact of COVID-19 on our tenants and operators. We expect to fund our future short-term operating liquidity requirements, including dividends to holders of Series A Preferred Stock and holders of Series B Preferred Stock, through a combination of current cash on hand, net cash provided by our property operations and draws on the Revolving Credit Facility, which may include amounts reborrowed following the repayments we were or are required to make thereunder. As of December 31, 2021 and 2020, we had $59.7 million and $72.4 million of cash and cash equivalents, respectively. Our ability to use this cash on hand is restricted. Under our Credit Facility, we are required to maintain a combination of cash, cash equivalents and availability for future borrowings under our Revolving Credit Facility totaling at least $50.0 million. As of 67 Table of Contents December 31, 2021, $236.6 million was available for future borrowings under our Revolving Credit Facility. Certain other restrictions and conditions described below, including those on paying cash dividends, will no longer apply starting in the “Commencement Quarter” which is a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%, and the Covenant Relief Period has terminated. The fiscal quarter ended June 30, 2021 was the first quarter that could have been the Commencement Quarter. We satisfied the conditions during the quarter ended December 31, 2021 in order to elect the quarter ending March 31, 2022 as the Commencement Quarter, but chose not to do so. There can be no assurance as to if, or when, we will elect to do so, including to the extent we may be unable to satisfy these conditions in future periods. We may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of our common stock) on our common stock until the Commencement Quarter. Moreover, beginning in the Commencement Quarter, we may only pay cash distributions provided that the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock and Series B Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter. Our Credit Facility also restricts our uses of liquidity. Until the first day of the Commencement Quarter, we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to repay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. The availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the decreases in cash rent collected from our tenants and income from our operators that have resulted from the effects of the COVID-19 pandemic and may persist for some time. During the year ended December 31, 2021, we generated liquidity through the sale of equity securities and from various financings as described below. Preferred Stock Equity Line with B. Riley Principal Capital, LLC On September 15, 2020, we entered into a preferred stock purchase agreement and registration rights agreement with B. Riley Principal Capital, LLC (“B. Riley”), pursuant to which we had the right from time to time to sell up to an aggregate of $15 million of shares of our Series A Preferred Stock to B. Riley until December 31, 2023, on the terms and subject to the conditions set forth in the purchase agreement (“Preferred Stock Equity Line”). We sold 15,000 shares of Series A Preferred Stock under the Preferred Stock Equity Line during the year ended December 31, 2021, resulting in gross proceeds of $0.4 million and net proceeds of $0.3 million after fees and commissions. In total, we incurred $1.2 million in costs related to establishing the Preferred Stock Equity Line which were all initially recorded in prepaid expenses and other assets on our consolidated balance sheet. Upon receiving proceeds under the Preferred Stock Equity Line in the third quarter of 2021, the Company reclassified $30,000 of these prepaid costs to additional paid in capital in our consolidated statement of changes in equity as a reduction of the gross proceeds received under the Preferred Stock Equity Line. In the fourth quarter of 2021, we determined that it was not probable that additional proceeds would be received from the Preferred Stock Equity Line and later terminated the Preferred Stock Equity Line. As a result, we expensed the remaining balance of prepaid costs within acquisition and transaction related costs on the consolidated statement of operations and comprehensive income during the year ended December 31, 2021. We did not sell any Series A Preferred Stock under the Preferred Stock Equity Line during the year ended December 31, 2020. Series A Preferred Stock Add-On Offering On May 11, 2021, we completed an underwritten public offering of 2,352,144 shares (which included 152,144 shares issued and sold pursuant to the underwriters’ exercise of their option to purchase additional shares) of our Series A Preferred Stock for net proceeds of $56.0 million after deducting the underwriters’ discount, structuring fees and other offering costs aggregating to $2.9 million. Pursuant to the terms of the Credit Facility, all proceeds were used to repay amounts outstanding under the Credit Facility. Subject to the terms and conditions set forth in the Credit Facility, we may then draw on the Credit Facility to borrow any amounts so repaid. Series B Preferred Stock Offering On October 6, 2021, we completed the initial issuance and sale of 3,630,000 shares (which includes 430,000 shares issued and sold pursuant to the underwriters’ exercise of their option to purchase additional shares) of our 7.125% Series B Preferred Stock in an underwritten public offering at a public offering price equal to the liquidation preference of $25.00 per share. The offering generated gross proceeds of $90.8 million and net proceeds of $86.8 million, after deducting underwriting discounts, structuring fees and other offering costs. Pursuant to the terms of the Credit Facility, all proceeds were used to repay amounts outstanding under the 68 Table of Contents Credit Facility. Subject to the terms and conditions set forth in the Credit Facility, we may then draw on the Credit Facility to borrow any amounts so repaid. Financings As of December 31, 2021, our total debt leverage ratio (net debt divided by gross asset value) was approximately 40.1%. Net debt totaled $1.0 billion, which represents gross debt ($1.1 billion) less cash and cash equivalents ($59.7 million). Gross asset value totaled $2.6 billion, which represents total real estate investments, at cost ($2.6 billion), net of gross market lease intangible liabilities ($23.5 million). Impairment charges are already reflected within gross asset value. As of December 31, 2021, we had total gross borrowings of $1.1 billion, at a weighted average interest rate of 3.44%. As of December 31, 2020, we had total gross borrowings of $1.2 billion at a weighted average interest rate of 3.58%. As of December 31, 2021, the carrying value of our real estate investments, at cost was $2.6 billion, with $0.9 billion of this amount pledged as collateral for mortgage notes payable, $0.6 billion of this amount pledged to secure advances under the Fannie Mae Master Credit Facilities and $1.0 billion of this amount comprising the borrowing base of the Credit Facility. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the Credit Facility, which would impact availability thereunder. We expect to utilize proceeds from our Credit Facility to fund future property acquisitions, as well as, subject to the terms of our Credit Facility, other sources of funds that may be available to us. These actions may require us to add some or all of our unencumbered properties as security for that debt or add them to the borrowing base under our Credit Facility. Unencumbered real estate investments, at cost as of December 31, 2021 was $110.4 million. There can be no assurance as to the amount of liquidity we would be able to generate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility. Pursuant to the Credit Facility, any resulting net proceeds from these dispositions prior to the Commencement Quarter must be used to prepay amounts outstanding under the Revolving Credit Facility. Mortgage Notes Payable As of December 31, 2021, we had $591.8 million in gross mortgage notes payable outstanding. Future scheduled principal payments on our mortgage notes payable for 2022 are $1.3 million. Credit Facility Our Credit Facility consists of two components, the Revolving Credit Facility and our Term Loan. The Revolving Credit Facility is interest-only and matures on March 13, 2023, subject to one one-year extension at our option. Our Term Loan is interest-only and matures on March 13, 2024. Loans under our Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty, subject to customary breakage costs. Any amounts repaid under our Term Loan may not be re-borrowed. We drew $125.0 million under our Credit Facility during the year ended December 31, 2021, primarily to fund acquisitions during the year. We repaid $298.8 million of amounts outstanding under our Revolving Credit Facility during the year ended December 31, 2021 derived from $88.0 million of net proceeds of our dispositions of the Wellington, Florida and Jupiter, Florida properties, all $56.7 million of net cash proceeds from our May 2021 Series A Preferred Stock offering, $87.6 million of net cash proceeds from our October Series B Preferred Stock Offering, $37.0 million of proceeds from our BMO CMBS Loan and $29.4 million from cash on hand. The total commitments under the Credit Facility are $630.0 million including $480.0 million under the Revolving Credit Facility. The Credit Facility includes an uncommitted “accordion feature” that may be used to increase the commitments under either component of the Credit Facility by up to an additional $370.0 million to a total of $1.0 billion. As of December 31, 2021, $150.0 million was outstanding under the Term Loan, and no amounts were outstanding under the Revolving Credit Facility. The unused borrowing availability under the Credit Facility was $236.6 million. The amount available for future borrowings under the Revolving Credit Facility is based on either the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, or satisfying a minimum debt service coverage ratio with respect to the borrowing base. Both of these amounts are calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and, therefore, availability under our Revolving Credit Facility has been adversely affected by the decreases in cash rent collected from our tenants and income from our operators due to the effects of the COVID-19 pandemic, and may continue to be adversely affected. See also the discussion above regarding the need to maintain certain levels of liquidity until the Commencement Quarter. The equity interests and related rights in our wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The applicable margin used to determine the interest rate under both the Term Loan and Revolving Credit Facility components of the Credit Facility varies based on our leverage. As of December 31, 2021, the Term Loan had an effective interest rate per annum equal to 4.11%. The Credit Facility prohibits us from exceeding a maximum ratio of consolidated total indebtedness to consolidated total asset value, and requires us to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges (the “Fixed Charge 69 Table of Contents Coverage Ratio”) on a quarterly basis and a minimum consolidated tangible net worth. We entered into an amendment to our Credit Facility on November 12, 2021. We would have been in default of the Fixed Charge Coverage Ratio for the four fiscal quarter period ended September 30, 2021. Pursuant to the terms of a third amendment entered into on November 12, 2021 by us, the agent and the requisite lenders under the Credit Facility, the lenders waived any defaults or event of defaults under the covenant requiring us to maintain a Fixed Charge Coverage Ratio of 1.60 to 1.00 for the quarter ended September 30, 2021 and any further defaults or Events of Default (as defined in the Credit Facility) resulting from the breach of the Fixed Charge Coverage Ratio covenant. In addition, as described above, the Fixed Charge Coverage Ratio we are required to maintain was reduced from 1.60 to 1.00 to 1.50 to 1.00 until the earlier of December 31, 2022, and such earlier date as we elect to terminate this relief. There can be no assurance our lenders will consent to any amendments or waivers that may become necessary to comply with the terms of the Credit Facility in the future. As of December 31, 2021, we were in compliance with the financial covenants under the Credit Facility. Based upon our current expectations, we believe we will be able to comply with these covenants during the next 12 months. Please see “Item 1A. Risk Factors. Risks Related to our Indebtedness.” Fannie Mae Master Credit Facilities As of December 31, 2021, $355.0 million was outstanding under the Fannie Mae Master Credit Facilities. We may request future advances under the Fannie Mae Master Credit Facilities by adding eligible properties to the collateral pool subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. We do not expect to draw any further amounts on the Fannie Mae Master Credit Facilities. Borrowings under the Fannie Mae Master Credit facilities bear annual interest at a rate that varies on a monthly basis and is equal to the sum of the current LIBOR for one month U.S. dollar-denominated deposits and 2.62%, with a combined floor of 2.62%. The Fannie Mae Master Credit Facilities mature on November 1, 2026. Future scheduled principal payments on our Fannie Mae Master Credit Facilities for 2022 are $2.8 million. Capital Expenditures During the year ended December 31, 2021, our capital expenditures were $19.1 million, of which approximately $6.2 million related our MOB segment and $12.9 million related to our SHOP segment. We anticipate this rate of capital expenditures will be similar for the MOB and SHOP segments throughout 2022, however, the recent economic uncertainty created by the COVID-19 global pandemic will continue to impact our decisions on the amount and timing of future capital expenditures. Our capital expenditures in 2021 were funded using cash on hand, and we also expect to fund future capital expenditures using cash on hand. Acquisitions — Year Ended December 31, 2021 During the year ended December 31, 2021, we completed the acquisitions of five multi-tenant MOBs and 12 single tenant MOBs for an aggregate contract purchase price of $160.2 million. The acquisition of one multi-tenant MOB and two single-tenant MOBs for a contract purchase price of $12.8 million, was completed during the three months ended December 31, 2021. The properties acquired during the year were funded with proceeds cash on hand and borrowings from our Revolving Credit Facility, and in one case, in part by the issuance of our Series A Preferred OP Units (see Note 8 — Stockholders’ Equity and Note 13 — Non-Controlling Interests to our consolidated financial statements included in this Annual Report on Form 10-K). Acquisitions — Subsequent to December 31, 2021 We did not acquire any properties subsequent to December 31, 2021. We have entered into one non-binding letter of intent to purchase one MOB property for a contract purchase price of $8.2 million. There can be no assurance we will complete this acquisition on its contemplated terms, or at all. Dispositions — Year Ended December 31, 2021 During the year ended December 31, 2021, we sold eight properties (three MOBs and five SHOPs) for an aggregate contract price of $133.6 million, which resulted in an aggregate gain on sale of $3.6 million. Two of these properties were sold in the fourth quarter of 2021 and had an aggregate contract sales price of $37.8 million, which resulted in an aggregate gain on sale of $1.3 million. Of the properties disposed in the year ended December 31, 2021, one was encumbered under the Capital One MOB loan, one was unencumbered, and six were part of the borrowing base of our Credit Facility. Pursuant to the terms of our amended Credit Facility, all proceeds from these dispositions were used to repay amounts outstanding under the Credit Facility. Dispositions — Subsequent to December 31, 2021 Subsequent to December 31, 2021, we did not dispose of any properties. We have entered into a PSA to dispose of the four LaSalle properties located in Texas for an aggregate contract sales price of $12.4 million. The PSA is subject to conditions, and there can be no assurance this, or any, disposition will be completed on the contemplated terms, or at all. Pursuant to the terms of our Credit Facility, the net cash proceeds from any completed dispositions must be used to prepay amounts outstanding under the Revolving Credit Facility and will therefore not be available to us for any other purpose. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. Share Repurchase Program 70 Table of Contents Under the Credit Facility, we are restricted from repurchasing shares until the end of the Commencement Quarter. Thus, the Board suspended repurchases under the SRP effective August 14, 2020. No further repurchase requests under the SRP may be made unless and until the SRP is reactivated. There can be no assurance, however, as to whether our SRP will be reactivated or on what terms. Beginning in the Commencement Quarter, we will be permitted to repurchase up to $50.0 million of shares of our common stock (including amounts previously repurchased during the term of the Revolving Credit Facility) if, after giving effect to the repurchases, we maintain cash and cash equivalents of at least $30.0 million and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 55.0%. No assurances can be made as to when or if our SRP will be reactivated. Non-GAAP Financial Measures This section discusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations (“FFO”), Modified Funds from Operations (“MFFO”) and NOI. While NOI is a property-level measure, MFFO is based on our total performance as a company and therefore reflects the impact of other items not specifically associated with NOI such as, interest expense, general and administrative expenses and operating fees to related parties. Additionally, NOI as defined here, includes straight-line rent which is excluded from MFFO. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below: Funds from Operations and Modified Funds from Operations The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative. Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP. We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s definition. We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and 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. Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings. Because of these factors, the Institute of Portfolio Alternatives (“IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP. We calculate MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in 71 Table of Contents November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income 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 adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses and capitalized interest. In addition, because we currently believe that concessions granted to our tenants as a result of the COVID-19 pandemic are collectable (see Accounting Treatment of Rent Deferrals below), we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these deferrals, which is not considered by the Practice Guideline. We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 once our portfolio is stabilized. Our Modified FFO (as defined in our Credit Facility) is similar but not identical to MFFO as discussed in this Annual Report on Form 10-K. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs. Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to pay dividends and other distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO. Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, updates to the White Paper or the Practice Guideline may be published or the SEC or another regulatory body could 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 accordingly. Accounting Treatment of Rent Deferrals All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information). As a result of relief granted by the FASB and SEC related to lease modification accounting, rental revenue used to calculate Net Income and NAREIT FFO has not been, and we do not expect it to be, significantly impacted by these types of deferrals. In addition, because we currently believe that these deferred amounts are collectable, we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these deferrals. For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 — Significant Accounting Polices to our consolidated financial statements included in this Annual Report on Form 10-K. 72 Table of Contents The table below reflects the items deducted from or added to net loss attributable to common stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests. Year Ended December 31, (In thousands) 2021 2020 Net loss attributable to common stockholders (in accordance with GAAP) $ (92,942) $ (78,781) Depreciation and amortization (1) 78,115 79,643 Impairment charges 40,951 36,446 Gain on sale of real estate investments (3,648) (5,230) Adjustments for non-controlling interests (2) (529) (526) FFO (as defined by NAREIT) attributable to common stockholders 21,947 31,552 Acquisition and transaction related 2,714 173 (Accretion) amortization of market lease and other lease intangibles, net (198) (80) Straight-line rent adjustments (780) (2,405) Straight-line rent (rent deferral agreements) (3) (280) 280 Amortization of mortgage premiums and discounts, net 55 60 (Gain) loss on non-designated derivatives (37) 102 Deferred tax asset valuation allowance (4) (482) 4,641 Adjustments for non-controlling interests (2) 1 (9) MFFO attributable to common stockholders $ 22,940 $ 34,314 ________ (1) Net of non-real estate depreciation and amortization. (2) Represents the portion of the adjustments allocable to non-controlling interests. (3) Represents the amount of deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our consolidated balance sheet but are considered to be earned revenue attributed to the current period for purposes of MFFO as they are expected to be collected. (4) This is a non-cash item and is added back as it is not considered a part of operating performance. Net Operating Income NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss). We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss). NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay distributions. The following table reflects the items deducted from or added to net loss attributable to common stockholders in our calculation of NOI for the year ended December 31, 2021: 73 Table of Contents (In thousands) Same Store Acquisitions Dispositions Non-Property Specific Total Net (loss) income attributable to common stockholders (in accordance with GAAP) $ (133) $ 2,527 $ 2,074 $ (97,410) $ (92,942) Impairment charges 40,073 — 878 — 40,951 Operating fees to related parties — — — 24,206 24,206 Acquisition and transaction related 3 — — 2,711 2,714 General and administrative 135 — — 16,693 16,828 Depreciation and amortization 70,972 6,705 2,249 — 79,926 Interest expense 1,726 — — 46,174 47,900 Interest and other income (19) — — (42) (61) Loss on non-designated derivative instruments — — — (37) (37) Loss on sale of real estate investments — — (3,648) — (3,648) Income tax expense — — — 203 203 Net income attributable to non-controlling interests — — — (260) (260) Allocation for preferred stock — — — 7,762 7,762 NOI $ 112,757 $ 9,232 $ 1,553 $ — $ 123,542 The following table reflects the items deducted from or added to net loss attributable to common stockholders in our calculation of NOI for the year ended December 31, 2020: (In thousands) Same Store Acquisitions Dispositions Non-Property Specific Total Net income (loss) attributable to common stockholders (in accordance with GAAP) $ 62,691 $ 983 $ (40,010) $ (102,445) $ (78,781) Impairment charges (10,135) — 46,581 — 36,446 Operating fees to related parties — — — 23,922 23,922 Acquisition and transaction related — — — 173 173 General and administrative 95 — — 21,477 21,572 Depreciation and amortization 72,653 3,076 5,324 — 81,053 Interest expense 2,036 — — 49,483 51,519 Interest and other income — — — (44) (44) Loss on non-designated derivative instruments — — — 102 102 Gain on sale of real estate investments — — (5,230) — (5,230) Income tax expense — — — 4,061 4,061 Net income (loss) attributable to non-controlling interests — — — 303 303 Allocation for preferred stock — — — 2,968 2,968 NOI $ 127,340 $ 4,059 $ 6,665 $ — $ 138,064 Refer to Note 15 — Segment Reporting to our consolidated financial statements found in this Annual Report on Form 10-K for a reconciliation of NOI to net loss attributable to stockholders by reportable segment. 74 Table of Contents Dividends and Other Distributions Dividends on our Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to Series A Preferred Stock holders, which is equivalent to 7.375% per annum on the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us. Dividends on our Series B Preferred Stock accrue in an amount equal to $1.78125 per share each year ($0.445313 per share per quarter) to Series B Preferred Stock holders, which is equivalent to 7.125% of per annum in the $25.00 liquidation preference per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us. The first dividend on the Series B Preferred Stock was paid in January 2022. From March 1, 2018 until June 20, 2020, we paid distributions to our common stockholders, at a rate equivalent to $0.85 per annum, per share of common stock. Distributions were payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. On June 29, 2020, the Board approved a change in our common stock distribution policy changing from daily record dates to a single record date during the applicable month. Under our Credit Facility we may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of the Company’s common stock), subject to certain exceptions. These exceptions include paying cash dividends on the Series A Preferred Stock and the Series B Preferred Stock or any other preferred stock we may issue and paying any cash distributions necessary to maintain our status as a REIT. We may not pay any cash distributions (including dividends on Series A Preferred Stock and Series B Preferred Stock) if a default or event of default exists or would result therefrom. The restrictions on paying cash distributions will no longer apply starting in the quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter, we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%, and the Covenant Relief Period has ended. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We may only pay cash distributions on our common stock beginning in the Commencement Quarter and the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock and Series B Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter. In addition, our ability to pay cash distributions may be limited by financial covenants in the Credit Facility, including our requirement to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges. Until four full fiscal quarters have elapsed after the commencement of Commencement Quarter, the aggregate amount of permitted distributions and Modified FFO will be determined by using only the fiscal quarters that have elapsed from and after the Commencement Quarter and annualizing those amounts. On August 13, 2020, the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the continued COVID-19 pandemic and to comply with the Credit Facility described above. Under the new policy, distributions authorized by the Board on shares of our common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at the Estimated Per-Share NAV in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. In each of October 2020 and January 2021, we declared and issued stock dividends equal to 0.01349 shares of common stock on each share of outstanding common stock, and in April 2021, July 2021, October 2021 and January 2022, we declared and issued a stock dividend equal to 0.014655 shares of common stock on each share of outstanding common stock. The amounts of these stock dividends were based on our prior cash distribution rate of $0.85 per share per annum and the then applicable Estimated Per-Share NAV. We did not pay any cash dividends on our common stock during the year ended December 31, 2021. See “— Overview” for additional information on the impact of the stock dividends. Subject to the restrictions in our Credit Facility, the amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Code. Distribution payments are dependent on the availability of funds. The Board may reduce the amount of dividends or distributions paid or suspend dividend or distribution payments at any time and therefore dividend and distribution payments are not assured. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock or Series B Preferred Stock become part of the liquidation preference thereof. 75 Table of Contents The following table shows the sources for the payment of distributions to common stockholders and preferred stockholders, including distributions on restricted shares and OP Units, but excluding distributions related to Class B Units because these distributions are recorded as an expense in our consolidated statement of operations and comprehensive loss, for the periods indicated: Three Months Ended Year Ended March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 December 31, 2021 (In thousands) Percentage of Distributions Percentage of Distributions Percentage of Distributions Percentage of Distributions Percentage of Distributions Distributions: Dividends paid to holders of Series A Preferred Stock $ 742 $ 742 $ 1,827 $ 1,833 $ 5,144 Distributions paid to holders of Series A OP Units — — — 46 46 Total cash distributions [1] [3] $ 742 $ 742 $ 1,827 $ 1,879 $ 5,190 Source of distribution coverage: Cash flows provided by operations [2] $ 742 100.0 % $ 742 100.0 % $ 1,827 100.0 % $ 1,879 100.0 % $ 5,190 100.0 % Total source of distribution coverage $ 742 100.0 % $ 742 100.0 % $ 1,827 100.0 % $ 1,879 100.0 % $ 5,190 100.0 % Cash flows provided by operations (in accordance with GAAP) $ 13,959 $ 3,644 $ 8,401 $ 12,875 $ 38,879 Net loss (in accordance with GAAP) $ (11,442) $ (14,103) $ (40,465) $ (19,430) $ (85,440) _______ [1] Assumes the use of available cash flows from operations before any other sources. [2] During 2021 all dividends on common stock and common stock OP Units were issued in the form of additional shares and therefore, are not included in the table above. [3] Our Series B Preferred Stock was first issued in October 2021, and we are required to begin paying dividends on the Series B Preferred Stock in January 2022. For the year ended December 31, 2021, cash flows provided by operations were $38.9 million. We had not historically generated sufficient cash flow from operations to fund the payment of dividends and other distributions at the current rate prior to switching from paying cash dividends to stock dividends on our common stock. As shown in the table above, we funded distributions with cash flows provided by operations. Because shares of common stock are only offered and sold pursuant to the DRIP in connection with the reinvestment of distributions paid in cash, participants in the DRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in stock instead of cash. Our ability to pay dividends on our Series A Preferred Stock and Series B Preferred Stock and starting with the Commencement Quarter, other distributions and maintain compliance with the restrictions on the payment of distributions in our Credit Facility depends on our ability to increase the amount of cash we generate from property operations which in turn depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective. We may still pay any cash distributions necessary to maintain its status as a REIT and may not pay any cash distributions (including dividends on Series A Preferred Stock and Series B Preferred Stock) if a default or event of default exists or would result therefrom under the Credit Facility. Loan Obligations The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities required interest only payments through November 2021 and principal and interest payments thereafter. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2021, we were in compliance with the financial and reporting covenants under our loan agreements. 76 Table of Contents Election as a REIT We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. Commencing with that taxable year, we have been organized and operated in a manner so that we qualify as a REIT under the Code. We intend to continue to operate in such a manner but can provide no assurances that we will operate in a manner so as to remain qualified for taxation as a REIT. To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and comply with a number of other organizational and operational requirements. If we continue to qualify as a REIT, we generally will not be subject to U.S. federal corporate income tax on the portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as U.S. federal income and excise taxes on our undistributed income. Inflation We may be adversely impacted by inflation on the leases with tenants in our MOB segment that do not contain indexed escalation provisions, or those leases which have escalations at rates which do not exceed or approximate current inflation rates. For the year ended December 31, 2021, the increase to the 12-month CPI for all items, as published by the Bureau of Labor Statistics, was 7.0%. To help mitigate the adverse impact of inflation, approximately 87% of our leases with our tenants in our MOB segment contain rent escalation provisions which average 1.8% per year. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). Approximately 84% are fixed-rate, 3% are based on the Consumer Price Index and 13% do not contain any escalation provisions. In addition to base rent, depending on the specific lease, MOB tenants are generally reuired to pay either (i) their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors or (ii) their share of increases in property operating and maintenance expenses to the extent they exceed the properties’ expenses for the base year of the respective leases. Property operating and maintenance expenses include common area maintenance costs, real estate taxes and insurance. Increased operating costs paid by our tenants under these net leases could have an adverse impact on our tenants if increases in their operating expenses exceed increases in their revenue, which may adversely affect our tenants’ ability to pay rent owed to us or property expenses to be paid, or reimbursed to us, by our tenants. Renewals of leases or future leases for our net lease properties may not be negotiated on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs. Leases with residents at our SHOPs typically do not have rent escalations, however, we are able to renew leases at market rates as they mature due to their short-term nature. As inflation rates increase or persist at high levels, the cost of providing medical care at our SHOPs, particularly labor costs, will increase. If we are unable to admit new residents or renew resident leases at market rates, while bearing these increased costs from providing services to our residents, our results of operations may be affected. Related-Party Transactions and Agreements Please see Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.