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. As of December 31, 2023, we owned 204 properties (including two land parcels) located in 33 states and comprised of 9.0 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 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, 2023, we had four eligible independent contractors operating 46 SHOPs. All of our properties across both business segments are located throughout the United States. We have declared quarterly dividends entirely in shares of our common stock since October 2020 in order to preserve our liquidity. Management Update on the Adverse Economic Impacts Since the COVID-19 During the first quarter of 2020, the global COVID-19 pandemic commenced. The pandemic and its aftermath have had, and could continue to have, adverse impacts on economic and market conditions. Our MOB segment has been less impacted than our SHOP segment, which continues to be challenged by the post-pandemic operating environment. Further, recent increases in inflation brought about by labor shortages, supply chain disruptions, and higher property insurance, property tax and interest rates have had, and may continue to have, adverse impacts on our results of operations. Moreover, these adverse economic impacts may also impact the ability of our tenants and residents to pay rent and hence negatively affect our results of operations and liquidity. 51 Table of Contents Seniors Housing Properties SHOP Occupancy Occupancy in our SHOP portfolio trended lower since December 31, 2019 to a low of 72.0% as of March 31, 2021, stabilized and partially recovered from June 30, 2021 until June 30, 2022 and has since stabilized in the mid-70% occupied range. As of December 31, 2023, occupancy in our SHOP segment was 74.1%. The below table presents SHOP occupancy since December 31, 2019, which we consider the last period before the COVID-19 pandemic and its continuing impacts began: 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% March 31, 2022 50 4,378 75.9% June 30, 2022 50 4,374 76.3% September 30, 2022 50 4,374 75.8% December 31, 2022 50 4,374 75.1% March 31, 2023 50 4,374 73.3% June 30, 2023 46 4,164 73.3% September 30, 2023 46 4,164 74.1% December 31, 2023 46 4,164 74.1% __________ (1) Exclusive of two land parcels. Contract Labor and Wage Expenses During the year ended December 31, 2022, our third party operators needed to increase their use of temporary contract labor and agencies, and the amount paid for overtime, training and bonus wages, in response to a shortage of workers, the cost of labor generally, lack of qualified personnel that our third party operators are able to employ on a permanent basis and training hours and other onboarding costs for permanent staff which replaced previously utilized contract and agency labor. During the year ended December 31, 2023, these contract and agency costs declined. In particular, costs incurred from contract labor and agencies for care providers decreased in our total SHOP segment by $5.6 million, from $7.6 million in the year ended December 30, 2022, to $2.0 million as compared to the year ended December 31, 2023. However, these costs were partially offset by increased wage costs for direct employees of our third party operators in our total SHOP segment of $5.1 million, from $74.9 million in the year ended December 31, 2022 to $80.1 million in the year ended December 31, 2023. On a Same Store basis (as defined below in Results of Operations — Same Store Properties, ), contract labor costs decreased $5.5 million but were more than offset by increases to wage costs of $7.7 million in the year ended December 31, 2023 as compared to the year ended December 31, 2022. The results of operations in our SHOP segment have been significantly and adversely affected because occupancy levels have not recovered to their pre-pandemic rates (as noted in the table above) and labor costs have increased, even though resident leasing rates have increased. Rent Concessions We have also granted rent concessions which serve to reduce revenue in our SHOP segment. We offered $3.1 million and $3.3 million of rent concessions during the years ended December 31, 2023 and 2022, respectively. 52 Table of Contents The CARES Act On March 27, 2020, the CARES Act was signed into law providing, among other things, 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 did not receive any funds through the CARES Act during the year ended December 31, 2023. During the years ended December 31, 2022 and 2021, we received $4.5 million and $5.1 million, respectively, from CARES Act grants . For accounting purposes, we treat the funds as grant contributions from the government and the full amounts were recognized as reductions of property operating and maintenance expenses in our consolidated statement of operations during the years ended December 31, 2022 and 2021. We do not anticipate that any further funds under the CARES Act will be received, and 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: Revenue Recognition Our revenues, which are derived primarily from lease contracts, include rent received from tenants in our MOB segment. As of December 31, 2023 these leases had a weighted average remaining lease term of 4.7 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 expenses paid directly by the tenant, under both ASC 842 and 840, we have reflected them on a net basis. Our revenues also include resident services and fee income primarily related to rent derived from lease contracts with residents in the Company’s SHOP segment, held using a structure permitted under RIDEA and to a lesser extent, 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 when services are provided. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the leases 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 and maintenance 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 and maintenance costs of the respective properties. 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 the 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 in accordance with accounting rules, on the accompanying consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable. 53 Table of Contents 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, 2023, 2022 and 2021 such amounts were $1.2 million, $3.2 million and $1.1 million, respectively. Approximately $1.3 million in the year ended December 31, 2022 related to previously disposed properties. There were no significant write-off’s related to previously disposed properties during the years ended December 31, 2023 and 2021. 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, 2023, 2022 and 2021. 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 no real estate investments held for sale as of December 31, 2023 and 2022. 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 allocating the fair value to any assumed or issued non-controlling interests, amounts are recorded at their fair value at the close of business on the acquisition date. 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, 2023, 2022 and 2021 were accounted for as asset acquisitions. We acquired seven properties during the year ended December 31, 2023. 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 the 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. 54 Table of Contents 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, 2023 and 2022. Accounting for Leases Lessor Accounting In accordance with the lease accounting standard, all of our leases as lessor prior to adoption were accounted for as operating leases. 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 a major part of the remaining economic useful life of the asset (e.g., equal to or greater than 75%), 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 the asset is 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. As of December 31, 2023 and 2022, we did not have any leases as a lessor that would be considered as sales-type leases or financings under sale-leaseback rules. As a lessor of real estate, we elected, by class of underlying assets, to account for lease and non-lease components (such as tenant reimbursements of property operating and maintenance expenses) as a single lease component as an operating lease because (a) the non-lease components have the same timing and pattern of transfer as the associated lease component; and (b) the lease component, if accounted for separately, would be classified as an operating lease. Additionally, only incremental direct leasing costs may be capitalized under the accounting guidance. Indirect leasing costs in connection with new or extended tenant leases, if any, are being expensed. Lessee Accounting We are also the lessee under certain land leases which will continue to be classified as operating leases under transition elections unless subsequently modified. These leases are reflected on the consolidated balance sheets as of December 31, 2023 and 2022, and the rent expense is reflected on a straight-line basis over the lease term in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023, 2022 and 2021. For lessees, the accounting standard requires the application of a dual lease classification approach, classifying leases as either operating or finance leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease, while lease expense for finance leases is recognized based on an effective interest method over the term of the lease. Also, lessees must recognize a right-of-use asset (“ROU”) and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Further, certain transactions where at inception of the lease the buyer-lessor accounted for the transaction as a purchase of real estate and a new lease, may now be required to have symmetrical accounting to the seller-lessee if the transaction was not a qualified sale-leaseback and accounted for as a financing transaction. For additional information and disclosures related to our operating leases, see Note 16 — Commitments and Contingencies to the consolidated financial statements included in this Annual Report on Form 10-K. 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 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. 55 Table of Contents 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 15 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, the 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 did not receive any funds through the CARES Act in the year ended December 31, 2023. During the years ended December 31, 2022 and 2021 we received $4.5 million and $5.1 million in funding from CARES Act grants, respectively. For accounting purposes, the CARES Act funds are treated as a grant contribution from the government. The funding we received was recognized as a reduction of property operating and maintenance expenses in our consolidated statements of operations to offset the negative impacts of COVID-19. We do not anticipate that any further funds under the CARES Act will be received, and there can be no assurance that the program will be extended or any further amounts received under currently effective or potential future government programs. 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 Below is a discussion of our results of operations for the years ended December 31, 2023 and 2022. Please see the “Results of Operations” section located on page 49 under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our results of operations for the year ended December 31, 2022 and comparisons between December 31, 2022 and 2021. 56 Table of Contents Comparison of the Years Ended December 31, 2023 and 2022 Net loss attributable to common stockholders was $86.1 million and $93.3 million for the years ended December 31, 2023 and 2022, respectively. The following table shows our results of operations for the years ended December 31, 2023 and 2022 and the year to year change by line item of the consolidated statements of operations: Year Ended December 31, Increase (Decrease) (in thousands) 2023 2022 $ Revenue from tenants $ 345,925 $ 335,846 $ 10,079 Operating expenses: Property operating and maintenance 217,792 213,444 4,348 Impairment charges 4,676 27,630 (22,954) Operating fees to related parties 25,527 25,353 174 Acquisition and transaction related 545 1,484 (939) General and administrative 18,928 17,287 1,641 Depreciation and amortization 82,873 82,064 809 Total expenses 350,341 367,262 (16,921) Operating loss before loss on sale of real estate investments (4,416) (31,416) 27,000 Loss on sale of real estate investments (322) (125) (197) Operating loss (4,738) (31,541) 26,803 Other income (expense): Interest expense (66,078) (51,740) (14,338) Interest and other income 734 27 707 (Loss) gain on non-designated derivatives (1,995) 3,834 (5,829) Total other expenses (67,339) (47,879) (19,460) Loss before income taxes (72,077) (79,420) 7,343 Income tax expense (303) (201) (102) Net loss (72,380) (79,621) 7,241 Net loss attributable to non-controlling interests 82 135 (53) Allocation for preferred stock (13,799) (13,799) — Net loss attributable to common stockholders $ (86,097) $ (93,285) $ 7,188 Segment Income We evaluate the performance of the combined properties in each segment based on total revenues from tenants, less property operating costs. As such, this excludes all other items of expense and income included in the financial statements in calculating net loss (each item discussed separately in “Other Results of Operations” below). We use segment income to assess and compare property level performance and to make decisions concerning the operation of our properties. We believe that segment income is useful as a performance measure because, when compared across periods, segment income 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 loss. Same Store Properties Information based on Same Store Properties, Acquired Properties and Disposed Properties (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, 2023, we owned 204 properties (including two land parcels). There were 193 properties (our “Same Store Properties”) owned for the entire years ended December 31, 2023 and 2022 (including two land parcels). Since January 1, 2022 and through December 31, 2023, we acquired 11 properties (our “Acquired Properties”) and disposed of nine properties (our “Disposed Properties”). 57 Table of Contents The following table presents a roll-forward of our properties owned from January 1, 2022 to December 31, 2023: MOB SHOP Total Number of properties, December 31, 2021 146 56 202 Acquisition activity during the year ended December 31, 2022 4 — 4 Disposition activity during the year ended December 31, 2022 — (4) (4) Number of properties, December 31, 2022 150 52 202 Acquisition activity during the year ended December 31, 2023 7 — 7 Disposition activity during the year ended December 31, 2023 (1) (4) (5) Number of properties, December 31, 2023 156 48 204 Number of Same Store Properties 145 48 193 Number of Acquired Properties 11 — 11 Number of Disposed Properties 1 8 9 Segment Results — Medical Office Buildings The following table presents the components of segment income and the period to period change within our MOB segment for the years ended December 31, 2023 and 2022: 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) (In thousands) 2023 2022 $ 2023 2022 $ 2023 2022 $ 2023 2022 $ Revenue from tenants $ 131,201 $ 130,542 $ 659 $ 4,187 $ 911 $ 3,276 $ 61 $ (9) $ 70 $ 135,449 $ 131,444 $ 4,005 Less: Property operating and maintenance 37,347 35,665 1,682 425 84 341 182 196 (14) 37,954 35,945 2,009 Segment income $ 93,854 $ 94,877 $ (1,023) $ 3,762 $ 827 $ 2,935 $ (121) $ (205) $ 84 $ 97,495 $ 95,499 $ 1,996 __________ (1) Our MOB segment included 145 Same Store Properties. (2) Our MOB segment included 11 Acquired Properties. (3) Our MOB segment included one Disposed Property. (4) Our MOB segment consisted of 156 total properties. Revenue from tenants primarily reflects contractual rent received from tenants in our MOBs and operating expense reimbursements. These reimbursements generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent. Revenue from Tenants During the year ended December 31, 2023, revenue from tenants increased by $4.0 million in our MOB segment as compared to the year ended December 31, 2022, primarily as a result of increased revenue from tenants of $3.3 million generated from our Acquired Properties, increased revenue from tenants of $0.7 million from our Same Store Properties and an increase in revenue from tenants of $0.1 million from our Disposed Properties. The increase in revenue from our Same Store Properties was primarily attributable from increased operating expense reimbursement revenue from increased property, operating and maintenance expenses. Property Operating and Maintenance 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, 2023, property operating and maintenance costs in our MOB segment increased by $2.0 million as compared to the year ended December 31, 2022, primarily as a result of increased costs from our Same Store Properties of $1.7 million and increased costs from our Acquired Properties of $0.3 million. The increase in property operating and maintenance expenses from our Same Store properties is primarily the result of the impacts of inflation on utility and maintenance costs as well as increased property insurance and property tax expenses, which are largely reimbursed by tenants. 58 Table of Contents 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, 2023 and 2022: 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) (In thousands) 2023 2022 $ 2023 2022 $ 2023 2022 $ 2023 2022 $ Revenue from tenants $ 207,707 $ 196,749 $ 10,958 $ — $ — $ — $ 2,769 $ 7,653 $ (4,884) $ 210,476 $ 204,402 $ 6,074 Less: Property operating and maintenance 176,745 167,064 9,681 — — — 3,093 10,435 (7,342) 179,838 177,499 2,339 Segment income $ 30,962 $ 29,685 $ 1,277 $ — $ — $ — $ (324) $ (2,782) $ 2,458 $ 30,638 $ 26,903 $ 3,735 __________ (1) Our SHOP segment included 48 Same Store Properties, including two land parcels. (2) Our SHOP segment included zero Acquired Properties. (3) Our SHOP segment included eight Disposed Properties. (4) Our SHOP segment included 48 total properties, including two land parcels. Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents 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. Revenue from Tenants During the year ended December 31, 2023, revenue from tenants increased by $6.1 million in our SHOP segment as compared to the year ended December 31, 2022, which was primarily driven by an increase in revenue from tenants of $11.0 million from our Same Store Properties, partially offset by a decrease in revenue from tenants of $4.9 million due to our Disposed Properties. The increase to our Same Store Properties revenue from tenants was primarily driven by higher monthly leasing rates in the year ended December 31, 2023, as compared to the year ended December 31, 2022. We offered consistent levels of rent concessions between the periods of $3.2 million, which are recorded as reductions to revenue. Additionally, during the years ended December 31, 2023 and 2022, we recorded reductions in revenue related to bad debt of $1.2 million and $3.2 million, respectively. Approximately $1.3 million of bad debt expense recorded in the year ended December 31, 2022 was related to our Disposed Properties. There were no significant write-off’s related to previously disposed properties during the year ended December 31, 2023. Property Operating and Maintenance During the year ended December 31, 2023, property operating and maintenance expenses increased $2.3 million in our SHOP segment as compared to the year ended December 31, 2022, primarily due to an increase in property operating and maintenance expenses of $9.7 million from our Same Store Properties, partially offset by a decrease in property operating and maintenance expenses of $7.3 million from our Disposed Properties. Our Same Store properties operating and maintenance expenses increased significantly in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily from increased amounts incurred for wages, including overtime and bonus amounts, paid to employees of our third-party operators. These amounts increased our property maintenance and operating costs by $7.7 million in the year ended December 31, 2023 as compared to the year ended December 31, 2022, but were partially offset by a decrease in amounts paid for contract labor of $5.5 million. The remainder of the increase in our Same Store property operating and maintenance expenses was attributable to the general increase in food, utilities and supplies from inflation, as well as increases to property insurance and property tax rates. For additional information on the risks and uncertainties associated with increases in inflation and labor costs, see the Inflation section below and Part 1 — Item 1A. Risk Factors section of this Annual Report on Form 10-K. 59 Table of Contents The total increase in Same Store Properties operating and maintenance expenses was also impacted by the receipt of $4.5 million of funds through the CARES Act in the year ended December 31, 2022, as compared to no funds received through the CARES Act during the year ended December 31, 2023, which offset costs incurred from the COVID-19 pandemic. Of the $4.5 million of CARES Act funds received by us in the year ended December 31, 2022, $3.7 million was recognized as a reduction to our Same Store Property operating and maintenance expenses in the table above, with the remainder attributable to our Disposed properties. 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 $4.7 million of impairment charges for the year ended December 31, 2023 related to one held-for-use SHOP property and one held-for-use MOB property. These impairment charges were recorded to reduce the carrying values of the properties to their estimated fair values as determined by the estimated discounted cash flows over our intended holding periods. We are actively marketing these properties for sale. We incurred $27.6 million of impairment charges for the year ended December 31, 2022, of which $10.6 million related to seven skilled nursing facilities in our MOB segment located in Illinois, $15.1 million related to six held-for-use SHOP properties and $1.8 million related to an MOB property located in Pennsylvania. All of these impairment charges were recorded to reduce the carrying value of the properties to their fair values, respectively, as determined by our estimated discounted cash flows over our intended holding periods. 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 $0.2 million to $25.5 million for the year ended December 31, 2023 from $25.4 million for the year ended December 31, 2022. Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. We pay a fixed base management fee equal to $1.6 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth of 1.25% of the cumulative net proceeds of any equity raised subsequent to February 17, 2017. Asset management fees were consistent at $21.8 million for the years ended December 31, 2023 and 2022. There are no fees earned for stock dividend issuances. Variable asset management fees will further increase if we issue additional equity securities in the future. There were no incentive fees incurred in either of the years ended December 31, 2023 or 2022. Property management fees increased $0.2 million to $3.7 million during the year ended December 31, 2023 from $3.5 million for the year ended December 31, 2022, primarily due to additional property management fees on revenues from recently acquired MOBs. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed and depending on the mix of properties managed, as the fee payable for different types of properties varies. 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 $0.5 million for the year ended December 31, 2023 and $1.5 million for the year ended December 31, 2022. The acquisition and transaction related expenses incurred during the year ended December 31, 2023 consist of dead deal costs of $0.2 million and legal fees related to terminated SHOP operators of $0.3 million. The acquisition and transaction related expenses incurred during the year ended December 31, 2022 consisted of dead deal costs of $0.8 million, legal fees related to terminated SHOP operators of $0.5 million and mortgage repayment penalties of $0.2 million. General and Administrative Expenses General and administrative expenses increased $1.6 million to $18.9 million for the year ended December 31, 2023 compared to $17.3 million for the year ended December 31, 2022, which includes $10.6 million and $8.8 million for the years ended December 31, 2023 and 2022, respectively, incurred in professional fees and other expense reimbursements. 60 Table of Contents The professional fees and other expense reimbursements relating to salaries, wages and benefits, including for executive officers and all other employees of the Advisor or its affiliates who provide services to us, increased by $0.9 million to $6.9 million for the year ended December 31, 2023 from $6.0 million for the year ended December 31, 2022. These reimbursable professional fees are subject to a limit (the “Capped Reimbursement Amount”), which was $8.0 million and $7.8 million as of December 31, 2023 and 2022, respectively. We expect that the general and administrative expenses we incur from salaries, wages, and benefits will continue to increase in the year ended December 31, 2024, and we expect that the Capped Reimbursement Amount for 2024 will be approximately $8.2 million. Please 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 increased $0.8 million to $82.9 million for the year ended December 31, 2023 from $82.1 million for the year ended December 31, 2022. The increase in depreciation and amortization expense was primarily attributable to $0.3 million of increased expense from our Same Store Properties and $1.5 million of increased expense from our Acquired Properties, partially offset by $1.0 million of decreased expense from our Disposed Properties. The increase to our 2023 Same Store depreciation and amortization includes $1.3 million of accelerated depreciation we recorded in the year ended December 31, 2022 on one MOB property in Florida which incurred damages as a result of Hurricane Ian, as well as 15 SHOPs across the Midwest which suffered cold weather-related damages. The increase in depreciation and amortization expense in the year ended December 31, 2023 also includes an out-of period adjustment of $0.7 million recorded in the year ended December 31, 2023 due to the understatement of depreciation and amortization expense on certain capital improvements and deferred leasing commissions, thereby understating previously reported depreciation and amortization expense by $0.1 million and $0.6 million which related to the year ended December 31, 2022 and pre-2022 periods, respectively. For additional information, please see Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report on Form 10-K . Loss on Sale of Real Estate Investments During the year ended December 31, 2023, we disposed of four SHOPs and one MOB for an aggregate contract sales price of $13.8 million. Two of the four disposed SHOPs were impaired by $15.1 million in the year ended December 31, 2022 (see above). As a result, the Company recorded an aggregate loss on sale of $0.3 million in the year ended December 31, 2023. During the year ended December 31, 2022 we disposed of four SHOPs for an aggregate contract sales price of $12.4 million. These four SHOPs had been previously impaired by $34.0 million in the year ended December 31, 2021. As a result, we recorded a loss on sale of $0.3 million for the year ended December 31, 2022. We also recorded a gain on sale of $0.2 million in the year ended December 31, 2022 related to the settlement of a lien on formerly disposed properties. See N ote 3 — Real Estate Investments, Net to our consolidated financial statements in this Annual Report on Form 10-K for additional information on the dispositions noted above. Interest Expense Interest expense increased by $14.3 million to $66.1 million for the year ended December 31, 2023 from $51.7 million for the year ended December 31, 2022. The increase in interest expense resulted from higher average interest rates on our variable debt in 2023 as compared to 2022, as well as from higher levels of debt. We also recorded $2.6 million of accelerated deferred financing cost amortization in the year ended December 31, 2023 from the termination of our Prior Credit Facility. These increases were partially offset by $4.2 million of reclassifications from AOCI as decreases to interest expense from our 2023 interest rate swap terminations which resulted in a gain of $5.4 million which is being amortized into earnings through March 2024 (see Note 7 — Derivatives and Hedging Activities for additional information). As of December 31, 2023 we had total borrowings of $1.2 billion, at a weighted average interest rate of 5.56% per year. As of December 31, 2022, we had total borrowings of $1.1 billion, at a weighted average interest rate of 4.83% per year. Our interest expense in future periods will vary based on our level of future borrowings and the cost of borrowings (including current market rates) among other factors. Market interest rates continued to increase throughout the year ended December 31, 2023. Our weighted average interest rate as of December 31, 2023 was higher than that as of December 31, 2022. We anticipate that interest expense for the year ended December 31, 2024 may exceed the $66.1 million expense recorded for the year ended December 31, 2023 if interest rates remain at current levels or increase. 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 $0.7 million for the year ended December 31, 2023. Interest and other income was approximately $27,000 for the year ended December 31, 2022. 61 Table of Contents (Loss) gain on Non-Designated Derivatives (Loss) gain on non-designated derivative instruments for the years ended December 31, 2023 and 2022 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 and MOB Warehouse Facility, which have variable interest rates. The loss recorded in the year ended December 31, 2023 was due to decreases in forward-interest rate curves, and represents the decrease in fair value as well as $5.6 million of cash received from our interest rate caps. The gain recorded in the year ended December 31, 2022 was due to significant increases to interest rates during the period and represents the increase in fair value as well as $0.3 million of cash received from our interest rate caps. Income Tax Expense Income taxes generally relate to our SHOPs, which are leased to our TRS. We recorded income tax expense of $0.3 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively. Because of our TRS’s recent operating history of losses and the impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, in the third quarter of 2020, we were not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets and recorded a full valuation allowance. Since that time, our TRS’s operating performance has not significantly improved and thus we have recorded a 100% valuation allowance on our net deferred tax assets through December 31, 2023. 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 operations and comprehensive loss. Net Loss Attributable to Non-Controlling Interests Net loss attributable to non-controlling interests was $82,000 and $135,000 for the years ended December 31, 2023 and 2022, respectively. These amounts represent the portion of our net loss that is related to the Series A Preferred Units held by third parties (issued in connection with a property acquisition in September, 2021), Common OP Units held by third parties, and other non-controlling interest holders in our subsidiaries that own certain properties. Allocation for Preferred Stock Allocation for preferred stock was $13.8 million for the years ended December 31, 2023 and 2022. These amounts represent the allocation of our net income that is related to holders of Series A Preferred Stock and holders of Series B Preferred Stock. 62 Table of Contents Cash Flows from Operating Activities The following table presents a reconciliation of our net cash provided by operations from our net loss for the years ended December 31, 2023 and 2022: (in thousands) Year Ended December 31, Increase Cash flows from operating activities: 2023 2022 (Decrease) Net loss $ (72,380) $ (79,621) $ 7,241 Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 82,873 82,064 809 Amortization (including write-offs) of deferred financing costs 6,702 4,879 1,823 Amortization of terminated swap (4,195) 423 (4,618) Amortization of mortgage premiums and discounts, net 91 51 40 (Accretion) amortization of market lease and other intangibles, net (890) (625) (265) Bad debt expense 1,225 3,159 (1,934) Equity-based compensation 919 1,185 (266) (Gain) loss on non-designated derivative instruments 1,995 (3,834) 5,829 Cash received from non-designated derivative instruments 5,580 286 5,294 (Gain) loss on sales of real estate investments, net 322 125 197 Impairment charges 4,676 27,630 (22,954) Deferred tax valuation allowance 1,165 2,750 (1,585) Changes in assets and liabilities: — Straight-line rent receivable (1,049) (1,523) 474 Prepaid expenses and other assets (6,069) (3,036) (3,033) Accounts payable, accrued expenses and other liabilities 83 (2,924) 3,007 Deferred rent 576 (2,694) 3,270 Net cash provided by operating activities $ 21,624 $ 28,295 $ (6,671) 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 Flows from Investing Activities The following table presents our net cash used in investing activities for the years ended December 31, 2023 and 2022: (in thousands) Year Ended December 31, Increase Cash flows from investing activities: 2023 2022 (Decrease) Property acquisitions $ (35,261) $ (25,538) $ (9,723) Investments in non-designated interest rate caps (9,962) — (9,962) Capital expenditures (22,397) (27,993) 5,596 Proceeds from sales of real estate investments 4,803 11,749 (6,946) Net cash used in investing activities $ (62,817) $ (41,782) $ (21,035) 63 Table of Contents Cash Flows from Financing Activities The following table presents our net cash provided by financing activities for the years ended December 31, 2023 and 2022: (in thousands) Year Ended December 31, Increase Cash flows from investing activities: 2023 2022 (Decrease) Payments on credit facilities $ (200,602) $ (2,998) $ (197,604) Proceeds from credit facilities 34,748 30,000 4,748 Proceeds from mortgage notes payable 240,000 — 240,000 Payments on mortgage notes payable (1,139) (6,662) 5,523 Payments for non-designated derivative instruments — — — Proceeds from interest rate swap terminations 5,413 — — Payments of deferred financing costs (8,748) (1,672) (7,076) Proceeds from issuance of Series A Preferred Stock, net — — — Proceeds from issuance of Series B Preferred Stock, net — (42) 42 Dividends paid on Series A Preferred stock (7,334) (7,333) (1) Dividends paid on Series B Preferred stock (6,466) (6,466) — Contributions from non-controlling interest holders 284 — — Distributions to non-controlling interest holders (185) (184) (1) Net cash provided by financing activities $ 55,971 $ 4,643 $ 45,631 Liquidity and Capital Resources Our existing principal demands for cash are to fund acquisitions, capital expenditures, payments for our operating and administrative expenses, debt service obligations (including principal repayments), and dividends to holders of our Series A Preferred Stock and holders of our 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 twelve months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as recent increases in inflation, labor shortages, supply chain disruptions, and higher property insurance, property tax and interest rates, all of which may adversely impact our results of operations and thus ultimately our liquidity. Moreover, these adverse impacts, as well as the ongoing wars in Ukraine, Israel and related sanctions, may also impact our tenant and residents’ ability to pay rent and thus our cash flows. For more information about the risks and uncertainties associated with inflation, the ongoing wars in Ukraine, Israel and related sanctions, and labor shortages and labor costs, please see the Inflation section below and Part I – Item 1A. Risk Factors section of this Annual Report on Form 10-K. 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, potential future advances under our Fannie Mae Master Credit Facilities and MOB Warehouse Facility, net cash provided by our property dispositions and potential new financings utilizing certain of our currently unencumbered properties. As of December 31, 2023 and 2022, we had $46.4 million and $53.7 million of cash and cash equivalents, respectively, and our ability to use this cash on hand is restricted. The Barclays MOB Loan Agreement requires us to maintain a minimum balance of cash and cash equivalents of $12.5 million at all times. Financings As of December 31, 2023, our total debt leverage ratio (net debt divided by gross asset value) was approximately 43.7%. Our net debt totaled $1.1 billion, which represents gross debt ($1.2 billion) less cash and cash equivalents ($46.4 million). Our 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). Cumulative impairment charges are reflected within gross asset value. As of December 31, 2023, we had total gross borrowings of $1.2 billion, at a weighted-average interest rate of 5.59% and a weighted-average remaining term of 5.1 years. As of December 31, 2022, we had total gross borrowings of $1.1 billion at a weighted average interest rate of 4.83%. Inclusive of the effect of our non-designated hedging instruments, our total portfolio economic interest rate was 5.00% and 4.47% as of December 31, 2023 and 2022, respectively. 64 Table of Contents As of December 31, 2023, the carrying value of our real estate investments, at cost was $2.6 billion, with $1.3 billion of this amount secured as collateral for mortgage notes payable, $614.0 million of this amount pledged to secure advances under the Fannie Mae Master Credit Facilities and $23.0 million of this amount was pledged to secure advances under the MOB Warehouse 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 Fannie Mae Master Credit Facilities or MOB Warehouse Facility, which would impact availability thereunder. Unencumbered real estate investments, at cost as of December 31, 2023 was $635.9 million. There can be no assurance as to the amount of liquidity we would be able to generate from leveraging these unencumbered real estate investments , if we are able to leverage them at all. Mortgage Notes Payable As of December 31, 2023, we had $821.4 million in gross mortgage notes payable outstanding with a weighted-average interest rate of 4.58% and a weighted-average remaining term of 6.1 years. Future scheduled principal payments on our mortgage notes payable for 2024 are $1.2 million. All of our mortgage debt is either fixed-rate, or effectively fixed-rate via our interest rate swap. During the year ended December 31, 2023, we entered into one new mortgage note, which is described below: Barclays MOB Loan On May 24, 2023, we entered into the Barclays MOB Loan with the Lenders, in the aggregate amount of $240.0 million. In connection with the Barclays MOB Loan Agreement, we entered into the Guaranty and the Environmental Indemnity for the benefit of the Lenders. The Barclays MOB Loan is secured by, among other things, first priority mortgages on 62 of our MOBs with an aggregate gross asset value of $417.5 million. The Barclays MOB Loan has a 10-year term and is interest-only at a fixed rate of 6.453% per year. Under the Barclays MOB Loan Agreement, we are required to make interest-only payments on a monthly basis with the principal balance due on the maturity date of June 6, 2033. The Barclays MOB Loan Agreement requires us to comply with certain covenants, including, maintaining combined cash and cash equivalents totaling at least $12.5 million at all times. We paid $7.8 million in deferred financing costs related to the Barclay’s MOB Loan, which is amortized into interest expense over the term of the loan. At the closing of the Barclays MOB Loan, we applied $194.8 million of the proceeds to repay and terminate the Prior Credit Facility. The remaining proceeds of approximately $39.0 million (after the payment of Barclays MOB Loan closing costs and reimbursement of deposits) were used for general corporate purposes, subject to the terms of the Barclays MOB Loan Agreement. Additionally, by terminating the Prior Credit Facility, we are no longer subject to certain restrictive covenants previously imposed by the Prior Credit Facility (see Note 5 — Credit Facilities for additional information). Credit Facilities As of December 31, 2023, we had $361.0 million in total amounts outstanding under our credit facilities at a weighted-average interest rate of 7.90% and a weighted-average remaining term of 2.8 years. Inclusive of our non-designated interest rate caps, the economic interest rate on our credit facilities was 5.94% as of December 31, 2023. Future scheduled principal payments on our credit facilities for 2024 are $5.8 million. Fannie Mae Master Credit Facilities As of December 31, 2023, $346.3 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 SOFR for one month U.S. dollar-denominated deposits and a spread (2.41% and 2.46% for the Capital One Facility and the KeyBank Facility, respectively) 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 2024 are $5.8 million. During the year ended December 31, 2023, we provided multiple deposits related to our interest rate swaps to Fannie Mae totaling $11.8 million. These deposits were provided because the debt service coverage ratios of the underlying properties of each facility were below those of the minimum required amounts per the debt agreements. These deposits will be refunded upon either (i) the achievement of debt service coverage ratios above those of the required minimum amounts or (ii) the maturity of the Fannie Mae Master Credit Facilities. 65 Table of Contents MOB Warehouse Facility On December 22, 2023, we, entered into a loan agreement with Capital One to provide up to $50.0 million of variable-rate financing. As of December 31, 2023, $14.7 million was outstanding under the MOB Warehouse Facility. We may request future advances under the MOB Warehouse Facility by adding eligible MOBs to the collateral pool subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. Borrowings under the MOB Warehouse Facility bear interest at a monthly rate equal to the sum of the current SOFR for one-month denominated deposits and a spread of 3.0%. Interest payments are due monthly, with no principal payments due until maturity in December 2026. Non-Designated Interest Rate Caps Our interest rate caps are used to limit our exposure to interest rate movements on our credit facilities for economic purposes, however, we do not elect to apply hedge accounting to these instruments. As of December 31, 2023, we had seven SOFR-based interest rate caps with an aggregate notional amount of $364.2 million, which limits 30-day SOFR to 3.50% and have varying maturities through January 2027. As 30-day SOFR has increased beyond 3.50%, we have received cash payments of $5.6 million in the year ended December 31, 2023. We received $0.3 million of cash payments in the year ended December 31, 2022. We paid premiums of $9.6 million to renew five interest rate caps with an aggregate notional amount of $289.4 million which matured in the year ended December 31, 2023, and we also paid $0.4 million for a new interest rate cap entered into during the year ended December 31, 2023 for a notional amount of $14.7 million. One interest rate cap with a notional amount of $60.0 million matures in April 2024, which represents the next interest rate cap maturity. We estimate that this renewal will cost us approximately $1.3 million in premiums. Upon the maturity and renewal of our interest rate caps, we have been obligated to provide cash deposits to Fannie Mae because the debt service coverage ratios of the underlying SHOPs of each facility were below those of the minimum required amounts per the debt agreements. In the year ended December 31, 2023, we provided a cash deposit of $11.8 million. We expect to provide another deposit, which we estimate to be $2.3 million, upon the maturity of one interest rate cap in April 2024. Please see the Fannie Mae Master Credit Facilities section above for additional information. Capital Expenditures During the year ended December 31, 2023, our capital expenditures, including accrued capital expenditures, were $25.3 million, of which $10.5 million related our MOB segment and $14.8 million related to our SHOP segment. We anticipate this rate of capital expenditures will be similar for the MOB segment and our SHOP capital expenditures will decrease in 2024. Acquisitions — Year Ended December 31, 2023 During the year ended December 31, 2023, we acquired seven single-tenant MOBs for an aggregate contract purchase price of $34.9 million. These acquisitions were funded with $20.0 million from draws under our Prior Credit Facility and the remainder with cash on hand. Acquisitions — Subsequent Year Ended December 31, 2023 We acquired four MOB properties subsequent to December 31, 2023 for an aggregate contract purchase price of $12.6 million. This acquisition was funded with $7.5 million of proceeds from a new mortgage note secured by the four acquired properties and the remainder with cash on hand. Dispositions — Year Ended December 31, 2023 During the year ended December 31, 2023, we disposed of four SHOPs and one MOB for an aggregate contract sales price of $13.8 million. Pursuant to the terms of the Prior Credit Facility, $5.2 million of net proceeds were used to repay amounts then outstanding, and $2.7 million of net proceeds were used to partially repay the Multi-Property CMBS Loan mortgage note. Dispositions — Subsequent to December 31, 2023 Subsequent to December 31, 2023, we did not dispose of any properties. However, we have one MOB and one SHOP scheduled for sale in the second quarter of 2024. There can be no assurance that these properties will be sold on favorable terms, or at all. Share Repurchase Program Under the Prior Credit Facility, we were restricted from repurchasing shares. 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. 66 Table of Contents Non-GAAP Financial Measures This section discusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations (“FFO”) and Modified Funds from Operations (“MFFO”). MFFO is based on our total performance as a company and therefore reflects the impacts of interest expense, general and administrative expenses and operating fees to related parties. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net loss, 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 and 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, business cycles, unemployment levels and consumer spending, presentations of operating results for REITs using the historical accounting convention for depreciation, amortization and certain other items may not be 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 loss as determined under GAAP, and FFO is not intended to replace financial performance measures 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 (i) depreciation and amortization related to real estate assets, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from changes in control and (iv) 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 the proportionate share of FFO attributable to our stockholders. Our FFO calculation complies with NAREIT’s definition. We believe that 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 loss as determined by GAAP. 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 capitalized and depreciated 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 acquisition 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 loss as determined by GAAP. MFFO is not equivalent to our net loss as determined under GAAP, and MFFO is not intended to replace financial performance measures determined under GAAP. 67 Table of Contents 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 November 2010, except that we adjust for deferred tax asset allowances based on management’s determination. 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 (with the added adjustment for deferred tax asset allowances based on management’s determination as noted above) and exclude (i) acquisition fees and expenses, (ii) amortization of above and below-market leases and other intangible lease assets and liabilities, (iii) 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), (iv) accretion of discounts and amortization of premiums on debt investments, (v) mark-to-market adjustments included in net loss as determined by GAAP, (vi) hedges, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, and (vii) 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. In addition, because we have collected all concessions granted to our tenants as a result of the COVID-19 pandemic (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. 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 were rent deferrals with the original lease term unchanged and all deferred rent has been collected (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 significantly impacted by these types of deferrals. As of December 31, 2021, all deferred amounts had been collected and we have not deferred any additional amounts since the year ended December 31, 2020. 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. 68 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) 2023 2022 2021 Net loss attributable to common stockholders (in accordance with GAAP) $ (86,097) $ (93,285) $ (92,942) Depreciation and amortization (1) 80,057 80,063 78,115 Impairment charges 4,676 27,630 40,951 Loss (gain) on sale of real estate investments 322 125 (3,648) Adjustments for non-controlling interests (2) (403) (490) (529) FFO (as defined by NAREIT) attributable to common stockholders (1,445) 14,043 21,947 Acquisition and transaction related 545 1,484 2,714 (Accretion) amortization of market lease and other lease intangibles, net (890) (625) (198) Straight-line rent adjustments (1,049) (1,523) (780) Straight-line rent (rent deferral agreements) (3) — — (280) Amortization of mortgage premiums and discounts, net 91 51 55 (Gain) loss on non-designated derivatives 1,995 (3,834) (37) Cash received from non-designated derivatives 5,580 286 — Deferred tax asset valuation allowance (4) 1,165 2,750 (482) Adjustments for non-controlling interests (2) 38 10 1 MFFO attributable to common stockholders $ 6,030 $ 12,642 $ 22,940 ________ (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) Represents the non-cash change of the reserve against our deferred tax asset, which has been fully reserved since December 31, 2020, which we do not consider part of our normal operations. Dividends and Other Distributions Dividends on our Series A Preferred Stock are declared quarterly 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 and declared by us. Dividends on our Series B Preferred Stock are declare quarterly 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 and declared by us. The first dividend on the Series B Preferred Stock was paid in January 2022. On February 20, 2018, the Board authorized the rate at which we pay monthly distributions to stockholders, effective as of March 1, 2018, which is $0.85 per annum, per share of common stock. Also, 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 COVID-19 pandemic and to comply with the Prior Credit Facility at the time. Under this distribution 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 asset value in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. 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. 69 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 Common 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. No cash distributions were made to common stockholders, restricted shareholders, holders of Common OP Units or holders of Class B Units in the year ended December 31, 2023. Three Months Ended Year Ended March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023 December 31, 2023 (In thousands) Amounts Percentage of Distributions Amounts Percentage of Distributions Amounts Percentage of Distributions Amounts Percentage of Distributions Amounts Percentage of Distributions Distributions: Dividends paid to holders of Series A Preferred Stock $ 1,833 52.4% $ 1,833 52.4% $ 1,834 52.5% $ 1,834 52.4% $ 7,334 52.4% Dividends paid to holders of Series B Preferred Stock 1,616 46.2% 1,617 46.3% 1,616 46.2% 1,617 46.2% 6,466 46.2% Distributions paid to holders of Series A Preferred Units 46 1.3% 46 1.3% 46 1.3% 47 1.3% 185 1.3% Total cash distributions $ 3,495 100.0% $ 3,496 100.0% $ 3,496 100.0% $ 3,498 100.0% $ 13,985 100.0% Source of distribution coverage: Cash flows provided by operations (1) $ 3,495 100.0 % $ 3,496 100.0 % $ 3,496 100.0 % $ 3,498 100.0 % $ 13,985 100.0 % Total source of distribution coverage $ 3,495 100.0 % $ 3,496 100.0 % $ 3,496 100.0 % $ 3,498 100.0 % $ 13,985 100.0 % Cash flows provided by operations (in accordance with GAAP) $ 4,989 $ 5,688 $ 5,681 $ 5,266 $ 21,624 Net loss (in accordance with GAAP) $ (14,068) $ (17,332) $ (16,125) $ (24,855) $ (72,380) __________ (1) Assumes the use of available cash flows from operations before any other sources. For the year ended December 31, 2023, cash flows provided by operations were $21.6 million. We had not historically generated sufficient cash flows 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, which occurred on October 1, 2020. As shown in the table above, we funded dividends to holders of Series A Preferred Stock, Series B Preferred Stock and Series A Preferred Units 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 solely in stock instead of cash. Our ability to pay dividends on our Series A Preferred Stock, Series B Preferred Stock and Series A Preferred Units and other distributions 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 our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties, some of which have recently been impacted by the adverse effects of inflation, labor shortages, and supply chain disruptions. 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. 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 Fannie Mae Master Credit Facilities required interest only payments through November 2021 and principal and interest payments thereafter. The payment terms of our MOB Warehouse Facility require interest only payments with all unpaid principal due in December 2026. Our loan agreements require us to comply with specific financial and reporting covenants. 70 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 believe 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. As of December 31, 2023, the increase to the 12-month CPI for all items, as published by the Bureau of Labor Statistics, was 3.4%. To help mitigate the adverse impact of inflation, most of our leases with our tenants in our MOB segment contain rent escalation provisions which increase the cash that is due under these leases over their respective terms. 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). Although most of our leases with tenants in our MOB segment contain rent escalation provisions, these escalation rates are generally below the rate of inflation. In addition to base rent, depending on the specific lease, MOB 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 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.