Item 7. Management’s Discussion and Analysis
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. See “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K for a description of these risks and uncertainties.
Overview
We are a REIT for U.S. federal income tax purposes. We acquire, own and manage a diversified portfolio of healthcare-related real estate focused on outpatient medical facilities and senior housing operating properties. As of December 31, 2024, we owned 193 properties (including one land parcel) located in 31 states and comprised of 8.4 million rentable square feet.
Substantially all of our business is conducted through the OP and its wholly-owned subsidiaries. Prior to consummation of the Internalization on September 27, 2024, our former Advisor managed our day-to-day business with the assistance of our Property Manager. Prior to the Internalization, the Advisor and Property Manager were under common control with the Advisor Parent and these related parties received compensation and fees for providing services to us. In connection with the Internalization, we internalized our advisory and property management functions with our own dedicated workforce; the Property Manager became our wholly-owned subsidiary as a result of the Internalization. See Note 1 — Organization and Note 9 — Related Party Transactions and Arrangements to our Consolidated Financial Statements for additional information. Effective September 30, 2024, we also effected the Reverse Stock Split.
We operate in two reportable business segments for management and financial reporting purposes: OMFs and SHOPs. All of our properties across both business segments are located throughout the United States. In our OMF operating segment, we own, manage and lease single and multi-tenant OMFs 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 OMFs. In our SHOP segment, we invest in seniors housing properties through the RIDEA structure. As of December 31, 2024, we had four eligible independent contractors operating 44 SHOPs.
We declared and issued quarterly dividends entirely in shares of our common stock from October 2020 through January 2024. We do not intend to declare any further stock dividends in the future.
Critical Accounting Policies and Estimates
Set forth below is a summary of the critical accounting policies and estimates 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:
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Revenue Recognition
Our revenues, which are derived primarily from lease contracts, include rent received from tenants in our OMF segment. As of December 31, 2024, these leases had a weighted average remaining lease term of 6.5 years. Rent from tenants in our OMF 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. Tenant revenue also includes operating expense reimbursements which generally increase with any increase in property operating and maintenance expenses in our OMF segment. In addition to base rent, dependent on the specific lease, tenants are generally required to pay either (i) their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, or (ii) their share of increases in property operating and maintenance expenses to the extent they exceed the properties’ expenses for the base year of the respective leases. 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 our SHOP segment, held using a structure permitted under RIDEA. 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.
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 rent 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. 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 current accounting rules, on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
During the years ended December 31, 2024, 2023 and 2022, we recorded reductions in revenue of $1.5 million, $1.2 million and $3.2 million, respectively, related to uncollectible accounts. Approximately $1.3 million of bad debt expense recorded in the year ended December 31, 2022, related to previously disposed properties. There were no significant write-offs related to previously disposed properties during the year ended December 31, 2024 and 2023.
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.
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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, 2024, 2023 and 2022. 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, 2024 and 2023.
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, 2024, 2023 and 2022 were asset acquisitions. We acquired four properties during the year ended December 31, 2024.
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, market rental rates, discount rates and land values per square foot.
Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of market rental 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 relationships, 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, 2024 and 2023.
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Accounting for Leases
Lessor Accounting
We evaluate new leases (by us or by a predecessor lessor/owner) pursuant to ASC 842: Leases to determine lease classification. A lease 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, 2024 and 2023, we had no 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 have 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 (i) the non-lease components have the same timing and pattern of transfer as the associated lease component; and (ii) 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, 2024 and 2023, 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, 2024, 2023 and 2022.
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 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 our Consolidated Financial Statements.
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, excluding interest charges, 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 statements 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 for use. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net loss because recording an impairment loss results in an immediate negative adjustment to earnings.
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.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies — Recent Accounting Pronouncements to our Consolidated Financial Statements for further discussion.
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Results of Operations
Below is a discussion of our results of operations for the years ended December 31, 2024 and 2023. See the “Results of Operations” section located under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of our results of operations for the year ended December 31, 2023 and comparisons between December 31, 2023 and 2022.
Comparison of the Years Ended December 31, 2024 and 2023
Net loss attributable to common stockholders was $203.5 million and $86.1 million for the years ended December 31, 2024 and 2023, respectively. The following table shows our results of operations for the years ended December 31, 2024 and 2023 and the year-to-year change by line item of the consolidated statements of operations:
Year Ended December 31, Increase (Decrease)
(in thousands) 2024 2023 $ %
Revenue from tenants $ 353,794 $ 345,925 $ 7,869 2.3 %
Operating expenses:
Property operating and maintenance 221,148 217,792 3,356 1.5 %
Impairment charges 24,881 4,676 20,205 NM
Termination fees to related parties
106,650 — 106,650 NM
Operating fees to related parties 19,203 25,527 (6,324) (24.8) %
Acquisition and transaction related 7,949 545 7,404 NM
General and administrative 22,744 18,928 3,816 20.2 %
Depreciation and amortization 84,067 82,873 1,194 1.4 %
Total expenses 486,642 350,341 136,301 38.9 %
Operating loss before loss on sale of real estate investments (132,848) (4,416) (128,432) NM
Gain (loss) on sale of real estate investments
9,307 (322) 9,629 NM
Operating loss (123,541) (4,738) (118,803) NM
Other (expense) income:
Interest expense (69,447) (66,078) (3,369) (5.1) %
Interest and other income 1,051 734 317 43.2 %
Gain on extinguishment of debt
392 — 392 NM
Gain (loss) on non-designated derivatives
1,544 (1,995) 3,539 NM
Total other expenses, net
(66,460) (67,339) 879 1.3 %
Loss before income taxes (190,001) (72,077) (117,924) (163.6) %
Income tax expense (262) (303) 41 13.5 %
Net loss (190,263) (72,380) (117,883) (162.9) %
Net loss attributable to non-controlling interests 567 82 485 NM
Allocation for preferred stock (13,799) (13,799) — NM
Net loss attributable to common stockholders $ (203,495) $ (86,097) $ (117,398) (136.4) %
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Net Operating Income
We, through our chief operating decision maker (“CODM”), 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 net operating income (“NOI”) to assess and compare property level performance and to make decisions concerning the operation of our properties. We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from consolidated loss before income taxes. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) and net income (loss) attributable to common stockholders (each as determined in accordance with GAAP) as presented in our Consolidated Financial Statements. NOI should not be considered as an alternative to net income (loss) and net income (loss) attributable to common stockholders (each as determined in accordance with GAAP) as an indication of our performance or to cash flows as a measure of our liquidity. A reconciliation of NOI to net income (loss) attributable to common stockholders can be found in Note 1 5 — Segment Reporting to our Consolidated Financial Statements.
Segment Results — Outpatient Medical Facilities
The following table presents the components of NOI and the period to period change within our OMF segment for the years ended December 31, 2024 and 2023:
Year Ended December 31, Increase (Decrease) to NOI
(In thousands) 2024 2023 $ %
Revenue from tenants $ 137,317 $ 135,449 $ 1,868 1.4 %
Less: Property operating and maintenance 39,201 37,954 1,247 3.3 %
NOI
$ 98,116 $ 97,495 $ 621 0.6 %
Number of Properties at December 31,
Occupancy (1) for the Years Ended December 31,
2024 2023 2024 2023
Total Portfolio
148 156 89.7 % 90.6 %
__________
(1) Occupancy for the OMF segment is presented as of the end of the period shown.
Revenue from tenants primarily reflects contractual rent received from tenants in our OMFs and operating expense reimbursements. These reimbursements generally increase in proportion with the increase in property operating and maintenance expenses in our OMF segment. Pursuant to many of our lease agreements in our OMFs, 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. Property operating and maintenance expenses reflect the costs associated with our OMFs, including real estate taxes, utilities, repairs, maintenance and unaffiliated third-party property management fees.
The OMF NOI increase for the year ended December 31, 2024 over the prior year was primarily driven by the acquisition of four properties in the first quarter of 2024, partially offset by the disposition of 12 OMF properties in the third and fourth quarters of 2024.
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, 2024 and 2023:
Year Ended December 31, Increase (Decrease) to NOI
(In thousands) 2024 2023 $ %
Revenue from tenants $ 216,477 $ 210,476 $ 6,001 2.9 %
Less: Property operating and maintenance 181,947 179,838 2,109 1.2 %
NOI
$ 34,530 $ 30,638 $ 3,892 12.7 %
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Number of Properties at December 31, Average Unit Occupancy for the Years Ended December 31,
2024 2023 2024 2023
Total communities 45 48 77.4 % 74.4 %
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 relate 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.
The SHOP NOI increase for the year ended December 31, 2024 over the prior year was primarily due to positive trends in revenue driven by occupancy gains, partially offset by higher operating and maintenance expenses, which was primarily attributable to macro inflationary impacts on labor costs.
Other Results of Operations
Impairment Charges
We recorded $24.9 million of impairment charges for the year ended December 31, 2024 related primarily to two held-for-use SHOP properties ($13.4 million) and two held-for-use OMF properties ($11.2 million). 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 OMF property. See Note 3 — Real Estate Investments to our Consolidated Financial Statements for additional information on impairment charges.
Operating Fees to Related Parties
Prior to the consummation of the Internalization, our former Advisor and the Property Manager were paid for asset management and property management services for managing our properties on a day-to-day basis. Following the consummation of the Internalization, we are no longer paying the above-referenced fees to the related parties.
Operating fees to related parties decreased by $6.3 million to $19.2 million for the year ended December 31, 2024 from $25.5 million for the year ended December 31, 2023 as a result of the Internalization.
See Note 9 — Related Party Transactions and Arrangements to our Consolidated Financial Statements for additional details regarding our fees and expense reimbursements to our former Advisor.
Termination Fees to Related Parties
We recorded $106.7 million of termination fees to related parties for the year ended December 31, 2024 as a result of our termination of the Advisory Agreement with our former Advisor and transition to self-management through the Internalization, comprised of an internalization fee of $98.2 million, an asset management fee of $5.5 million and a property management fee of $2.9 million. See Note 1 — Organization to our Consolidated Financial Statements for additional details regarding the Internalization.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses were $7.9 million for the year ended December 31, 2024 and $0.5 million for the year ended December 31, 2023. This increase was primarily due to $5.3 million of advisory, legal and other professional costs and non-recurring employee transition expenses directly related to the Internalization.
General and Administrative Expenses
General and administrative expenses increased by $3.8 million to $22.7 million for the year ended December 31, 2024 compared to $18.9 million for the year ended December 31, 2023. The increase was primarily attributable to employee compensation costs incurred by us after the Internalization and certain severance and other compensation reimbursement payments made to our former Advisor prior to the Internalization.
Depreciation and Amortization Expenses
Depreciation and amortization expense increased by $1.2 million to $84.1 million for the year ended December 31, 2024 from $82.9 million for the year ended December 31, 2023. The increase was primarily attributable to amortization of deferred leasing commissions.
Gain (Loss) on Sale of Real Estate Investments
During the year ended December 31, 2024, we disposed of two SHOPs, 12 OMFs and one land parcel for an aggregate contract sales price of $118.1 million. One of the two disposed SHOPs was previously impaired by $2.1 million in the year ended December 31, 2023. These dispositions resulted in an aggregate gain on sale of $9.3 million in the year ended December 31, 2024.
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During the year ended December 31, 2023, we disposed of four SHOPs and one OMF for an aggregate contract sales price of $13.8 million. Two of the four disposed SHOPs were previously impaired by $15.1 million in the year ended December 31, 2022. These dispositions resulted in an aggregate loss on sale of $0.3 million in the year ended December 31, 2023.
See Note 3 — Real Estate Investments, Net to our Consolidated Financial Statements for additional information on the dispositions noted above.
Interest Expense
Interest expense increased by $3.4 million to $69.4 million for the year ended December 31, 2024 from $66.1 million for the year ended December 31, 2023. The increase in interest expense was mainly due to higher average balances of amounts outstanding under our indebtedness during the year ended December 31, 2024 as compared to the year ended December 31, 2023. This increase was partially offset by lower weighted average interest rates.
Inclusive of our non-designated interest rate caps, the weighted-average economic interest rate on our total gross borrowings was 5.0% as of both December 31, 2024 and 2023.
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 $1.1 million for the year ended December 31, 2024 and approximately $0.7 million for the year ended December 31, 2023. Interest and other income increased in 2024 due to higher interest rates on, and balances of, our cash accounts.
Gain on Extinguishment of Debt
We recorded a $0.4 million gain on extinguishment of debt in 2024 in connection with the repayment of a loan prior to maturity relating to the sale of an OMF.
Gain (Loss) on Non-Designated Derivatives
Gain on non-designated derivative instruments for the years ended December 31, 2024 and 2023 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 OMF Warehouse Facility, which have variable interest rates.
The gain recorded in the year ended December 31, 2024 was due to increases in forward-interest rate curves, and represents the increase in fair value as well as $6.8 million of cash received from our interest rate caps.
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.
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 for both years ended December 31, 2024 and 2023.
Because of our TRS’s recent operating history of losses and the adverse economic impacts from increases in the rate of inflation in recent years on the results of operations of our SHOP assets, we are not able to conclude that it is more likely than not that we will realize the future benefit of our deferred tax assets and recorded a full valuation allowance; thus we have recorded a 100% valuation allowance on our net deferred tax assets through December 31, 2024. 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.
Allocation for Preferred Stock
Allocation for preferred stock was $13.8 million for the years ended December 31, 2024 and 2023. These amounts represent the allocation of our net income that is related to holders of Series A Preferred Stock and Series B Preferred Stock.
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, 2024 and 2023:
(in thousands) Year Ended December 31, Increase
Cash flows from operating activities: 2024 2023 (Decrease)
Cash, cash equivalents and restricted cash, beginning of year $ 91,316 $ 76,538 $ 14,778
Net cash (used in) provided by operating activities (79,846) 21,624 (101,470)
Net cash provided by (used in) investing activities 63,972 (62,817) 126,789
Net cash (used in) provided by financing activities (1,347) 55,971 (57,318)
Cash, cash equivalents and restricted cash, end of year $ 74,095 $ 91,316 $ (17,221)
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Cash Flows from Operating Activities
Cash flows from operating activities decreased by $101.5 million during the year ended December 31, 2024 compared to 2023, primarily due to the termination fee incurred in connection with the Internalization in 2024. This was partially offset by higher property NOI in 2024.
Cash Flows from Investing Activities
Cash flows from investing activities increased by $126.8 million during the year ended December 31, 2024 compared to 2023, primarily due to higher disposition volume and lower acquisition volume in 2024.
Cash Flows from Financing Activities
Cash flows from financing activities decreased by $57.3 million during the year ended December 31, 2024 compared to 2023, primarily due to lower proceeds from mortgages and credit facilities and higher pay downs on our mortgages in 2024. This was partially offset by higher paydowns on the credit facilities in 2023 and proceeds from the Promissory Note (as defined below) in connection with the Internalization in 2024.
Liquidity and Capital Resources
Our existing principal demands for cash are to fund acquisitions, capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), the repayment of the Promissory Note (as discussed below, which was fully repaid in January 2025) and distributions to holders of our Series A Preferred Stock and 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 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 and continuing increases in inflation, labor shortages, supply chain disruptions and higher property insurance, property tax and interest rates, all of which have and may continue to have adverse impacts on our results of operations and thus ultimately our liquidity. Moreover, these adverse impacts 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, labor shortages and labor costs, 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 distributions to holders of Series A Preferred Stock and Series B Preferred Stock, through a combination of current cash on hand, net cash provided by our operating activities, potential future advances under our Fannie Mae Master Credit Facilities and OMF Warehouse Facility, net cash provided by our property dispositions (as discussed below) and potential new financings utilizing certain of our currently unencumbered properties.
As of December 31, 2024 and 2023, we had $21.7 million and $46.4 million of cash and cash equivalents, respectively. The Barclays OMF Loan Agreement requires us to maintain a minimum balance of cash and cash equivalents of $12.5 million at all times.
Internalization and Promissory Note
Pursuant to the merger agreement dated August 6, 2024 (the “Internalization Agreement”) effecting the Internalization, (i) the outstanding membership interests of our former Advisor were converted into the right to receive from us an internalization fee of $98.2 million and (ii) the Advisor Parent received (x) an asset management fee of $5.5 million, representing the aggregate base management fee that we would have been required to pay to our former Advisor during the remaining three month notice period required to terminate the advisory agreement, and (y) a property management fee of $2.9 million, representing the aggregate management fees that we would have been required to pay to the Property Manager through the current term of the property management agreement, subject to certain other adjustments (collectively, the “Closing Payments” in an aggregate amount of $106.6 million). For more information regarding the Internalization, including the fees paid therewith, see Note 1 — Organization and Note 9 — Related Party Transactions and Arrangements to our Consolidated Financial Statements.
Because the Closing Payments exceeded our Available Cash (as defined in the Internalization Agreement), we paid the Advisor Parent aggregate cash consideration of $75.0 million (such cash amount, the “Closing Date Cash Consideration”), and we issued to the Advisor Parent an unsecured promissory note (the “Promissory Note”) in a principal amount of $30.3 million, equal to the difference between the Closing Date Cash Consideration and the Closing Payments. The Promissory Note was a senior unsecured obligation and ranks equal in right of payment with all of our existing and future indebtedness. As of December 31, 2024, the full principal amount under the Promissory Note was outstanding. In January 2025, we disposed of 11 OMFs for an aggregate contract sales price of $114.4 million and used a portion of the net proceeds to fully repay the outstanding balance on the Promissory Note (including any unpaid interest at the time of payment).
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Following the Internalization, we are no longer required to pay asset management and property management fees to the Advisor Parent. We paid total asset management fees of $16.4 million during the year ended December 31, 2024 and total property management fees, including capitalized leasing commissions, of $3.6 million, during the year ended December 31, 2024, exclusive of the asset management fee and property management fee paid to the Advisor Parent as part of the Closing Payments discussed above.
Financings
As of December 31, 2024, our Net Debt to Gross Asset Value ratio (net debt divided by gross asset value) was approximately 45.9%. Net debt totaled $1.1 billion, which represents gross debt ($1.2 billion) less cash and cash equivalents ($21.7 million). Gross asset value totaled $2.5 billion, which represents total real estate investments, at cost ($2.5 billion), net of gross market lease intangible liabilities ($22.8 million). Cumulative impairment charges are reflected within gross asset value.
As of December 31, 2024, we had total gross borrowings of $1.2 billion, at a weighted-average interest rate of 5.40% and a weighted-average remaining term of 4.1 years. The weighted-average interest rate includes the impact of “pay-fixed” swaps that are designated as hedging instruments on a portion of our variable-rate debt, but does not include the impact of our non-designated interest rate caps (discussed below). Inclusive of our non-designated interest rate caps, the weighted-average economic interest rate on our total gross borrowings was 5.0% as of December 31, 2024.
As of December 31, 2024, the carrying value of our real estate investments, at cost was $2.5 billion, with $1.3 billion of this asset value pledged as collateral for mortgage notes payable, $619.0 million of this asset value pledged to secure advances under our credit facilities. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable, unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the credit facilities, which would impact availability thereunder.
Unencumbered real estate investments, at cost as of December 31, 2024 was $533.1 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, 2024, we had $789.6 million in mortgage notes payable outstanding, all of which is either fixed-rate or effectively fixed through our interest rate swap at a weighted-average annual interest rate of 4.56% and a weighted-average remaining term of 5.2 years. Future scheduled principal payments on our mortgage notes payable for 2025 are $0.9 million.
During the year ended December 31, 2024, we entered into the BMO CPC Mortgage Loan in connection with a four-property acquisition also completed in the year ended December 31, 2024. The mortgage has a principal balance of $7.5 million, bears interest at an annual fixed rate of 6.84% and matures in February 2034 with no principal amounts due until that time.
For additional information on our mortgage notes, see Note 4 — Mortgage Notes Payable, net to our Consolidated Financial Statements.
Credit Facilities
As of December 31, 2024, we had $362.2 million outstanding under our credit facilities, which bore interest at a weighted-average annual rate of 7.23% and had a weighted-average remaining term of 1.8 years. Inclusive of our non-designated interest rate caps, the weighted average economic interest rate on our credit facilities was 5.94% as of December 31, 2024.
For additional information on our credit facilities, see Note 5 — Credit Facilities to our Consolidated Financial Statements.
Non-Designated Interest Rate Caps
Our interest rate caps are used to limit our exposure to interest rate movements on our Fannie Mae Master Credit Facilities for economic purposes; however, we do not elect to apply hedge accounting to these instruments. As of December 31, 2024, we had eight SOFR-based interest rate caps with an aggregate notional amount of $369.2 million, which limits one-month SOFR to 3.50% and have varying maturities through January 2027. Although these interest rate caps are not designated hedging instruments, we consider them economically related to our variable-rate credit facility borrowings.
As SOFR has increased beyond 3.50%, we received cash payments of $6.8 million in the year ended December 31, 2024 and $5.6 million in the year ended December 31, 2023.
We paid total premiums of $1.5 million to renew one cap with an aggregate notional amount of $58.1 million which matured during the year ended December 31, 2024. We also paid a premium of $0.3 million for a new interest rate cap with a notional amount of $7.0 million which matures in January 2027. We have five interest rate caps with a notional amount of $289.4 million which mature in 2025, which represents the next maturing interest rate caps. During the year ended December 31, 2023, we paid premiums of $10.0 million to renew expiring interest rate cap contracts.
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Capital Expenditures
During the year ended December 31, 2024, our capital expenditures were $21.9 million, of which $9.0 million related to our OMF segment and $12.9 million related to our SHOP segment. We anticipate a consistent rate of capital expenditures for the OMF and SHOP segments in 2025.
Acquisitions — Year Ended December 31, 2024
During the year ended December 31, 2024, we acquired four single-tenant OMFs for an aggregate contract purchase price of $12.6 million. These acquisitions were funded with $7.5 million of new mortgage debt from our BMO CPC Mortgage Loan and the remainder with cash on hand.
Dispositions — Year Ended December 31, 2024
During the year ended December 31, 2024, we disposed of two SHOPs, 12 OMFs and one land parcel for an aggregate contract sales price of $118.1 million.
Dispositions — Subsequent to December 31, 2024
Subsequent to December 31, 2024, we disposed of 11 OMFs for an aggregate contract sales price of $114.4 million and used a portion of the net proceeds to fully repay the outstanding balance on the Promissory Note (including any unpaid interest at the time of payment) as discussed above.
Share Repurchase Program
We did not repurchase any shares during the years ended December 31, 2024 and 2023.
Non-GAAP Financial Measures
This section discusses certain of the non-GAAP financial measures we use to evaluate our performance, including Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”). A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income (loss) attributable to common stockholders, are provided below.
We consider FFO and AFFO to be useful supplemental measures for reviewing comparative operating and financial performance because, by excluding the applicable items listed below, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent, nor are they meant to replace, cash flows from operations and net income or loss as defined by GAAP, and should not be considered alternatives to those measures in evaluating our liquidity or operating performance. Rather, FFO and AFFO should be reviewed in conjunction with these and other GAAP measurements as an indication of our operational performance and are not necessarily indicative of cash available to fund our future cash requirements, including our ability to pay dividends and other distributions to our stockholders. Additionally, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition or that interpret the current NAREIT definition or define AFFO differently than we do.
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 AFFO, and the adjustments to GAAP in calculating FFO and AFFO.
Funds from Operations
Our Consolidated Financial Statements are presented in accordance with GAAP, utilizing historical cost accounting which, among other things, requires depreciation of real estate investments. As a result, our operating results imply that the value of our real estate investments will decrease predictably over a set time period. However, we believe that the value of our real estate investments will fluctuate over time based on various market conditions and as such, depreciation under historical cost accounting may be less informative. FFO is a standard REIT industry metric defined by NAREIT as net income or loss (computed in accordance with GAAP), adjusted for (i) real estate-related depreciation and amortization, (ii) impairment charges on depreciable real property, (iii) gains or losses from sales of depreciable real property and (iv) similar adjustments for non-controlling interests and unconsolidated entities.
We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and when compared year-over-year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, which may not be immediately apparent from net loss.
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Adjusted Funds from Operations
We also believe that AFFO is a meaningful supplemental non-GAAP measure of our operating results. We calculate AFFO by further adjusting FFO to reflect the performance of our portfolio for items we believe are not directly attributable to our operations. We believe that AFFO is a beneficial indicator of our ongoing portfolio performance and isolates the financial results of our operations. Our adjustments to FFO to arrive at AFFO include removing the impacts of (i) acquisition and transaction related costs (including certain expenses directly related to the Internalization and the Reverse Stock-Split), (ii) amortization of market-lease intangible assets and liabilities, (iii) adjustments for straight-line rent, (iv) termination fees to related parties, (v) equity-based compensation expense, (vi) depreciation and amortization related to non-real estate related assets, (vii) mark-to-market gains and losses from our non-designated derivatives, (viii) non-cash components of interest expense, (ix) casualty-related charges, (x) gains or losses on extinguishment of debt and (xi) similar adjustments for non-controlling interests and unconsolidated entities. We believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry and is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and AFFO for the periods indicated:
Year Ended December 31,
(In thousands) 2024 2023 2022
Net loss attributable to common stockholders (in accordance with GAAP) $ (203,495) $ (86,097) $ (93,285)
Depreciation and amortization related to real estate assets
79,231 80,057 80,063
Impairment charges 24,881 4,676 27,630
(Gain) loss on sale of real estate investments
(9,307) 322 125
Adjustments for non-controlling interests (1)
(466) (403) (490)
FFO (as defined by NAREIT) attributable to common stockholders (109,156) (1,445) 14,043
(Accretion) amortization of market lease and other lease intangibles, net (1,428) (890) (625)
Straight-line rent adjustments (794) (1,049) (1,523)
Acquisition and transaction related (2)
7,949 545 1,484
Termination fees to related parties (3)
106,650 — —
Equity-based compensation
613 919 1,185
Depreciation and amortization on non-real estate assets
4,836 2,816 2,001
Mark-to-market (gains)/losses from derivatives (4)
5,266 7,576 (3,541)
Non-cash components of interest expense (5)
2,247 2,606 5,353
Adjustments for non-controlling interests (1)
(540) 38 10
Gain on extinguishment of debt
(392) — —
Casualty-related charges (6)
489 63 209
AFFO attributable to common stockholders
$ 15,740 $ 11,179 $ 18,596
________
(1) Represents the portion of the adjustments allocable to non-controlling interests.
(2) Includes certain advisory, legal, accounting, information technology, tax and other professional expenses and other non-recurring employee transition expenses of $4.8 million for the year ended December 31, 2024 that were directly related to the Internalization and the Reverse Stock Split. We do not consider these expenses to be indicative of our performance given their unique and non-recurring nature.
(3) Represents the Closing Payments paid in connection with the Internalization. We do not consider such payments to be indicative of our performance given its unique and non-recurring nature.
(4) Presented as total gains or losses from our non-designated derivatives net of cash received.
(5) Non-cash components of interest expense include (i) deferred financing cost amortization, (ii) mortgage discount and premium amortization and (iii) amortized gains or losses from terminated hedging instruments.
(6) Includes labor, supplies and evacuation expenses from natural disasters not covered by insurance.
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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 holders of Series A Preferred Stock, which is equivalent to 7.375% of per annum in the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on our Series B Preferred Stock are declared quarterly in an amount equal to $1.78125 per share each year ($0.445313 per share per quarter) to holders of Series B Preferred Stock, 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 A Preferred Stock and 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. 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.
Since mid-2020, we have not paid cash dividends on our shares of common stock but we issued stock dividends to the holders from October 2020 until January 2024. The stock dividends were declared quarterly using a rate of $3.40 (as adjusted to reflect the Reverse Stock Split) per share per year. The number of shares issued with each dividend is based on the estimated per share asset value in effect on the applicable date. We do not intend to declare further stock dividends in the future.
The following table shows the sources for the payment of distributions to preferred stockholders, including distributions on unvested restricted shares and Common OP Units, but excluding distributions related to Class B Units as these distributions are recorded as an expense in our consolidated statements 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, 2024.
Three Months Ended Year Ended
March 31, 2024 June 30, 2024 September 30, 2024 December 31, 2024 December 31, 2024
(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 $ 1,834 52.5% $ 1,834 52.5% $ 1,833 52.4% $ 1,832 52.4% $ 7,333 52.4%
Dividends paid to holders of Series B Preferred Stock 1,616 46.2% 1,616 46.2% 1,617 46.2% 1,617 46.3% 6,466 46.2%
Distributions paid to holders of Series A Preferred Units 46 1.3% 46 1.3% 47 1.3% 45 1.3% 184 1.3%
Total cash distributions $ 3,496 100.0% $ 3,496 100.0% $ 3,497 100.0% $ 3,494 100.0% $ 13,983 100.0%
Source of distribution coverage:
Cash flows provided by operations (1)
$ 2,543 72.7 % $ 3,496 100.0 % $ — — % $ 3,494 100.0 % $ — — %
Available cash on hand (2)
953 27.3 % — — % 3,497 100.0 % — — % 13,983 100.0 %
Total source of distribution coverage
$ 3,496 100.0 % $ 3,496 100.0 % $ 3,497 — % $ 3,494 100.0 % $ 13,983 — %
Cash flows provided by operations (in accordance with GAAP)
$ 2,543 $ 8,395 $ (97,778) $ 6,994 $ (79,846)
Net loss (in accordance with GAAP) $ (15,550) $ (116,918) $ (40,769) $ (17,026) $ (190,263)
__________
(1) Assumes the use of available cash flows from operations before any other sources.
(2) Year-to-date total does not equal the sum of the quarters. Each quarter and year-to-date period is evaluated separately for purposes of this table. Cash available cash on hand also includes proceeds from property dispositions and additional secured financings and borrowings under our credit facilities.
For the year ended December 31, 2024, cash flows used in operations were $79.8 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. As shown in the table above, we funded distributions to holders of Series A Preferred Stock, Series B Preferred Stock and Series A Preferred Units with cash flows provided by operations and available cash on hand.
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Our ability to pay distributions 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, but not limited to, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective.
Inflation
We may be adversely impacted by inflation on the leases with tenants in our OMF 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, 2024, the increase to the 12-month CPI for all items, as published by the Bureau of Labor Statistics, was 3.2%. To help mitigate the adverse impact of inflation, most of our leases with our tenants in our OMF segment contain rent escalation provisions which increase the cash that is due under these leases over time. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on CPI or other measures). Although most of our leases with tenants in our OMF segment contain rent escalation provisions, these rates are generally below the current rate of inflation.
In addition to base rent, depending on the specific lease, OMF 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.