UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
(Address of Principal Executive Offices) |
(Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Securities registered pursuant to section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☒ | Smaller reporting company | |||
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes
As of June 30, 2022 (the last business day of the Registrant’s second fiscal quarter), there were
As of March 21, 2023 there were
SUMMIT HEALTHCARE REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
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PART I
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
As used in this report, “we,” “us,” “our” and the “Company” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Item 1A of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, there can be no assurance that our expectations will be realized.
ITEM 1. BUSINESS
Our Company
Summit Healthcare REIT, Inc. (“Summit”), a Maryland corporation, formed in 2004, invests in and owns real estate. We continue to qualify as a real estate investment trust (“REIT”) for federal tax purposes. We are structured as an umbrella partnership REIT, referred to as an “UPREIT,” under which substantially all of our business is conducted through Summit Healthcare Operating Partnership, L.P. (“Operating Partnership”).
We are self-managed and have employees to directly manage our operations. At December 31, 2022, we own a 99.88% general partner interest in the Operating Partnership while Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest.
Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the sole general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
We are currently focused on investing in healthcare real estate assets, more specifically senior housing facilities, which we believe to be accretive to earnings and potentially stockholder value. Senior housing facilities include independent living (“IL”), skilled-nursing (“SNF”), assisted living (“AL”), memory care (“MC”) and continuing care retirement communities (“CCRC”). Each of these caters to different segments of the senior population. AL and IL facilities provide residents a place to reside that offers medical monitoring and certain medical care while still maintaining personal privacy and freedom. MC facilities are similar to AL facilities in that residents may live in semi-private apartments or private rooms and have structured activities delivered by staff members specifically trained to care for those with memory impairment. Most AL, IL and MC facilities are paid for with private funds. SNFs are typically dependent on government reimbursement programs. SNFs are for seniors in need of continuous medical attention or recovery and therapy after a hospital visit but do not require the more extensive and sophisticated treatment available at hospitals. Sub-acute care services are provided to residents beyond room and board. Certain SNFs provide some services on an outpatient basis. Skilled nursing services are paid for either by private sources, insurance, Medicare or Medicaid programs.
As of December 31, 2022, our ownership interests in our 18 real estate properties of senior housing facilities was as follows: 100% ownership of 14 properties and 95.3% ownership interest in four properties held in a consolidated joint venture, Cornerstone Healthcare Partners LLC. Additionally, we have a 10% equity interest in an unconsolidated equity-method investment that holds 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds one property, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties. In June 2021, we sold our 15% equity interest in an unconsolidated equity-method investment that held 14 properties.
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We generally lease our senior housing facilities to tenants on a triple net basis, with an initial leasehold term of 10 to 15 years with one or more five-year renewal options. Under a triple net lease, the tenant pays or reimburses the owner for all or substantially all property operating expenses and capital expenditures.
Each of our tenants holds the license to operate the facility, employs all facility employees (facility administrator, nurses, housekeeping staff, etc.), contracts directly with residents or patients and receives all facility-related revenue, and bears all of the expenses and other obligations of the property, including rent payments to us. Most, if not all, of our tenants engage a separate, affiliated management company (“operator/manager”) to assist with back-office management of the facility (e.g. bookkeeping, human resources, and payroll processing).
Cornerstone Healthcare Partners LLC – Consolidated Joint Venture
We own 95% of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% noncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated within our financial statements and owns four properties (each, a “JV Property” and collectively, the “JV Properties”).
As of December 31, 2022 and 2021, we own a 95.3% interest in the four JV Properties, and CHREF owns a 4.7% interest.
Summit Union Life Holdings, LLC – Equity-Method Investment
In April 2015, through our Operating Partnership, we entered into a limited liability company agreement (as amended, the “SUL LLC Agreement”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 10% interest in the SUL JV which owns 17 properties.
Summit Fantasia Holdings, LLC – Equity-Method Investment
In September 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia LLC Agreement”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 35% in the Fantasia JV which owns one property as of December 31, 2022 and owned two properties at December 31, 2021.
Summit Fantasia Holdings II, LLC – Equity-Method Investment
In December 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 20% interest in the Fantasia II JV which owns two properties.
Summit Fantasia Holdings III, LLC – Equity-Method Investment
In July 2017, through our Operating Partnership, we entered into a limited liability company agreement (“Fantasia III LLC Agreement”) with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 10% interest in the Fantasia III JV which owns nine properties.
Summit Fantasy Pearl Holdings, LLC – Equity-Method Investment
In October 2017, through our Operating Partnership, we entered into a limited liability company agreement (“FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 10% interest in the FPH JV which owns six properties.
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Indiana JV – Equity-Method Investment
In June 2021, we sold our 15% interest in an Indiana joint venture (the “Indiana JV”) for approximately $5.4 million. See Note 5 to the accompanying Notes to Consolidated Financial Statements for further information.
Summit Healthcare Asset Management, LLC (TRS)
Summit Healthcare Asset Management, LLC (the “SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, FPH JV and Indiana JV (through the sale date of June 11, 2021), (collectively, our “Equity-Method Investments”) and provide various services in exchange for fees and reimbursements. All acquisition fees and management fees are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS.
SHOP TRS LLC
SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary formed for the purpose of managing the operations of two of our real estate investment properties that no longer have a lease with an unrelated tenant. Summit is responsible for the operations of these two facilities, Pennington Gardens and Sundial Assisted Living, and has engaged unrelated third-party managers to operate the facilities and hold the licenses. See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information.
Investment Strategy
We intend to continue acquiring a portfolio of healthcare real estate assets, although we may also invest in other real estate-related assets that we believe may assist us in meeting our investment objectives. Our charter does not allow investments in mortgage loans on unimproved real property, but we are not otherwise restricted in our investment allocation to any specific type of property. We periodically review our investment policies to determine whether these policies continue to be in the best interest of our stockholders.
Acquisition Policies
Primary Investment Focus
We intend to acquire healthcare-related real estate assets that are:
| ● | stabilized; |
| ● | operated by high-quality and experienced tenants and operators/managers; |
| ● | of high-quality and currently producing income; and |
| ● | fee simple. |
The properties in which we invest may not meet all of these criteria and the relative importance that we assign to any one or more of these criteria may differ from asset to asset and change as general economic and real estate market conditions evolve. We may also consider additional important criteria in the future.
Joint Ventures and Other Potential Investments
We may invest in any type of real estate investment that we believe to be in the best interests of our stockholders, including other real estate funds or REITs, mortgage funds, mortgage loans of developed properties, and sale leasebacks. Furthermore, there are no restrictions on the number or size of properties we may purchase or on the amount that we may invest in a single property. Although we may invest in any type of real estate investment, our charter restricts certain types of investments. We do not intend to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than real estate investments.
We may acquire additional properties through joint venture investments in the future or sell a percentage of our existing properties to a joint venture partner, which may result in the deconsolidation of properties we already own. We anticipate acquiring properties through joint ventures in order to diversify our portfolio of properties in terms of geographic region, facility type and operator/manager, among other reasons. Joint ventures typically also allow us to acquire an interest in a property without funding the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, management will evaluate the structure of the joint venture, the real property that such joint venture owns or is being formed to
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own under the same criteria. We may form additional entities in conjunction with joint ventures. These entities may employ debt financing consistent with our borrowing policies. See “Borrowing Policies” below. Our joint ventures may take the form of equity joint ventures with one or more large institutional partners.
We continue to believe that raising institutional equity to make acquisitions will be accretive to shareholder value. Our sole source of equity funding since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is a prudent strategy for growth; however, in the future, we may raise additional equity capital through alternative methods if warranted by market conditions.
Borrowing Policies
We may acquire properties initially with temporary financing or permanent long-term debt financing with the objective of increasing income and increasing the amount of capital available to us so that we achieve greater property diversification.
We may incur indebtedness for working capital requirements, capital improvements, and to make distributions, including but not limited to those necessary in order to maintain our qualification as a REIT for federal income tax purposes. We have secured, and we may continue to secure, indebtedness with some or all of our properties if a majority of our directors determine that it is in the best interests of the Company and our stockholders to do so. We may also acquire properties encumbered with existing financing which cannot be immediately repaid.
We may invest in joint venture entities that borrow funds or issue senior equity securities to acquire properties, in which case our equity interest in the joint venture would be junior to the rights of the lender or preferred equity holders.
Our charter limits our borrowings to 300% of our net asset value, as defined in our charter, unless any excess borrowing is approved by a majority of our directors and is disclosed to our stockholders in our next quarterly report with an explanation from our directors of the justification for the excess borrowing.
Competition
We compete with a considerable number of other real estate investment companies and investors, which may have greater marketing and financial resources than we do. Principal factors of competition in our business are the availability and quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator/manager of quality properties in the relevant market. Our ability to compete also depends on, among other factors, trends in the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.
Government Regulations applicable to our Business
Health Law Matters — Generally
The healthcare properties in our portfolio are subject to extensive federal, state, and local licensure, registration, certification, and inspection laws, regulations, and industry standards. Our tenants’ failure to comply with any of these, and other, laws could result in loss of accreditation; denial of reimbursement; imposition of fines; suspension, decertification, or exclusion from federal and state healthcare programs; loss of license; or closure of the facility.
Licensing and Certification
The primary regulations affecting ALs are state licensing and registration laws. In granting and renewing these licenses, state regulatory agencies consider numerous factors relating to a property’s physical plant and operations, including, but not limited to, admission and discharge standards, staffing, and training. A decision to grant or renew a license is also affected by a tenant’s record with respect to patient and consumer rights, medication guidelines, and other regulations.
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With respect to licensure, generally tenants of SNFs are required to be licensed and certified for participation in Medicare, Medicaid, and other state and federal healthcare programs. This generally requires license renewals and compliance surveys on an annual or bi-annual basis. Our tenants’ failure to maintain or renew any required license or regulatory approval, as well as their failure to correct serious deficiencies identified in a compliance survey, could require those tenants to discontinue operations at a facility. In addition, if a facility is found to be out of compliance with Medicare, Medicaid, or other healthcare program conditions of participation, the facility tenant may be excluded from participating in those government healthcare programs. Any such occurrence may impair a tenant’s ability to meet their financial obligations to us. If we must replace an excluded tenant, our ability to replace the tenant may be affected by federal and state laws, regulations, and applicable guidance governing changes in provider control. This may result in payment delays, an inability to find a replacement tenant, a significant working capital commitment from us to a new tenant or other difficulties.
Certain healthcare facilities are subject to a variety of licensure and certificate of need (“CON”) laws and regulations. Where applicable, CON laws generally require, among other requirements, that a facility demonstrate the need for (1) constructing a new facility, (2) adding beds or expanding an existing facility, (3) investing in major capital equipment or adding new services, (4) changing the ownership or control of an existing licensed facility, or (5) terminating services that have been previously approved through the CON process. Certain state CON laws and regulations may restrict the ability of tenants to add new properties or expand an existing facility’s size or services. In addition, CON laws may constrain the ability of a tenant to transfer responsibility for operating a particular facility to a new tenant. If we must replace a tenant who is excluded from participating in a federal or state healthcare program, our ability to replace the tenant may be affected by a particular state’s CON laws, regulations, and applicable guidance governing changes in provider control.
Reimbursement
Some states offer Medicaid reimbursement to AL providers as an alternative to institutional long-term care services. And some states seek waivers from typical Medicaid requirements to develop cost-effective alternatives to long-term care, including Medicaid payments for AL and home health care.
SNFs typically receive most of their revenues from the Medicare and Medicaid programs, with the balance representing payments from private payors, including private insurers. Consequently, changes in federal or state reimbursement policies may also adversely affect a tenant’s ability to cover its expenses, including Patient-Driven Payment Model (PDPM) which was implemented in 2019. SNFs are subject to periodic pre- and post-payment reviews, and other audits by federal and state authorities. A review or audit of a tenant’s claims could result in recoupments, denials, or delay of payments in the future, which could have a material adverse effect on the tenant’s ability to meet its financial obligations to us. Due to the significant judgments and estimates inherent in payor settlement accounting, no assurance can be given as to the adequacy of any reserves maintained by our tenants to cover potential adjustments to reimbursements, or to cover settlements made to payors. Recent attention on skilled nursing billing practices and payments or ongoing government pressure to reduce spending by government healthcare programs, could result in lower payments to SNFs and, as a result, may impair a tenant’s ability to meet its financial obligations to us.
The reimbursement methodologies applied to healthcare facilities continue to evolve. Federal and state authorities have considered and may seek to implement new or modified reimbursement methodologies that may negatively impact healthcare property operations. The impact of any such changes, if implemented, may result in a material adverse effect on our skilled nursing property operations. No assurance can be given that current revenue sources or levels will be maintained. Accordingly, there can be no assurance that payments under a government healthcare program are currently, or will be in the future, sufficient to fully reimburse the tenants for their operating and capital expenses. As a result, this may impair a tenant’s ability to meet its financial obligations to us.
Finally, the Patient Protection and Affordable Care Act of 2010 (“PPACA”) and the Healthcare and Education Reconciliation Act of 2010, which amends the PPACA (collectively, the “Health Reform Laws”), and any modifications to these Health Reform Laws, may have a significant impact on Medicare, Medicaid, other federal healthcare programs, and private insurers, which impact the reimbursement amounts received by SNFs and other healthcare providers. The Health Reform Laws could have a substantial and material adverse effect on all parties directly or indirectly involved in the healthcare system.
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Other Related Laws
SNFs (and participating senior housing facilities that receive Medicare and Medicaid payments) are subject to federal, state, and local laws, regulations, and applicable guidance that govern the operations and financial and other arrangements that may be entered into by healthcare providers. Certain of these laws prohibit direct or indirect payments of any kind for the purpose of inducing or encouraging the referral of patients for medical products or services reimbursable by government healthcare programs. Other laws require providers to furnish only medically necessary services and submit to the government valid and accurate statements for each service. Still, other laws require providers to comply with a variety of safety, health and other requirements relating to the condition of the licensed property and the quality of care provided. Sanctions for violations of these laws, regulations, and other applicable guidance may include, but are not limited to, criminal and/or civil penalties and fines, loss of licensure, immediate termination of government payments, and exclusion from any government healthcare program. In certain circumstances, violation of these rules (such as those prohibiting abusive and fraudulent behavior) with respect to one property may subject other facilities under common control or ownership to sanctions, including exclusion from participation in the Medicare and Medicaid programs, as well as other government healthcare programs. In the ordinary course of its business, a tenant is regularly subjected to inquiries, investigations, and audits by the federal and state agencies that oversee these laws and regulations.
Our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground and above-ground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property.
We obtain satisfactory Phase I environmental assessments on each property we purchase. A Phase I assessment is an inspection and review of the property, its existing and prior uses, aerial maps and records of government agencies for the purpose of determining the likelihood of environmental contamination. A Phase I assessment includes only non-invasive testing. It is possible that environmental liabilities related to a property we purchase will not be identified in the Phase I assessments we obtain or that a prior owner, tenant or current occupant has created (or will create) an environmental condition which we do not know about. There can be no assurance that future law, ordinances or regulations will not impose material environmental liability on us or that the current environmental condition of our properties will not be affected by our tenants, or by the condition of land or operations in the vicinity of our properties such as the presence of underground and above-ground storage tanks or groundwater contamination.
Other information
Our executive offices are located at 23382 Mill Creek Drive, Suite 125, Laguna Hills, CA 92653. Our current lease, which covers approximately 5,241 square feet in a two-story office building, expires in December 2028. As of December 31, 2022, we have 10 full-time employees.
Available Information
Information about us is available on our website (http://www.summithealthcarereit.com/). We make available, free of charge on our internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (“SEC”). Our filings with the SEC are available to the public over the internet at the SEC’s website at http://www.sec.gov.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below can adversely affect our business, operating results, prospects and financial condition. These risks and uncertainties could cause our actual results to differ materially from those presented in our forward-looking statements.
General Risks of the Company
Because there is no public trading market for our stock, it will be difficult for stockholders to sell their stock.
There is no current public market for our stock and there is no assurance that a public market will ever develop for our stock. Our charter contains restrictions on the ownership and transfer of our stock, and these restrictions may inhibit our stockholders’ ability to sell their stock further limiting any potential market.
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We believe the value of our stock owned by our stockholders has declined substantially from the issue price. It may be difficult for our stockholders to sell their stock promptly or at all. If our stockholders are able to sell shares of stock, they may only be able to sell them at a substantial discount from the price they paid. This may be the result, in part, because the amount of funds available for investment was reduced by sales commissions, dealer manager fees, organization and offering expenses, and acquisition fees and expenses. As of December 31, 2022, our estimated per-share value of our common stock was $2.73 per share. Unless our aggregate investments increase in value to compensate for upfront fees and expenses and prior declines in value, it is unlikely that our stockholders will be able to sell their stock without incurring a substantial loss. We cannot assure our stockholders that their stock will ever appreciate in value to equal the price they paid for their stock. Stockholders should consider their stock as an illiquid investment, and they must be prepared to hold their stock for an indefinite period of time.
We have limited liquidity and we may be required to pursue certain measures in order to maintain or enhance our liquidity.
Liquidity is essential to our business and our ability to operate and to fund our existing obligations. We are dependent on external debt financing, joint venture opportunities and cash from our operating properties to fund our ongoing operations. We may not find suitable joint venture partners willing to provide capital at terms acceptable to us or at all. Our access to debt financing depends on the willingness of third parties to provide us with corporate- or asset-level debt. It also depends on conditions in the capital markets generally. A rising interest rate environment makes capital more expensive and more difficult to raise. We cannot be certain that sufficient funding will be available to us in the future on terms that are acceptable to us, if at all. If we cannot obtain sufficient funding on acceptable terms, or at all, we will not be able to operate and/or grow our business, which would likely have a negative impact on the value of our common stock and our ability to make distributions to our stockholders. In such an instance, a lack of sufficient liquidity would have a material adverse impact on our operations, cash flow and financial condition. We may be required to pursue certain measures in order to maintain or enhance our liquidity, including seeking the extension or replacement of our debt facilities, potentially selling assets at unfavorable prices and/or reducing our operating expenses. We cannot assure you that we will be successful in managing our liquidity.
If we do not successfully implement a long-term business strategy, our stockholders may have to hold their investment for an indefinite period.
The timing of the sale of our company or assets will depend on real estate and financial markets, economic conditions in the areas in which properties are located, and federal income tax effects on stockholders, that may prevail in the future. We cannot guarantee that we will be able to liquidate all of our assets. After we adopt a plan of liquidation, we would remain in existence until all properties and assets are liquidated. If we do not pursue a liquidity event, or delay such an event due to market conditions, our stockholders’ shares may continue to be illiquid and they may, for an indefinite period of time, be unable to convert their investment to cash easily and could suffer losses on their investment. If we were to pursue a liquidation currently, our stockholders would likely not receive the amount of their original investment.
The inability to retain or obtain key personnel could have a material negative impact on our operations, which could impair our ability to make distributions.
Our success depends to a significant degree upon our management team, specifically our Chief Executive Officer (or CEO) and Chief Operating Officer/Chief Financial Officer (or COO/CFO). If key personnel were to cease employment with the Company, we may be unable to find suitable replacements, and our operating results could suffer. We believe that our future success depends, in large part, upon our ability to hire and retain highly-skilled managerial and operational personnel. Competition for highly-skilled personnel is intense, and we may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly-skilled personnel, our ability to implement our investment strategies could be delayed or hindered and the value of our stockholders’ investments in us may decline.
Cash distributions to our stockholders may be limited.
Our directors will determine the amount and timing of distributions. Our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditure, reserve requirements, general operational requirements, and the analysis of investing excess cash flow to grow the portfolio versus paying distributions to shareholders.
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A limit on the percentage of our securities a person may own may discourage a takeover or business combination, which could prevent our stockholders from realizing a premium price for their stock.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To assure that we do not fail to qualify as a REIT under this test, our charter restricts direct or indirect ownership by one person or entity to no more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our stockholders.
Our business could be negatively impacted by cyber and other security threats or disruptions.
We face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks; threats to the security of our leased facilities; and threats from terrorist acts or other acts of aggression. Although we use various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. These threats could lead to losses of sensitive information or capabilities; harm to personnel, infrastructure or products; financial liabilities and damage to our reputation.
Cyber threats are evolving and include, but are not limited to, malicious software, destructive malware, attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential, personal or otherwise protected information (ours or that of our employees, tenants or partners), and corruption of data, networks or systems. In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in our partners’ or tenants’ systems that are used in connection with our business. These events, if not prevented or effectively mitigated, could damage our reputation, require remedial actions and lead to loss of business, regulatory actions, potential liability and other financial losses.
The impact of these factors is difficult to predict, but one or more of them could result in the loss of information or capabilities, harm to individuals or property, damage to our reputation, loss of business, contractual or regulatory actions and potential liabilities, any one of which could have a material adverse effect on our financial position, results of operations and/or cash flows.
We are subject to risks of damage from catastrophic weather and other natural or man-made disasters and the physical effects of climate change.
Natural and man-made disasters, including terrorist attacks and acts of nature such as hurricanes, tornadoes, earthquakes, flooding and wildfires, may cause damage to our properties or business disruption to our tenants and operators . These adverse weather and natural or manmade events could cause substantial damage or loss to our properties which could exceed applicable property insurance coverage. Such events could also have a material adverse impact on our tenants’ operations and ability to meet their respective obligations to us. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected property, as well as anticipated future revenue from that property. Any such loss could materially and adversely affect our business and our financial condition and results of operations. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable. To the extent that significant changes in the climate occur in areas where our properties are located, we may experience more frequent extreme weather events which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties without a corresponding increase in revenue. Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.
General Risks Related to Investments in Real Estate and Real Estate-Related Investments
Economic and regulatory changes that impact the real estate market may reduce our net income and the value of our properties.
We are subject to risks related to the ownership and operation of real estate, including but not limited to:
| ● | worsening general or local economic conditions and financial markets could cause lower demand, tenant defaults, and reduced occupancy and rental rates, some or all of which would cause an overall decrease in revenue from rents; |
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| ● | increases in competing properties in an area which could require increased concessions to tenants and reduced rental rates; |
| ● | increases in interest rates or unavailability of permanent mortgage funds which may render the sale of a property difficult or unattractive; and |
| ● | changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes. |
Some or all of the foregoing factors may affect our properties, which would reduce our net income, and our ability to make distributions to our stockholders.
Lease terminations could reduce our revenues from rents and our distributions to our stockholders and cause the value of our stockholders’ investment in us to decline.
The success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. In the event of tenant default or bankruptcy, or lease terminations or expiration, we may be unable to re-lease the property for the rent previously received. We may be unable to sell a property without incurring a loss. These events and others could cause the value of our stockholders’ investment in us to decline.
Acquisitions of properties that we execute, or seek to execute, may prove to be unsuccessful or may not produce the cash flow that we expect, which would negatively affect our financial results.
We intend to continue to acquire real estate properties. In deciding whether to acquire a particular property, we make assumptions regarding the expected future performance of that property. We are exposed to the risk that some of our acquisitions may not prove to be successful. We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. Such expenditures may negatively affect our results of operations. If our estimated return on investment proves to be inaccurate, it may fail to perform as we expected. Furthermore, there can be no assurance that our anticipated acquisitions and investments, the completion of which is subject to various conditions, will be consummated in accordance with anticipated timing, on anticipated terms, or at all.
We may have difficulty selling our real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholders may be limited.
Equity real estate investments are relatively illiquid. Therefore, we will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We may also have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any of our properties, we may not realize a gain on such sale. We may elect not to distribute any proceeds from the sale of properties to our stockholders; for example, we may use such proceeds to:
| ● | purchase additional properties; |
| ● | repay debt, if any; |
| ● | buy out interests of any joint venturer or other partners in any joint venture in which we are a party; |
| ● | create working capital reserves; or |
| ● | make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties. |
Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time, generally two years, and comply with certain other requirements in the Internal Revenue Code.
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Actions of our joint venture partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions that are in the best interests of our stockholders which could result in lower investment returns to our stockholders.
We have and are likely to continue to enter into joint ventures with third parties to acquire or improve properties. We may also purchase properties in partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present when acquiring real estate directly, including, for example:
| ● | joint venturers may share certain approval rights over major decisions; |
| ● | that such joint venturer, co-owner or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation of the joint venture; |
| ● | the possibility that our joint venturer, co-owner or partner in an investment might become insolvent or bankrupt; |
| ● | the possibility that we may incur liabilities as a result of an action taken by our joint venturer, co-owner or partner; |
| ● | that such joint venturer, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT; |
| ● | disputes between us and our joint venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture to additional risk; or |
| ● | that under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached which might have a negative influence on the joint venture. |
These events might subject us to liabilities in excess of those contemplated and, thus, reduce our stockholders’ investment returns. If we have a right of first refusal or buy/sell right to buy out a joint venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes exercisable or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interest of a joint venturer subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire to exit the venture.
Risks Related to Investments in Healthcare-Related Real Estate
Healthcare policy changes, including national legislation to reform the U.S. healthcare system, may have a material adverse effect on our business.
There have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control healthcare costs and, more generally, to reform the U.S. healthcare system. Our results of operations may be adversely affected by current and potential future healthcare reforms as our tenants’ operations could be affected impacting their ability to make lease payments to us or, in the case of our operated properties, negatively impacting resident fees and services revenues.
Federal and state legislatures, health agencies and third-party payors continue to focus on containing the cost of healthcare. Legislative and regulatory proposals and enactments to reform healthcare insurance programs could significantly impact our properties and the manner in which our tenants are paid. For example, provisions of the PPACA, also known as “Obamacare,” have resulted in changes in the way healthcare is paid for by both governmental and private insurers. These changes have had, and are expected to continue to have, a significant impact on our business. There is no assurance that the PPACA, as currently enacted or as amended in the future, will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.
There is also significant economic pressure on state budgets that may result in states increasingly seeking to achieve budget savings through mechanisms that limit coverage or payment for the services our tenants provide.
Adverse trends in the healthcare service industry may negatively affect lease revenues from healthcare properties that we may acquire and the values of those investments.
The healthcare service industry may be affected by the following:
| ● | staffing shortages, minimum staffing level mandates, and continued reliance on higher-priced agency healthcare workers; |
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| ● | increased costs and decreased occupancy due to COVID-19 and potential future pandemics or contagious outbreaks; |
| ● | trends in the method of delivery of healthcare services, specifically expansion of home-based healthcare; |
| ● | increased acuity of care; |
| ● | competition among healthcare providers; |
| ● | nursing home reform mandates from state and federal governments without increases in reimbursement to fund the mandates; |
| ● | lower increases or decreases in reimbursement rates from government and commercial payors, high uncompensated care expense, investment losses and limited admissions growth pressuring operating profit margins for healthcare providers; |
| ● | liability and workers compensation insurance expense; and |
| ● | health reform initiatives to address healthcare costs through expanded pay-for-performance criteria, value-based purchasing programs, bundled provider payments, accountable care organizations, state health insurance exchanges, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions. |
These changes, among others, can adversely affect the economic performance of some or all of the tenants and operators/managers of healthcare properties that we may acquire and, in turn, negatively affect the lease revenues, resident fees and services revenues, and the value of our property investments.
Tenants of our healthcare properties derive a substantial portion of their income from third-party payors.
SNF tenants derive a substantial portion of their net operating revenues from third-party payors, including the Medicare and Medicaid programs. These programs are highly regulated by federal, state and local laws, rules and regulations and are subject to substantial change. There are no assurances that payments from governmental and other third-party payors will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients utilizing reimbursement under these programs. Efforts by such third-party payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. In addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government-sponsored programs. The healthcare industry continues to face various challenges on healthcare providers to control or reduce costs. The financial impact on tenants of healthcare properties that we may acquire could limit their ability to make rent payments to us, which would have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Under the current Patient-Driven Payment Model (PDPM), therapy minutes are removed as the basis for payment in favor of resident classifications and anticipated resource needs during the course of a patient’s stay. PDPM assigns every resident a case-mix classification that drives the daily reimbursement rate for that individual. We do not believe that PDPM has adversely affected our tenants; however, lower reimbursement rates may impair a tenant’s ability to meet its financial obligation to us.
Operators/managers of healthcare properties that we may acquire may be affected by the financial deterioration, insolvency and/or bankruptcy of other significant operators/managers in the healthcare industry.
Certain companies in the healthcare industry, including some key senior housing operators/managers, are experiencing considerable financial, legal and/or regulatory difficulties which have resulted or may result in financial deterioration and, in some cases, insolvency and/or bankruptcy. The adverse effects on these companies could have a significant impact on the industry as a whole, including but not limited to negative public perception by investors, lenders and consumers. As a result, lessees of healthcare facilities that we may acquire could experience the damaging financial effects of a weakened industry sector driven by negative headlines, ultimately making them unable to meet their obligations to us, and our business could be adversely affected.
Tenants of healthcare properties that we may acquire face certain operational risks that may impact their ability to generate revenues or that may increase their expenses, either of which might negatively affect our financial results.
Our tenants’ revenues are primarily driven by occupancy, private pay rates, and Medicare and Medicaid reimbursement, if applicable. Expenses for these facilities are primarily driven by the costs of labor, food, utilities, taxes, insurance and rent or debt service. Revenues from government reimbursement have, and may continue to, come under pressure due to reimbursement cuts and state budget shortfalls. Operating costs continue to increase for our tenants. To the extent that any decrease in revenues and/or any increase in operating expenses result in a property not generating enough cash to make payments to us, our revenues may be reduced and the credit of our tenant and the value of other collateral would have to be relied upon. To the extent the value of such property is reduced, we may need to record
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an impairment for such asset. Furthermore, if we determine to dispose of an underperforming property, such sale may result in a loss. Any such impairment or loss on sale would negatively affect our financial results.
Future economic weakness may have an adverse effect on our tenants and our operated properties, including their ability to access credit or maintain occupancy and/or private pay rates. If the operations, cash flows or financial condition of our tenants are materially adversely impacted by economic or other conditions, our revenue and operations may be adversely affected. Increased competition may affect our tenants’ ability to meet their obligations to us. The tenants of our properties compete on a local and regional basis with tenants and licensed operators of properties and other healthcare providers that provide comparable services. We cannot be certain that the tenants of all of our facilities will be able to achieve and maintain occupancy and rate levels that will enable them to meet all of their obligations to us. Our tenants are expected to encounter increased competition in the future that could limit their ability to attract residents or expand their businesses.
Potential litigation and rising insurance costs may affect our tenants ability to obtain and maintain adequate liability and other insurance and their ability to make lease payments and fulfill their insurance and indemnification obligations to us.
Our tenants and the Company may be subject to lawsuits filed by advocacy groups that monitor the quality of care at healthcare facilities or by patients, facility residents or their families. Significant damage awards are possible in cases where neglect has been found. This litigation has increased our tenants costs of monitoring and reporting quality of care and has resulted in increases in the cost of liability and medical malpractice insurance. These increased costs may materially adversely affect our tenants ability to obtain and maintain adequate liability and other insurance; manage related risk exposures; fulfill their insurance, indemnification and other obligations to us under their leases or property management agreements, as applicable; or make lease payments to us, as applicable. In addition, from time to time, we may be subject to claims brought against us in lawsuits and other legal proceedings arising out of our alleged actions or the alleged actions of our tenants and operators for which such tenants or operators may have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such pending or future litigation could materially adversely affect our liquidity, financial condition and results of operations and have a material adverse effect on us in the event that we are not ultimately indemnified by our tenants.
COVID-19 or another pandemic, epidemic or outbreak of a contagious disease could affect the markets in which our tenants operate or otherwise impact our facilities.
If a pandemic or other public health crisis were to affect our markets, or our tenants specifically, such as the major breakout of the coronavirus (COVID-19) in the United States or specifically in the locations where our tenants operate, the businesses of our tenants could be adversely affected. There have been numerous examples of outbreaks at similar senior housing health care facilities. Such incidents have diminished the public trust in healthcare facilities, especially facilities that fail to accurately or timely diagnose, or other facilities such as those where our tenants that are treating, have treated or otherwise have residents affected by these contagious diseases. If there is an outbreak at any of our facilities, residents or prospective residents might decline to use such facilities. Any of our tenants’ infectious disease plans or polices may not prevent the spread of these diseases to their residents, many of which are already elderly or otherwise medically compromised. Further, a pandemic might adversely impact our tenants’ businesses by causing a temporary shutdown of one or more facilities or diversion of residents, by disrupting or delaying production and delivery of materials and products in the supply chain or by causing staffing shortages in one or more facilities. The potential impact of a pandemic, epidemic or outbreak of a contagious disease, including COVID–19, with respect to our tenants or our facilities is difficult to predict and could have a material adverse impact on the operations of our tenants and, in turn, our revenues, business and results of operations and the value of our stock. The COVID-19 pandemic has already impacted some of our tenants negatively. See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information.
Our properties expose us to various operational risks, liabilities and claims that could adversely affect our ability to generate revenues or increase our costs and could have a material adverse effect on us.
From time to time, circumstances may require one or more of our subsidiaries to hire a third-party manager to operate and/or become the licensed operator of a senior housing facility, rather than entering into a triple net lease with an independent tenant, although that is not our objective. Hiring a third-party manager to operate or becoming the licensed operator of a facility exposes us to additional operational risks, liabilities and claims that could increase our costs or adversely affect our ability to generate revenues, thereby reducing our profitability. These operational risks include fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), increased cost of compliance, increases in the cost of food, materials, energy, labor (as a result of unionization or otherwise) or other services, national and regional economic conditions, the imposition of new or increased
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taxes, capital expenditure requirements, professional and general liability claims, and the availability and cost of professional and general liability insurance. Any one or a combination of these factors could result in operating deficiencies in our operations and decreases in cash flow, which could have a material adverse effect on us. See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information regarding financial issues for two of our owned properties and the impact on us.
Transfers of healthcare facilities may require regulatory approvals and these facilities may not have efficient alternative uses.
Transfers of healthcare facilities to successor tenants frequently are subject to regulatory approvals or notifications, including, but not limited to, change of ownership approvals under CON or determination of need laws, state licensure laws and Medicare and Medicaid provider arrangements, that are not required for transfers of other types of real estate. The replacement of a healthcare facility tenant could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. Alternatively, given the specialized nature of our facilities, we may be required to spend substantial time and funds to adapt these properties to other uses. If we are unable to timely transfer properties to successor tenants or find efficient alternative uses, our revenue and operations may be adversely affected.
Risks Associated with Financing
We expect to continue to use short term acquisition financing to acquire properties and otherwise incur other indebtedness, including long-term financing, which will increase our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.
We have used short term acquisition financing to acquire our healthcare properties. We have also used long-term debt financing to increase the amount of capital available to us and to achieve greater property diversification. We may also acquire properties encumbered with existing financing which cannot be immediately repaid. We may also invest in joint venture entities that borrow funds or issue senior equity securities to acquire properties, in which case our equity interest in the joint venture would be junior to the rights of the lender or preferred stockholders. Our charter limits our borrowings to 300% of our net asset value, as defined in our charter, unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report with an explanation from our independent directors of the justification for the excess borrowing. We may borrow funds for operations, tenant improvements, capital improvements or other working capital needs. We may also borrow funds to make distributions, including but not limited to funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow, if we otherwise deem it necessary or advisable, to ensure that we maintain our qualification as a REIT for federal income tax purposes. To the extent we borrow funds, we may raise additional equity capital or sell properties to pay such debt.
If there is a shortfall between the cash flow from a property and the cash flow needed to service acquisition financing on that property, then the amount available for operations or distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness collateralized by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. Some of our mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we have entered into contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. These or other limitations may limit our flexibility and prevent us from achieving our operating plans.
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High levels of debt or increases in interest rates could increase the amount of our loan payments, reduce the cash available for distribution to stockholders and subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.
Our policies do not limit us from incurring debt. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. Interest we pay could reduce cash available for distribution to stockholders. Additionally, variable rate debt could result in increases in interest rates which would increase our interest costs, which would reduce our cash flows and our ability to make distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss.
Federal Income Tax Risks
Failure to qualify as a REIT would subject us to federal income tax, which would reduce the cash available for distribution to our stockholders.
We expect to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax even if the market conditions at that time are not favorable for these borrowings or sales. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT was excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:
| ● | In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income. |
| ● | We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. |
| ● | If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may avoid the 100% tax on gain from a resale of that property, but the income from the sale or operation of that property may be subject to corporate income tax at the highest applicable rate. |
| ● | If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries. |
| ● | We may be subject to an excise tax under IRC section 857(b)(7) if the IRS reallocates certain specified income and expense items between the REIT and the TRS under principles similar to IRC section 482. The excise tax is equal to 100% of redetermined rents, redetermined deductions, excess interest, and redetermined TRS service income. |
We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.
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We may be subject to adverse legislative or regulatory tax changes.
At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2022, our portfolio consisted of 18 properties, 14 of which we own 100%, and four of which we own through a 95.3% interest in CHP LLC. 16 of the properties are 100% leased, on a triple net basis, to the tenants of the related facilities and the other two properties are each 100% leased to an affiliated subsidiary (see Note 3 to the accompanying Notes to Consolidated Financial Statements under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”) owned by our wholly-owned subsidiaries, Summit Chandler LLC and HP Redding LLC, respectively). The following table (excluding the 35 properties held by our unconsolidated Equity-Method Investments) provides summary information regarding these properties:
Number | |||||||||||
Purchase | of | ||||||||||
Property |
| Location |
| Date Purchased |
| Type(1) |
| Price |
| Beds | |
Sheridan Care Center | Sheridan, OR | August 3, 2012 | SNF | $ | 4,100,000 | 51 | |||||
Fernhill Care Center | Portland, OR | August 3, 2012 | SNF | 4,500,000 | 63 | ||||||
Friendship Haven Healthcare and Rehabilitation Center | Galveston County, TX | September 14, 2012 | SNF | 15,000,000 | 150 | ||||||
Pacific Health and Rehabilitation Center | Tigard, OR | December 24, 2012 | SNF | 8,140,000 | 73 | ||||||
Brookstone of Aledo | Aledo, IL | July 2, 2013 | AL | 8,625,000 | 66 | ||||||
Sundial Assisted Living | Redding, CA | December 18, 2013 | AL | 3,500,000 | 65 | ||||||
Pennington Gardens | Chandler, AZ | July 17, 2017 | AL/MC | 13,400,000 | 90 | ||||||
Yucaipa Hill Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 10,715,000 | 82 | ||||||
Creekside Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 4,780,000 | 59 | ||||||
University Post Acute | Mentone, CA | July 2, 2021 | SNF | 4,560,000 | 50 | ||||||
Calhoun Health Center | Calhoun, GA | December 30, 2021 | SNF | 7,670,000 | 100 | ||||||
Maple Ridge Health Care Center | Cartersville, GA | December 30, 2021 | SNF | 13,548,000 | 74 | ||||||
Chatsworth Health Care Center | Chatsworth, GA | December 30, 2021 | SNF | 29,785,000 | 120 | ||||||
East Lake Arbor | Decatur, GA | December 30, 2021 | SNF | 15,640,000 | 103 | ||||||
Fairburn Health Care Center | Fairburn, GA | December 30, 2021 | SNF | 14,644,000 | 120 | ||||||
Grandview Health Care Center | Jasper, GA | December 30, 2021 | SNF | 10,061,000 | 60 | ||||||
Rosemont at Stone Mountain | Stone Mountain, GA | December 30, 2021 | SNF | 23,908,000 | 149 | ||||||
Willowwood Nursing Center & Rehab | Flowery Branch, GA | December 30, 2021 | SNF | 14,744,000 | 100 | ||||||
Total: |
| $ | 207,320,000 | 1,575 |
| (1) | SNF is an abbreviation for skilled nursing facility. AL is an abbreviation for assisted living facility. MC is an abbreviation for memory care facility. |
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Portfolio Lease Expirations
The following table sets forth lease expiration information for the ten years and thereafter following December 31, 2022. We expect that, prior to maturity, we will negotiate new terms of a lease to either the current tenant or another qualified operator.
Percent of |
| |||||||||
Base Rent | Total | Percent of |
| |||||||
In Final Year | Leasable | Total |
| |||||||
No. of | of Expiring | Area | Annual Base |
| ||||||
Year Ending | Leases | Leases | Expiring | Rent Expiring |
| |||||
December 31 |
| Expiring |
| (Annual $) |
| (%) |
| (%) |
| |
2027 |
| 3 | (1) |
| 1,538,000 | (1) | 26.6 | % | 7.2 | % |
2029 |
| 3 |
| 2,418,000 |
| 9.6 | % | 11.3 | % | |
2030 -2036 |
| 12 |
| 17,517,000 | 63.8 | % | 81.5 | % | ||
| 18 | $ | 21,473,000 |
| 100.0 | % | 100.0 | % | ||
(1) | See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information regarding the status of the tenant leases in 2022 for Pennington Gardens and Sundial. As the total rental revenue payments for these leases are eliminated in consolidation and are of a short-term nature, the base rent for the final year has not been included in the table above. Resident agreements for the operated properties, Pennington Gardens and Sundial, are short-term and excluded from the table above and revenue is included in resident fees and services in the accompanying statements of operations. |
ITEM 3. LEGAL PROCEEDINGS
See Note 11 to the accompanying Notes to Consolidated Financial Statements for a summary of our material legal proceedings.
In addition, we are or may be subject to various other legal proceedings and actions arising in the normal course of our business. In the opinion of management, based upon the information presently known, the ultimate liability, if any, arising from such pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are likely to be asserted, taking into account established accruals for estimated liabilities (if any), are not expected to be material individually and in the aggregate to our consolidated financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
During the period covered by this report, there was no established public trading market for our shares of common stock.
On December 31, 2022, the estimated common stock per-share value is $2.73 per share, adjusted from the previous estimated common stock per-share value of $2.94 established on December 31, 2021. The estimated value per share was based on the methodologies and assumptions described further below. The estimated per-share value determined below is not audited and does not represent the fair value according to U.S. generally accepted accounting principles (“GAAP”) of our assets less liabilities, nor does it represent the amount our shares would trade at on a national securities exchange or the amount a stockholder would obtain if he or she tried to sell his or her shares or if we liquidated our assets.
As with any valuation methodology, our methodology is based on a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated per-share amount, and these differences could be significant. Accordingly, with respect to our estimated per-share value, we can provide no assurance that:
| ● | a stockholder would be able to realize our estimated value per share upon attempting to resell his or her shares; |
| ● | we would be able to achieve, for our stockholders, our estimated value per share, upon a listing of our shares of common stock on a national securities exchange, selling our real estate portfolio, or merging with another company; |
| ● | an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or |
| ● | the estimated share value, or the methodologies relied upon to estimate the share value, will be found by any regulatory authority to comply with FINRA, ERISA, or any other regulatory requirements. |
Our December 31, 2022 estimated per-share value was calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the current book value of our liabilities, and dividing the total by the number of our common shares outstanding as of December 31, 2022. Our estimated per-share value is the same as our net asset value. Our estimated per-share value does not reflect “enterprise value,” which may include a premium for the portfolio or the potential increase in our share value if we were to list our shares on a national securities exchange. Our estimated per-share value also does not reflect a liquidity discount for the fact that the shares are not currently traded on a national securities exchange.
The following is a summary of the valuation methodologies used:
Investments in Real Estate. For purposes of calculating an estimated value per share, we used the value of the 2022 lease payments and applied the current market lease rates for each asset type to determine fair market value of our properties or for recently purchased properties, the current appraised values.
Loans Payable. We reduced the fair value of our investments by the total amount due of our loans payable based on the current book value at December 31, 2022.
Other Assets and Liabilities. The carrying values of our other assets and liabilities are considered to be equal to fair value due to their short maturities. Certain balances, including straight-line rent related assets and liabilities, have been eliminated for the purpose of the valuation due to the fact that the value of those balances have no value or decrement to the assets going forward.
Equity-Method Investments. We estimate the value of our interests in our equity-method investments based on the discounted cash flows and then applying our ownership percentage in the individual equity-method investments after a sale to determine the amount of equity attributable to the Company.
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Our estimated per-share value was calculated as follows:
| December 31, 2022 | ||
Investments in real estate | $ | 9.84 | |
Loans payable |
| (7.93) | |
Other assets and liabilities, net |
| 0.26 | |
Equity-Method Investments |
| 0.56 | |
Estimated net asset value per-share | $ | 2.73 | |
Estimated enterprise value premium |
| None applied | |
Estimated liquidity discount |
| None applied | |
Total estimated per-share value | $ | 2.73 | |
The value of our shares will fluctuate over time in response to, among other things, changes in real estate market fundamentals, capital markets activities, and attributes specific to the properties within our portfolio. We are not required to update the estimated value per share more frequently than every 18 months. We expect that any future estimates of the value of our properties will be performed by the Company; however, our board of directors may direct us to engage one or more independent, third-party valuation firms in connection with such estimates.
Our board of directors reviewed the report prepared by management which recommended an estimated per-share value, and considering all information provided in light of its own knowledge regarding our assets and unanimously agreed upon an estimated value of $2.73 per share, which is consistent with the recommendations of management.
A summary of our estimated per-share value for the last five years at December 31 is as follows:
2022 |
| $ | 2.73 |
2021 | $ | 2.94 | |
2020 | $ | 2.90 | |
2019 | $ | 2.82 | |
2018 | $ | 2.83 |
Stockholders
As of March 20, 2023 we had approximately 23.0 million shares of common stock outstanding held by 4,230 stockholders of record.
Recent Sales of Unregistered Securities
We did not sell any equity securities that were not registered under the Securities Act of 1933 during the period covered by this Form 10-K.
Equity Compensation Plans
See the “Equity Compensation Plan Information” in Item 12 of this report.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. See also the “Special Note about Forward-Looking Statements” preceding Item 1 of this report.
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Overview
As of December 31, 2022, our ownership interests in our 18 real estate properties of senior housing facilities was as follows: 100% ownership of 14 properties and a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds one property, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties (collectively, our “Equity-Method Investments”). In June 2021, we sold our 15% equity interest in an unconsolidated equity-method investment that held 14 properties. As used in this report, the “Company,” “we,” “us” and “our” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.
Our revenues are comprised largely of tenant rental income from our 18 real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, resident fees and services, and asset management fees resulting from our Equity-Method Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture or other equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with sustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.
We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities focuses on different segments of the senior population.
Current Market and Economic Conditions
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. Two of our tenants have experienced a material adverse effect on their operations related to COVID-19, and that has affected their ability to make rent payments in 2022 and 2021 (see Note 3 to the accompanying Notes to Consolidated Financial Statements for further information on its impact to us and see below for the impact on our Equity-Method Investments). We expect the COVID-19 pandemic will continue to adversely affect our tenants’ and our Company’s financial condition and results of operations, including but not limited to, occupancy, resident leases and related resident fees and service revenues, and additional labor and operating expenses. The fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses in future periods.
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies. The Federal Reserve has increased its targeted range for the federal funds rate, leading to increased interest rates and it foresees further interest rate increases. We currently have fixed and variable interest rates for our loans. The rise in overall interest rates has caused an increase in our variable rate borrowing costs and our overall cost of capital, resulting in an increase in interest expense. The higher interest rates imposed by the Federal Reserve to address inflation may also adversely impact real estate asset values. In addition, a prolonged period of high and persistent inflation could cause an increase in our expenses. The current market and economic conditions could have a material impact on our business, cash flow and results of operations. It could also impact our ability to find suitable acquisitions, sell properties, and raise equity and debt capital.
Summit Portfolio Properties
At December 31, 2022, our portfolio consisted of 18 real estate properties as noted above in Overview, 16 of which were 100% leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (see Note 3 to the accompanying Notes to Consolidated Financial Statements under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the “Operated Properties”) which are operated directly and earn resident fees and service revenue.
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On July 2, 2021, we acquired three properties in California (the “CA3 Properties”) for approximately $20.1 million. See Notes 3 and 4 to the accompanying Notes to Consolidated Financial Statements for further information regarding the purchase price and associated financing arrangements.
On December 30, 2021, we acquired eight properties in Georgia (the “GA8 Properties”) for approximately $130.0 million. See Notes 3 and 4 to the accompanying Notes to Consolidated Financial Statements for further information regarding the purchase price and associated financing arrangements.
The following table provides summary information (excluding the 35 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of December 31, 2022:
|
|
| Square |
| Purchase | ||||
Properties | Beds | Footage | Price | ||||||
SNF |
| 15 |
| 1,354 |
| 406,135 | $ | 181,795,000 | |
AL or AL/MC |
| 3 |
| 221 |
| 136,765 |
| 25,525,000 | |
Total Real Estate Properties |
| 18 |
| 1,575 |
| 542,900 | $ | 207,320,000 | |
|
|
|
|
| 2022 | ||||||
Lease | |||||||||||
Property |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) | |
Sheridan Care Center |
| Sheridan, OR | August 3, 2012 |
| SNF |
| 51 | $ | 492,000 | ||
Fernhill Care Center |
| Portland, OR | August 3, 2012 |
| SNF |
| 63 |
| 525,000 | ||
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County TX | September 14, 2012 |
| SNF |
| 150 |
| 1,412,000 | ||
Pacific Health and Rehabilitation Center |
| Tigard, OR | December 24, 2012 |
| SNF |
| 73 |
| 968,000 | ||
Brookstone of Aledo | Aledo, IL | July 2, 2013 | AL | 66 | 765,000 | ||||||
Sundial Assisted Living (2) | Redding, CA | December 18, 2013 | AL | 65 | — | ||||||
Pennington Gardens (2) | Chandler, AZ | July 17, 2017 | AL/MC | 90 | — | ||||||
Yucaipa Hill Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 82 | 1,065,000 | ||||||
Creekside Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 59 | 475,000 | ||||||
University Post Acute | Mentone, CA | July 2, 2021 | SNF | 50 | 453,000 | ||||||
Calhoun Health Center | Calhoun, GA | December 30, 2021 | SNF | 100 | 479,000 | ||||||
Maple Ridge Health Care Center |
| Cartersville, GA | December 30, 2021 |
| SNF |
| 74 |
| 1,894,000 | ||
Chatsworth Health Care Center | Chatsworth, GA | December 30, 2021 | SNF | 120 | 3,459,000 | ||||||
East Lake Arbor | Decatur, GA | December 30, 2021 | SNF | 103 | 902,000 | ||||||
Fairburn Health Care Center | Fairburn, GA | December 30, 2021 | SNF | 120 | 1,447,000 | ||||||
Grandview Health Care Center | Jasper, GA | December 30, 2021 | SNF | 60 | 1,065,000 | ||||||
Rosemont at Stone Mountain |
| Stone Mountain, GA | December 30, 2021 |
| SNF |
| 149 |
| 2,735,000 | ||
Willowwood Nursing Center & Rehab |
| Flowery Branch, GA | December 30, 2021 |
| SNF |
| 100 |
| 1,031,000 | ||
Total |
|
|
|
|
| 1,575 |
|
| |||
(1) Represents lease revenue for the year ended December 31, 2022, based on in-place leases, including straight-line rent and excluding $2.5 million in tenant reimbursement revenue, $0.06 million in above/below market lease amortization and approximately $0.4 million related to the lease terminations and settlement agreements from two former tenants (See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information).
(2) See Note 3 to the accompanying Notes to Consolidated Financial Statements for further information on these two properties. Lease revenue due under the Pennington Gardens and Sundial intercompany leases are eliminated in consolidation and revenue is reflected in resident fees and services in the accompanying consolidated statements of operations for these operated properties.
As of December 31, 2022, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than 20% of our total assets due to cross-default provisions in the leases. Audited financial statements are attached as an Exhibit to this Form 10-K.
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Summit Equity-Method Investment Portfolio Properties
We continue to believe that raising institutional capital to make acquisitions will be accretive to shareholder value. Our primary source of capital since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is a prudent strategy for growth; however, in the future, we may raise additional capital through alternative methods if warranted by market conditions.
A summary of the condensed combined financial data for the balance sheets and statements of income (operations) for all unconsolidated Equity-Method Investments are as follows (see below under Indiana JV for information regarding the sale of our equity interest in the Indiana JV on June 11, 2021 and see Note 5 to the accompanying Notes to Consolidated Financial Statements; accordingly, the financial information for the Indiana JV is not included in the December 31, 2021 combined balance sheet and the year ended December 31, 2021 combined statement of operations below):
| December 31, |
| December 31, | |||
Condensed Combined Balance Sheets: |
| 2022 |
| 2021 | ||
Total Assets | $ | 249,540,000 | $ | 286,572,000 | ||
Total Liabilities | $ | 185,857,000 | $ | 213,812,000 | ||
Members Equity: |
|
| ||||
Summit | $ | 5,676,000 | (1) | $ | 8,017,000 | |
JV Partners | $ | 58,007,000 | $ | 64,743,000 | ||
Total Members Equity | $ | 63,683,000 | $ | 72,760,000 | ||
(1) | See below under each entity for the difference between the total balance of our equity method investments in our consolidated financials statements of approximately $5.2 million versus the balance above of approximately $5.7 million. |
| December 31, |
| December 31, | |||
Condensed Combined Statements of Operations: |
| 2022 |
| 2021 | ||
Total Revenue: | $ | 35,374,000 | $ | 39,710,000 | ||
Income from Operations | $ | (1,864,000) | $ | 14,786,000 | ||
Net (Loss) Income | $ | (8,936,000) | $ | 7,580,000 | ||
Summit equity interest in Equity-Method Investments net (loss) income | $ | (2,281,000) | $ | 932,000 | ||
JV Partners interest in Equity-Method Investments net (loss) income | $ | (6,655,000) | $ | 6,648,000 | ||
Summit Union Life Holdings, LLC
In April 2015, through our operating partnership (“Operating Partnership”), we formed Summit Union Life Holdings, LLC (“SUL JV”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and entered into a limited liability company with Best Years with respect to the SUL JV (the “SUL LLC Agreement”).
22
The SUL JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements.
In December 2022, the SUL JV entered into a purchase and sale agreement to sell the two Delaware properties as noted below.
The following reconciles our 10% equity investment in the SUL JV from inception through December 31, 2022:
JV 2 Properties (Colorado, Oregon and Virginia) – April 2015 |
| $ | 1,150,000 | |
Creative Properties (Texas) – October 2015 |
| 837,000 | ||
Cottage Properties (Wisconsin) – December 2015 |
| 1,932,000 | ||
Riverglen (New Hampshire) – April 2016 |
| 424,000 | ||
Delaware Properties – September 2016 |
| 1,846,000 | ||
Total investments |
| 6,189,000 | ||
Income from equity-method investee |
| 924,000 | ||
Distributions |
| (4,687,000) | ||
Total investment at December 31, 2022 | $ | 2,426,000 | (1) |
(1) | At inception of the SUL JV, we recorded a difference in the equity-method investment in the SUL JV JV 2 Properties of approximately $0.1 million. |
A summary of the consolidated financial data for the balance sheets and statements of income for the unconsolidated SUL JV, of which we own a 10% equity interest, is as follows:
| December 31, |
| December 31, | |||
Condensed Consolidated Balance Sheets of SUL JV: |
| 2022 |
| 2021 | ||
Real estate properties and intangibles, net (2) | $ | 114,544,000 | $ | 125,183,000 | ||
Cash and cash equivalents |
| 4,511,000 |
| 4,929,000 | ||
Other assets |
| 12,640,000 |
| 14,322,000 | ||
Total Assets: | $ | 131,695,000 | $ | 144,434,000 | ||
Loans payable, net | $ | 89,815,000 | (1) | $ | 98,432,000 | |
Other liabilities |
| 8,420,000 |
| 8,463,000 | ||
Members’ equity: |
|
| ||||
Best Years |
| 30,920,000 |
| 34,568,000 | ||
Summit |
| 2,540,000 |
| 2,971,000 | ||
Total Liabilities and Members’ Equity | $ | 131,695,000 | $ | 144,434,000 | ||
(1) | In June 2022, the $6.8 million loan payable related to the Cottage Properties was paid off using funds received from the members (Summit’s portion was approximately $650,000). |
(2) | In December 2022, the SUL JV changed the operator/managers again for five of their operated properties, which triggered the SUL JV to record an impairment of approximately $6.1 million on the five properties. Additionally, the SUL JV wrote off the straight-line rent receivable of approximately $1.1 million for two properties due to operational issues and recording rents on the cash basis and recorded an impairment of approximately $0.6 million. Additionally, the SUL JV entered into an agreement with a broker to market two properties for sale. |
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| Year Ended |
| Year Ended | |||
Condensed Consolidated Statements of Operations of SUL JV: |
| December 31, 2022 |
| December 31, 2021 | ||
Total revenue | $ | 19,927,000 | $ | 20,575,000 | ||
Property operating expenses |
| (10,533,000) |
| (8,532,000) | ||
Net operating income |
| 9,394,000 |
| 12,043,000 | ||
General and administrative expense |
| (402,000) |
| (399,000) | ||
Depreciation and amortization expense |
| (4,094,000) |
| (4,733,000) | ||
Impairment on real estate properties | (6,743,000) | — | ||||
(Loss) income from operations |
| (1,845,000) |
| 6,911,000 | ||
Interest expense |
| (4,248,000) |
| (4,586,000) | ||
Amortization of deferred financing costs |
| (321,000) |
| (201,000) | ||
Other income (expense) |
| (73,000) |
| 470,000 | ||
Net (loss) income | $ | (6,487,000) | $ | 2,594,000 | ||
Summit equity interest in SUL JV net (loss) income | $ | (648,000) | $ | 259,000 | ||
As of December 31, 2022, the 17 properties held by SUL JV, our unconsolidated 10% equity-method investment, of which 11 are leased on a triple net basis and six are operated directly, are as follows:
|
|
| Number of | |||
Property |
| Location |
| Type |
| Beds |
Lamar Estates |
| Lamar, CO |
| SNF |
| 60 |
Monte Vista Estates |
| Monte Vista, CO |
| SNF |
| 60 |
Myrtle Point Care Center |
| Myrtle Point, OR |
| SNF |
| 55 |
Gateway Care and Retirement Center |
| Portland, OR |
| SNF/IL |
| 91 |
Applewood Retirement Community |
| Salem, OR |
| IL |
| 69 |
Shenandoah Senior Living |
| Front Royal, VA |
| AL |
| 78 |
Pine Tree Lodge Nursing Center |
| Longview, TX |
| SNF |
| 92 |
Granbury Care Center |
| Granbury, TX |
| SNF |
| 181 |
Twin Oaks Nursing Center |
| Jacksonville, TX |
| SNF |
| 116 |
Dogwood Trails Manor |
| Woodville, TX |
| SNF |
| 90 |
Carolina Manor |
| Appleton, WI |
| AL |
| 45 |
Carrington Manor |
| Green Bay, WI |
| AL |
| 20 |
Marla Vista Manor |
| Green Bay, WI |
| AL |
| 40 |
Marla Vista Gardens |
| Green Bay, WI |
| AL/MC |
| 20 |
Riverglen House of Littleton |
| Littleton, NH |
| AL |
| 59 |
Atlantic Shore Rehabilitation and Health Center |
| Millsboro, DE |
| SNF |
| 181 |
Pinnacle Rehabilitation and Health Center |
| Smyrna, DE |
| SNF |
| 151 |
Total: |
|
|
|
|
| 1,408 |
Equity-Method Partner - Fantasia Investment III LLC
In 2016 and 2017, through our Operating Partnership, we entered into three separate limited liability company agreements (collectively, the “Fantasia Agreements”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed three separate companies, Summit Fantasia Holdings, LLC (“Fantasia I”), Summit Fantasia Holdings II, LLC (“Fantasia II”) and Summit Fantasia Holdings III, LLC (“Fantasia III”) (collectively, the “Fantasia JVs”). The Fantasia JVs are not consolidated in our consolidated financial statements and are accounted for under the equity-method in our consolidated financial statements. Through the Fantasia JVs, we own a 35% interest in one senior housing facility located in California; a 20% interest in two skilled nursing facilities located in Rhode Island; and a 10% interest in nine skilled nursing facilities located in Connecticut.
24
The following reconciles our equity investments in the Fantasia JVs from inception through December 31, 2022:
Summit Fantasia Holdings, LLC – October 2016 |
| $ | 2,813,000 | |
Summit Fantasia Holdings II, LLC – February 2017 | $ | 1,923,000 | ||
Summit Fantasia Holdings III, LLC – August 2017 | $ | 1,954,000 | ||
Total investment |
| 6,690,000 | ||
Loss from Fantasia JVs |
| (309,000) | ||
Distributions |
| (3,625,000) | ||
Total Fantasia JV investments at December 31, 2022 | $ | 2,756,000 | (1) |
(1) | During 2022, Summit recorded an aggregate impairment of $0.2 million that reduced the Fantasia I balance to zero. However, there were additional losses at Fantasia I that were allocated to Summit Members’ Equity balance of $0.1 million (not included in the loss from Fantasia JVs above) accounting for the difference in our total Fantasia JV investments at December 31, 2022 of $2.8 million versus $2.9 million under Summit Members’ Equity below. |
A summary of the consolidated financial data for the balance sheets and statements of operations for the unconsolidated Fantasia JVs, of which we own a 10% to 35% equity interest, is as follows:
| December 31, |
| December 31, | |||
Condensed Combined Balance Sheets of Fantasia JVs: |
| 2022 |
| 2021 | ||
Real estate properties, net (1) (2) | $ | 76,343,000 | $ | 88,908,000 | ||
Cash and cash equivalents |
| 6,265,000 |
| 8,135,000 | ||
Assets held for sale(1) | 4,776,000 | 10,454,000 | ||||
Other assets |
| 4,072,000 |
| 6,834,000 | ||
Total Assets: | $ | 91,456,000 | $ | 114,331,000 | ||
Loans payable, net (1) | $ | 54,595,000 | $ | 67,154,000 | ||
Liabilities held for sale(1) | 4,354,000 | 7,537,000 | ||||
Other liabilities |
| 6,847,000 |
| 8,885,000 | ||
Members’ equity: |
|
| ||||
Fantasia JVs |
| 22,770,000 |
| 25,967,000 | ||
Summit |
| 2,890,000 |
| 4,788,000 | ||
Total Liabilities and Members’ Equity | $ | 91,456,000 | $ | 114,331,000 | ||
| (1) | In May 2021, the Fantasia I JV entered into an agreement to sell one of the properties in our Summit Fantasia Holdings, LLC equity-method investment; therefore, such property was accounted for as Held for Sale as of December 31, 2021. In March 2022, the property was sold for $11.0 million and the funds were used to pay down the loan payable associated with the Fantasia I JV. Additionally, in August 2022, the Fantasia I JV entered into an agreement with a broker to market the property, Sun Oak Assisted Living, for sale; and the property is considered as Held For Sale as of December 31, 2022. |
| (2) | In June and December 2022, the Fantasia I JV recorded an impairment of approximately $3.2 million and $3.2 million, respectively, related to the Summit Citrus Heights (Sun Oak Assisted Living) property. Additionally, in 2022, Summit recorded an aggregate $0.1 million impairment to our Equity-Method Investment in the Fantasia I JV reducing the equity-method investment investment balance to $0. |
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| Year Ended |
| Year Ended | |||
Condensed Combined Statements of Operations of Fantasia JVs: |
| December 31, 2022 |
| December 31, 2021 | ||
Total revenue | $ | 13,752,000 | $ | 15,520,000 | ||
Property operating expenses |
| (5,539,000) |
| (6,119,000) | ||
Net operating income |
| 8,213,000 |
| 9,401,000 | ||
General and administrative expense |
| (501,000) |
| (487,000) | ||
Depreciation and amortization expense |
| (2,323,000) |
| (2,719,000) | ||
Impairment on real estate property | (6,397,000) | — | ||||
Gain on sale of real estate | 1,247,000 | — | ||||
Income from operations |
| 239,000 |
| 6,195,000 | ||
Interest expense |
| (3,539,000) |
| (3,570,000) | ||
Amortization of debt issuance costs |
| (138,000) |
| (65,000) | ||
Other income |
| 188,000 |
| 741,000 | ||
Net (loss) income | $ | (3,250,000) | $ | 3,301,000 | ||
Summit equity interest in Fantasia JVs net (loss) income | $ | (1,713,000) | $ | 504,000 | ||
As of December 31, 2022, the 12 properties in Fantasia JVs, our unconsolidated equity-method investments, are all 100% leased on a triple net basis, and are as follows:
|
|
| Number of | |||
Property |
| Location |
| Type |
| Beds |
Sun Oak Assisted Living |
| Citrus Heights, CA |
| AL/MC |
| 78 |
Trinity Health and Rehabilitation Center |
| Woonsocket, Rhode Island |
| SNF |
| 185 |
Hebert Nursing Home |
| Smithfield, Rhode Island |
| SNF |
| 133 |
Chelsea Place Care Center |
| Hartford, CT |
| SNF |
| 234 |
Touchpoints at Manchester |
| Manchester, CT |
| SNF |
| 131 |
Touchpoints at Farmington |
| Farmington, CT |
| SNF |
| 105 |
Fresh River Healthcare |
| East Windsor, CT |
| SNF |
| 140 |
Trinity Hill Care Center |
| Trinity Hill, CT |
| SNF |
| 144 |
Touchpoints at Bloomfield |
| Bloomfield, CT |
| SNF |
| 150 |
Westside Care Center |
| Westside, CT |
| SNF |
| 162 |
Silver Springs Care Center |
| Meriden, CT |
| SNF |
| 159 |
Touchpoints of Chestnut |
| Chestnut, CT |
| SNF |
| 60 |
Total: |
|
|
|
| 1,681 |
Summit Fantasy Pearl Holdings, LLC
In October 2017, through our Operating Partnership, we entered into a limited liability company agreement (the “FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method.
During 2022 and continuing into 2023, the tenant/operator of the FPH JV facilities has been and continues to experience cash flow issues due to the following: (1) increased expenses due to inflation, (2) workforce staffing issues, and (3) lower census from pre-pandemic levels due to COVID related issues. As a result, the tenant has not paid rent since August 2022. Summit, as the manager of the FPH JV, and the tenant are working together to find a solution. As of December 31, 2022, there have been no agreements executed, however, for the months of August, September, and October 2022, the base rents were applied to the tenants’ remaining escrow and security deposits held by the FPH JV. The FPH JV has written off the related straight line rent as a reduction to lease revenue due to uncertainty of resuming the rent payments.
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The following reconciles our equity investment in the FPH JV from inception through December 31, 2022:
Iowa properties – November 2017 |
| $ | 929,000 | |
Total investment |
| 929,000 | ||
Loss from equity-method investee (including impairment of the Equity-Method Investment balance) |
| (112,000) | ||
Distributions |
| (817,000) | ||
Total Fantasia investments at December 31, 2022 | $ | — | (1) |
(1) | In December 2022, Summit recorded an impairment of $246,000 for our Equity-Method Investment in the FPH JV due to the issues noted above, reducing the equity-method investment balance to $0. |
A summary of the consolidated financial data for the balance sheets and statements of income for the unconsolidated FPH JV is as follows:
| December 31, |
| December 31, | |||
Condensed Consolidated Balance Sheets of FPH JV: |
| 2022 |
| 2021 | ||
Real estate properties, net | $ | 23,667,000 | $ | 24,840,000 | ||
Cash and cash equivalents |
| 1,412,000 |
| 1,650,000 | ||
Other assets |
| 1,310,000 |
| 1,317,000 | ||
Total Assets: | $ | 26,389,000 | $ | 27,807,000 | ||
Loans payable, net | $ | 20,309,000 | $ | 20,764,000 | ||
Other liabilities |
| 1,517,000 |
| 2,577,000 | ||
Members’ equity: |
|
| ||||
Fantasia JVs |
| 4,317,000 |
| 4,207,000 | ||
Summit |
| 246,000 |
| 259,000 | ||
Total Liabilities and Members’ Equity | $ | 26,389,000 | $ | 27,807,000 | ||
| Year Ended |
| Year Ended | |||
December 31, | December 31, | |||||
Condensed Consolidated Statements of Operations of FPH JV: |
| 2022 |
| 2021 | ||
Total revenue | $ | 1,695,000 | $ | 3,615,000 | ||
Property operating expenses |
| (632,000) |
| (562,000) | ||
Net operating income |
| 1,063,000 |
| 3,053,000 | ||
General and administrative expense |
| (148,000) |
| (145,000) | ||
Depreciation and amortization expense |
| (1,173,000) |
| (1,228,000) | ||
Income from operations |
| (258,000) |
| 1,680,000 | ||
Interest expense |
| (983,000) |
| (1,011,000) | ||
Amortization of debt issuance costs |
| (61,000) |
| (61,000) | ||
Other income (expense) |
| 2,103,000 |
| 1,077,000 | ||
Net income | $ | 801,000 | $ | 1,685,000 | ||
Summit equity interest in FPH JV net income | $ | 80,000 | $ | 169,000 | ||
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As of December 31, 2022, the six properties of our unconsolidated equity-method investment in FPH JV, all of which are 100% leased on a triple net basis, are as follows:
|
|
| Number of | |||
Property |
| Location |
| Type |
| Beds |
Accura Healthcare of Bancroft |
| Bancroft, Iowa |
| SNF/AL |
| 50 |
Accura Healthcare of Milford |
| Milford, Iowa |
| SNF/AL |
| 94 |
Accura Healthcare of Carroll |
| Carroll, Iowa |
| SNF/IL |
| 124 |
Accura Healthcare of Cresco |
| Cresco, Iowa |
| SNF |
| 59 |
Accura Healthcare of Marshalltown |
| Marshalltown, Iowa |
| SNF |
| 86 |
Accura Healthcare of Spirit Lake |
| Spirit Lake, Iowa |
| SNF |
| 98 |
Total: |
|
|
|
|
| 511 |
Indiana JV
In June 2021, we sold our 15% interest in the Indiana JV for approximately $5.4 million. The Indiana JV was not consolidated in our consolidated financial statements and was accounted for under the equity-method.
The following reconciles our equity investment in the Indiana JV from inception through June 11, 2021:
Indiana properties – March 2019 |
| $ | 4,906,000 |
Total investment |
| 4,906,000 | |
Loss from equity-method investee |
| (1,433,000) | |
Distributions |
| (1,577,000) | |
Total Indiana JV investment at June 11, 2021 | 1,896,000 | ||
Funds received from sale of interest in equity-method investment | 5,411,000 | ||
Total gain on sale of Indiana JV equity-method investment at June 11, 2021 | $ | 3,515,000 |
Distributions from Equity-Method Investments
For the years ended December 31, 2022 and 2021, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:
Years Ended December 31, | ||||||
| 2022 |
| 2021 | |||
Distributions | $ | 1,140,000 | $ | 1,814,000 | ||
Cash received for distributions | $ | 1,116,000 | $ | 2,564,000 | ||
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Results of Operations
Our results of operations are described below:
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
December 31, | |||||||||
| 2022 |
| 2021 |
| $ Change | ||||
Total rental revenues | $ | 21,957,000 | $ | 5,974,000 | $ | 15,983,000 | |||
Property operating costs |
| (3,139,000) |
| (1,023,000) |
| (2,116,000) | |||
Resident fees and services income | 3,678,000 | — | 3,678,000 | ||||||
Resident costs | (3,713,000) | — | (3,713,000) | ||||||
Net operating income (1) |
| 18,783,000 |
| 4,951,000 |
| 13,832,000 | |||
Asset management fees |
| 659,000 |
| 953,000 |
| (294,000) | |||
Interest income from notes receivable |
| — |
| 26,000 |
| (26,000) | |||
General and administrative |
| (4,580,000) |
| (5,245,000) |
| 665,000 | |||
Depreciation and amortization |
| (7,311,000) |
| (1,841,000) |
| (5,470,000) | |||
Loss from equity-method investees |
| (2,898,000) |
| (354,000) |
| (2,544,000) | |||
Gain on sale of equity-method investment | — | 3,515,000 | (3,515,000) | ||||||
Other income |
| 252,000 |
| 20,000 |
| 232,000 | |||
Interest expense |
| (13,534,000) |
| (2,535,000) |
| (10,999,000) | |||
Net loss |
| (8,629,000) |
| (510,000) |
| (8,119,000) | |||
Noncontrolling interests’ share in (income) loss |
| (64,000) |
| (75,000) |
| 11,000 | |||
Net loss applicable to common stockholders | $ | (8,693,000) | $ | (585,000) | (8,108,000) | ||||
| (1) | Net operating income (“NOI”) is a non-GAAP supplemental measure used to evaluate the operating performance of real estate properties. We define NOI as total rental revenues, resident fees and service income less property operating costs and resident costs. NOI excludes asset management fees, interest income from notes receivable, general and administrative expense, depreciation and amortization, income from equity-method investees, other income, and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of the REIT’s real estate at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess and compare property-level performance. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect the aforementioned excluded items. Additionally, NOI as we define it may not be comparable to NOI as defined by other REITs or companies, as they may use different methodologies for calculating NOI. |
Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating costs include insurance, property taxes and other operating expenses, and resident costs are related to the Operated Properties. Net operating income increased approximately $13.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to rental revenues generated from the CA3 and GA8 acquisitions in July and December 2021, respectively.
Asset management fees decreased approximately $0.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due primarily to the sale of the Indiana JV in June 2021 (see Note 5 to the accompanying Notes to Condensed Consolidated Financial Statements).
The net decrease of approximately $0.6 million in general and administrative expense is primarily due to the write off of expenses associated with a terminated transaction in 2021 of approximately $0.6 million and a decrease in payroll related expense of approximately $0.4 million, offset by an increase in legal fees of $0.3 million and audit-related fees of $0.1 million.
The net increase in depreciation and amortization of $5.5 million and interest expense of $11.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 is primarily due to CA3 and GA8 acquisitions in July and December 2021 and an increase in interest rates for both CA3 and GA8 portfolios.
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The net increase of approximately $2.5 million in loss from our Equity-Method Investments for the year ended December 31, 2022 is primarily due to the impairment of our equity-method investments of approximately $1.5 million and the impairment of the assets and losses in equity of the Fantasia I JV and SUL JV of approximately $1.0 million.
The net decrease in gain on sale of equity-method investment of approximately $3.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 is due to the sale of our equity interest in the Indiana JV in 2021. (see Note 5 to the accompanying Notes to Consolidated Financial Statements for further information related to the sale of our interest in the Indiana JV in June 2021).
The net increase in other income of $0.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 is primarily due to government COVID related relief funds received by Pennington Gardens.
Liquidity and Capital Resources
As of December 31, 2022, we had approximately $11.6 million in cash and cash equivalents on hand. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.
Going forward, we expect our primary sources of cash to be rental revenues, equity-method investment distributions and asset management fees. In addition, we may increase cash through the sale of additional properties, which may result in the deconsolidation of properties we already own, or borrowing against currently-owned properties. For the foreseeable future, we expect our primary uses of cash to be for funding future acquisitions, investments in joint ventures, operating expenses, interest expense on outstanding indebtedness and the repayment of principal on loans payable. We may also incur expenditures for renovations of our existing properties, making our facilities more appealing in their market.
Seven of our debt obligations are long-term, fixed rate U.S. Department of Housing and Urban Development (“HUD”)-insured loans that mature between 2039 and 2055. The other debt obligations are short-term loans that mature in July 2024 through December 2026 with variable interest rates (see Note 4 to the accompanying Notes to Consolidated Financial Statements). Due to the current environment of increasing interest rates, this may have a negative effect on our results of operations and for that reason, we may refinance these short-term loans with long-term, fixed rate HUD-insured debt, other long-term debt, or a combination of debt and equity in 2023.
Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties. In regard to our Operated Properties, our intent is to stabilize the operations of the facilities and execute long-term triple-net leases with either a new or the existing manager/operator.
Credit Facilities and Loan Agreements
As of December, 2022, we had debt obligations of approximately $183.8 million. The outstanding balance by lender is as follows (see Note 4 to the accompanying Notes to Consolidated Financial Statements for further information regarding our financing arrangements):
| ● | Capital One Multifamily Finance, LLC (HUD-insured) – approximately $10.0 million maturing September 2053 |
| ● | Lument Capital (formerly ORIX Real Estate Capital, LLC) (HUD-insured) – approximately $35.0 million maturing from September 2039 through April 2055 |
| ● | CIBC Bank, USA - approximately $106.0 million maturing from July 2024 to December 2024 |
| ● | Oxford Finance LLC – approximately $32.8 million maturing from March 2025 to December 2026 |
Debt Service Requirements
Please refer to Note 4 in the accompanying Notes to Consolidated Financial Statements for a detailed discussion of our loans payable.
Funds from Operations
Funds from operations (“FFO”) is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or
30
losses from sales of property, plus real estate depreciation and amortization, impairments, and after adjustments for unconsolidated partnerships and joint ventures.
Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and impairments, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
The following is the reconciliation from net income (loss) applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the years ended December 31, 2022 and 2021:
| Year Ended December 31 | |||||
| 2022 |
| 2021 | |||
Net loss applicable to common stockholders (GAAP) | $ | (8,693,000) | $ | (585,000) | ||
Adjustments: |
|
| ||||
Depreciation and amortization |
| 7,282,000 |
| 1,841,000 | ||
Depreciation and amortization related to noncontrolling interests |
| (44,000) |
| (37,000) | ||
Depreciation related to Equity-Method Investments |
| 859,000 |
| 1,302,000 | ||
Impairment on real estate property in Fantasia I and SUL JV and impairment of Equity-Method Investments (included in loss from Equity-Method Investments) | 3,294,000 | — | ||||
Gain on sale of property in Fantasia I JV (included in loss from Equity-Method Investments) | (437,000) | — | ||||
Gain on sale of equity-method investment |
| — |
| (3,515,000) | ||
Funds provided by (used in) operations (FFO) applicable to common stockholders | $ | 2,261,000 | $ | (994,000) | ||
Weighted-average number of common shares outstanding – basic and diluted |
| 23,027,978 |
| 23,027,978 | ||
FFO per weighted average common shares - basic and diluted | $ | 0.10 | $ | (0.04) | ||
Weighted-average number of common shares outstanding – diluted |
| 23,528,120 |
| 23,027,978 | ||
FFO per weighted average common shares - diluted | $ | 0.10 | $ | (0.04) | ||
Subsequent Events
See Note 14 to the accompanying Notes to Consolidated Financial Statements for further information regarding subsequent events.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in materially adverse ways, and those estimates could be different under different assumptions or conditions. Our significant accounting policies are described in more detail in Note 2 to the accompanying Notes to Consolidated Financial Statements. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
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Real Estate Purchase Price Allocation and Useful Lives
In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, our acquisitions of real estate investments generally do not meet the definition of a business, and are treated as asset acquisitions. The assets acquired and liabilities assumed are measured at their acquisition date relative fair values. Acquisition costs are capitalized as incurred. We allocate the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value basis. Purchase price allocations contain uncertainties because they require management to make significant estimates and assumptions and to apply judgment to allocate the purchase price of real estate acquired among its components. We assess fair value based on available market information, including comparable transactions, rental rates, discount rates, and capitalization rates.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements and furniture and fixtures considers the value of the property as if it was vacant as well as replacement costs, depreciation factors, and other relevant market information.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the leases and (ii) management’s estimate of the amount that would be received using fair market lease rates over the remaining non-cancelable term of the lease and, for below-market leases, we also evaluate any renewal options associated with that lease to determine if the intangible should include those periods.The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases.
The value of in-place leases consisting of tenant origination and absorption costs and leasing commissions avoided is based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, discount rates, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases and included in depreciation and amortization in the consolidated statements of operations. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of their related intangible asset is expensed in the consolidated statements of operations.
Impairment of Real Estate Properties
An assessment as to whether our investments in real estate are impaired is highly subjective. Impairment calculations involve management’s best estimate of the holding period, market comparables, future occupancy levels, rental rates, capitalization rates, lease-up periods and capital requirements for each property at the point in time when a valuation analysis is performed. We review our properties for recoverability when events or circumstances, including changes in our use of property or the strategy for its overall business, plans to sell a property before its depreciable life has ended, occupancy changes, significant near-term lease expirations, significant deteriorations of the underlying cash flows of the property, and other market factors indicate that the carrying amount of the property may not be recoverable. Impairment is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. A change in any one or more of these factors could materially impact whether a property is impaired as of any given valuation date.
There were no material changes in the accounting methodology we use to assess impairment charges during the year ended December 31, 2022. We did not record any impairment charges during the years ended December 31, 2022 or 2021.
Revenue Recognition
Revenue Recognition – Rental Revenue
We collect rent from our tenants based on our lease agreements. We recognize revenues on an accrual basis as earned. Revenue from minimum lease payments under our leases is recognized on a straight-line basis to the extent that future lease payments are considered collectible. If tenant lease payments are not likely to be collected, then the revenues will be recognized on a cash basis (or if the answer changes at a later date, the revenues are adjusted to reflect what it would have been on a cash basis) and the adjustments will be recorded through rental revenues, rather than bad debt expense. Tenant reimbursements are included within rental revenues and are based on the actual property tax and insurance incurred for the properties. We earn our asset management fees based on a percentage of the purchase price or equity raised. As the manager, our duty is to manage the day-to-day operations of the special-purpose entities which own the
32
properties. Asset management fees are recognized as a single performance obligation (managing the properties) comprised of a series of distinct services (handling issues with our tenants, etc.). We believe that the overall service of asset management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, billed monthly and paid quarterly.
Revenue Recognition - Resident Fees and Services
We recognize resident fees and services revenue at the amount that we expect to be entitled to in exchange for providing resident care and services. Resident fees are recognized and billed monthly based on the contracted rate in the resident lease agreements and the reimbursements from Medicaid are based on contracted reimbursement rates. These amounts are paid directly from the residents and/or third-party payors (currently only Medicaid). Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by us. The majority of resident fees and services is attributable to the portion of the base monthly lease fee in the resident lease agreement. We elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognize the resident fee revenue based upon the predominant component, either the lease or non-lease component, of the contracts. We have determined that the lease component is the predominant component and the services included under the resident agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. Resident services consist of care level services and certain other ancillary services (i.e., housekeeping, laundry, etc.). These services are provided and paid for in addition to the standard fees included in each resident lease (i.e., room and board, standard meals, etc.).
Equity-Method Investments
We recognize our investments in unconsolidated entities over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. We initially record our investments based on our cash invested or for properties that we have contributed, at the carrying value of the properties at the time of contribution.
We evaluate our equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may be other than temporarily impaired and when the carrying value may exceed the fair value. The fair value is estimated based on discounted cash flows models that include all estimated cash flows and terminal values based on an estimated hold period. The discounted cash flows are based on several assumptions including terminal capitalization rates, terminal lease rates, stabilized occupancy, stabilized operating margin, and discount rates. The assumptions are generally based on management’s experience in its real estate markets, and the effects of current market conditions, which are subject to economic and market uncertainties. If we believe that there is an other-than temporary decline in the value of an equity method investment, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of such equity-method investment.
For the year ended December 31, 2022, we recorded impairment in two of our Equity-Method Investments. See Note 5 to the accompanying Notes to Consolidated Financial Statements for further information.
No impairments of our Equity-Method Investments were recorded as of December 31, 2021.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. Exhibits and Financial Statement Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
33
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management, under the supervision of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), periodically evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, as of December 31, 2022, our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer) have concluded that these disclosure controls and procedures are effective.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Report on Internal Control over Financial Reporting
Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on their evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that we maintained effective internal control over financial reporting as of December 31, 2022.
This report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company under applicable SEC rules, we are not required to include an attestation of management’s report from our independent registered public accounting firm.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
34
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
Our Board of Directors (our “Board”) is currently comprised of three members, Messrs. Kent Eikanas and J. Steven Roush, and Ms. Suzanne Koenig, of which, J. Steven Roush and Suzanne Koenig are independent directors.
J. Steven Roush, CPA, age 76, serves on our Audit, Independent Directors, Compensation and Investment Committees. Mr. Roush chairs our Board of Directors and our Audit Committee. Mr. Roush’s terms on our Board and the Committees noted above expire on the date of the 2023 Annual Meeting. Mr. Roush retired from PricewaterhouseCoopers (PWC) in 2007 after 39 years, 30 of those as a Partner. Mr. Roush brings experience in a diverse number of industries ranging from manufacturing, non-profits and retail (restaurants) with concentrations in real estate (office, residential, hospitality and commercial) telecommunications and pharmaceutical. He has a background in dealing with both private and public company boards of directors. Mr. Roush has a Bachelor of Science Degree in Accounting from Drake University and an Executive Masters Professional Director Certification from the American College of Corporate Directors. Mr. Roush has served on our Board since 2014.
Mr. Roush brings to our Board years of dealing with the SEC and its various regulatory filings, Sarbanes Oxley (SOX 404) implementation and maintenance and the experience of working with many diverse boards running across varied industries. Over the years, he has served as an office managing partner, an SEC Review Partner (over 20 years) and a Risk Management Partner. Mr. Roush currently serves as Chairman of the Board and Chairman of the Audit Committee of W.E. Hall Company, a privately held manufacturer and distributor of corrugated pipe and related drainage products. He also is Chairman of the Board and Chairman of the Audit Committee for Fieldpiece Instruments, Inc., a privately held manufacturer of hand held instruments for HVAC/R field service. Mr. Roush also serves on the Board of Trustees of the Orange County Museum of Art and is the Treasurer and the Chairman of the Finance Committee. He is on the Board of Directors of the American Heart Association - Orange County and previously served six years on the Audit Committee of the National American Heart Association. Mr. Roush serves on the Corporate Cabinet of the Tocqueville Society of United Way – Orange County. Mr. Roush is a founding member of the Private Directors Association-Southern California chapter. He previously served as a member of the Board and Chairman of the Audit committee of AirTouch Communications, Inc., a public telecommunication device company and Staar Surgical Company, a public manufacturer of implantable lenses for the eye. Our Board has determined that Mr. Roush satisfies the SEC’s requirements of an “audit committee financial expert.”
Suzanne Koenig, age 62, serves on our Audit, Independent Directors, Compensation and Investment Committees. Ms. Koenig’s terms on our Board and the Committees noted above expire on the date of the 2023 Annual Meeting. Ms. Koenig is president and founder of SAK Management Services LLC, a nationally recognized long-term care management and healthcare consulting services company, where she has worked for over 20 years. With over 35 years of extensive experience as an owner and operator, Ms. Koenig offers specialized skills in operations improvement, staff development and quality assurance with particular expertise in marketing, census development and operations enhancement for the whole spectrum of senior housing, long-term care and other healthcare entities requiring turnaround services. Ms. Koenig has served on our Board since 2015.
Ms. Koenig’s professional experience has included executive positions in marketing, development and operations management for both regional and national healthcare providers representing property portfolios throughout the United States. Recently Ms. Koenig has been appointed as the Patient Care Ombudsman, Examiner, Receiver and Chapter 11 Trustee in several of the new Health Care Bankruptcy Filings (Chapter 11 and Chapter 7) with the advent of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, including healthcare entities such as physician practices and hospitals. In addition, Ms. Koenig has served in an advisory and consulting capacity for numerous client engagements involving bankruptcy proceedings as well as in turnaround management situations. She offers proven proficiency in maximizing financial return and cash flow, while maintaining the highest standards of quality care.
Ms. Koenig brings to our Board over 40 years of experience in operating long-term care facilities. Ms. Koenig offers the practical perspective of the challenges and opportunities confronting healthcare providers in managing the changing dynamics of this industry. She is a Certified Turnaround Practitioner, a Licensed Nursing Home Administrator and a Licensed Social Worker in multiple states where she has worked.
35
Ms. Koenig also serves as an officer and director for several of the states’ long term care provider associations. Ms. Koenig is the former Co-Chair of the American Bankruptcy Institute’s Health Care Insolvency Committee and Ms. Koenig is a Board of Director for the Global Turnaround Management Association Chapter. Ms. Koenig is a frequent speaker for various healthcare industry associations and business affiliates where she conducts continuing education and training programs. She holds a Master of Science Degree from Spertus College, Illinois, and a Bachelor of Social Work Degree from the University of Illinois, Champaign-Urbana, Illinois.
Kent Eikanas, age 53, currently serves as our Chief Executive Officer and Secretary. Further information regarding Mr. Eikanas’ business experience and specific skills that qualify him to serve as a director of the Company is set forth below in the “Executive Officers” section. Mr. Eikanas’ term on our Board expires on the date of the 2023 Annual Meeting. Mr. Eikanas has served on our Board since 2016.
Executive Officers
Mr. Kent Eikanas is our Chief Executive Officer. Our Chief Operating Officer, Chief Financial Officer, and Treasurer is Ms. Elizabeth Pagliarini.
Kent Eikanas, age 53, currently serves as our Chief Executive Officer and Secretary. Mr. Eikanas has served as Chief Executive Officer since August 2019, President since September 2012, and previously served as Chief Operating Officer from July 2012 through August 2019. He has successfully transitioned the Company from industrial properties to senior housing, building the Company portfolio to 54 assets under management. From 2008 to 2012, Mr. Eikanas served as Vice President of Senior Housing for a private equity group, where he closed over $100 million in senior housing real estate refinances, dispositions and acquisitions. In addition, Mr. Eikanas was responsible for asset management of over $700 million in senior housing assets, was a key contributor to the launch of a skilled nursing operating company based in Dallas, Texas, as well as helped grow the operating company from 14 facilities to 35 facilities. From 2003 to 2008, Mr. Eikanas was the Vice President of Acquisitions for a private real estate company and closed over $200 million in senior housing real estate. Mr. Eikanas has overseen licensing for skilled nursing facilities, assisted living facilities and memory care facilities in California, Texas, Rhode Island, Oregon and Pennsylvania. Mr. Eikanas graduated from California State University Sacramento with a Bachelor of Arts Degree in Psychology and a minor in Business Administration. Mr. Eikanas is often asked to speak and has presented at industry conferences and events both in the Unites States and abroad, including as a panelist in 2012 on a question-and-answer webinar about buying, valuing and selling skilled nursing facilities hosted by Irving Levin Associates, as a speaker in 2015 at the IBC Asia 2nd Healthcare Facilities Asia conference in Singapore and 2019, Mr. Eikanas was a panelist on BDO’s Adapting to Changing Market Winds Healthcare REITs and Private Equity and a speaker at Senior Living 100 Conference 2019.
Elizabeth Pagliarini, age 52, currently serves as our Chief Operating Officer, Chief Financial Officer and Treasurer and has been with the Company since June 2014. She has served as Chief Financial Officer and Treasurer since September 2014 and Chief Operating Officer since August 2019. Ms. Pagliarini is a seasoned executive with over 30 years of experience in financial services and investment banking having held positions including chief executive officer, president, chief financial officer and chief compliance officer. Ms. Pagliarini successfully broke the “glass ceiling” in her mid-twenties as chief executive officer and chairwoman of the board of an investment brokerage subsidiary of a public company in Beverly Hills, California. She also co-founded a boutique investment bank and registered broker-dealer. Prior to working at Summit, Ms. Pagliarini was a principal at a securities litigation and financial consulting firm since 2001 and chief compliance officer and FINOP (financial and operations principal) at a Los Angeles-based investment bank from 2005-2008. Ms. Pagliarini received her Bachelor of Science in Business Administration with a concentration in Finance from Valparaiso University where she was honored with their highest academic award, the Presidential Scholarship. She is also a Certified Fraud Examiner (CFE).
Ms. Pagliarini is a member of the Board of Directors of First Foundation Inc. (NASDAQ: FFWM), and serves on its audit, compensation and nominating and governance committees. She has served as Chairwoman of the Mission Viejo, California Investment Advisory Commission and is an advisory board member of The CFO Executive Summit of Southern California. In addition, she proudly serves on the Emeritus Board of Directors for Forever Footprints, a non-profit organization that provides support to families that have suffered the loss of a baby during pregnancy or infancy and educates the medical community to improve quality of care and response. In 2020, Ms. Pagliarini was awarded with the Lifetime Achievement Award at the Orange County Business Journal’s CFO of the Year Awards after receiving nominations for CFO of the Year in both 2019 and 2020. She has also been named one of “20 Women to Watch” by OC Metro magazine and nominated for The Orange County Business Journal’s Women in Business Award. Additionally, she has been honored by Step Up Women’s Network as the recipient of their prestigious Commitment to Philanthropy Volunteer Award and by Forever Footprints as the winner of their Compassion Award.
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Code of Business Conduct and Ethics
Our Board has adopted a Code of Business Conduct and Ethics that is applicable to all members of our Board and our executive officers. The Code of Business Conduct and Ethics can be accessed through our website: www.summithealthcarereit.com/code-of-business-conduct-and-ethics.
No Changes to Director Nomination Procedures
Since the date of our proxy statement for our 2022 Annual Meeting, there have been no changes to the procedures by which our stockholders may recommend nominees to our Board.
Audit Committee
Our Board has a standing Audit Committee that selects the independent public accountants that audit our annual consolidated financial statements, reviews the plans and results of the audit engagement with the independent public accountants, approves the audit and non-audit services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of our internal accounting controls. The current members of the Audit Committee are J. Steven Roush, Suzanne Koenig and Kent Eikanas. J. Steven Roush serves as the Chairman of the Audit Committee and satisfies the SEC’s requirements of an “audit committee financial expert.”
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table provides certain information concerning compensation for services rendered in all capacities by our named executive officers during the fiscal years ended December 31, 2022 and 2021.
Name and |
|
|
|
|
| ||||||||||||
Principal | Option | All Other | |||||||||||||||
Position |
| Year |
| Salary |
| Bonus |
| Awards |
| Comp |
| Total | |||||
Kent Eikanas Chief Executive | 2022 | $ | 458,260 | $ | 15,000 | $ | — | $ | 12,200 | (1) | $ | 485,460 | |||||
Officer and Secretary |
| 2021 | $ | 425,760 | $ | 409,375 | $ | — | $ | 11,600 | (2) | $ | 846,735 | ||||
Elizabeth Pagliarini Chief Financial Officer, |
| 2022 | $ | 433,260 | $ | 15,000 | $ | — | $ | 12,200 | (1) | $ | 460,460 | ||||
Chief Operating Officer and Treasurer |
| 2021 | $ | 400,760 | $ | 409,375 | $ | — | $ | 11,600 | (2) | $ | 821,735 | ||||
| (1) | This amount relates to the employer matching 401(K) contributions earned in 2022 which were paid in 2023. |
| (2) | This amount relates to the employer matching 401(K) contributions earned in 2021 which were paid in 2022. |
Employment Agreements with Named Executive Officers
The Company has entered into employment agreements with each of its named executive officers, Kent Eikanas, Chief Executive Officer and Secretary, and Elizabeth Pagliarini, Chief Operating Officer, Chief Financial Officer, and Treasurer which expire in October 2024. These employment agreements were approved by the Company’s Compensation Committee and Board of Directors. Each employment agreement has a three-year term and contains standard terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a special cash payment following a change in control of the Company. The base salaries for each of Mr. Eikanas and Ms. Pagliarini are subject to annual merit increases. Effective January 1, 2022, the Company’s Compensation Committee approved an increase in the base salaries for each of Mr. Eikanas and Ms. Pagliarini to $445,000 and $420,000 per year, respectively. Effective July 1, 2022, the Company’s Compensation Committee approved an increase in the base salaries for each of Mr. Eikanas and Ms. Pagliarini to $470,000 and $445,000 per year, respectively.
37
Potential Payments upon Termination or Change in Control
If there is a termination of employment by the Company without cause or by the named executive officer for good reason, then the named executive officer will be entitled to receive payment of any base salary amounts that have accrued but not been paid as of the termination date, expenses not yet reimbursed, vested benefits accrued through the termination date payable pursuant to the plans providing such benefits and cash severance in the amount equal to two (2) times base salary for Mr. Eikanas and Ms. Pagliarini. In addition, all options granted to the executive under the Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan that otherwise were unvested shall immediately and fully accelerate and shall be deemed to be vested, and the executive shall be entitled to reimbursement for monthly COBRA premiums until the earliest of (A) the eighteen (18) month anniversary of the termination date; or (B) the date on which executive becomes eligible to enroll in comparable coverage with another employer.
If the Company undergoes a change in control during the executive’s term of employment or within six months after the termination of the executive’s employment for any reason, then the Company will pay a cash bonus in the amount equal to three (3) times base salary for Mr. Eikanas and Ms. Pagliarini. In addition, all options granted to the executive under the Summit Healthcare REIT Inc., 2015 Omnibus Incentive Plan that otherwise were unvested shall immediately and fully accelerate and shall be deemed to be vested.
Director Compensation
In the event that a director is also one of our full-time executive officers, we do not pay any compensation for services rendered as a director. The amount and form of compensation payable to our directors for their service to us is determined by the Compensation Committee of our Board, based in part on its evaluation of third-party board compensation information.
The following table summarizes the annual compensation received by our independent directors for the fiscal year ended December 31, 2023.
| Fees Earned or |
|
| ||||||
Paid in Cash in | Stock | ||||||||
Name |
| 2022 |
| Awards |
| Total | |||
J. Steven Roush | $ | 82,000 | $ | — | $ | 82,000 | |||
Suzanne Koenig | $ | 62,000 | $ | — | $ | 62,000 | |||
During fiscal year 2022, we paid each of our independent directors’ compensation as follows:
$50,000 annual retainer, paid pro-rata monthly ($12,500 per director per quarter);
All directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our Board and Committees.
Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan
In October 2015, we adopted the Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan. The purpose of the Omnibus Incentive Plan is to provide a means through which to attract and retain key personnel and to provide a means whereby current or prospective directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders.
The Omnibus Incentive Plan provides that the total number of shares of common stock that may be issued under the Omnibus Incentive Plan is 3,000,000.
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Outstanding Equity Awards as of December 31, 2022
The following table presents information regarding the outstanding equity awards held by each of our named executive officers as of December 31, 2022, including the vesting dates for the portions of these awards that had not vested as of that date.
Option Awards | |||||||||
Number of | Number of | ||||||||
Securities | Securities | ||||||||
Underlying | Underlying | ||||||||
Unexercised | Unexercised | Option | Option | ||||||
Options - | Options - | Exercise | Expiration | ||||||
Name |
| Exercisable |
| Unexercisable |
| Price |
| Date | |
Kent Eikanas |
| 300,000 |
| — |
| $ | 1.72 |
| 12/22/2025 |
Kent Eikanas |
| 109,678 |
| — |
| $ | 2.02 |
| 12/1/2026 |
Kent Eikanas |
| 100,000 |
| — |
| $ | 2.04 |
| 4/1/2027 |
Kent Eikanas |
| 26,167 |
| — |
| $ | 2.26 |
| 11/7/2027 |
Kent Eikanas |
| 120,000 |
| — |
| $ | 2.24 |
| 4/1/2028 |
Kent Eikanas |
| 225,000 |
| — | $ | 2.26 |
| 3/1/2029 | |
Elizabeth Pagliarini |
| 100,000 |
| — |
| $ | 1.72 |
| 12/17/2025 |
Elizabeth Pagliarini |
| 73,118 |
| — |
| $ | 2.02 |
| 12/1/2026 |
Elizabeth Pagliarini |
| 70,000 |
| — |
| $ | 2.04 |
| 4/1/2027 |
Elizabeth Pagliarini |
| 17,445 |
| — |
| $ | 2.26 |
| 11/7/2027 |
Elizabeth Pagliarini |
| 80,000 |
| — |
| $ | 2.24 |
| 4/1/2028 |
Elizabeth Pagliarini |
| 225,000 |
| $ | 2.26 |
| 3/1/2029 | ||
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
Our equity compensation plan information as of December 31, 2022 is as follows:
| Number of Securities to be |
| Weighted Average |
| |||
Issued Upon Exercise of | Exercise Price of | Number of Securities | |||||
Outstanding Options, | Outstanding Options, | Remaining Available | |||||
Plan Category | Warrants and Rights | Warrants and Rights | for Future Issuance | ||||
Equity compensation plans approved by security holders |
| 1,948,908 | $ | 2.10 |
| 1,051,092 | |
Equity compensation plans not approved by security holders |
| — |
| — |
| — | |
Total |
| 1,948,908 | $ | 2.10 |
| 1,051,092 | |
39
OWNERSHIP OF EQUITY SECURITIES
Security Ownership of Certain Beneficial Owners
There are no persons known to the Company to beneficially own 5% or more of our outstanding common stock.
Security Ownership of Management
The following table sets forth information as of March 15, 2023, regarding the beneficial ownership of our common stock by each of our directors, each of our named executive officers, and our directors and executive officers as a group. The percentage of beneficial ownership is calculated based on 23,027,978 shares of common stock outstanding as of March 15, 2023.
| Amount and Nature |
|
| ||
of Beneficial | Percentage |
| |||
Name of Beneficial Owner |
| Ownership (1) |
| of Class |
|
Kent Eikanas |
| 880,845 |
| 3.8 | % |
Elizabeth Pagliarini |
| 565,563 |
| 2.5 | % |
J. Steven Roush |
| 160,000 |
| * | |
Suzanne Koenig |
| 110,000 |
| * | |
All current directors and executive officers as a group (4 persons) |
| 1,716,408 |
| 7.5 | % |
| * | Less than 1%. |
| (1). | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following March 15, 2023. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. None of the securities listed are pledged as security. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Independent Directors Committee has reviewed the material transactions between the Company and our affiliates (including CRA, our former advisor) since the beginning of 2022, as well as any such currently proposed transactions. Set forth below is a description of such transactions.
Our Relationship with Our Equity-Method Investments
We currently have an interest in five equity-method investments (collectively, “Equity-Method Investments”) (see Note 5 to the Notes to Consolidated Financial Statements). We serve as the manager of our Equity-Method Investments and provide various services in exchange for fees and reimbursements. Under the agreements, as the manager, we are paid an annual asset management fee based on the properties in the portfolios, as defined in the agreements. All asset management fees are paid to Summit Healthcare Asset Management, LLC (“SAM TRS”), our consolidated taxable REIT subsidiary, and expenses incurred by us, as the manager, are reimbursed from SAM TRS.
For the year ended December 31, 2022, we recorded approximately $0.7 million in asset management fees as the manager of the Equity-Method Investments.
Our Policy regarding Transactions with Affiliates
Our charter requires our Independent Directors Committee to review and approve all transactions involving our affiliates and us. For example, prior to entering into a transaction with an affiliate, a majority of the Independent Directors Committee must have concluded that the transaction was fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. Furthermore, our Independent Directors Committee must review at least annually our fees and expenses to determine that the expenses incurred are reasonable in light of our investment performance, our net asset value, our net income and the fees and expenses of other comparable unaffiliated REITs.
40
Our Code of Business Conduct and Ethics sets forth examples of types of transactions with related parties that would create conflicts of interest between the interests of our stockholders and the private interests of the parties involved in such transactions. Our directors and officers are required to take all reasonable action to avoid such conflicts of interest or the appearance of conflicts of interest. If a conflict of interest becomes unavoidable, our directors and officers are required to report the conflict to a designated ethics contact, which, depending on the circumstances of the transaction, would be either our Chief Executive Officer, Chief Financial Officer or the Chairman of our Audit Committee. The appropriate ethics contact is then responsible for working with the reporting director or officer to monitor and resolve the conflict of interest in accordance with our Code of Business Conduct and Ethics.
Director Independence
Our charter contains detailed criteria for determining the independence of our directors and requires a majority of the members of our Board to qualify as independent. Our Board consults with our legal counsel to ensure that its independence determinations are consistent with our charter and applicable securities and other laws and regulations. Consistent with these considerations, after reviewing all relevant transactions or relationships between each director, or any of his family members and the Company, our senior management and our independent registered public accounting firm, our Board has determined that a majority of our Board is independent. Furthermore, although our shares are not listed on a national securities exchange, our Board reasonably believes that a majority of our Board and, thus, a majority of our Audit Committee, Independent Directors Committee, Compensation Committee and Investment Committee are independent under the Nasdaq Stock Exchange listing standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table lists the aggregate fees billed for services rendered by BDO USA, LLP, our principal accountant, for 2022 and 2021:
Services |
| 2022 |
| 2021 | ||
Audit Fees(1) | $ | 394,000 | $ | 388,000 | ||
Audit Related Fees(2) |
| — |
| 120,000 | ||
Total | $ | 394,000 | $ | 508,000 | ||
(1) | Audit fees for 2022 and 2021 consisted of the audit of our annual consolidated financial statements, reviews of our quarterly consolidated financial statements, consents, and other audit services related to filings with the SEC. |
(2) | Audit related fees for 2021 consisted of property level audits for U.S. Department of Housing and Urban Development (“HUD”) compliance and related fees and audits in connection with acquisitions. |
The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act and the rules and regulations of the SEC which are approved by the Audit Committee prior to the completion of the audit.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
Report of Independent Registered Public Accounting Firm |
Consolidated Balance Sheets as of December 31, 2022 and 2021 |
Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 |
Consolidated Statements of Equity for the Years Ended December 31, 2022 and 2021 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 |
Notes to Consolidated Financial Statements |
(2) Exhibits
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this annual report.
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | 44 |
46 | |
47 | |
48 | |
49 | |
50 |
43
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Summit Healthcare REIT, Inc
Lake Forest, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Summit Healthcare REIT, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of Real Estate Properties for Potential Impairment
As discussed in Note 3 to the consolidated financial statements, the Sundial Assisted Living and Pennington Gardens facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues that affected their ability to make rent payments. As a result, the Company terminated the leases with the operators in 2022. The properties have continued to experience losses through December 31, 2022. The Company evaluates real estate properties for impairment on a property-by-property basis when events or circumstances indicate that the carrying value might not be recoverable. Impairments, when present, are measured as the amount by which the carrying amount of the property exceeds the fair value of the property. No impairments were recorded for the year ended December 31, 2022.
We identified the evaluation of the Sundial Assisted Living and Pennington Gardens properties for potential impairment as a critical audit matter. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from
44
the real estate investment’s use and eventual disposition, which requires management to make assumptions with respect to holding periods, net operating income, and capitalization rates. Auditing these elements and assumptions involved increased auditor judgment and effort.
The primary procedures we performed to address this critical audit matter included:
| ● | Evaluating the reasonableness of the significant assumptions used in management’s recoverability analysis including intended holding periods and forecasts of future net operating income for the Sundial Assisted Living and Pennington Gardens properties by comparing to historical results. |
| ● | Evaluating third party market information, including the impacts of the COVID-19 pandemic on the industry and capitalization rates, to assess the reasonableness of the undiscounted future cash flows. |
| ● | Evaluating comparable sales to corroborate the undiscounted future cash flows used for the Sundial Assisted Living and Pennington Gardens properties. |
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2013.
Costa Mesa, California
March 31, 2023
45
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2022 and 2021
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
ASSETS |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Real estate properties, net |
| |
| | ||
Intangible lease assets, net |
| |
| | ||
Tenant and other receivables, net |
| |
| | ||
Deferred leasing commissions, net |
| |
| | ||
Other assets, net |
| |
| | ||
Equity-method investments |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY | ||||||
Accounts payable and accrued liabilities | $ | | $ | | ||
Security deposits |
| |
| | ||
Loans payable, net of debt issuance costs |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 9) | ||||||
Stockholders’ Equity | ||||||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit | ( |
| ( | |||
Total stockholders’ equity |
| |
| | ||
Noncontrolling interests |
| |
| | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements
46
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2022 and 2021
| 2022 |
| 2021 | |||
Revenues: |
|
|
|
| ||
Total rental revenues | $ | | $ | | ||
Resident fees and services | | — | ||||
Asset management fees |
| |
| | ||
Interest income from notes receivable |
| — |
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Total operating revenue |
| |
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Expenses: |
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Property operating costs |
| |
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Resident costs | | — | ||||
General and administrative |
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Depreciation and amortization |
| |
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Total operating expenses |
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Operating income (loss) |
| |
| ( | ||
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Loss from equity-method investees |
| ( |
| ( | ||
Gain on sale of equity-method investment | — | | ||||
Other income |
| |
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Interest expense | ( | ( | ||||
Net loss |
| ( |
| ( | ||
Noncontrolling interests’ share in net (income) loss |
| ( |
| ( | ||
Net loss applicable to common stockholders | $ | ( | $ | ( | ||
Earnings per common share: | ||||||
Basic and diluted: |
|
|
| |||
Net loss applicable to common stockholders | $ | ( | $ | ( | ||
Weighted average shares used to calculate earnings per common share: | ||||||
Basic and diluted |
| |
| | ||
The accompanying notes are an integral part of these consolidated financial statements
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SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2022 and 2021
Common Stock | ||||||||||||||||||||
Common | ||||||||||||||||||||
Number | Stock | Additional | Total | |||||||||||||||||
of | Par | Paid-In | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| Interests |
| Equity | |||||||
Balance — January 1, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Stock-based compensation |
| |
| |
| |
| |
| |
| |
| | ||||||
Distributions paid to noncontrolling interests |
| |
| |
| |
| |
| |
| ( |
| ( | ||||||
Net (loss) income |
| |
| |
| |
| ( |
| ( |
| |
| ( | ||||||
Balance — December 31, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Stock-based compensation |
| |
| |
| |
| |
| |
| |
| | ||||||
Distributions paid to noncontrolling interests |
| |
| |
| |
| |
| |
| ( |
| ( | ||||||
Net (loss) income |
| |
| |
| |
| ( |
| ( |
| |
| ( | ||||||
Balance — December 31, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements
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SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022 and 2021
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
| ||||
Amortization of debt issuance costs |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Amortization of above/below market lease intangible | | | ||||
Straight line rents |
| ( |
| | ||
Stock-based compensation expense |
| |
| | ||
Gain on sale of equity-method investment | — | ( | ||||
Loss from equity-method investees |
| |
| | ||
Change in operating assets and liabilities: |
|
| ||||
Tenant and other receivables, net |
| ( |
| | ||
Other assets |
| ( |
| | ||
Accounts payable and accrued liabilities |
| |
| | ||
Security deposits |
| — |
| | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities: |
|
| ||||
Real estate acquisitions | — | ( | ||||
Additions to real estate and other assets | ( | — | ||||
Investments in equity-method investees |
| ( |
| ( | ||
Proceeds from sale of equity-method investment | — | | ||||
Distributions received from equity-method investees |
| |
| | ||
Payments from notes receivable |
| — |
| | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
|
| ||||
Proceeds from issuance of loans payable |
| — |
| | ||
Payments of loans payable |
| ( |
| ( | ||
Distributions paid to noncontrolling interests |
| ( |
| ( | ||
Debt issuance costs |
| ( |
| ( | ||
Net cash (used in) provided by financing activities |
| ( |
| | ||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| |
| ( | ||
Cash, cash equivalents and restricted cash — beginning of year |
| |
| | ||
Cash, cash equivalents and restricted cash – end of year | $ | | $ | | ||
Supplemental disclosure of cash flow information: | ||||||
Cash paid for interest: | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements
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SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2022 and 2021
1. Organization
Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns
We conduct substantially all of our operations through the Operating Partnership, which is a Delaware limited partnership. We own a
Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
Cornerstone Healthcare Partners LLC – Consolidated Joint Venture
We own
As of December 31, 2022 and 2021, we own a
Summit Union Life Holdings, LLC – Equity-Method Investment
In April, 2015, through our Operating Partnership, we entered into a limited liability company agreement with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements (see Note 5). As of December 31, 2022 and 2021, we have a
Summit Fantasia Holdings, LLC – Equity-Method Investment
In September 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a
Summit Fantasia Holdings II, LLC – Equity-Method Investment
In December 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a
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Summit Fantasia Holdings III, LLC - Equity-Method Investment
In July 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a
Summit Fantasy Pearl Holdings, LLC – Equity-Method Investment
In October 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a
Indiana JV– Equity-Method Investment
In June 2021, we sold our
The Indiana JV was not consolidated in our consolidated financial statements and was accounted for under the equity-method prior to the sale of our equity interest. As of December 31, 2022 and 2021, we had a
Taxable REIT Subsidiaries
Summit Healthcare Asset Management, LLC
Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, FPH JV and the Indiana JV prior to the sale of our equity interest (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.
SHOP TRS LLC
SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary that is the sole member for two of our real estate properties that no longer have a lease with an unrelated tenant. Each of these properties are leased to an affiliated subsidiary (see Note 3 under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the “Operated Properties”) and the operations are consolidated in our financial statements.
Coronavirus (COVID-19)
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. Two of our tenants have experienced a material adverse effect on their operations related to COVID-19, which has affected their ability to make rent payments in 2022 and 2021 (see Note 3 for further information on its impact on us). Additionally, see Note 5 for further issues related to our Equity-Method Investments.
The extent to which COVID-19 could continue to impact our business, cash flow and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses in future periods.
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2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of our management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership, and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
All intercompany accounts and transactions have been eliminated in consolidation.
The Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification (“ASC”) 810, Consolidation, which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. Before concluding that it is appropriate to apply the voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity. We evaluate, as appropriate, our interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate.
Use of Estimates
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. The most significant estimates made include that of real estate acquisition valuation and the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at relative fair value, the evaluation of potential impairment of long-lived assets and equity method investments, and the estimated useful lives of real estate assets and intangibles.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. As of December 31, 2022, we had cash accounts in excess of FDIC-insured limits. To date, the Company has not experienced losses or lack of access to cash in its cash and cash equivalent accounts.
Restricted Cash
Restricted cash represent restricted cash held by our lenders in interest bearing accounts related to impound reserve accounts for property taxes, insurance and capital funds as required under the terms of the loan agreements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statements of cash flows:
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Total cash, cash equivalents, and restricted cash shown on the consolidated statements of cash flows | $ | | $ | | ||
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Investments in Real Estate and Depreciation
We allocate the purchase price of our properties in accordance with ASC 805 – Business Combinations. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. For transactions that are business combinations, acquisition costs are expensed as incurred. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred. Upon an asset acquisition of a property, we allocate the purchase price of the property based upon the relative fair value of the tangible and intangible assets acquired and liabilities assumed, which generally consists of land, buildings, site improvements, furniture and fixtures and intangible assets. The determination of fair value involves the use of significant judgment and estimation. We value land based on various inputs, which may include internal analysis of recently acquired properties, existing comparable properties within our portfolio, or third party appraisals or valuations based on comparable sales. We allocate the purchase price to tangible assets of an acquired property by valuing the property as if it were vacant.
We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is being charged to expense on a straight-line basis over the estimated useful lives. We depreciate the fair value allocated to building and improvements over estimated useful lives ranging from
We estimate the value of furniture and fixtures based on the assets’ depreciated replacement cost. We depreciate the fair value allocated to furniture and fixtures over estimated useful lives ranging from to
In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above/below-market leases and in-place leases are estimated as follows:
The value of above/below market leases is based on the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The above/below market leases are amortized as an adjustment to rental revenue over the remaining term of the respective leases.
The value of in-place leases consisting of tenant origination and absorption costs and leasing commissions avoided is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, discount rates, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases and included in depreciation and amortization in the consolidated statements of operations. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of their related intangible asset is recorded in the consolidated statements of operations.
Assets held for sale are not depreciated.
Impairment of Real Estate Properties
We evaluate the recoverability of the carrying value of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including changes in the Company’s use of property or the strategy for its overall business, plans to sell a property before its depreciable life has ended, occupancy changes, significant near-term lease expirations, significant deteriorations of the underlying cash flows of the property, and other market factors indicate that the carrying amount of the property may not be recoverable. Impairment is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.
As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances.
Fair Value Measurements
Fair value represents the estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820, Fair Value Measurement, establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from
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independent sources and unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability.
Financial assets and liabilities are categorized based on the inputs to the valuation techniques as follows:
Level 1. Quoted prices in active markets for identical instruments.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument.
We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or use appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.
As of and for the year ended December 31, 2022, our equity method investments in the Fantasia JV and FPH JV were measured at fair value, on a nonrecurring basis using unobservable (level 3) inputs. We estimated the fair value of our equity-method investments based on discounted future cash flows. As a result, we recognized an impairment loss of $
There were
Fair Value Measurement of Financial Instruments
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment.
As of December 31, 2022 and 2021, the fair value of our HUD-insured loans payable was $
At December 31, 2022 and 2021, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.
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Variable Interest Entities
We analyze our contractual and/or other interests to determine whether such interests constitute an interest in a VIE in accordance with ASC 810, Consolidation, and, if so, whether we are the primary beneficiary. If we are determined to be the primary beneficiary of a VIE, we must consolidate the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We evaluated our wholly and partially-owned subsidiaries, CHP, LLC and equity method investments to determine if they are a VIE, and if such VIE should be consolidated. The Operating Partnership and CHP, LLC are consolidated as the Company is deemed the primary beneficiary. Our Operating Partnership’s equity investment in SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, and FPH JV met the definition and criteria of VIEs. However, as we do not have power to direct the activities that most significantly impact economic performance of these VIEs, they are accounted for under the equity method of accounting and are reflected as Equity-Method Investments.
Tenant and Other Receivables
Tenant and other receivables are comprised mainly of the cumulative amount of future adjustments necessary to present tenant rental income on a straight-line basis, accounts receivable due from residents for our Operated Properties, asset management fees and distributions receivable.
Allowance for Credit Losses
The allowance for credit losses is maintained on all receivables except for lease receivables and is maintained at a level believed adequate to absorb potential losses in our receivables. The determination of the credit allowance is based on a quarterly evaluation of each of these receivables, including general economic conditions and estimated collectability. We evaluate the collectability of our receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical charge-offs, and financial strength of the lessee or equity method investment. A receivable is considered to have deteriorated in credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due. As of December 31, 2022 and 2021, the allowance for credit losses is immaterial.
Deferred Financing Costs
Costs incurred with potential financing arrangements are recorded as deferred debt issuance costs. Costs incurred in connection with completed debt financing are recorded as debt issuance costs. Debt issuance costs are amortized using the straight-line basis which approximates the effective interest rate method, over the contractual terms of the respective financings, and are presented net of loans payable in loans payable, net of debt issuance costs, in the consolidated balance sheets.
Deferred Leasing Commissions
Leasing commissions (paid to CRA prior to April 1, 2014) were capitalized at cost and are being amortized on a straight-line basis over the related lease term. As of December 31, 2022 and 2021, total costs incurred were $
Other Assets
Other assets consist primarily of deferred financing costs, deposits, prepaid insurance, property taxes and other and corporate assets. Additionally, other assets will be amortized to expense over their future service periods. Balances without future economic benefit are expensed as they are identified.
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Equity-Method Investments
We report our investments in unconsolidated entities, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the applicable entity’s earnings or losses is included in our consolidated statements of operations. We initially record our investments based on either the carrying value for properties contributed or the cash invested.
We evaluate our Equity-Method Investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may exceed the fair value. If it is determined that a decline in the fair value of our investments is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors. For the year ended December 31, 2022, we recorded impairment of approximately $
Rental Revenue
We recognize rental revenue based on FASB Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). This requires a lessor to classify leases as either sales-types, finance or operating leases. A lease will be treated as a sales-type lease if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. After evaluating our tenant leases, we have concluded that these are operating leases. Additionally, as lessors we elected to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure.
Additionally, where real estate taxes and insurance expenses were paid directly by our tenants to taxing authorities, we do not record any revenue or expense. For our triple-net leasing arrangements in which the tenant remits payment for certain costs to us and we pay the vendor, we have reported the amounts gross in total rental revenues and property operating costs on the consolidated statements of operations. We also made an accounting policy election to keep short-term leases less than twelve months off the balance sheet for all classes of underlying assets.
Additionally, under Topic 842, we must assess if substantially all payments due under the lease are likely to be collected. If tenant lease payments are not likely to be collected, then the revenues will be recognized on a cash basis (or if the answer changes at a later date, the revenues are adjusted to reflect what it would have been on a cash basis) and the adjustments will be recorded through rental revenues, rather than bad debt expense. During 2022 and 2021, we determined that two of our leases were uncollectible (see Note 3) and therefore, we recorded rental revenue received from those tenants on the cash basis.
Resident Fees and Services Revenue
We recognize resident fees and services revenue at the amount that we expect to be entitled to in exchange for providing resident care and services. Resident fees are recognized and billed monthly based on the contracted rate in the resident lease agreements and the reimbursements from Medicaid are based on contracted reimbursement rates. These amounts are paid directly from the residents and/or third-party payors (currently only Medicaid). Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by us. The majority of resident fees and services is attributable to the portion of the base monthly lease fee in the resident lease agreement. The Company has elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognizes the resident fee revenue based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the lease component is the predominant component and the services included under the resident agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. Resident services consist of care level services and certain other ancillary services (i.e., housekeeping, laundry, etc.). These services are provided and paid for in addition to the standard fees included in each resident lease (i.e., room and board, standard meals, etc.).
Asset Management Fees
We record asset management fee revenue based on ASC 606, Revenue from Contracts with Customers (Topic 606). We earn our asset management fees based on a percentage of the purchase price or equity raised. As the manager, our duty is to manage the day-to-day operations of the special-purpose entities which own the properties. Asset management fees are recognized as a single performance
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obligation (managing the properties) comprised of a series of distinct services (handling issues with our tenants, etc.). We believe that the overall service of asset management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, billed monthly and paid quarterly.
Stock-Based Compensation
We record stock-based compensation expense for share-based payments to employees and directors, including grants of stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized ratably over the vesting term and is included in general and administrative expense in our consolidated statements of operations. Forfeitures are recognized as they occur. See Note 12 for further information.
Noncontrolling Interest in Consolidated Subsidiary
Noncontrolling interest relates to the interest in the consolidated entities that are not wholly-owned by us. As of December 31, 2022 and 2021, the noncontrolling interest mainly relates to CHP, LLC.
ASC 810-10-65, Consolidation, clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810-10-65 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and requires disclosure, on the face of the consolidated statements of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.
We periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
Income Taxes
We have elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with our taxable year ending December 31, 2006. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least
We have elected to treat SAM TRS and SHOP TRS as taxable REIT subsidiaries, which generally may engage in any business, including the provision of customary or non-customary services for our tenants. Both TRS’ are treated as a regular corporation and are subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. SAM TRS has deferred tax assets related to their net operating losses (“NOL”) for a total of $
Uncertain Tax Positions
In accordance with the requirements of ASC 740, Income Taxes, favorable tax positions are included in the calculation of tax liabilities if it is more likely than not that our adopted tax position will prevail if challenged by tax authorities. As a result of our REIT status, we are able to claim a dividends-paid deduction on our tax return to deduct the full amount of common dividends paid to stockholders when
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computing our annual taxable income, which results in our taxable income being passed through to our stockholders. A REIT is subject to a 100% tax on the net income from prohibited transactions. A “prohibited transaction” is the sale or other disposition of property held primarily for sale to customers in the ordinary course of a trade or business. There is a safe harbor provision which, if met, expressly prevents the Internal Revenue Service from asserting the prohibited transaction test. We have no income tax expense, deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions for the operations of any entity included in the consolidated results of operations. We classify interest and penalties related to uncertain tax positions, if any, in our consolidated financial statements as a component of general and administrative expense.
Basic and Diluted Net Income (Loss) and Distributions per Common Share
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares are calculated in accordance with the treasury stock method. For the years ended December 31, 2022 and 2021, all stock options outstanding were considered to be anti-dilutive.
Reclassification of Intangible Lease Assets
The following table provides a reconciliation for the reclassification of our intangible lease assets as of December 31, 2021 in our consolidated balance sheets to conform to the presentation as of December 31, 2022:
| As previously reported |
| Increase (decrease) |
| As reclassified | ||||
Real estate properties, net | $ | | $ | ( | $ | | |||
Intangible lease assets, net | $ | — | $ | | $ | | |||
Other assets, net | $ | | $ | ( | $ | | |||
Total assets | $ | | $ | — | $ | | |||
The intangible lease assets related to our acquisitions in 2021 were reclassified from real estate properties, net and other assets, net into a separate line item as of December 31, 2022. The result of this reclassification did not have any effect on our total assets, liabilities, accumulated deficit, net loss or statements of cash flows.
3. Investments in Real Estate Properties
As of December 31, 2022 and 2021, investments in real estate properties including those held by our consolidated subsidiaries (excluding the 35 properties owned by our unconsolidated Equity-Method Investments) are set forth below:
| December 31, |
| December 31, | |||
2022 | 2021 | |||||
Land | $ | | $ | | ||
Buildings and improvements |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Buildings and improvements, net |
| |
| | ||
Furniture and fixtures |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Furniture and fixtures, net |
| |
| | ||
Real estate properties, net | $ | | $ | | ||
Depreciation and amortization expense (excluding intangible lease amortization and leasing commission amortization) for the years ended December 31, 2022 and 2021 was approximately $
As of December 31, 2022, our portfolio consisted of
58
During 2022 and 2021, our tenants for the Pennington Gardens and Sundial Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues, that affected their ability to make their rent payments in 2022 and 2021. As a result, we experienced the following impacts:
Pennington Gardens Operations LLC
In March 2021, under a receivership, we began recording rent payments on a cash basis for our Pennington Gardens facility and wrote off the remaining straight-line rent receivable of $
On February 3, 2022, the current receiver, who was acting as the operator, received the license to be the licensed operator. As such, on February 10, 2022, the tenant’s lease was terminated, and we received $
Sundial Operations LLC
In October 2021, we reached an agreement with the tenant of our Sundial Assisted Living facility in Redding, California to terminate the lease, and we requested approval from HUD to terminate the lease and install a new licensed operator/manager. Beginning in June 2021, we recorded rent payments on a cash basis and in May 2021, wrote off the remaining straight-line rent receivable of $
On June 6, 2022, the new operator received approval to be the licensed operator of the facility and the previous tenant’s lease was terminated. We received $
59
The following table provides summary information regarding our portfolio (excluding the
Loans | |||||||||||||
Payable, | |||||||||||||
Excluding | |||||||||||||
Debt | |||||||||||||
Purchase | Issuance | ||||||||||||
Property |
| Location |
| Date Purchased |
| Type(1) |
| Price |
| Costs | |||
Sheridan Care Center | $ | | $ | | |||||||||
Fernhill Care Center | |
| | ||||||||||
Friendship Haven Healthcare and Rehabilitation Center | |
| | ||||||||||
Pacific Health and Rehabilitation Center | |
| | ||||||||||
Brookstone of Aledo | | | |||||||||||
Sundial Assisted Living | | | |||||||||||
Pennington Gardens | | | |||||||||||
Yucaipa Hill Post Acute | | | |||||||||||
Creekside Post Acute | | | |||||||||||
University Post Acute | |
| | ||||||||||
Calhoun Health Center | | | |||||||||||
Maple Ridge Health Care Center | | | |||||||||||
Chatsworth Health Care Center | |
| | ||||||||||
East Lake Arbor | |
| | ||||||||||
Fairburn Health Care Center | |
| | ||||||||||
Grandview Health Care Center | |
| | ||||||||||
Rosemont at Stone Mountain | |
| | ||||||||||
Willowwood Nursing Center & Rehab | |
| | ||||||||||
Total: |
| $ | | $ | | ||||||||
(1) | SNF is an abbreviation for skilled nursing facility. |
AL is an abbreviation for assisted living facility.
MC is an abbreviation for memory care facility.
Future Minimum Lease Payments
The future minimum lease payments to be received under existing operating leases (not including intercompany leases) for our consolidated properties as of December 31, 2022 are as follows:
Years ending December 31, |
| ||
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 | | ||
Thereafter |
| | |
$ | |
2022 Acquisitions
None.
60
2021 Acquisitions
CA3 Properties
On July 2, 2021, through our wholly-owned subsidiary, we acquired
GA8 Properties
On December 30, 2021, through our wholly-owned subsidiary, we acquired
61
4. Loans Payable
As of December 31, 2022 and 2021, loans payable consisted of the following
| December 31, 2022 |
| December 31, 2021 | |||
Loans payable to Lument (formerly ORIX Real Estate Capital, LLC) (insured by HUD) in monthly installments of approximately $ | $ | | $ | | ||
Loan payable to Capital One Multifamily Finance, LLC (insured by HUD) in monthly installments of approximately $ | | | ||||
|
| |||||
Loan payable to CIBC Bank, USA in monthly installments of approximately of $ | | | ||||
Loan payable to CIBC Bank, USA in monthly installments of approximately $ | | | ||||
Loan payable to Oxford Finance, LLC in monthly installments of approximately $ | | | ||||
Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $ | | | ||||
| |
| | |||
Less debt issuance costs |
| ( |
| ( | ||
Total loans payable | $ | | $ | | ||
As of December 31, 2022, we have total debt obligations of approximately $
During the years ended December 31, 2022 and 2021, we incurred approximately $
During the years ended December 31, 2022 and 2021, we incurred approximately $
In connection with our loans payable, we incurred debt issuance costs. As of December 31, 2022 and 2021, the unamortized balance of the debt issuance costs was approximately $
62
For the years ended December 31, 2022 and 2021, approximately $
The principal payments due on the loans payable (excluding debt issuance costs and cash collateral funds) for each of the five following years and thereafter ending December 31 are as follows:
Principal | |||
Year |
| Amount | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 | | ||
Thereafter |
| | |
$ | | ||
The following information notes our loan activity:
CA3 Properties
On July 2, 2021, in conjunction with the acquisition of the CA3 Properties (see Note 3), we entered into a first priority $
GA8 Properties
We acquired our interest in the GA8 Properties subject to a $
On December 30, 2021, we entered into a loan agreement with CIBC for $
On December 30, 2021, we entered into a subordinated term loan agreement with Oxford for $
63
fee if the GA8 Properties are refinanced through HUD. Additionally, we are required to pay an exit fee of $
On December 30, 2021, we entered into a mezzanine loan agreement with Oxford for $
HUD-insured loans
We have six properties with HUD-insured loans from Lument Capital (formerly ORIX Real Estate Capital, LLC) and one property with a HUD-insured loan from Capital One Multifamily Finance, LLC. See table above listing loans payable for further information.
All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our consolidated balance sheets.
5. Equity-Method Investments
As of December 31, 2022 and 2021, the balances of our Equity-Method Investments were approximately $
Summit Union Life Holdings, LLC
The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”).
Under the SUL LLC Agreement, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Years pari passu up to a
For the year ended December 31, 2022, we invested approximately $
As of December 31, 2022 and 2021, the balance of our equity-method investment related to the SUL JV was approximately $
Summit Fantasia Holdings, LLC
The Fantasia JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia LLC Agreement”).
64
Under the Fantasia LLC Agreement, as amended in April 2018, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
For the year ended December 31, 2022, we invested approximately $
In August 2022, the Fantasia JV agreed to sell its remaining property, Sun Oak Assisted Living; therefore the property is considered as held for sale in the Fantasia JV as of December 31, 2022.
As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia JV was approximately $
Summit Fantasia Holdings II, LLC
The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”).
Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia II JV was approximately $
Summit Fantasia Holdings III, LLC
The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”).
Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia III JV was approximately $
Summit Fantasy Pearl Holdings, LLC
The FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).
65
Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid
In December 2022, Summit recorded an impairment of approximately $
As of December 31, 2022 and 2021, the balance of our equity-method investment related to the FPH JV was approximately $
Indiana JV
In June 2021, we sold our
As of December 31, 2022 and 2021, we have a
Summarized Financial Data for Equity-Method Investments
Our Equity-Method Investments are significant equity-method investments in the aggregate.
The results of operations of our Equity-Method Investments for the year ended December 31, 2022 are summarized below:
Fantasia | Fantasia | Fantasia | FPH | Combined | |||||||||||||||
| SUL JV |
| JV |
| II JV |
| III JV |
| JV |
| Total |
| |||||||
Revenue | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Income (loss) from operations | $ | ( | $ | ( | $ | | $ | | $ | ( | $ | ( | |||||||
Net income (loss) | $ | ( | $ | ( | $ | | $ | | $ | | $ | ( | |||||||
Summit interest in Equity-Method Investments net income (loss) | $ | ( | $ | ( | $ | | $ | | $ | | $ | ( | (1) | ||||||
(1) | Included in the loss from equity-method investees in the consolidated statements of operations is an additional $ |
The results of operations of our Equity-Method Investments for the year ending December 31, 2021 are summarized below:
Fantasia | Fantasia | Fantasia | FPH | Indiana | Combined | ||||||||||||||||
| SUL JV |
| JV |
| II JV |
| III JV |
| JV |
| JV |
| Total | ||||||||
Revenue | $ | | $ | | $ | | $ | | $ | | $ | ( | (1) | $ | | ||||||
Income (loss) from operations | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Net income (loss) | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | ( | |||||||
Summit interest in Equity-Method Investments net income (loss) | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | ( | |||||||
| (1) | This amount includes the revenues of the Indiana JV prior to the sale of our |
66
Distributions from Equity-Method Investments
As of December 31, 2022 and 2021, we have distributions receivable, which is included in tenant and other receivables in our consolidated balance sheets, as follows:
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
SULH JV | $ | | $ | | ||
Fantasia JV |
| — |
| | ||
Fantasia II JV |
| |
| | ||
Fantasia III JV |
| |
| | ||
FPH JV |
| |
| | ||
Total | $ | | $ | | ||
For the years ended December 31, 2022 and 2021, we received cash distributions, which are included in our cash flows from operating activities in the change in tenant and other receivables, and cash flows from investing activities, using the cumulative earnings approach, as follows:
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||||
Total Cash | Cash Flow | Cash Flow | Total Cash | Cash Flow | Cash Flow | |||||||||||||
Distributions | from | from | Distributions | from | from | |||||||||||||
| Received |
| Operating |
| Investing |
| Received |
| Operating |
| Investing | |||||||
SUL JV | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Fantasia JV |
| |
| |
| |
| — |
| — |
| — | ||||||
Fantasia II JV |
| |
| |
| |
| |
| |
| | ||||||
Fantasia III JV |
| |
| |
| |
| |
| |
| | ||||||
FPH JV |
| |
| |
| |
| |
| |
| | ||||||
Indiana JV | | | | — | | |||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Asset Management Fees
We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in the agreements. For the years ended December 31, 2022 and 2021, we recorded approximately $
6. Receivables
Tenant and Other Receivables, net
Tenant and other receivables, net consists of:
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Straight-line rent receivables | $ | | $ | | ||
Distribution receivables from Equity-Method Investments |
| |
| | ||
Asset management fees |
| |
| | ||
Other receivables |
| |
| | ||
Total | $ | | $ | | ||
67
7. Related Party Transactions
Equity-Method Investments
See Notes 5 and 6 for further discussion of distributions and asset management fees related to our Equity-Method Investments.
8. Intangible Lease Assets
Intangible lease assets as of December 31, 2022 and 2021 are as follows:
| December 31, |
| December 31, | |||
2022 | 2021 | |||||
In-place leases | $ | | $ | | ||
Less: accumulated amortization |
| ( |
| ( | ||
In-place leases, net |
| |
| | ||
Above-market leases |
| |
| | ||
Less: accumulated amortization |
| ( |
| ( | ||
Above-market leases, net |
| |
| | ||
Total intangible lease assets, net | $ | | $ | | ||
For the year ended ended December 31, 2022 and 2021, amortization expense for intangible lease assets was approximately $
Expected future amortization of the intangible lease assets as of December 31, 2022 and for each of the five following years and thereafter ending December 31 are as follows:
Years ending December 31, |
|
| |
2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
$ | |
9. Right of Use Asset – Operating Lease
On April 1, 2022, we entered into a temporary space license agreement (“Temporary License”) and a standard office lease (“New Lease”) with Lakehills CM-CG LLC (collectively, the “LH Lease”).
The Temporary License, for space located in Laguna Hills, California, began on April 22, 2022 and expired on November 15, 2022. We were entitled to use such office space at no cost during the term of the Temporary License.
Concurrent with the execution of the Temporary License, we entered into the New Lease, as amended, which began on November 16, 2022 for a period of and one half (66 ½) months, with a
The LH Lease is classified as an operating lease. A right of use (“ROU”) asset represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The LH Lease did not provide an explicit rate of interest; therefore we used an estimated incremental borrowing rate of
68
determining the present value of lease payments. At inception, we recorded an ROU asset and lease liability of approximately $
Supplemental balance sheet information related to the LH Lease as of December 31, 2022 is as follows:
Component |
| Consolidated Balance Sheet Caption |
|
| |
Right of use asset - operating |
| $ | | ||
Lease liability - operating |
| $ | |
Lease expense is presented as part of continuing operations within general and administrative expenses in the consolidated statements of operations. For the year ended December 31, 2022, we recognized approximately $
Pursuant to ASC 842, lease payments on the LH Lease for each of the four following years and thereafter ending December 31 are as follows:
Year |
| Lease payments | |
2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total lease payments | $ | | |
Less imputed interest |
| ( | |
$ | | ||
10. Concentration of Risk
As of December 31, 2022, we owned
Additionally, as of December 31, 2022, we leased our
As of December 31, 2021, we leased our
As of December 31, 2022, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than
11. Commitments and Contingencies
We inspect our properties under a Phase I assessment for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.
69
Legal Proceedings
In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $
Indemnification and Employment Agreements
We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, effective October 19, 2021, we entered into new employment agreements with our executive officers for a term of three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements.
Management of our Equity-Method Investments
As the manager of our Equity-Method Investments, we are responsible for managing the day-to-day operations. Additionally, we could be subject to a capital call from our Equity-Method Investments.
12. Equity
Distributions
The Company declared
Our distribution reinvestment plan was suspended indefinitely effective December 31, 2010. At this time, we cannot provide any assurance as to if or when we will resume our distribution reinvestment plan.
70
Share-Based Compensation Plans
Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the book value of our liabilities, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a lack of a control premium, and divided the total by the number of our common shares outstanding at the time the options were granted.
The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on the simplified method as we do not have sufficient historical exercise data. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant using the expected life of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option.
Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan
On October 28, 2015, we adopted the Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”). The purpose of the Incentive Plan is to provide a means through which to attract and retain key personnel and to provide a means whereby current or prospective directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders.
We may grant non-qualified stock options and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, and performance based compensation awards. Stock options granted under the Incentive Plan are required to have a per share exercise price that is not less than 100% of the fair market value of our common stock underlying such stock options on the date an option is granted (other than in the case of options that are substitute awards). All stock options that are intended to qualify as incentive stock options must be granted pursuant to an award agreement expressly stating that the option is intended to qualify as an incentive stock option, and will be subject to the terms and conditions that comply with the rules as may be prescribed by Section 422 of the Code. The maximum term for stock options granted under the Incentive Plan will be ten years from the initial date of grant.
The Incentive Plan provides that the total number of shares of common stock that may be issued is
On April 1, 2022, we granted
The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:
| 2022 |
| ||
Stock options granted |
| | ||
Expected volatility |
| | % | |
Expected term |
| | years | |
Risk-free interest rate |
| | % | |
Dividend yield |
| % | ||
Fair value per stock option | $ | | ||
In December 2022, the Compensation Committee of the Board of Directors approved the issuance of
71
The following table summarizes our stock options as of December 31, 2022:
Weighted | ||||||||||
Weighted | Average | |||||||||
Average | Remaining | Aggregate | ||||||||
Exercise | Contractual | Intrinsic | ||||||||
| Options |
| Price |
| Term |
| Value | |||
Options outstanding at January 1, 2021 | | $ | | |||||||
Granted | — | |||||||||
Exercised | — | |||||||||
Cancelled/forfeited | ( | | ||||||||
Options outstanding at December 31, 2021 |
| | $ | | ||||||
Granted |
| |
| | ||||||
Exercised |
|
| ||||||||
Cancelled/forfeited |
| — |
|
| ||||||
Options outstanding at December 31, 2022 |
| | $ | | $ | | ||||
Options exercisable at December 31, 2022 |
| | $ | | $ | | ||||
For our outstanding non-vested options as of December 31, 2022, the weighted average grant date fair value per share was $
Years Ending December 31, |
|
| |
2023 | | ||
2024 |
| | |
2025 |
| | |
$ | |
The stock-based compensation expense reported for the years ended December 31, 2022 and 2021 was approximately $
13. Segment Reporting
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of December 31, 2022 and 2021, we operate in
14. Subsequent Events
None.
ITEM 16. FORM 10-K SUMMARY
None
72
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUMMIT HEALTHCARE REIT, INC. | ||
Date: March 31, 2023 | By: | /s/ Kent Eikanas |
Kent Eikanas | ||
Chief Executive Officer and Secretary | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2023.
Name |
| Title |
|
/s/ Kent Eikanas | Chief Executive Officer and Secretary | ||
Kent Eikanas | (Principal Executive Officer) | ||
/s/ Elizabeth A. Pagliarini | Chief Operating Officer, Chief Financial Officer, and | ||
Elizabeth A. Pagliarini | (Principal Financial Officer and Principal Accounting Officer) | ||
/s/ J. Steven Roush | Director | ||
J. Steven Roush | |||
/s/ Suzanne Koenig | Director | ||
Suzanne Koenig | |||
/s/ Kent Eikanas | Director | ||
Kent Eikanas |
73
EXHIBIT INDEX
Ex. |
| Description |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 |
74
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
14.1 | ||
21.1 | ||
23.1 | ||
23.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
99.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
75
Exhibit 21.1
Summit Healthcare Operating Partnership, L.P. |
| Delaware |
Summit Healthcare Asset Management, LLC |
| Delaware |
SHOP TRS LLC | | Delaware |
|
|
|
Healthcare Properties |
|
|
Cornerstone Healthcare Partners, LLC |
| Delaware |
Cornerstone Healthcare Holdings 1, LLC |
| Delaware |
CHP Sheridan LLC | | Delaware |
CHP Portland LLC |
| Delaware |
CHP Friendswood SNF, LLC |
| Delaware |
CHP Tigard, LLC |
| Delaware |
Healthcare Property Holding Co., LLC |
| Delaware |
NHP Holding Co., LLC |
| Delaware |
HP Aledo, LLC |
| Delaware |
HP Redding, LLC |
| Delaware |
Summit Chandler, LLC |
| Delaware |
Summit Yucaipa LLC | | Delaware |
Summit Creekside LLC | | Delaware |
Summit Mentone LLC | | Delaware |
Summit Georgia Holdings LLC | | Georgia |
Summit Calhoun LLC | | Georgia |
Summit Cartersville LLC | | Georgia |
Summit Chatsworth LLC | | Georgia |
Summit Decatur LLC | | Georgia |
Summit Fairburn LLC | | Georgia |
Summit Flowery Branch LLC | | Georgia |
Summit Jasper LLC | | Georgia |
Summit Stone Mountain LLC | | Georgia |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Summit Healthcare REIT, Inc.
Lake Forest, California
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-212231) of Summit Healthcare REIT, Inc. of our report dated March 31, 2023, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ BDO USA, LLP | |
| |
Costa Mesa, California | |
March 31, 2023 | |
Exhibit 23.2
Consent of Independent Auditor
We consent to the incorporation by reference in this Form 10-K of Summit Healthcare REIT, Inc. of our report dated March 13, 2023, with respect to the combined financial statements of the GA8 Tenants as of and for the years ended December 31, 2022 and 2021.
/s/ Warren Averett, LLC | |
| |
Warren Averett | |
Certified Public Accountants | |
Birmingham, Alabama | |
March 31, 2023 | |
Exhibit 31.1
CERTIFICATIONS
I, Kent Eikanas, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Healthcare REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
| /s/ Kent Eikanas |
Date: March 31, 2023 | | Kent Eikanas |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Elizabeth A. Pagliarini, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Healthcare REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
| /s/ Elizabeth A. Pagliarini |
Date: March 31, 2023 | | Elizabeth A. Pagliarini |
| Chief Financial Officer | |
| | (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. Sec.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Kent Eikanas and Elizabeth A. Pagliarini, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his or her knowledge, the Annual Report of Summit Healthcare REIT, Inc. on Form 10-K for the year ended December 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Summit Healthcare REIT, Inc.
|
| /s/ Kent Eikanas |
Date: March 31, 2023 | | Kent Eikanas |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| |
|
| |
|
| | /s/ Elizabeth A. Pagliarini |
Date: March 31, 2023 | | Elizabeth A. Pagliarini |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
GA8 TENANTS
DECEMBER 31, 2022 AND 2021
| 1 | |
| | |
COMBINED FINANCIAL STATEMENTS | | |
| | |
| 3 | |
| | |
Combined Statements of Income and Changes in Members’ Equity | | 4 |
| | |
| 5 | |
| | |
| 6 | |
| | |
| | |
| | |
| 14 | |
| | |
| 15 | |
| | |
| 16 | |
| | |
| 17 | |
| | |
| 18 |
To the Owners and Management
GA8 Tenants
Opinion
We have audited the accompanying combined financial statements of GA8 Tenants, which comprise the combined balance sheets as of December 31, 2022 and 2021, and the related combined statements of income and changes in members’ equity and cash flows for the years then ended, and the related notes to the combined financial statements.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of GA8 Tenants as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Combined Financial Statements section of our report. We are required to be independent of GA8 Tenants and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Management’s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the combined financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about GA8 Tenants’ ability to continue as a going concern within one year after the date that the combined financial statements are available to be issued.
1
Auditors’ Responsibilities for the Audit of the Combined Financial Statements
Our objectives are to obtain reasonable assurance about whether the combined financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal control. Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the combined financial statements.
In performing an audit in accordance with generally accepted auditing standards, we:
| ● | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| ● | Identify and assess the risks of material misstatement of the combined financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of GA8 Tenants’ internal control. Accordingly, no such opinion is expressed. |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the combined financial statements. |
| ● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about GA8 Tenants’ ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings and certain internal control related matters that we identified during the audit.
/s/ Warren Averett, LLC
Birmingham, Alabama
March 13, 2023
2
GA8 TENANTS
DECEMBER 31, 2022 AND 2021
ASSETS |
| | |
| | |
| | 2022 | | 2021 | ||
CURRENT ASSETS |
| |
|
| |
|
Cash | | $ | 4,047,322 | | $ | 3,114,852 |
Patient accounts receivable, net | |
| 13,571,787 | |
| 12,894,880 |
Estimated third-party payor settlements | |
| — | |
| 513,153 |
Prepaid expenses and other current assets | |
| 929,060 | |
| 578,626 |
Other receivables | |
| 4,694,190 | |
| 5,757,779 |
Total current assets | |
| 23,242,359 | |
| 22,859,290 |
NONCURRENT ASSETS | |
|
| |
|
|
Right-of-use asset, net (see note 1) | |
| 124,631,303 | |
| — |
Property and equipment, net | |
| 511,080 | |
| 407,544 |
Deposits | |
| 3,462,085 | |
| 3,462,085 |
Total noncurrent assets | |
| 128,604,468 | |
| 3,869,629 |
TOTAL ASSETS | | $ | 151,846,827 | | $ | 26,728,919 |
LIABILITIES AND MEMBERS’ EQUITY |
|
| |
|
| |
CURRENT LIABILITIES |
| |
|
| |
|
Accounts payable | | $ | 9,400,775 | | $ | 7,237,383 |
Accrued expenses | |
| — | |
| 324,384 |
Accrued payroll and benefits | |
| 438,591 | |
| 665,197 |
Current lease liabilities (see note 1) | |
| 6,273,189 | |
| — |
Medicare advance payment loan | |
| — | |
| 1,955,625 |
Total current liabilities | |
| 16,112,555 | |
| 10,182,589 |
PAYCHECK PROGRAM PROTECTION LOAN | |
| — | |
| 3,812,300 |
LONG-TERM LEASE LIABILITIES (see note 1) | |
| 123,428,432 | |
| — |
MEMBERS’ EQUITY | |
| 12,305,840 | |
| 12,734,030 |
TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ | 151,846,827 | | $ | 26,728,919 |
See notes to the combined financial statements.
3
GA8 TENANTS
COMBINED STATEMENTS OF INCOME AND CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
|
| 2022 |
| 2021 | ||
REVENUES |
| |
|
| |
|
Net patient service revenue | | $ | 77,151,042 |
| | 73,028,068 |
COVID‑19 Relief Funds revenue | |
| 1,446,482 |
| | 3,140,176 |
| |
| 78,597,524 |
| | 76,168,244 |
OPERATING EXPENSES (INCOME) | |
|
|
| |
|
Administrative and general services | |
| 11,250,387 |
| | 11,154,677 |
Management services | |
| 4,219,897 |
| | 3,986,381 |
Employee health and welfare | |
| 2,224,942 |
| | 2,932,177 |
Plant operations | |
| 2,215,290 |
| | 1,866,549 |
Dietary services | |
| 5,276,659 |
| | 4,432,404 |
Housekeeping and laundry | |
| 2,200,473 |
| | 2,135,739 |
Nursing services | |
| 27,863,663 |
| | 20,755,923 |
Social services | |
| 290,972 |
| | 241,707 |
Medical services | |
| 874,615 |
| | 852,495 |
Rehabilitative therapies | |
| 8,507,704 |
| | 9,211,057 |
Recreation | |
| 531,077 |
| | 486,707 |
Provision for bad debt | |
| 2,153,854 |
| | 3,168,446 |
Employee retention tax credit | |
| — |
| | (6,873,073) |
Rent on facilities | |
| — |
| | 15,316,057 |
Amortization of ROU assets | |
| 8,902,235 |
| | — |
Interest on lease liabilities | |
| 6,843,573 |
| | — |
Depreciation | |
| 149,011 |
| | 132,794 |
Property insurance | |
| 118,813 |
| | 24,497 |
Total operating expenses | |
| 83,623,165 |
| | 69,824,537 |
INCOME (LOSS) FROM OPERATIONS | |
| (5,025,641) |
| | 6,343,707 |
OTHER INCOME | |
|
|
| |
|
Other income | |
| 246,145 |
| | — |
Gain on forgiveness of debt | |
| 3,812,300 |
| | — |
Insurance proceeds from business interruption | |
| 949,006 |
| | — |
Total other income (expense) | |
| 5,007,451 |
| | — |
NET INCOME (LOSS) | |
| (18,190) |
| | 6,343,707 |
MEMBERS’ EQUITY AT BEGINNING OF YEAR | |
| 12,734,030 |
| | 8,197,408 |
DISTRIBUTIONS | |
| (410,000) |
| | (1,807,085) |
MEMBERS’ EQUITY AT END OF YEAR | | $ | 12,305,840 | | $ | 12,734,030 |
See notes to the combined financial statements.
4
GA8 TENANTS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income (loss) | | $ | (18,190) | | $ | 6,343,707 |
Adjustments to reconcile net income (loss) to net cash | |
|
| |
|
|
provided by operating activities: | |
|
| |
|
|
Depreciation | |
| 149,011 | |
| 132,795 |
Provision for bad debt expense | |
| 2,153,854 | |
| 3,168,446 |
Amortization of Right of Use Asset | |
| 8,902,235 | |
| — |
Gain on forgiveness of debt | |
| (3,812,300) | |
| — |
Change in other assets | |
| — | |
| (3,394,180) |
Change in patient accounts receivable | |
| (2,830,761) | |
| 978,943 |
Change in estimated third-party payor settlements | |
| 513,153 | |
| 613,917 |
Change in prepaid expenses | |
| (350,434) | |
| 446,849 |
Change in other receivables | |
| 1,063,589 | |
| (5,335,802) |
Change in accounts payable | |
| 2,163,392 | |
| 1,263,598 |
Change in accrued expenses | |
| (324,384) | |
| 242,089 |
Change in accrued payroll and benefits | |
| (226,606) | |
| (95,927) |
| |
| 7,400,749 | |
| (1,979,272) |
Net cash provided by operating activities | |
| 7,382,559 | |
| 4,364,435 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
|
| |
|
|
Purchases of property and equipment | |
| (203,035) | |
| (218,339) |
Net cash used in investing activities | |
| (203,035) | |
| (218,339) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Distributions | |
| (410,000) | |
| (1,807,085) |
Principal payment on lease liabilities | |
| (3,881,429) | |
| — |
Repayment of Medicare advance payment loan | |
| (1,955,625) | |
| (1,943,697) |
Net cash used in financing activities | |
| (6,247,054) | |
| (3,750,782) |
INCREASE IN CASH | |
| 932,470 | |
| 395,314 |
CASH AT BEGINNING OF YEAR | |
| 3,114,852 | |
| 2,719,538 |
CASH AT END OF YEAR | | $ | 4,047,322 | | $ | 3,114,852 |
SUPPLEMENTAL DISCLOSURES OF |
| |
|
| |
|
CASH FLOW INFORMATION |
| |
|
| |
|
Cash paid during the year for interest | | $ | 6,843,570 | | $ | — |
| | | | | | |
SUPPLEMENTAL DISCLOSURES OF | |
|
| |
|
|
NONCASH OPERATING, INVESTING AND | |
|
| |
|
|
FINANCING ACTIVITIES | |
|
| |
|
|
Right-of-use asset and lease liability associated with implementation of ASC 842 | | $ | 133,533,538 | | $ | — |
| | | | | | |
Vehicle acquired through financing lease | | $ | 49,512 | | $ | — |
See notes to the combined financial statements.
5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
GA8 Tenants (the Company) operates eight nursing facilities located in Georgia, which includes, GACalhoun SNF LLC, GAChatsworth SNF LLC, GAFairburn SNF LLC, GADecatur SNF LLC, GACartersville SNF LLC, GAJasper SNF LLC, GAStone Mountain SNF LLC, and Willowwood PAC LLC, collectively known as GA8 Tenants.
Principles of Combination
The accompanying combined financial statements include GACalhoun SNF LLC, GAChatsworth SNF LLC, GAFairburn SNF LLC, GADecatur SNF LLC, GACartersville SNF LLC, GAJasper SNF LLC, GAStone Mountain SNF LLC, and Willowwood PAC LLC, collectively known as GA8 Tenants. Upon combination, all material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the combined financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the combined financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated net realizable amounts from residents, third-party payors and others for services rendered.
Revenue under third-party payor agreements is paid on a prospective basis and is subject to audit by the third-party payor. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued, and interim and final settlements, are reported in operations in the year final settlements are determined.
The promise to provide quality care is accounted for as a single performance obligation. The Company has concluded that the contracts with patients and residents represent a bundle of distinct services that are substantially the same, with the same pattern of transfer to the customer. The Company uses the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Private Pay and other commercial payments for services. In order to determine the transaction price, the Company estimates the amount of variable consideration at the beginning of the contract using the expected value method. Changes in the Company’s expectation of the amount it will receive from the patient or third-party payors will be recorded in revenue unless there is a specific event that suggests the patient or third-party payor no longer has the ability and intent to pay the amount due and, therefore, the changes in its estimate of variable consideration better represent an impairment, or bad debt. The Company satisfies its performance obligation by providing quality of care services to its patients and residents on a daily basis until termination of the contract.
6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
The following tables summarize revenue from contracts with customers by payor source for the periods presented:
| | | | | | | | | | | | | | | |
|
| 2022 | |||||||||||||
| | Other | | Total | | | | | | | | | | ||
| | Third-Party | | of All | | | | | | | | | | ||
| | Medicare |
| Medicaid |
| Payors |
| Patients |
| Payors | |||||
Patient service revenue | | | | | | | | | | | | | | | |
(net of contractual allowances, discounts and implicit price concessions) | | $ | 26,460,749 | | $ | 42,040,945 | | $ | 6,289,774 | | $ | 2,359,574 | | $ | 77,151,042 |
| | | | | | | | | | | | | | | |
|
| 2021 | |||||||||||||
| | Other | | Total | | | | | | | | | | ||
| | Third-Party | | of All | | | | | | | | | | ||
| | Medicare |
| Medicaid |
| Payors |
| Patients |
| Payors | |||||
Patient service revenue |
| |
|
| |
|
| |
|
| |
|
| |
|
(net of contractual allowances, discounts and implicit price concessions) | | $ | 26,600,322 | | $ | 38,304,073 | | $ | 6,175,651 | | $ | 1,948,022 | | $ | 73,028,068 |
Accounts Receivable
Accounts receivable is reported in the combined balance sheet at the outstanding balance net of an estimated allowance for doubtful accounts. Billing terms usually provide for payment within 30 days. An allowance for doubtful accounts is estimated based upon review of outstanding receivables, historical collection information and existing economic conditions. Bad debts are charged against the allowance when substantially all collection efforts cease. Recovery of bad debts previously charged off are recorded when received. The Company’s billing arrangements generally do not provide for interest on past due amounts. At December 31, 2022, 2021, and 2020, the allowance for doubtful accounts totaled $1,450,735, $1,115,435, and $1,641,010. Total receivables totaled $15,022,522, $14,010,314, and $16,683,279 at December 31, 2022, 2021, and 2020 respectively.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of whom are local residents in relation to the nursing home in which they reside and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors was as follows at December 31:
|
| 2022 |
| 2021 |
|
Medicare |
| 42 | % | 43 | % |
Medicaid |
| 38 | % | 43 | % |
Other insurance |
| 9 | % | 9 | % |
Private pay |
| 11 | % | 5 | % |
|
| 100 | % | 100 | % |
Property and Equipment
Property and equipment acquisitions are recorded at cost less accumulated depreciation. The Company’s policy is to capitalize individual acquisitions of property and equipment greater than $5,000. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method.
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Income Taxes
As a limited liability company, income or loss generated by the Company is passed on to the members of the Company and taxed at their individual rates. Therefore, no provision or liability for income taxes has been included in the accompanying combined financial statements.
The Company assessed guidance relating to uncertainty in income taxes. This guidance requires entities to assess their uncertain tax positions for the likelihood that they would be overturned upon Internal Revenue Service examination or upon examination by state taxing authorities. The Company has determined that it does not have any positions at December 31, 2022 and 2021, that it would be unable to substantiate. The Company has filed its tax returns for all years through December 31, 2021.
Leases
The Company leases certain nursing facilities. The Company determines if an arrangement is a lease at inception. Financing leases are included in right-of-use (ROU) assets, current liabilities, and long-term lease liability on the combined balance sheets. The Company does not have any operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Financing lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses their incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The financing lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company has elected to apply the short-term lease exemption to leases with an initial term of twelve months or less.
In evaluating contracts to determine if they qualify as a lease, the Company considers factors such as if the Company has obtained substantially all the rights to the underlying asset through exclusivity, if the Company can direct the use of the asset by making decisions about how and for what purpose the asset will be used, and if the lessor has substitution rights. This evaluation may require significant judgement.
Insurance
The Company maintains insurance programs including: workers’ compensation, employees’ medical care, property, casualty, directors’ and officers’ liability, and automobile. The Company believes its insurance programs are adequate and, where there has been a direct transfer of risk to the insurance carrier, the Company does not recognize a liability in the combined financial statements. The Company maintains a claims-made insurance program for general and professional liability and provides an estimated reserve for incurred but not reported claims. In the opinion of management, insurance coverage and estimated reserves for incurred but not reported claims are adequate to cover significant losses, if any.
Medicare Advance Payments
During 2020, the Company applied for and received $3,823,517 from the Medicare Advance Payment Program (MAPP). These funds are an interest free loan that will be subsequently repaid over time. In April 2021, the Company began to repay the loan. At December 31, 2021, the remaining amount to be repaid was $1,955,625 and is recorded as Medicare Advance Payment Loan in the accompanying combined financial statements. This amount was repaid in 2022.
8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on members, the change in members equity or cash flows as previously stated.
Subsequent Events
Management has evaluated subsequent events and their potential effects on these combined financial statements through March 13, 2023, which is the date the combined financial statements were available to be issued.
On March 12, 2023, the New York State Department of Financial Services closed Signature Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. On that date, the FDIC transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A. Signature Bridge Bank, N.A is a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders. The Company had cash deposits with Signature Bank on March 12, 2023, totaling $2,059,856 of which $286,264 was over the FDIC insured limit of $250,000. The Company does not anticipate any losses from the closure.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued guidance (Accounting Standards Codification [ASC] 842, Leases) to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Company adopted the standard effective January 1, 2022, and recognized and measured leases existing at, or entered into after, January 1, 2022, with certain practical expedients available. Lease disclosures for the year ended December 31, 2021, are made under prior lease guidance in FASB ASC 840.
The Company elected the available practical expedients to account for its existing operating leases as operating leases, under the new guidance, without reassessing (1) whether the contracts contain leases under the new standard, (2) whether classification of capital leases or operating leases would be different in accordance with new guidance, or (3) whether the unamortized initial direct costs before transition adjustments would have met the definition of initial direct costs in the new guidance at lease commencement.
As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2022, a lease liability of $133,583,051, which represents the present value of the remaining financing lease payments, discounted using the incremental borrowing rate of 5.25% for leases, and a right-of-use asset of $133,533,538.
The standard had a material impact on the combined balance sheets but did not have an impact on the combined income statements, nor combined statements of cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.
9
2. PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, is as follows:
|
| 2022 |
| 2021 | ||
Furniture and equipment | | $ | 210,490 | | $ | 75,094 |
Software and website | |
| 4,745 | |
| 3,913 |
Minor movable equipment | |
| 191,777 | |
| 183,667 |
Motor vehicles | |
| 51,126 | |
| — |
Major leasehold improvements | |
| 359,620 | |
| 302,537 |
| |
| 817,758 | |
| 565,211 |
Less accumulated depreciation | |
| 306,678 | |
| 157,667 |
| | $ | 511,080 | | $ | 407,544 |
Depreciation charged to operations was $149,011 and $132,795 in 2022 and 2021, respectively.
3. FINANCING LEASES
The Company has financing leases for vehicles and nursing facilities. The Company leases have remaining lease terms through December 31, 2036, some of which may include options to extend the leases, and some of which may include options to terminate the leases.
The following is a schedule of future minimum lease payments under all operating leases having initial or remaining noncancelable lease terms in excess of one year:
Financing lease expense |
| |
| |
Amortization of ROU assets | | $ | 8,902,236 | |
Interest on lease liabilities | |
| 6,843,571 | |
Total financing lease expense | | $ | 15,745,807 | |
| | | | |
Weighted average remaining lease term | |
| 13.93 | years |
| | | | |
Cash paid for financing lease liabilities | |
|
| |
Interest paid | | $ | 6,843,570 | |
Principal paid | |
| 3,881,429 | |
Total cash paid for financing lease liabilities | | $ | 10,724,999 | |
10
3. FINANCING LEASES – CONTINUED
Reported as of December 31, 2022: |
| |
|
Other current liabilities | | $ | 6,273,189 |
Other long-term liabilities | | $ | 123,428,432 |
| | | |
2023 | | $ | 12,900,013 |
2024 | |
| 12,053,632 |
2025 | |
| 12,234,437 |
2026 | |
| 12,417,954 |
2027 | |
| 12,604,223 |
Thereafter | |
| 122,295,266 |
| |
| 184,505,525 |
Less imputed interest | |
| (54,803,903) |
Total | | $ | 129,701,622 |
Associated with the leases, the Company was required to make $3,462,085 in deposits and prepayments related to operating leases. This amount is included in deposits in the accompanying December 31, 2022 and 2021 combined balance sheets.
4. CONTINGENCIES AND COMMITMENTS
Pursuant to legislative directives and authorizations from Congress, the Centers for Medicare and Medicaid Services (CMS) has developed and instituted various Medicare audit programs under which CMS contracts with private companies to conduct audits on claims and medical records. In the ordinary course of business, the Company is subject to inquiries, investigations and audits by these private companies, or other federal and state agencies that oversee applicable healthcare program participation and payment regulations. Audits may include enhanced medical necessity reviews pursuant to the Medicare, Medicaid and SCHIP Extension Act of 2007 and audits under the CMS Recovery Audit Contractor (RAC) program. The Company makes significant efforts through training and education to ensure compliance with all programs.
5. LITIGATION
There are several lawsuits pending against the Company. The ultimate outcome of these claims is uncertain at this time; however, management believes that the liability resulting from the claims, if any, will not have a material adverse effect in the combined financial statements.
6. COVID-19 RELIEF FUNDS REVENUE
As part of the response to the coronavirus pandemic, the federal government passed legislation, referred to as the Coronavirus Aid, Relief, and Economic Security Act, in March 2020, and the America Rescue Plan Act in March of 2021, that included, among other things, financial assistance to offset some of the financial burden incurred by providers in responding to the pandemic. As a result of this legislation, the Company received $123,735 in 2022 ($1,597,821 in 2021) from funds established under the CARES Act in the form of a grant that, as long as certain terms and conditions are met by the Company, is not required to be repaid. The Company has met the terms and conditions as required by the grants and has recognized $123,735 in 2022 ($1,597,821 in 2021) of the relief funds to offset lost revenues and additional expenses incurred for the year ended December 31, 2022, due to the coronavirus pandemic. This amount is recorded as other operating income in the accompanying combined statements of income and changes in members’ equity.
In addition to the above, the Company also received various state grants to help mitigate the coronavirus pandemic. The funds were required to be used for necessary expenditures incurred due to COVID-19. The Company has met the terms and conditions of use and recognized the amounts into income. The Company received $1,322,747 and $1,542,355 in funds in 2022 and 2021, respectively.
11
7. RELATED PARTIES
The Company pays management fees to a related party that provides general and administrative services to the nursing home operators. Management fee expenses incurred for the years ended December 31, 2022 and 2021, totaled $4,219,897 and $3,986,381, respectively. Management fees are presented as an expense and included in administrative services in the accompanying combined financial statements. At December 31, 2022, the Company had $521,602 due from the related party ($294,036 due from the related party in 2021) included in other receivables in the accompanying combined financial statements.
The Company also had other net advances outstanding from related parties totaling $505,749 and $101,917 as of December 31, 2022 and 2021.
8. PAYCHECK PROTECTION LOAN
During 2020, the nursing homes were granted loans (the Loan) from a financial institution in the aggregate amount of $3,812,300 pursuant to the Paycheck Protection Program (the PPP) under Division A, Title I of the CARES Act, which was enacted on March 27, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses and if certain other requirements as described in the CARES Act are met. The Company used the entire loan amount for qualifying expenses. The Company applied for forgiveness and received with the lender and the Small Business Administration, as such the amount has been recorded as other income in the accompanying 2022 combined financial statements.
9 EMPLOYEE RETENTION TAX CREDIT
In December 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law which included additional COVID-19 related relief. The CAA substantially and retroactively expended the Employee Retention Tax Credit (ERTC) for eligible companies. Under the revised terms of the ERTC, companies are eligible to claim the payroll tax credit if the company was fully or partially suspended by a COVID-19 government order or if calendar 2021 gross receipts were less than 20% compared to the same quarter in 2019. For the period January 1, 2021, through September 30, 2021, the Company qualified for $6,876,330 in payroll tax credits. The Company received $2,664,654 during 2022 and $1,644,793 during 2021. The remaining uncollected balance has been recorded as a receivable (included in other receivables) on the accompanying combined balance sheets of $2,566,883 and $5,231,537 as of December 31, 2022 and 2021, respectively, and a reduction to operating expenses of $6,873,073 for the year-ended December 31, 2021, on the accompanying combined statements of income.
12
INDEPENDENT AUDITORS’ REPORT ON
SUPPLEMENTARY INFORMATION
To the Owners and Management
GA8 Tenants
We have audited the accompanying combined financial statements of GA8 Tenants as of and for the years ended December 31, 2022 and 2021, and our report thereon dated March 13, 2023, which expressed an unmodified opinion on those combined financial statements, appears on pages 1 and 2. Our audit was conducted for the purpose of forming an opinion on the combined financial statements as a whole. The combining balance sheets as of December 31, 2022 and 2021, and the related combining statement of income and members’ equity for the years then ended, are presented for purposes of additional analysis and are not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole.
/s/ Warren Averett, LLC
Birmingham, Alabama
March 13, 2023
14
GA8 TENANTS
DECEMBER 31, 2022
ASSETS | ||||||||||||||||||||||||||||||
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
| | GACalhoun | | GAChatsworth | | GAFairburn | | GADecatur | | GACartersville | | GAJasper | | GAStone Mountain | | Willowwood | | | | | |
| ||||||||
| | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | PAC LLC | | Eliminations | | TOTAL | ||||||||||
CURRENT ASSETS | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
Cash | | $ | 294,538 | | $ | 772,355 | | $ | 43,881 | | $ | 1,248,746 | | $ | 154,809 | | $ | 123,365 | | $ | 116,188 | | $ | 1,293,440 | | $ | — |
| $ | 4,047,322 |
Patient accounts receivable, net | |
| 1,167,173 | |
| 998,491 | |
| 1,000,906 | |
| 2,092,376 | |
| 1,436,376 | |
| 736,318 | |
| 4,641,300 | |
| 1,498,847 | |
| — |
|
| 13,571,787 |
Intercompany receivables | |
| 1,410,434 | |
| 728,794 | |
| 1,387,432 | |
| 1,504,148 | |
| 311,284 | |
| 15,997 | |
| (326,819) | |
| 712,397 | |
| (5,743,667) |
|
| — |
Prepaid expenses and other current assets | |
| 203,579 | |
| 68,018 | |
| 73,977 | |
| 132,981 | |
| 60,555 | |
| 76,785 | |
| 216,444 | |
| 96,721 | |
| — |
|
| 929,060 |
Other receivables | |
| 2,220,469 | |
| 626,111 | |
| 338,574 | |
| 28,779 | |
| 609,759 | |
| 38,167 | |
| 511,810 | |
| 320,521 | |
| — |
|
| 4,694,190 |
Total current assets | |
| 5,296,193 | |
| 3,193,769 | |
| 2,844,770 | |
| 5,007,030 | |
| 2,572,783 | |
| 990,632 | |
| 5,158,923 | |
| 3,921,926 | |
| (5,743,667) |
|
| 23,242,359 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NONCURRENT ASSETS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Right-of-use asset, net | |
| 4,585,473 | |
| 33,128,918 | |
| 13,863,794 | |
| 8,641,743 | |
| 18,143,442 | |
| 10,199,634 | |
| 26,193,665 | |
| 9,874,634 | |
| — |
|
| 124,631,303 |
Property and equipment, net | |
| 139,843 | |
| 25,006 | |
| 44,789 | |
| 94,726 | |
| 38,787 | |
| 20,448 | |
| 84,272 | |
| 63,209 | |
| — |
|
| 511,080 |
Deposits | |
| 175,703 | |
| 851,521 | |
| 387,871 | |
| 263,623 | |
| 490,229 | |
| 285,919 | |
| 723,311 | |
| 283,908 | |
| — |
|
| 3,462,085 |
Total noncurrent assets | |
| 4,901,019 | |
| 34,005,445 | |
| 14,296,454 | |
| 9,000,092 | |
| 18,672,458 | |
| 10,506,001 | |
| 27,001,248 | |
| 10,221,751 | |
| — |
|
| 128,604,468 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 10,197,212 | | $ | 37,199,214 | | $ | 17,141,224 | | $ | 14,007,122 | | $ | 21,245,241 | | $ | 11,496,633 | | $ | 32,160,171 | | $ | 14,143,677 | | $ | (5,743,667) |
| $ | 151,846,827 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND MEMBERS’ EQUITY (DEFICIT) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
CURRENT LIABILITIES | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Accounts payable | | $ | 1,004,216 | | $ | 670,169 | | $ | 1,302,179 | | $ | 1,211,459 | | $ | 997,282 | | $ | 700,935 | | $ | 1,809,788 | | $ | 1,704,746 | | $ | — |
| $ | 9,400,775 |
Accrued payroll and benefits | |
| 36,747 | |
| 83,661 | |
| 50,617 | |
| 50,920 | |
| 61,001 | |
| 35,431 | |
| 67,726 | |
| 52,488 | |
| — |
|
| 438,591 |
Current lease liability | |
| 230,806 | |
| 1,667,511 | |
| 669,155 | |
| 434,973 | |
| 879,751 | |
| 638,511 | |
| 1,255,453 | |
| 497,029 | |
| — |
|
| 6,273,189 |
Intercompany payables | |
| 2,918,685 | |
| — | |
| 47,384 | |
| 311,284 | |
| 1,880,437 | |
| — | |
| 712,397 | |
| (126,520) | |
| (5,743,667) |
|
| — |
Total current liabilities | |
| 4,190,454 | |
| 2,421,341 | |
| 2,069,335 | |
| 2,008,636 | |
| 3,818,471 | |
| 1,374,877 | |
| 3,845,364 | |
| 2,127,744 | |
| (5,743,667) |
|
| 16,112,555 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LONG-TERM LEASE LIABILITY | |
| 4,588,908 | |
| 32,796,015 | |
| 13,724,481 | |
| 8,554,905 | |
| 17,961,124 | |
| 10,097,140 | |
| 25,930,453 | |
| 9,775,406 | |
| — |
|
| 123,428,432 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MEMBERS’ EQUITY (DEFICIT) | |
| 1,417,850 | |
| 1,981,858 | |
| 1,347,408 | |
| 3,443,581 | |
| (534,354) | |
| 24,616 | |
| 2,384,354 | |
| 2,240,527 | |
| — |
|
| 12,305,840 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ | 10,197,212 | | $ | 37,199,214 | | $ | 17,141,224 | | $ | 14,007,122 | | $ | 21,245,241 | | $ | 11,496,633 | | $ | 32,160,171 | | $ | 14,143,677 | | $ | (5,743,667) |
| $ | 151,846,827 |
See independent auditors’ report on supplementary information.
15
GA8 TENANTS
FOR THE YEAR ENDED DECEMBER 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| GACalhoun |
| GAChatsworth |
| GAFairburn |
| GADecatur |
| GACartersville |
| GAJasper |
| GAStone Mountain |
| Willowwood |
|
|
| ||||||||
| | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | PAC LLC | | TOTAL | |||||||||
REVENUES |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
Net patient service revenue | | $ | 7,025,557 | | $ | 11,096,658 | | $ | 9,223,563 | | $ | 9,896,772 | | $ | 8,918,861 | | $ | 6,644,205 | | $ | 14,923,171 | | $ | 9,422,255 |
| $ | 77,151,042 |
COVID‑19 Relief Funds revenue | |
| 164,962 | |
| 288,697 | |
| 164,962 | |
| 164,962 | |
| 164,963 | |
| 164,962 | |
| 164,962 | |
| 168,012 |
|
| 1,446,482 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| 7,190,519 | |
| 11,385,355 | |
| 9,388,525 | |
| 10,061,734 | |
| 9,083,824 | |
| 6,809,167 | |
| 15,088,133 | |
| 9,590,267 |
|
| 78,597,524 |
OPERATING EXPENSES (INCOME) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Administrative and general services | |
| 1,149,119 | |
| 1,437,006 | |
| 1,573,565 | |
| 1,698,887 | |
| 1,104,270 | |
| 941,228 | |
| 2,103,834 | |
| 1,242,478 |
|
| 11,250,387 |
Management services | |
| 406,406 | |
| 601,133 | |
| 495,511 | |
| 549,235 | |
| 488,129 | |
| 376,645 | |
| 817,640 | |
| 485,198 |
|
| 4,219,897 |
Employee health and welfare | |
| 264,756 | |
| 310,662 | |
| 243,169 | |
| 224,838 | |
| 237,611 | |
| 182,322 | |
| 544,824 | |
| 216,760 |
|
| 2,224,942 |
Plant operations | |
| 251,268 | |
| 263,070 | |
| 241,426 | |
| 271,836 | |
| 261,491 | |
| 132,208 | |
| 482,984 | |
| 311,007 |
|
| 2,215,290 |
Dietary services | |
| 569,408 | |
| 778,628 | |
| 666,974 | |
| 670,589 | |
| 563,648 | |
| 448,237 | |
| 984,931 | |
| 594,244 |
|
| 5,276,659 |
Housekeeping and laundry | |
| 202,700 | |
| 344,527 | |
| 225,924 | |
| 298,427 | |
| 269,093 | |
| 231,532 | |
| 377,316 | |
| 250,954 |
|
| 2,200,473 |
Nursing services | |
| 2,592,783 | |
| 3,452,398 | |
| 3,892,260 | |
| 3,611,919 | |
| 2,690,121 | |
| 2,877,724 | |
| 5,203,621 | |
| 3,542,837 |
|
| 27,863,663 |
Social services | |
| 44,949 | |
| 49,156 | |
| 32,544 | |
| — | |
| — | |
| 33,713 | |
| 90,300 | |
| 40,310 |
|
| 290,972 |
Medical services | |
| 86,136 | |
| 155,982 | |
| 31,694 | |
| 117,942 | |
| 83,666 | |
| 90,502 | |
| 170,425 | |
| 138,268 |
|
| 874,615 |
Rehabilitative therapies | |
| 783,321 | |
| 977,446 | |
| 1,291,734 | |
| 987,476 | |
| 981,728 | |
| 793,954 | |
| 1,598,068 | |
| 1,093,977 |
|
| 8,507,704 |
Recreation | |
| 26,712 | |
| 84,855 | |
| 81,233 | |
| 82,644 | |
| 117,307 | |
| 36,641 | |
| 60,487 | |
| 41,198 |
|
| 531,077 |
Provision for bad debt | |
| 237,924 | |
| 306,664 | |
| 215,574 | |
| 297,688 | |
| 172,231 | |
| 136,452 | |
| 531,012 | |
| 256,309 |
|
| 2,153,854 |
Amortization of ROU assets | |
| 327,534 | |
| 2,366,351 | |
| 990,271 | |
| 617,267 | |
| 1,295,960 | |
| 728,545 | |
| 1,870,976 | |
| 705,331 |
|
| 8,902,235 |
Interest on lease liabilities | |
| 251,791 | |
| 1,819,129 | |
| 761,268 | |
| 474,523 | |
| 996,266 | |
| 560,067 | |
| 1,438,308 | |
| 542,221 |
|
| 6,843,573 |
Depreciation | |
| 28,434 | |
| 10,261 | |
| 9,576 | |
| 31,190 | |
| 11,152 | |
| 7,062 | |
| 33,138 | |
| 18,198 |
|
| 149,011 |
Property insurance | |
| 12,089 | |
| 15,589 | |
| 13,633 | |
| 10,403 | |
| 13,734 | |
| 10,534 | |
| 20,665 | |
| 22,166 |
|
| 118,813 |
TOTAL OPERATING EXPENSES | |
| 7,235,330 | |
| 12,972,857 | |
| 10,766,356 | |
| 9,944,864 | |
| 9,286,407 | |
| 7,587,366 | |
| 16,328,529 | |
| 9,501,456 |
|
| 83,623,165 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) FROM OPERATIONS | |
| (44,811) | |
| (1,587,502) | |
| (1,377,831) | |
| 116,870 | |
| (202,583) | |
| (778,199) | |
| (1,240,396) | |
| 88,811 |
|
| (5,025,641) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Other Income | |
| 70,534 | |
| 14,125 | |
| 15,577 | |
| 38,523 | |
| 26,658 | |
| 69,218 | |
| 4,176 | |
| 7,334 |
|
| 246,145 |
Gain on forgiveness of debt | |
| 407,600 | |
| 519,500 | |
| 407,600 | |
| 502,700 | |
| 377,800 | |
| 278,800 | |
| 721,400 | |
| 596,900 |
|
| 3,812,300 |
Insurance proceeds from business interrption | |
| 949,006 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| 949,006 |
TOTAL OTHER INCOME | |
| 1,427,140 | |
| 533,625 | |
| 423,177 | |
| 541,223 | |
| 404,458 | |
| 348,018 | |
| 725,576 | |
| 604,234 |
|
| 5,007,451 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
NET INCOME (LOSS) | | $ | 1,382,329 | | $ | (1,053,877) | | $ | (954,654) | | $ | 658,093 | | $ | 201,875 | | $ | (430,181) | | $ | (514,820) | | $ | 693,045 |
| $ | (18,190) |
See independent auditors’ report on supplementary information.
16
GA8 TENANTS
DECEMBER 31, 2021
ASSETS | ||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | GACalhoun | | GAChatsworth | | GAFairburn | | GADecatur | | GACartersville | | GAJasper | | GAStone Mountain | | Willowwood | | | | | |
| ||||||||
|
| SNF LLC |
| SNF LLC |
| SNF LLC |
| SNF LLC |
| SNF LLC |
| SNF LLC |
| SNF LLC |
| PAC LLC |
| Eliminations |
| TOTAL | ||||||||||
CURRENT ASSETS |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
Cash | | $ | 598,873 | | $ | 851,976 | | $ | 160,153 | | $ | 20,404 | | $ | 378,763 | | $ | 5,351 | | $ | 21,015 | | $ | 1,078,317 | | $ | — |
| $ | 3,114,852 |
Patient accounts receivable, net | |
| 1,109,316 | |
| 1,271,102 | |
| 950,462 | |
| 2,519,646 | |
| 930,699 | |
| 807,396 | |
| 3,860,699 | |
| 1,445,560 | |
| — |
|
| 12,894,880 |
Estimated third-party payor settlements | |
| 3,136 | |
| 315,677 | |
| (56,308) | |
| 22,000 | |
| 23,347 | |
| 37,797 | |
| (67,409) | |
| 234,913 | |
| — |
|
| 513,153 |
Intercompany receivables | |
| 6,495,824 | |
| 1,910,576 | |
| 2,345,179 | |
| 2,099,797 | |
| 500,325 | |
| 878,111 | |
| 1,832,288 | |
| 729,921 | |
| (16,792,021) |
|
| — |
Prepaid expenses and other current assets | |
| 158,216 | |
| 25,947 | |
| 26,878 | |
| 112,476 | |
| 20,152 | |
| 50,572 | |
| 126,597 | |
| 57,788 | |
| — |
|
| 578,626 |
Other receivables | |
| 1,181,394 | |
| 648,938 | |
| 552,644 | |
| 572,895 | |
| 890,795 | |
| 400,761 | |
| 859,699 | |
| 650,653 | |
| — |
|
| 5,757,779 |
Total current assets | |
| 9,546,759 | |
| 5,024,216 | |
| 3,979,008 | |
| 5,347,218 | |
| 2,744,081 | |
| 2,179,988 | |
| 6,632,889 | |
| 4,197,152 | |
| (16,792,021) |
|
| 22,859,290 |
NONCURRENT ASSETS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Property and equpment, net | |
| 74,693 | |
| 20,435 | |
| 23,561 | |
| 79,768 | |
| 40,566 | |
| 27,406 | |
| 83,372 | |
| 57,743 | |
| — |
|
| 407,544 |
Deposits | |
| 175,703 | |
| 851,521 | |
| 387,871 | |
| 263,623 | |
| 490,229 | |
| 285,919 | |
| 723,311 | |
| 283,908 | |
| — |
|
| 3,462,085 |
Total noncurrent assets | |
| 250,396 | |
| 871,956 | |
| 411,432 | |
| 343,391 | |
| 530,795 | |
| 313,325 | |
| 806,683 | |
| 341,651 | |
| — |
|
| 3,869,629 |
TOTAL ASSETS | | $ | 9,797,155 | | $ | 5,896,172 | | $ | 4,390,440 | | $ | 5,690,609 | | $ | 3,274,876 | | $ | 2,493,313 | | $ | 7,439,572 | | $ | 4,538,803 | | $ | (16,792,021) |
| $ | 26,728,919 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND MEMBERS’ EQUITY (DEFICIT) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
CURRENT LIABILITIES | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Accounts payable | | $ | 572,141 | | $ | 667,811 | | $ | 890,566 | | $ | 914,568 | | $ | 580,830 | | $ | 702,397 | | $ | 1,221,930 | | $ | 1,687,140 | | $ | — |
| $ | 7,237,383 |
Accrued expenses | |
| 18,329 | |
| 1,919 | |
| 12,727 | |
| 279,471 | |
| 5,606 | |
| (10,666) | |
| 4,516 | |
| 12,482 | |
| — |
|
| 324,384 |
Accrued payroll and benefits | |
| 61,277 | |
| 127,337 | |
| 65,209 | |
| 73,137 | |
| 62,828 | |
| 70,625 | |
| 130,585 | |
| 74,199 | |
| — |
|
| 665,197 |
Medicare advance payments | |
| 172,137 | |
| 193,194 | |
| 225,499 | |
| 253,129 | |
| 236,923 | |
| 361,041 | |
| 491,246 | |
| 22,456 | |
| — |
|
| 1,955,625 |
Intercompany payables | |
| 8,524,150 | |
| 1,257,676 | |
| 415,777 | |
| 856,116 | |
| 2,683,118 | |
| 616,319 | |
| 1,905,721 | |
| 533,144 | |
| (16,792,021) |
|
| — |
Total current liabilities | |
| 9,348,034 | |
| 2,247,937 | |
| 1,609,778 | |
| 2,376,421 | |
| 3,569,305 | |
| 1,739,716 | |
| 3,753,998 | |
| 2,329,421 | |
| (16,792,021) |
|
| 10,182,589 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PAYCHECK PROGRAM | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
PROTECTION LOAN | |
| 407,600 | |
| 519,500 | |
| 407,600 | |
| 502,700 | |
| 377,800 | |
| 278,800 | |
| 721,400 | |
| 596,900 | |
| — |
|
| 3,812,300 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MEMBERS’ EQUITY (DEFICIT) | |
| 41,521 | |
| 3,128,735 | |
| 2,373,062 | |
| 2,811,488 | |
| (672,229) | |
| 474,797 | |
| 2,964,174 | |
| 1,612,482 | |
| — |
|
| 12,734,030 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ | 9,797,155 | | $ | 5,896,172 | | $ | 4,390,440 | | $ | 5,690,609 | | $ | 3,274,876 | | $ | 2,493,313 | | $ | 7,439,572 | | $ | 4,538,803 | | $ | (16,792,021) |
| $ | 26,728,919 |
See independent auditors’ report on supplementary information.
17
GA8 TENANTS
FOR THE YEAR ENDED DECEMBER 31, 2021
|
| GACalhoun |
| GAChatsworth |
| GAFairburn |
| GADecatur |
| GACartersville |
| GAJasper |
| GAStone Mountain |
| Willowwood |
|
|
| ||||||||
| | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | SNF LLC | | PAC LLC | | TOTAL | |||||||||
REVENUES |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
Net patient service revenue | | $ | 6,867,169 | | $ | 11,206,277 | | $ | 8,311,066 | | $ | 9,068,129 | | $ | 8,176,877 | | $ | 6,810,229 | | $ | 14,884,561 | | $ | 7,703,760 |
| $ | 73,028,068 |
COVID‑19 Relief Funds revenue | |
| 512,161 | |
| 330,796 | |
| 277,872 | |
| 407,428 | |
| 549,979 | |
| 521,541 | |
| 322,755 | |
| 217,644 |
|
| 3,140,176 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| 7,379,330 | |
| 11,537,073 | |
| 8,588,938 | |
| 9,475,557 | |
| 8,726,856 | |
| 7,331,770 | |
| 15,207,316 | |
| 7,921,404 |
|
| 76,168,244 |
OPERATING EXPENSES (INCOME) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Administrative and general services | |
| 1,254,872 | |
| 1,313,156 | |
| 1,405,515 | |
| 2,048,987 | |
| 1,115,517 | |
| 1,021,935 | |
| 1,913,522 | |
| 1,081,173 |
|
| 11,154,677 |
Management services | |
| 371,793 | |
| 612,269 | |
| 452,575 | |
| 496,370 | |
| 436,412 | |
| 382,682 | |
| 801,637 | |
| 432,643 |
|
| 3,986,381 |
Employee health and welfare | |
| 393,387 | |
| 411,886 | |
| 368,175 | |
| 328,243 | |
| 338,634 | |
| 194,469 | |
| 561,657 | |
| 335,726 |
|
| 2,932,177 |
Plant operations | |
| 202,721 | |
| 235,244 | |
| 202,599 | |
| 286,316 | |
| 218,094 | |
| 126,477 | |
| 375,264 | |
| 219,834 |
|
| 1,866,549 |
Dietary services | |
| 539,611 | |
| 624,588 | |
| 576,695 | |
| 536,289 | |
| 515,298 | |
| 376,649 | |
| 786,784 | |
| 476,490 |
|
| 4,432,404 |
Housekeeping and laundry | |
| 261,343 | |
| 301,989 | |
| 260,084 | |
| 248,206 | |
| 231,859 | |
| 207,932 | |
| 379,386 | |
| 244,940 |
|
| 2,135,739 |
Nursing services | |
| 2,067,724 | |
| 2,251,946 | |
| 2,287,019 | |
| 3,317,138 | |
| 1,863,115 | |
| 2,478,358 | |
| 3,922,236 | |
| 2,568,387 |
|
| 20,755,923 |
Medical services | |
| 96,351 | |
| 178,651 | |
| 29,866 | |
| 95,098 | |
| 61,396 | |
| 53,427 | |
| 250,807 | |
| 86,899 |
|
| 852,495 |
Social services | |
| 22,292 | |
| 38,937 | |
| 35,338 | |
| — | |
| — | |
| 37,234 | |
| 68,458 | |
| 39,448 |
|
| 241,707 |
Recreation | |
| 20,412 | |
| 66,277 | |
| 65,533 | |
| 75,792 | |
| 136,480 | |
| 34,532 | |
| 57,268 | |
| 30,413 |
|
| 486,707 |
Provision for bad debt | |
| 363,504 | |
| 746,970 | |
| 237,764 | |
| 359,251 | |
| 287,139 | |
| 227,878 | |
| 588,275 | |
| 357,665 |
|
| 3,168,446 |
Rehabilitative therapies | |
| 942,844 | |
| 1,105,763 | |
| 1,193,320 | |
| 1,016,057 | |
| 944,774 | |
| 898,496 | |
| 1,931,771 | |
| 1,178,032 |
|
| 9,211,057 |
Employee retention tax credit | |
| (814,730) | |
| (1,123,683) | |
| (722,306) | |
| (748,264) | |
| (854,455) | |
| (517,075) | |
| (1,253,843) | |
| (838,717) |
|
| (6,873,073) |
Rent on facilities | |
| 1,193,402 | |
| 3,100,205 | |
| 1,164,408 | |
| 1,264,817 | |
| 2,923,091 | |
| 1,685,630 | |
| 3,546,338 | |
| 595,457 |
|
| 15,473,348 |
TOTAL OPERATING EXPENSES | |
| 6,915,526 | |
| 9,864,198 | |
| 7,556,585 | |
| 9,324,300 | |
| 8,217,354 | |
| 7,208,624 | |
| 13,929,560 | |
| 6,808,390 |
|
| 69,824,537 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
NET INCOME | | $ | 463,804 | | $ | 1,672,875 | | $ | 1,032,353 | | $ | 151,257 | | $ | 509,502 | | $ | 123,146 | | $ | 1,277,756 | | $ | 1,113,014 |
| $ | 6,343,707 |
See independent auditors’ report on supplementary information.
18
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| CONSOLIDATED BALANCE SHEETS | ||
| Preferred stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 290,000,000 | 290,000,000 |
| Common stock, shares issued | 23,027,978 | 23,027,978 |
| Common stock, shares outstanding | 23,027,978 | 23,027,978 |
CONSOLIDATED STATEMENTS OF EQUITY - USD ($) |
Common Stock |
Additional Paid-In Capital |
Accumulated Deficit [Member] |
Total Stockholders' Equity |
Noncontrolling Interests |
Total |
|---|---|---|---|---|---|---|
| Balance at the beginning at Dec. 31, 2020 | $ 23,000 | $ 116,335,000 | $ (84,456,000) | $ 31,902,000 | $ 195,000 | $ 32,097,000 |
| Balance at the beginning (in shares) at Dec. 31, 2020 | 23,027,978 | |||||
| Stock-based compensation | $ 0 | 66,000 | 0 | 66,000 | 0 | 66,000 |
| Distributions paid to noncontrolling interests | 0 | 0 | 0 | 0 | (99,000) | (99,000) |
| Net (loss) income | 0 | 0 | (585,000) | (585,000) | 75,000 | (510,000) |
| Balance at the end at Dec. 31, 2021 | $ 23,000 | 116,401,000 | (85,041,000) | 31,383,000 | 171,000 | 31,554,000 |
| Balance at the end (in shares) at Dec. 31, 2021 | 23,027,978 | |||||
| Stock-based compensation | $ 0 | 31,000 | 0 | 31,000 | 0 | 31,000 |
| Distributions paid to noncontrolling interests | 0 | 0 | 0 | 0 | (58,000) | (58,000) |
| Net (loss) income | 0 | 0 | (8,693,000) | (8,693,000) | 64,000 | (8,629,000) |
| Balance at the end at Dec. 31, 2022 | $ 23,000 | $ 116,432,000 | $ (93,734,000) | $ 22,721,000 | $ 177,000 | $ 22,898,000 |
| Balance at the end (in shares) at Dec. 31, 2022 | 23,027,978 |
Organization |
12 Months Ended |
|---|---|
Dec. 31, 2022 | |
| Organization | |
| Organization | 1. Organization Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of 14 properties, 95.3% of four properties, a 10% equity interest in an unconsolidated equity-method investment that holds 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds one property, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties. In June 2021, we sold our 15% equity interest in an unconsolidated equity-method investment that held 14 properties. Summit is a Maryland corporation, formed in 2004 under the General Corporation Law of Maryland for the purpose of investing in and owning real estate. As used in these notes, the “Company”, “we”, “us” and “our” refer to Summit and its consolidated subsidiaries, including Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), except where the context otherwise requires. We conduct substantially all of our operations through the Operating Partnership, which is a Delaware limited partnership. We own a 99.88% general partner interest in the Operating Partnership, and Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest. Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership. Cornerstone Healthcare Partners LLC – Consolidated Joint Venture We own 95 % of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% noncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated within our financial statements and owns four properties (the “JV Properties”) with another partially owned subsidiary. As of December 31, 2022 and 2021, we own a 95.3% interest in the four JV Properties, and CHREF owns a 4.7% interest. Summit Union Life Holdings, LLC – Equity-Method Investment In April, 2015, through our Operating Partnership, we entered into a limited liability company agreement with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements (see Note 5). As of December 31, 2022 and 2021, we have a 10% interest in the SUL JV which owns 17 properties. Summit Fantasia Holdings, LLC – Equity-Method Investment In September 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 35% in the Fantasia JV which owns one property as of December 31, 2022 and owned two properties at December 31, 2021. Summit Fantasia Holdings II, LLC – Equity-Method Investment In December 2016, through our Operating Partnership, we entered into a limited liability company agreement (the “Fantasia II LLC Agreement”) with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 20% interest in the Fantasia II JV which owns two properties. Summit Fantasia Holdings III, LLC - Equity-Method Investment In July 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 10% interest in the Fantasia III JV which owns nine properties. Summit Fantasy Pearl Holdings, LLC – Equity-Method Investment In October 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our consolidated financial statements and is accounted for under the equity-method in our consolidated financial statements. As of December 31, 2022 and 2021, we have a 10% interest in the FPH JV which owns six properties. Indiana JV– Equity-Method Investment In June 2021, we sold our 15% interest in the Indiana joint venture (the “Indiana JV”) for approximately $5.4 million. See Note 5 for further information. The Indiana JV was not consolidated in our consolidated financial statements and was accounted for under the equity-method prior to the sale of our equity interest. As of December 31, 2022 and 2021, we had a 0% interest in the Indiana JV which owned 14 properties. Taxable REIT Subsidiaries Summit Healthcare Asset Management, LLC Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, FPH JV and the Indiana JV prior to the sale of our equity interest (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information. SHOP TRS LLC SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary that is the sole member for two of our real estate properties that no longer have a lease with an unrelated tenant. Each of these properties are leased to an affiliated subsidiary (see Note 3 under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the “Operated Properties”) and the operations are consolidated in our financial statements. Coronavirus (COVID-19) The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. Two of our tenants have experienced a material adverse effect on their operations related to COVID-19, which has affected their ability to make rent payments in 2022 and 2021 (see Note 3 for further information on its impact on us). Additionally, see Note 5 for further issues related to our Equity-Method Investments. The extent to which COVID-19 could continue to impact our business, cash flow and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses in future periods. |
Summary of Significant Accounting Policies |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of our management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership, and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. The Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification (“ASC”) 810, Consolidation, which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. Before concluding that it is appropriate to apply the voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity. We evaluate, as appropriate, our interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate. Use of Estimates The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. The most significant estimates made include that of real estate acquisition valuation and the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at relative fair value, the evaluation of potential impairment of long-lived assets and equity method investments, and the estimated useful lives of real estate assets and intangibles. Cash and Cash Equivalents We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. As of December 31, 2022, we had cash accounts in excess of FDIC-insured limits. To date, the Company has not experienced losses or lack of access to cash in its cash and cash equivalent accounts. Restricted Cash Restricted cash represent restricted cash held by our lenders in interest bearing accounts related to impound reserve accounts for property taxes, insurance and capital funds as required under the terms of the loan agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statements of cash flows:
Investments in Real Estate and Depreciation We allocate the purchase price of our properties in accordance with ASC 805 – Business Combinations. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. For transactions that are business combinations, acquisition costs are expensed as incurred. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred. Upon an asset acquisition of a property, we allocate the purchase price of the property based upon the relative fair value of the tangible and intangible assets acquired and liabilities assumed, which generally consists of land, buildings, site improvements, furniture and fixtures and intangible assets. The determination of fair value involves the use of significant judgment and estimation. We value land based on various inputs, which may include internal analysis of recently acquired properties, existing comparable properties within our portfolio, or third party appraisals or valuations based on comparable sales. We allocate the purchase price to tangible assets of an acquired property by valuing the property as if it were vacant. We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is being charged to expense on a straight-line basis over the estimated useful lives. We depreciate the fair value allocated to building and improvements over estimated useful lives ranging from 15 to 39 years. We estimate the value of furniture and fixtures based on the assets’ depreciated replacement cost. We depreciate the fair value allocated to furniture and fixtures over estimated useful lives ranging from to six years. In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above/below-market leases and in-place leases are estimated as follows: The value of above/below market leases is based on the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The above/below market leases are amortized as an adjustment to rental revenue over the remaining term of the respective leases. The value of in-place leases consisting of tenant origination and absorption costs and leasing commissions avoided is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, discount rates, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases and included in depreciation and amortization in the consolidated statements of operations. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of their related intangible asset is recorded in the consolidated statements of operations. Assets held for sale are not depreciated. Impairment of Real Estate Properties We evaluate the recoverability of the carrying value of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including changes in the Company’s use of property or the strategy for its overall business, plans to sell a property before its depreciable life has ended, occupancy changes, significant near-term lease expirations, significant deteriorations of the underlying cash flows of the property, and other market factors indicate that the carrying amount of the property may not be recoverable. Impairment is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the years ended December 31, 2022 or 2021. Fair Value Measurements Fair value represents the estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820, Fair Value Measurement, establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from independent sources and unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability. Financial assets and liabilities are categorized based on the inputs to the valuation techniques as follows: Level 1. Quoted prices in active markets for identical instruments. Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument. We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or use appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. As of and for the year ended December 31, 2022, our equity method investments in the Fantasia JV and FPH JV were measured at fair value, on a nonrecurring basis using unobservable (level 3) inputs. We estimated the fair value of our equity-method investments based on discounted future cash flows. As a result, we recognized an impairment loss of $0.4 million (See Note 5). There were no assets or liabilities measured at fair value on a nonrecurring basis during the year ended December 31, 2022. Fair Value Measurement of Financial Instruments Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment. As of December 31, 2022 and 2021, the fair value of our HUD-insured loans payable was $38.9 million and $52.5 million, compared to the principal balance (excluding debt discount) of $45.0 million and $46.1 million, respectively. The fair value of loans payable was estimated using lending rates available to us for financial instruments with similar terms and maturities. The fair value of our fixed and variable rate debt was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy. As of December 31, 2022 and 2021, we believe the carrying amounts of our variable rate debt are reasonably estimated at their notional amounts as there have been minimal changes to the fixed spread portion of interest rates for similar loans observed in the market, and as the variable portion of our interest rates fluctuate with the associated market indices. At December 31, 2022 and 2021, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements. Variable Interest Entities We analyze our contractual and/or other interests to determine whether such interests constitute an interest in a VIE in accordance with ASC 810, Consolidation, and, if so, whether we are the primary beneficiary. If we are determined to be the primary beneficiary of a VIE, we must consolidate the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We evaluated our wholly and partially-owned subsidiaries, CHP, LLC and equity method investments to determine if they are a VIE, and if such VIE should be consolidated. The Operating Partnership and CHP, LLC are consolidated as the Company is deemed the primary beneficiary. Our Operating Partnership’s equity investment in SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, and FPH JV met the definition and criteria of VIEs. However, as we do not have power to direct the activities that most significantly impact economic performance of these VIEs, they are accounted for under the equity method of accounting and are reflected as Equity-Method Investments. Tenant and Other Receivables Tenant and other receivables are comprised mainly of the cumulative amount of future adjustments necessary to present tenant rental income on a straight-line basis, accounts receivable due from residents for our Operated Properties, asset management fees and distributions receivable. Allowance for Credit Losses The allowance for credit losses is maintained on all receivables except for lease receivables and is maintained at a level believed adequate to absorb potential losses in our receivables. The determination of the credit allowance is based on a quarterly evaluation of each of these receivables, including general economic conditions and estimated collectability. We evaluate the collectability of our receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical charge-offs, and financial strength of the lessee or equity method investment. A receivable is considered to have deteriorated in credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due. As of December 31, 2022 and 2021, the allowance for credit losses is immaterial. Deferred Financing Costs Costs incurred with potential financing arrangements are recorded as deferred debt issuance costs. Costs incurred in connection with completed debt financing are recorded as debt issuance costs. Debt issuance costs are amortized using the straight-line basis which approximates the effective interest rate method, over the contractual terms of the respective financings, and are presented net of loans payable in loans payable, net of debt issuance costs, in the consolidated balance sheets. Deferred Leasing Commissions Leasing commissions (paid to CRA prior to April 1, 2014) were capitalized at cost and are being amortized on a straight-line basis over the related lease term. As of December 31, 2022 and 2021, total costs incurred were $1.0 million and $1.1 million, respectively, and the unamortized balance was approximately $0.4 million and $0.5 million, respectively. Amortization expense for each of the years ended December 31, 2022 and 2021 was approximately $79,000 and $70,000, respectively. Other Assets Other assets consist primarily of deferred financing costs, deposits, prepaid insurance, property taxes and other and corporate assets. Additionally, other assets will be amortized to expense over their future service periods. Balances without future economic benefit are expensed as they are identified. Equity-Method Investments We report our investments in unconsolidated entities, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the applicable entity’s earnings or losses is included in our consolidated statements of operations. We initially record our investments based on either the carrying value for properties contributed or the cash invested. We evaluate our Equity-Method Investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may exceed the fair value. If it is determined that a decline in the fair value of our investments is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors. For the year ended December 31, 2022, we recorded impairment of approximately $0.4 million related to our equity-method investments. We did not record any impairments related to our equity-method investments for the year ended December 31, 2021. Rental Revenue We recognize rental revenue based on FASB Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). This requires a lessor to classify leases as either sales-types, finance or operating leases. A lease will be treated as a sales-type lease if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. After evaluating our tenant leases, we have concluded that these are operating leases. Additionally, as lessors we elected to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. Additionally, where real estate taxes and insurance expenses were paid directly by our tenants to taxing authorities, we do not record any revenue or expense. For our triple-net leasing arrangements in which the tenant remits payment for certain costs to us and we pay the vendor, we have reported the amounts gross in total rental revenues and property operating costs on the consolidated statements of operations. We also made an accounting policy election to keep short-term leases less than twelve months off the balance sheet for all classes of underlying assets. Additionally, under Topic 842, we must assess if substantially all payments due under the lease are likely to be collected. If tenant lease payments are not likely to be collected, then the revenues will be recognized on a cash basis (or if the answer changes at a later date, the revenues are adjusted to reflect what it would have been on a cash basis) and the adjustments will be recorded through rental revenues, rather than bad debt expense. During 2022 and 2021, we determined that two of our leases were uncollectible (see Note 3) and therefore, we recorded rental revenue received from those tenants on the cash basis. Resident Fees and Services Revenue We recognize resident fees and services revenue at the amount that we expect to be entitled to in exchange for providing resident care and services. Resident fees are recognized and billed monthly based on the contracted rate in the resident lease agreements and the reimbursements from Medicaid are based on contracted reimbursement rates. These amounts are paid directly from the residents and/or third-party payors (currently only Medicaid). Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by us. The majority of resident fees and services is attributable to the portion of the base monthly lease fee in the resident lease agreement. The Company has elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognizes the resident fee revenue based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the lease component is the predominant component and the services included under the resident agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. Resident services consist of care level services and certain other ancillary services (i.e., housekeeping, laundry, etc.). These services are provided and paid for in addition to the standard fees included in each resident lease (i.e., room and board, standard meals, etc.). Asset Management Fees We record asset management fee revenue based on ASC 606, Revenue from Contracts with Customers (Topic 606). We earn our asset management fees based on a percentage of the purchase price or equity raised. As the manager, our duty is to manage the day-to-day operations of the special-purpose entities which own the properties. Asset management fees are recognized as a single performance obligation (managing the properties) comprised of a series of distinct services (handling issues with our tenants, etc.). We believe that the overall service of asset management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, billed monthly and paid quarterly. Stock-Based Compensation We record stock-based compensation expense for share-based payments to employees and directors, including grants of stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized ratably over the vesting term and is included in general and administrative expense in our consolidated statements of operations. Forfeitures are recognized as they occur. See Note 12 for further information. Noncontrolling Interest in Consolidated Subsidiary Noncontrolling interest relates to the interest in the consolidated entities that are not wholly-owned by us. As of December 31, 2022 and 2021, the noncontrolling interest mainly relates to CHP, LLC. ASC 810-10-65, Consolidation, clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810-10-65 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and requires disclosure, on the face of the consolidated statements of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made. Income Taxes We have elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with our taxable year ending December 31, 2006. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service were to grant us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate for the foreseeable future in such a manner so that we will remain qualified as a REIT for federal income tax purposes. Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2018 and subsequent years, and state income tax returns are subject to audit for the year ended December 31, 2017 and subsequent years. We have elected to treat SAM TRS and SHOP TRS as taxable REIT subsidiaries, which generally may engage in any business, including the provision of customary or non-customary services for our tenants. Both TRS’ are treated as a regular corporation and are subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. SAM TRS has deferred tax assets related to their net operating losses (“NOL”) for a total of $2,523,000 and $1,779,000, respectively, which has a full valuation allowance as of December 31, 2022 and 2021. SHOP TRS has deferred tax assets related to their NOL for a total of $862,000, which has a full valuation allowance as of December 31, 2022. Due to the losses incurred and the full valuation allowance on deferred tax assets, there was no tax provision related to SAM TRS or SHOP TRS in 2022 and 2021. Uncertain Tax Positions In accordance with the requirements of ASC 740, Income Taxes, favorable tax positions are included in the calculation of tax liabilities if it is more likely than not that our adopted tax position will prevail if challenged by tax authorities. As a result of our REIT status, we are able to claim a dividends-paid deduction on our tax return to deduct the full amount of common dividends paid to stockholders when computing our annual taxable income, which results in our taxable income being passed through to our stockholders. A REIT is subject to a 100% tax on the net income from prohibited transactions. A “prohibited transaction” is the sale or other disposition of property held primarily for sale to customers in the ordinary course of a trade or business. There is a safe harbor provision which, if met, expressly prevents the Internal Revenue Service from asserting the prohibited transaction test. We have no income tax expense, deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions for the operations of any entity included in the consolidated results of operations. We classify interest and penalties related to uncertain tax positions, if any, in our consolidated financial statements as a component of general and administrative expense. Basic and Diluted Net Income (Loss) and Distributions per Common Share Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares are calculated in accordance with the treasury stock method. For the years ended December 31, 2022 and 2021, all stock options outstanding were considered to be anti-dilutive. Reclassification of Intangible Lease Assets The following table provides a reconciliation for the reclassification of our intangible lease assets as of December 31, 2021 in our consolidated balance sheets to conform to the presentation as of December 31, 2022:
The intangible lease assets related to our acquisitions in 2021 were reclassified from real estate properties, net and other assets, net into a separate line item as of December 31, 2022. The result of this reclassification did not have any effect on our total assets, liabilities, accumulated deficit, net loss or statements of cash flows. |
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Investments in Real Estate Properties |
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| Investments in Real Estate Properties | 3. Investments in Real Estate Properties As of December 31, 2022 and 2021, investments in real estate properties including those held by our consolidated subsidiaries (excluding the 35 properties owned by our unconsolidated Equity-Method Investments) are set forth below:
Depreciation and amortization expense (excluding intangible lease amortization and leasing commission amortization) for the years ended December 31, 2022 and 2021 was approximately $6.3 million and $1.8 million, respectively. As of December 31, 2022, our portfolio consisted of 18 real estate properties, 16 of which were 100% leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (see below under Pennington Gardens Operations LLC and Sundial Operations LLC) During 2022 and 2021, our tenants for the Pennington Gardens and Sundial Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues, that affected their ability to make their rent payments in 2022 and 2021. As a result, we experienced the following impacts: Pennington Gardens Operations LLC In March 2021, under a receivership, we began recording rent payments on a cash basis for our Pennington Gardens facility and wrote off the remaining straight-line rent receivable of $0.4 million. In October 2021 , we reached an agreement with the tenant to terminate the lease. We notified the lender and the U.S. Department of Housing and Urban Development (“HUD”) and requested emergency approval to change the operator and terminate the lease. In November 2022, the operator change was approved by HUD. On February 3, 2022, the current receiver, who was acting as the operator, received the license to be the licensed operator. As such, on February 10, 2022, the tenant’s lease was terminated, and we received $0.2 million from the tenant as part of the settlement agreement and lease termination which is recorded in total rental revenues in the consolidated statements of operations for the year ended December 31, 2022. Concurrently, we entered into a new lease agreement with Pennington Gardens Operations LLC, the newly formed operating company for Pennington Gardens, which is a wholly owned subsidiary of SHOP TRS. As such, the operations of Pennington Gardens are consolidated in our financial statements beginning February 11, 2022, and all intercompany transactions have been eliminated. For the period from February 11, 2022 through December 31, 2022, revenues from Pennington Gardens Operations are recorded under resident fees and services and costs are recorded under resident costs in the consolidated statements of operations. Sundial Operations LLC In October 2021, we reached an agreement with the tenant of our Sundial Assisted Living facility in Redding, California to terminate the lease, and we requested approval from HUD to terminate the lease and install a new licensed operator/manager. Beginning in June 2021, we recorded rent payments on a cash basis and in May 2021, wrote off the remaining straight-line rent receivable of $0.1 million. On June 6, 2022, the new operator received approval to be the licensed operator of the facility and the previous tenant’s lease was terminated. We received $0.2 million from the tenant as part of the settlement agreement and lease termination, which is recorded in total rental revenues in the consolidated statements of operations for the year ended December 31, 2022. On June 7, 2022, we entered into a new lease agreement with Sundial Operations LLC, the newly formed operating company for Sundial Assisted Living, which is a wholly owned subsidiary of SHOP TRS. As such, the operations of Sundial Assisted Living are consolidated in our financial statements as of June 7, 2022. For the period from June 7, 2022 through December 31, 2022, revenues from Sundial Operations are recorded under resident fees and services and costs are recorded under resident costs in the consolidated statements of operations. The following table provides summary information regarding our portfolio (excluding the 35 properties owned by our unconsolidated Equity-Method Investments and the $12.75 million loan from Oxford (see Note 4) with Summit Georgia Holdings LLC, our wholly-owned subsidiary) as of December 31, 2022:
AL is an abbreviation for assisted living facility. MC is an abbreviation for memory care facility. Future Minimum Lease Payments The future minimum lease payments to be received under existing operating leases (not including intercompany leases) for our consolidated properties as of December 31, 2022 are as follows:
2022 Acquisitions None. 2021 Acquisitions CA3 Properties On July 2, 2021, through our wholly-owned subsidiary, we acquired three skilled nursing facilities, two located in Yucaipa, California and one located in Mentone, California (collectively, the “CA3 Properties”), for the purchase price of $20,055,000, which was funded through cash on hand plus the proceeds from the loan described in Note 4. We incurred approximately $80,000 in acquisition costs in connection with these acquisitions. The CA3 Properties are leased to three tenants under three separate 15-year triple net leases, each of which two five-year renewal options. GA8 Properties On December 30, 2021, through our wholly-owned subsidiary, we acquired eight skilled nursing facilities located in Georgia (collectively, the “GA8 Properties”), for the total purchase price of $130,000,000, which was funded through cash on hand plus the proceeds from the loans described in Note 4. The GA8 Properties are leased to eight tenants under eight separate 15-year triple net leases, each of which two five-year renewal options. |
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| Loans Payable | 4. Loans Payable As of December 31, 2022 and 2021, loans payable consisted of the following
As of December 31, 2022, we have total debt obligations of approximately $183.8 million that will mature between 2024 and 2055. See Note 3 for loans payable balance for each property. All of the loans payable have certain financial and non-financial covenants, including ratios and financial statement considerations. As of December 31, 2022, we were in compliance with all of our debt covenants. During the years ended December 31, 2022 and 2021, we incurred approximately $12.0 million and $2.4 million of interest expense, respectively (excluding debt issuance costs amortization and interest expense related to the Oxford mezzanine loan as noted below (“Oxford Monthly Fee”)), related to our loans payable. During the years ended December 31, 2022 and 2021, we incurred approximately $0.6 million and $0 million of interest expense, respectively, related to the Oxford Monthly Fee, which is included in interest expense in our consolidated statements of operations. In connection with our loans payable, we incurred debt issuance costs. As of December 31, 2022 and 2021, the unamortized balance of the debt issuance costs was approximately $3.6 million and $4.5 million, respectively. These debt issuance costs are being amortized over the life of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For the years ended December 31, 2022 and 2021, approximately $0.9 million and $0.1 million, respectively, of debt issuance costs were amortized and included in interest expense in our consolidated statements of operations. The principal payments due on the loans payable (excluding debt issuance costs and cash collateral funds) for each of the five following years and thereafter ending December 31 are as follows:
The following information notes our loan activity: CA3 Properties On July 2, 2021, in conjunction with the acquisition of the CA3 Properties (see Note 3), we entered into a first priority $15.0 million mortgage loan collateralized by the CA3 Properties with CIBC Bank, USA (“CIBC”). The loan bears interest at the One Month London Interbank Offer Rate (“LIBOR”) (with a floor of 1%) plus 4.00%, or the Secured Overnight Financing Rate (“SOFR”) when LIBOR is discontinued, and matures on July 2, 2024. The loan is interest only for the first year and thereafter requires additional monthly installments of principal that are held by the lender in a cash loan guarantee fund until maturity. The loan may be prepaid at any time with no penalty if the CA3 Properties are refinanced through HUD, otherwise we would be required to pay a prepayment premium equal to three percent (3%), two percent (2%) and one percent (1%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively. In the event the Company sells or transfers one or more properties, we would be required to pay an exit fee equal to (i) one-half of one percent (0.5%) of the amount of the outstanding principal balance of the Loan if such sale or transfer occurs on or prior to the second (2nd) year anniversary of the Closing Date; and (ii) zero percent (0%) if such sale or transfer occurs after the second (2nd) year anniversary of the Closing Date. GA8 Properties We acquired our interest in the GA8 Properties subject to a $91 million first priority mortgage loan collateralized by those properties, a $20 million subordinated term loan collateralized by those properties and a $12.75 million mezzanine loan secured by the equity interests of the wholly-owned subsidiary, Summit Georgia Holdings LLC, the parent holding company for the GA8 Properties. On December 30, 2021, we entered into a loan agreement with CIBC for $91.0 million in principal amount. The loan bears interest at the SOFR plus 3.50% with a SOFR floor of 50 basis points, or the bank’s base rate plus 0.75% (with a minimum of 4.0%), and matures on December 30, 2024. The loan is interest-only for two years and then requires additional monthly installments of principal that are held by the lender in a cash loan guarantee fund until maturity. The loan may be prepaid at any time with no penalty if the GA8 Properties are refinanced through HUD, otherwise we would be required to pay an a prepayment premium equal to three percent (3%), two percent (2%) and one percent (1%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively. In the event the Company sells or transfers one or more properties, we would be required to pay an exit fee equal to (i) one-half of one percent (0.5%) of the amount of the outstanding principal balance of the Loan if such sale or transfer occurs on or prior to the second (2nd) year anniversary of the Closing Date; and (ii) zero percent (0%) if such sale or transfer occurs after the second (2nd) year anniversary of the Closing Date. On December 30, 2021, we entered into a subordinated term loan agreement with Oxford for $20.0 million in principal amount. The loan bears interest at LIBOR plus 11.0% with a LIBOR floor of 100 basis points (or with a LIBOR replacement rate), and matures on March 31, 2025. The loan is interest only. The entire loan may be prepaid at any time and would be subject at that time to a prepayment premium fee equal to five percent (5%), two percent (2%) and one percent (1%) of the amount repaid if the repayment is made or the loan is accelerated prior to first (1st), second (2nd) and third (3rd) year anniversary of the closing date, respectively, or no prepayment fee if the GA8 Properties are refinanced through HUD. Additionally, we are required to pay an exit fee of $100,000 if the loan is paid off by December 31, 2024, or $140,000 if the loan is paid off after that date. On December 30, 2021, we entered into a mezzanine loan agreement with Oxford for $12.75 million in principal amount. The loan bears interest at LIBOR plus 11.0% with a LIBOR floor of 100 basis points (or with a LIBOR replacement rate), and matures on December 30, 2026. The loan is interest-only and requires a monthly fee in the amount of (i) twenty-two percent (22%) of net cash flow attributable to each month or portion thereof during the loan term, and (ii) five percent (5%) of net cash flow attributable to each month or portion thereof during the post-repayment period which is the earlier of (i) the second anniversary of the loan repayment date and (ii) the date upon which Summit no longer owns any direct or indirect interest in any of the properties and all accrued monthly fees, all excess cash fees and all other liabilities then due agent or lenders are indefeasibly paid in full. The entire Oxford mezzanine loan may be prepaid at any time prior to the three-year anniversary and would be subject at that time to a yield maintenance premium fee equal to the interest that would have been paid for the full three years, which will be due and payable upon the earliest of the maturity or acceleration of the loan, or payment of the loan in full. HUD-insured loans We have six properties with HUD-insured loans from Lument Capital (formerly ORIX Real Estate Capital, LLC) and one property with a HUD-insured loan from Capital One Multifamily Finance, LLC. See table above listing loans payable for further information. All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our consolidated balance sheets. |
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| Equity-Method Investments | 5. Equity-Method Investments As of December 31, 2022 and 2021, the balances of our Equity-Method Investments were approximately $5.2 million and $7.9 million, respectively, and are as follows: Summit Union Life Holdings, LLC The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”). Under the SUL LLC Agreement, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Years pari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing or another capital event will be paid first to the Operating Partnership and Best Years pari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%. For the year ended December 31, 2022, we invested approximately $821,000 related to capital calls for the SUL JV. During 2022, the SUL JV entered into agreements with brokers to market three properties for sale, however, no agreements for such sales have been executed and due to the provisions under the HUD-insured loans payable, none of the properties are considered held for sale as of December 31, 2022. In 2022, the SUL JV recorded an aggregate impairment charge of approximately $6.8 million on several of the properties in the SUL JV and we recorded our 10% share of the impairment of approximately $0.7 million in loss from equity-method investees in the consolidated statements of operations. As of December 31, 2022 and 2021, the balance of our equity-method investment related to the SUL JV was approximately $2.4 million and $2.9 million, respectively. Summit Fantasia Holdings, LLC The Fantasia JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia LLC Agreement”). Under the Fantasia LLC Agreement, as amended in April 2018, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 50% to Fantasia and 50% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 50% to Fantasia and 50% to the Operating Partnership. For the year ended December 31, 2022, we invested approximately $290,000 related to capital calls for the Fantasia JV. In 2022, the Fantasia JV recorded an impairment charge of approximately $6.4 million on one of the properties in the Fantasia JV and we recorded our 35% share of the impairment of approximately $2.2 million in loss from equity-method investees in the consolidated statements of operations. Additionally, we determined the fair value of our investment in the Fantasia JV to be impaired and recorded an aggregate impairment of $0.2 million and wrote off distributions receivable of approximately $0.2 million in 2022, which is recorded in the loss from equity-method investees in the consolidated statements of operations for the year ended December 31, 2022, and consequently, reduced our equity-method investment balance to $0. In August 2022, the Fantasia JV agreed to sell its remaining property, Sun Oak Assisted Living; therefore the property is considered as held for sale in the Fantasia JV as of December 31, 2022. As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia JV was approximately $0 and $2.0 million. Summit Fantasia Holdings II, LLC The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”). Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70% to Fantasia and 30% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia II JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership. As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.2 million and $1.3 million, respectively. Summit Fantasia Holdings III, LLC The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”). Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership. As of December 31, 2022 and 2021, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.6 million and $1.5 million, respectively. Summit Fantasy Pearl Holdings, LLC The FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”). Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the members pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership. In December 2022, Summit recorded an impairment of approximately $0.2 million in the FPH JV due to issues related to tenant operations, which is recorded in the loss from equity-method investees in the consolidated statements of operations for the year ended December 31, 2022, and consequently, reduced our equity-method investment balance to $0. As of December 31, 2022 and 2021, the balance of our equity-method investment related to the FPH JV was approximately $0 and $0.2 million, respectively. Indiana JV In June 2021, we sold our 15% interest in the Indiana JV for approximately $5.4 million in cash. For the year ended December 31, 2021, we recorded approximately $3.5 million in gain on the sale from this equity-method investment which is included in our consolidated statements of operations under gain on sale of equity-method investment. As of December 31, 2022 and 2021, we have a 0% interest in the Indiana JV. Summarized Financial Data for Equity-Method Investments Our Equity-Method Investments are significant equity-method investments in the aggregate. The results of operations of our Equity-Method Investments for the year ended December 31, 2022 are summarized below:
The results of operations of our Equity-Method Investments for the year ending December 31, 2021 are summarized below:
Distributions from Equity-Method Investments As of December 31, 2022 and 2021, we have distributions receivable, which is included in tenant and other receivables in our consolidated balance sheets, as follows:
For the years ended December 31, 2022 and 2021, we received cash distributions, which are included in our cash flows from operating activities in the change in tenant and other receivables, and cash flows from investing activities, using the cumulative earnings approach, as follows:
Asset Management Fees We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in the agreements. For the years ended December 31, 2022 and 2021, we recorded approximately $0.7 million and $1.0 million, respectively, in asset management fees from our Equity-Method Investments. |
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| Receivables | 6. Receivables Tenant and Other Receivables, net Tenant and other receivables, net consists of:
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| Related Party Transactions | 7. Related Party Transactions Equity-Method Investments See Notes 5 and 6 for further discussion of distributions and asset management fees related to our Equity-Method Investments. |
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| Intangible Lease Assets | 8. Intangible Lease Assets Intangible lease assets as of December 31, 2022 and 2021 are as follows:
For the year ended ended December 31, 2022 and 2021, amortization expense for intangible lease assets was approximately $1.0 million and $50,000, respectively, of which approximately $64,000 and $32,000, respectively, relates to the amortization of above-market leases which is included within rental revenues in the accompanying consolidated statements of operations. Expected future amortization of the intangible lease assets as of December 31, 2022 and for each of the five following years and thereafter ending December 31 are as follows:
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Right of Use Asset - Operating Lease |
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| Right of Use Asset - Operating Lease | 9. Right of Use Asset – Operating Lease On April 1, 2022, we entered into a temporary space license agreement (“Temporary License”) and a standard office lease (“New Lease”) with Lakehills CM-CG LLC (collectively, the “LH Lease”). The Temporary License, for space located in Laguna Hills, California, began on April 22, 2022 and expired on November 15, 2022. We were entitled to use such office space at no cost during the term of the Temporary License. Concurrent with the execution of the Temporary License, we entered into the New Lease, as amended, which began on November 16, 2022 for a period of and one half (66 ½) months, with a five-year renewal option. The office space subject to the New Lease is also located in Laguna Hills, California. The New Lease provides for the abatement of the base rent for the second full calendar month (January 2023) through the seventh full calendar month of the lease term (June 2023). The initial annual base rent is $204,399 and increases three percent (3%) each year on the anniversary date of the commencement of the New Lease. The LH Lease is classified as an operating lease. A right of use (“ROU”) asset represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The LH Lease did not provide an explicit rate of interest; therefore we used an estimated incremental borrowing rate of 5% based on a fully collateralized and fully amortizing loan with a maturity date of the same length as the lease that is based on information available at the commencement date in determining the present value of lease payments. At inception, we recorded an ROU asset and lease liability of approximately $0.9 million. As a result, the Company had activity of $0.9 million for the ROU asset obtained in exchange for new operating lease . The LH Lease does not contain material residual value guarantees or material restrictive covenants. Supplemental balance sheet information related to the LH Lease as of December 31, 2022 is as follows:
Lease expense is presented as part of continuing operations within general and administrative expenses in the consolidated statements of operations. For the year ended December 31, 2022, we recognized approximately $87,000 in lease expense related to this lease. The lease payments are classified within operating activities in the consolidated statements of cash flows. As of December 31, 2022, we paid approximately $26,000 in lease payments and the weighted average remaining lease term is 5.3 years. Pursuant to ASC 842, lease payments on the LH Lease for each of the four following years and thereafter ending December 31 are as follows:
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Concentration of Risk |
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| Concentration of Risk | 10. Concentration of Risk As of December 31, 2022, we owned eight properties in Georgia, four properties in California, three properties in Oregon, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 35 properties held by our Equity-Method Investments). Accordingly, there is a geographic concentration of risk subject to economic conditions in certain states. Additionally, as of December 31, 2022, we leased our 16 real estate properties to 14 different tenants under long-term triple net leases. For the year ended December 31, 2022, three of the 14 tenants each had rental revenue greater than 10% (16%, 14%, and 10%). As of December 31, 2021, we leased our 18 real estate properties to 16 different tenants under long-term triple net leases. For the year ended December 31, 2021, three of the sixteen tenants each had rental revenue greater than 10% (38%, 26%, and 16%). As of December 31, 2022, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than 20% of our total assets due to cross-default provisions in the leases. |
Commitments and Contingencies |
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| Commitments and Contingencies | 11. Commitments and Contingencies We inspect our properties under a Phase I assessment for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency. Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company. Legal Proceedings In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. The Bankruptcy Court granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay. The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay. This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court. The Bankruptcy Court held a status conference on February 4, 2021, and subsequently entered scheduling orders to govern discovery and pretrial matters, and discovery is ongoing. The parties have filed dispositive motions, including a motion filed by the Company and the petitioning creditors for judgment on the pleadings. On February 4, 2022, the Bankruptcy Court entered an order denying the motion for judgment on the pleadings on the basis that the Bankruptcy Court would consider the points raised therein after trial. The Bankruptcy Court also entered an order denying HCRE’s motion to dismiss certain counterclaims and severing certain other counterclaims asserted by the petitioning creditors and the Company against HCRE on jurisdictional grounds, with the effect that such counterclaims may be pursued in the United States District Court. Trial in the Bankruptcy Court was conducted on January 9 and 10, 2023, with final concluding arguments presented on January 19, 2023. At the conclusion of the trial, the Bankruptcy Court took the matter under advisement and has not yet issued a decision. Based on the assessment by management, the Company believes that a loss is currently not probable or estimable under ASC 450, “Contingencies”, and as of December 31, 2022 and 2021 no accrual has been made with regard to the claim. Indemnification and Employment Agreements We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, effective October 19, 2021, we entered into new employment agreements with our executive officers for a term of three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements. Management of our Equity-Method Investments As the manager of our Equity-Method Investments, we are responsible for managing the day-to-day operations. Additionally, we could be subject to a capital call from our Equity-Method Investments. |
Equity |
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| Equity | 12. Equity Distributions The Company declared no cash distributions per common share during the years ended December 31, 2022 and 2021. Our distribution reinvestment plan was suspended indefinitely effective December 31, 2010. At this time, we cannot provide any assurance as to if or when we will resume our distribution reinvestment plan. Share-Based Compensation Plans Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the book value of our liabilities, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a lack of a control premium, and divided the total by the number of our common shares outstanding at the time the options were granted. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on the simplified method as we do not have sufficient historical exercise data. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant using the expected life of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option. Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan On October 28, 2015, we adopted the Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”). The purpose of the Incentive Plan is to provide a means through which to attract and retain key personnel and to provide a means whereby current or prospective directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders. We may grant non-qualified stock options and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, and performance based compensation awards. Stock options granted under the Incentive Plan are required to have a per share exercise price that is not less than 100% of the fair market value of our common stock underlying such stock options on the date an option is granted (other than in the case of options that are substitute awards). All stock options that are intended to qualify as incentive stock options must be granted pursuant to an award agreement expressly stating that the option is intended to qualify as an incentive stock option, and will be subject to the terms and conditions that comply with the rules as may be prescribed by Section 422 of the Code. The maximum term for stock options granted under the Incentive Plan will be ten years from the initial date of grant. The Incentive Plan provides that the total number of shares of common stock that may be issued is 3,000,000, of which 1,051,092 is available for future issuances as of December 31, 2022. On April 1, 2022, we granted 81,000 stock options to our non-executive employees under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”). The stock options vest monthly beginning on May 1, 2022 and continuing over a three-year period through April 1, 2025. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.91. The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:
In December 2022, the Compensation Committee of the Board of Directors approved the issuance of 80,000 stock options under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”) to be issued to our non-executive employees in 2023. The following table summarizes our stock options as of December 31, 2022:
For our outstanding non-vested options as of December 31, 2022, the weighted average grant date fair value per share was $0.90. As of December 31, 2022, we have unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized as follows:
The stock-based compensation expense reported for the years ended December 31, 2022 and 2021 was approximately $31,000 and $66,000, respectively, and is included in general and administrative expense in the consolidated statements of operations. |
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Segment Reporting |
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Dec. 31, 2022 | |
| Segment Reporting | |
| Segment Reporting | 13. Segment Reporting ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of December 31, 2022 and 2021, we operate in one reportable segment: healthcare real estate and although our portfolio is located throughout the United States, we do not distinguish or group our operations on a geographical basis for purposes of allocating resources or measuring performance. We are managed as one segment, rather than multiple segments for internal purposes and for internal decision making. |
Subsequent Events |
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Dec. 31, 2022 | |
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| Subsequent Events | 14. Subsequent Events None. |
Summary of Significant Accounting Policies (Policies) |
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| Principles of Consolidation and Basis of Presentation | Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership, and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. The Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification (“ASC”) 810, Consolidation, which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. Before concluding that it is appropriate to apply the voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity. We evaluate, as appropriate, our interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate. |
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| Use of Estimates | Use of Estimates The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. The most significant estimates made include that of real estate acquisition valuation and the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at relative fair value, the evaluation of potential impairment of long-lived assets and equity method investments, and the estimated useful lives of real estate assets and intangibles. |
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| Cash and Cash Equivalents | Cash and Cash Equivalents We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. As of December 31, 2022, we had cash accounts in excess of FDIC-insured limits. To date, the Company has not experienced losses or lack of access to cash in its cash and cash equivalent accounts. |
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| Restricted Cash | Restricted Cash Restricted cash represent restricted cash held by our lenders in interest bearing accounts related to impound reserve accounts for property taxes, insurance and capital funds as required under the terms of the loan agreements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statements of cash flows:
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| Investments in Real Estate and Depreciation | Investments in Real Estate and Depreciation We allocate the purchase price of our properties in accordance with ASC 805 – Business Combinations. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. For transactions that are business combinations, acquisition costs are expensed as incurred. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred. Upon an asset acquisition of a property, we allocate the purchase price of the property based upon the relative fair value of the tangible and intangible assets acquired and liabilities assumed, which generally consists of land, buildings, site improvements, furniture and fixtures and intangible assets. The determination of fair value involves the use of significant judgment and estimation. We value land based on various inputs, which may include internal analysis of recently acquired properties, existing comparable properties within our portfolio, or third party appraisals or valuations based on comparable sales. We allocate the purchase price to tangible assets of an acquired property by valuing the property as if it were vacant. We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is being charged to expense on a straight-line basis over the estimated useful lives. We depreciate the fair value allocated to building and improvements over estimated useful lives ranging from 15 to 39 years. We estimate the value of furniture and fixtures based on the assets’ depreciated replacement cost. We depreciate the fair value allocated to furniture and fixtures over estimated useful lives ranging from to six years. In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above/below-market leases and in-place leases are estimated as follows: The value of above/below market leases is based on the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The above/below market leases are amortized as an adjustment to rental revenue over the remaining term of the respective leases. The value of in-place leases consisting of tenant origination and absorption costs and leasing commissions avoided is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, discount rates, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases and included in depreciation and amortization in the consolidated statements of operations. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of their related intangible asset is recorded in the consolidated statements of operations. Assets held for sale are not depreciated. |
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| Impairment of Real Estate Properties | Impairment of Real Estate Properties We evaluate the recoverability of the carrying value of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including changes in the Company’s use of property or the strategy for its overall business, plans to sell a property before its depreciable life has ended, occupancy changes, significant near-term lease expirations, significant deteriorations of the underlying cash flows of the property, and other market factors indicate that the carrying amount of the property may not be recoverable. Impairment is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the years ended December 31, 2022 or 2021. |
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| Fair Value Measurements | Fair Value Measurements Fair value represents the estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820, Fair Value Measurement, establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from independent sources and unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability. Financial assets and liabilities are categorized based on the inputs to the valuation techniques as follows: Level 1. Quoted prices in active markets for identical instruments. Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument. We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or use appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. As of and for the year ended December 31, 2022, our equity method investments in the Fantasia JV and FPH JV were measured at fair value, on a nonrecurring basis using unobservable (level 3) inputs. We estimated the fair value of our equity-method investments based on discounted future cash flows. As a result, we recognized an impairment loss of $0.4 million (See Note 5). There were no assets or liabilities measured at fair value on a nonrecurring basis during the year ended December 31, 2022. |
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| Fair Value Measurement Of Financial Instruments | Fair Value Measurement of Financial Instruments Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment. As of December 31, 2022 and 2021, the fair value of our HUD-insured loans payable was $38.9 million and $52.5 million, compared to the principal balance (excluding debt discount) of $45.0 million and $46.1 million, respectively. The fair value of loans payable was estimated using lending rates available to us for financial instruments with similar terms and maturities. The fair value of our fixed and variable rate debt was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy. As of December 31, 2022 and 2021, we believe the carrying amounts of our variable rate debt are reasonably estimated at their notional amounts as there have been minimal changes to the fixed spread portion of interest rates for similar loans observed in the market, and as the variable portion of our interest rates fluctuate with the associated market indices. At December 31, 2022 and 2021, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements. |
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| Variable Interest Entities | Variable Interest Entities We analyze our contractual and/or other interests to determine whether such interests constitute an interest in a VIE in accordance with ASC 810, Consolidation, and, if so, whether we are the primary beneficiary. If we are determined to be the primary beneficiary of a VIE, we must consolidate the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We evaluated our wholly and partially-owned subsidiaries, CHP, LLC and equity method investments to determine if they are a VIE, and if such VIE should be consolidated. The Operating Partnership and CHP, LLC are consolidated as the Company is deemed the primary beneficiary. Our Operating Partnership’s equity investment in SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, and FPH JV met the definition and criteria of VIEs. However, as we do not have power to direct the activities that most significantly impact economic performance of these VIEs, they are accounted for under the equity method of accounting and are reflected as Equity-Method Investments. |
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| Tenant and Other Receivables | Tenant and Other Receivables Tenant and other receivables are comprised mainly of the cumulative amount of future adjustments necessary to present tenant rental income on a straight-line basis, accounts receivable due from residents for our Operated Properties, asset management fees and distributions receivable. |
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| Allowance for Credit Losses | Allowance for Credit Losses The allowance for credit losses is maintained on all receivables except for lease receivables and is maintained at a level believed adequate to absorb potential losses in our receivables. The determination of the credit allowance is based on a quarterly evaluation of each of these receivables, including general economic conditions and estimated collectability. We evaluate the collectability of our receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical charge-offs, and financial strength of the lessee or equity method investment. A receivable is considered to have deteriorated in credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due. As of December 31, 2022 and 2021, the allowance for credit losses is immaterial. |
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| Deferred Financing Costs | Deferred Financing Costs Costs incurred with potential financing arrangements are recorded as deferred debt issuance costs. Costs incurred in connection with completed debt financing are recorded as debt issuance costs. Debt issuance costs are amortized using the straight-line basis which approximates the effective interest rate method, over the contractual terms of the respective financings, and are presented net of loans payable in loans payable, net of debt issuance costs, in the consolidated balance sheets. |
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| Deferred Leasing Commissions | Deferred Leasing Commissions Leasing commissions (paid to CRA prior to April 1, 2014) were capitalized at cost and are being amortized on a straight-line basis over the related lease term. As of December 31, 2022 and 2021, total costs incurred were $1.0 million and $1.1 million, respectively, and the unamortized balance was approximately $0.4 million and $0.5 million, respectively. Amortization expense for each of the years ended December 31, 2022 and 2021 was approximately $79,000 and $70,000, respectively. |
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| Other Assets | Other Assets Other assets consist primarily of deferred financing costs, deposits, prepaid insurance, property taxes and other and corporate assets. Additionally, other assets will be amortized to expense over their future service periods. Balances without future economic benefit are expensed as they are identified. |
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| Equity-Method Investments | Equity-Method Investments We report our investments in unconsolidated entities, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the applicable entity’s earnings or losses is included in our consolidated statements of operations. We initially record our investments based on either the carrying value for properties contributed or the cash invested. We evaluate our Equity-Method Investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may exceed the fair value. If it is determined that a decline in the fair value of our investments is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors. For the year ended December 31, 2022, we recorded impairment of approximately $0.4 million related to our equity-method investments. We did not record any impairments related to our equity-method investments for the year ended December 31, 2021. |
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| Rental Revenue | Rental Revenue We recognize rental revenue based on FASB Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). This requires a lessor to classify leases as either sales-types, finance or operating leases. A lease will be treated as a sales-type lease if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. After evaluating our tenant leases, we have concluded that these are operating leases. Additionally, as lessors we elected to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. Additionally, where real estate taxes and insurance expenses were paid directly by our tenants to taxing authorities, we do not record any revenue or expense. For our triple-net leasing arrangements in which the tenant remits payment for certain costs to us and we pay the vendor, we have reported the amounts gross in total rental revenues and property operating costs on the consolidated statements of operations. We also made an accounting policy election to keep short-term leases less than twelve months off the balance sheet for all classes of underlying assets. Additionally, under Topic 842, we must assess if substantially all payments due under the lease are likely to be collected. If tenant lease payments are not likely to be collected, then the revenues will be recognized on a cash basis (or if the answer changes at a later date, the revenues are adjusted to reflect what it would have been on a cash basis) and the adjustments will be recorded through rental revenues, rather than bad debt expense. During 2022 and 2021, we determined that two of our leases were uncollectible (see Note 3) and therefore, we recorded rental revenue received from those tenants on the cash basis. |
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| Resident Fees and Services Revenue | Resident Fees and Services Revenue We recognize resident fees and services revenue at the amount that we expect to be entitled to in exchange for providing resident care and services. Resident fees are recognized and billed monthly based on the contracted rate in the resident lease agreements and the reimbursements from Medicaid are based on contracted reimbursement rates. These amounts are paid directly from the residents and/or third-party payors (currently only Medicaid). Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by us. The majority of resident fees and services is attributable to the portion of the base monthly lease fee in the resident lease agreement. The Company has elected the lessor practical expedient within ASC 842, Leases (“ASC 842”) and recognizes the resident fee revenue based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the lease component is the predominant component and the services included under the resident agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. Resident services consist of care level services and certain other ancillary services (i.e., housekeeping, laundry, etc.). These services are provided and paid for in addition to the standard fees included in each resident lease (i.e., room and board, standard meals, etc.). |
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| Asset Management Fees | Asset Management Fees We record asset management fee revenue based on ASC 606, Revenue from Contracts with Customers (Topic 606). We earn our asset management fees based on a percentage of the purchase price or equity raised. As the manager, our duty is to manage the day-to-day operations of the special-purpose entities which own the properties. Asset management fees are recognized as a single performance obligation (managing the properties) comprised of a series of distinct services (handling issues with our tenants, etc.). We believe that the overall service of asset management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, billed monthly and paid quarterly. |
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| Stock-Based Compensation | Stock-Based Compensation We record stock-based compensation expense for share-based payments to employees and directors, including grants of stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized ratably over the vesting term and is included in general and administrative expense in our consolidated statements of operations. Forfeitures are recognized as they occur. See Note 12 for further information. |
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| Noncontrolling Interest in Consolidated Subsidiary | Noncontrolling Interest in Consolidated Subsidiary Noncontrolling interest relates to the interest in the consolidated entities that are not wholly-owned by us. As of December 31, 2022 and 2021, the noncontrolling interest mainly relates to CHP, LLC. ASC 810-10-65, Consolidation, clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810-10-65 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and requires disclosure, on the face of the consolidated statements of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made. |
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| Income Taxes | Income Taxes We have elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with our taxable year ending December 31, 2006. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service were to grant us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate for the foreseeable future in such a manner so that we will remain qualified as a REIT for federal income tax purposes. Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2018 and subsequent years, and state income tax returns are subject to audit for the year ended December 31, 2017 and subsequent years. We have elected to treat SAM TRS and SHOP TRS as taxable REIT subsidiaries, which generally may engage in any business, including the provision of customary or non-customary services for our tenants. Both TRS’ are treated as a regular corporation and are subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. SAM TRS has deferred tax assets related to their net operating losses (“NOL”) for a total of $2,523,000 and $1,779,000, respectively, which has a full valuation allowance as of December 31, 2022 and 2021. SHOP TRS has deferred tax assets related to their NOL for a total of $862,000, which has a full valuation allowance as of December 31, 2022. Due to the losses incurred and the full valuation allowance on deferred tax assets, there was no tax provision related to SAM TRS or SHOP TRS in 2022 and 2021. |
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| Uncertain Tax Positions | Uncertain Tax Positions In accordance with the requirements of ASC 740, Income Taxes, favorable tax positions are included in the calculation of tax liabilities if it is more likely than not that our adopted tax position will prevail if challenged by tax authorities. As a result of our REIT status, we are able to claim a dividends-paid deduction on our tax return to deduct the full amount of common dividends paid to stockholders when computing our annual taxable income, which results in our taxable income being passed through to our stockholders. A REIT is subject to a 100% tax on the net income from prohibited transactions. A “prohibited transaction” is the sale or other disposition of property held primarily for sale to customers in the ordinary course of a trade or business. There is a safe harbor provision which, if met, expressly prevents the Internal Revenue Service from asserting the prohibited transaction test. We have no income tax expense, deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions for the operations of any entity included in the consolidated results of operations. We classify interest and penalties related to uncertain tax positions, if any, in our consolidated financial statements as a component of general and administrative expense. |
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| Basic and Diluted Net Income (Loss) and Distributions per Common Share | Basic and Diluted Net Income (Loss) and Distributions per Common Share Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares are calculated in accordance with the treasury stock method. For the years ended December 31, 2022 and 2021, all stock options outstanding were considered to be anti-dilutive. |
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| Reclassification of Intangible Lease Assets | Reclassification of Intangible Lease Assets The following table provides a reconciliation for the reclassification of our intangible lease assets as of December 31, 2021 in our consolidated balance sheets to conform to the presentation as of December 31, 2022:
The intangible lease assets related to our acquisitions in 2021 were reclassified from real estate properties, net and other assets, net into a separate line item as of December 31, 2022. The result of this reclassification did not have any effect on our total assets, liabilities, accumulated deficit, net loss or statements of cash flows. |
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Summary of Significant Accounting Policies (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of reconciliation of cash, cash equivalents, and restricted cash |
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| Schedule of reconciliation for reclassification of intangible lease assets |
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Investments in Real Estate Properties (Tables) |
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| Investments in Real Estate Properties | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of investments in real estate properties |
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| Schedule of real estate properties |
AL is an abbreviation for assisted living facility. MC is an abbreviation for memory care facility. |
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| Schedule of future minimum lease payments |
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Loans Payable (Tables) |
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| Loans Payable | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of debt |
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| Schedule of maturities of long-term debt |
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Equity-Method Investments (Tables) |
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| Equity-Method Investments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of results of operations | The results of operations of our Equity-Method Investments for the year ended December 31, 2022 are summarized below:
The results of operations of our Equity-Method Investments for the year ending December 31, 2021 are summarized below:
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| Schedule of distributions receivable |
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| Schedule of cash distributions |
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Receivables (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Receivables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of tenant and other receivables |
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Intangible Lease Assets (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Lease Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of intangible lease assets |
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| Schedule of expected future amortization of the intangible lease assets |
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Right of Use Asset - Operating Lease (Tables) |
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| Right of Use Asset - Operating Lease | |||||||||||||||||||||||||||||||||||||||||||||
| Schedule of supplemental balance sheet information related to the LH Lease |
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| Schedule of lease payments on the LH Lease |
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Equity (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Schedule of estimated fair value using assumptions |
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| Schedule of stock options |
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| Schedule of unrecognized stock-based compensation expense |
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Summary of Significant Accounting Policies - Restricted Cash (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|---|
| Summary of Significant Accounting Policies | |||
| Cash and cash equivalents | $ 11,572,000 | $ 10,488,000 | |
| Restricted cash | 2,591,000 | 2,673,000 | |
| Total cash, cash equivalents, and restricted cash shown on the consolidated statements of cash flows | $ 14,163,000 | $ 13,161,000 | $ 17,591,000 |
Summary of Significant Accounting Policies - Reclassification of Intangible Lease Assets (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Summary of Significant Accounting Policies | ||
| Real estate properties, net | $ 173,127,000 | $ 179,102,000 |
| Intangible lease assets, net | 13,704,000 | 14,687,000 |
| Other assets, net | 1,720,000 | 422,000 |
| Total assets | $ 213,303,000 | 219,126,000 |
| As previously reported | ||
| Summary of Significant Accounting Policies | ||
| Real estate properties, net | 192,862,000 | |
| Other assets, net | 1,349,000 | |
| Total assets | 219,126,000 | |
| Increase (decrease) | ||
| Summary of Significant Accounting Policies | ||
| Real estate properties, net | (13,760,000) | |
| Intangible lease assets, net | 14,687,000 | |
| Other assets, net | $ (927,000) |
Investments in Real Estate Properties - Investments in real estate properties (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Investments in Real Estate Properties | ||
| Real estate properties, net | $ 173,127,000 | $ 179,102,000 |
| Land | ||
| Investments in Real Estate Properties | ||
| Real estate properties, net | 15,565,000 | 15,565,000 |
| Buildings and improvements | ||
| Investments in Real Estate Properties | ||
| Investments in real estate | 166,989,000 | 166,989,000 |
| Less: accumulated depreciation | (15,985,000) | (11,395,000) |
| Real estate properties, net | 151,004,000 | 155,594,000 |
| Furniture and Fixture | ||
| Investments in Real Estate Properties | ||
| Investments in real estate | 12,440,000 | 12,137,000 |
| Less: accumulated depreciation | (5,882,000) | (4,194,000) |
| Real estate properties, net | $ 6,558,000 | $ 7,943,000 |
Investments in Real Estate Properties - Future Minimum Lease Payments (Details) |
Dec. 31, 2022
USD ($)
|
|---|---|
| Investments in Real Estate Properties | |
| 2023 | $ 17,983,000 |
| 2024 | 18,272,000 |
| 2025 | 18,566,000 |
| 2026 | 18,865,000 |
| 2027 | 19,168,000 |
| Thereafter | 146,294,000 |
| Future minimum lease payments | $ 239,148,000 |
Loans Payable - Debt (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Loans Payable | ||
| Long-term debt, gross | $ 183,765,000 | $ 184,878,000 |
| Less debt issuance costs | (3,596,000) | (4,508,000) |
| Total loans payable | 180,169,000 | 180,370,000 |
| Lument Capital (formerly ORIX Real Estate Capital, LLC) | ||
| Loans Payable | ||
| Long-term debt, gross | 34,976,000 | 35,934,000 |
| Capital One Multifamily Finance LLC | ||
| Loans Payable | ||
| Long-term debt, gross | 10,039,000 | 10,194,000 |
| CIBC Bank | LIBOR | ||
| Loans Payable | ||
| Long-term debt, gross | 15,000,000 | 15,000,000 |
| CIBC Bank | SOFR | ||
| Loans Payable | ||
| Long-term debt, gross | 91,000,000 | 91,000,000 |
| US Oxford Finance, LLC | LIBOR | ||
| Loans Payable | ||
| Long-term debt, gross | 20,000,000 | 20,000,000 |
| US Oxford Finance, LLC | GA8 Properties | ||
| Loans Payable | ||
| Long-term debt, gross | $ 12,750,000 | $ 12,750,000 |
Loans Payable - Maturities of long term debt (Details) |
Dec. 31, 2022
USD ($)
|
|---|---|
| Loans Payable | |
| 2023 | $ 1,158,000 |
| 2024 | 107,201,000 |
| 2025 | 21,246,000 |
| 2026 | 14,042,000 |
| 2027 | 1,460,000 |
| Thereafter | 38,658,000 |
| Total | $ 183,765,000 |
Equity-Method Investments - Distributions receivable (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Equity-Method Investments | ||
| Distributions receivable | $ 400,000 | $ 582,000 |
| SULH JV | ||
| Equity-Method Investments | ||
| Distributions receivable | 259,000 | 273,000 |
| Fantasia II JV | ||
| Equity-Method Investments | ||
| Distributions receivable | 55,000 | 54,000 |
| Fantasia JV | ||
| Equity-Method Investments | ||
| Distributions receivable | 205,000 | |
| Fantasia III JV | ||
| Equity-Method Investments | ||
| Distributions receivable | 22,000 | 22,000 |
| FPH JV | ||
| Equity-Method Investments | ||
| Distributions receivable | $ 64,000 | $ 28,000 |
Receivables (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Receivables | ||
| Straight-line rent receivables | $ 3,862,000 | $ 2,395,000 |
| Distribution receivables from Equity-Method Investments | 400,000 | 582,000 |
| Asset management fees | 375,000 | 323,000 |
| Other receivables | 383,000 | 86,000 |
| Total | $ 5,020,000 | $ 3,386,000 |
Intangible Lease Assets (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
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| Intangible Lease Assets | ||
| Intangible lease assets, net | $ 13,704,000 | $ 14,687,000 |
| In-place leases | ||
| Intangible Lease Assets | ||
| Intangible lease assets, gross | 13,778,000 | 13,778,000 |
| Less: accumulated amortization | (937,000) | (18,000) |
| Intangible lease assets, net | 12,841,000 | 13,760,000 |
| In-place leases | Rental revenues | ||
| Intangible Lease Assets | ||
| Amortization expense for intangible lease assets | 1,000,000.0 | 50,000 |
| Above-market leases | ||
| Intangible Lease Assets | ||
| Intangible lease assets, gross | 959,000 | 959,000 |
| Less: accumulated amortization | (96,000) | (32,000) |
| Intangible lease assets, net | 863,000 | 927,000 |
| Above-market leases | Rental revenues | ||
| Intangible Lease Assets | ||
| Amortization of above market leases | $ 64,000 | $ 32,000 |
Intangible Lease Assets - Expected future amortization (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Intangible Lease Assets | ||
| 2023 | $ 980,000 | |
| 2024 | 980,000 | |
| 2025 | 980,000 | |
| 2026 | 980,000 | |
| 2027 | 980,000 | |
| Thereafter | 8,804,000 | |
| Intangible lease assets, net | $ 13,704,000 | $ 14,687,000 |
Right of Use Asset - Operating Lease (Details) - USD ($) |
Nov. 16, 2022 |
Dec. 31, 2022 |
Apr. 01, 2022 |
|---|---|---|---|
| Right of Use Asset - Operating Lease | |||
| Estimated incremental borrowing rate | 5.00% | ||
| Right of use asset - operating | $ 900,000 | ||
| Right of use asset - operating, Location | Other Assets | ||
| Lease liability - operating | $ 933,000 | $ 900,000 | |
| Lease liability, location | Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities | |
| Operating lease, weighted average remaining lease term | 5 years 3 months 18 days | ||
| Standard Office Lease | |||
| Right of Use Asset - Operating Lease | |||
| Lease term under three separate triple net leases | 66 months 15 days | ||
| Lease renewal options | 5 years | ||
| Initial annual base rent | $ 204,399 | ||
| Increase in initial annual base rent (as a percent) | 3.00% |
Right of Use Asset - Operating Lease (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Apr. 01, 2022 |
|
| Right of Use Asset - Operating Lease | ||
| Right of use asset - operating | $ 900,000 | |
| Right of use asset - operating, Location | Other Assets | |
| Lease liability - operating | $ 933,000 | $ 900,000 |
| Lease liability, location | Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities |
| Operating lease expense | $ 87,000 | |
| LH Lease | ||
| Right of Use Asset - Operating Lease | ||
| Right of use asset - operating | $ 833,000 | |
| Right of use asset - operating, Location | Other Assets | |
| Lease liability - operating | $ 933,000 | |
| Lease liability, location | Accounts Payable and Accrued Liabilities | |
| Operating lease expense | $ 26,000 |
Right of Use Asset-Operating Lease (Details) - USD ($) |
Dec. 31, 2022 |
Apr. 01, 2022 |
|---|---|---|
| Maturity of lease payments | ||
| 2023 | $ 103,000 | |
| 2024 | 211,000 | |
| 2025 | 217,000 | |
| 2026 | 224,000 | |
| 2027 | 231,000 | |
| Thereafter | 98,000 | |
| Total lease payments | 1,084,000 | |
| Less imputed interest | (151,000) | |
| Total lease liability | $ 933,000 | $ 900,000 |
| Lease liability, location | Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities |
Commitments and Contingencies (Details) $ in Millions |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
USD ($)
| |
| Commitments and Contingencies | |
| Purchased the investors' interests | $ 0.9 |
Equity - Black-Scholes option-pricing model (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Equity | ||
| Stock options granted | 81,000 | |
| Expected volatility | 36.50% | |
| Expected term | 5 years 9 months | |
| Risk-free interest rate | 2.53% | |
| Dividend yield | 0.00% | |
| Fair value per stock option | $ 0.91 | |
Equity - Stock options (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Equity | ||
| Options outstanding, Beginning Balance | 1,867,908 | 1,871,908 |
| Options outstanding, Granted | 81,000 | |
| Options outstanding, Exercised | 0 | |
| Cancelled/forfeited | (4,000) | |
| Options outstanding, Ending Balance | 1,948,908 | 1,867,908 |
| Options exercisable, Ending Balance | 1,884,713 | |
| Weighted Average Exercise Price, Outstanding at Beginning Balance | $ 2.09 | $ 2.09 |
| Weighted Average Exercise Price, Granted | 2.35 | |
| Weighted Average Exercise Price, Cancelled/forfeited | 2.26 | |
| Weighted Average Exercise Price, Outstanding at Ending Balance | 2.10 | $ 2.09 |
| Weighted Average Exercise Price, Exercisable at Ending Balance | $ 2.09 | |
| Options outstanding, Weighted Average Remaining Contractual Term | 4 years 11 months 26 days | |
| Options exercisable, Weighted Average Remaining Contractual Term | 4 years 10 months 6 days | |
| Options outstanding, Aggregate Intrinsic Value | $ 1,235,000 | |
| Options exercisable, Aggregate Intrinsic Value | $ 1,210,000 | |
Equity - Unrecognized stock-based compensation expense (Details) |
Dec. 31, 2022
USD ($)
|
|---|---|
| Equity | |
| Unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures | $ 58,000 |
| 2023 | |
| Equity | |
| Unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures | 25,000 |
| 2024 | |
| Equity | |
| Unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures | 25,000 |
| 2025 | |
| Equity | |
| Unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures | $ 8,000 |
Equity - Additional Information (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Apr. 01, 2022 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Equity | |||
| Cash distributions per common share | $ 0 | ||
| Stock options granted | 81,000 | ||
| Fair value per stock option | $ 0.91 | ||
| Weighted average grant date fair value (per share) | $ 0.90 | ||
| General and administrative expense | |||
| Equity | |||
| Stock-based compensation expense | $ 31,000 | $ 66,000 | |
| Board of Directors | |||
| Equity | |||
| Stock options granted | 81,000 | ||
| Incentive Plan | |||
| Equity | |||
| Stock options granted | 80,000 | ||
| Total number of shares of common stock issued | 3,000,000 | ||
| Issuance of common stock | 1,051,092 | ||
Segment Reporting (Details) - segment |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Segment Reporting | ||
| Number of reportable segments | 1 | 1 |