UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from _______________________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. Yes ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted 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 and post 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
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
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock, $0.0001 par value, issued and outstanding as of November 14, 2022.
STRAWBERRY FIELDS REIT INC.
FORM 10-Q
September 30, 2022
TABLE OF CONTENTS
2 |
PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in $000’s, except share data)
September 30, 2022 | December 31, 2021 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Real estate investments, net | $ | $ | ||||||
Cash and cash equivalents | ||||||||
Restricted cash and equivalents | ||||||||
Straight-line rent receivable, net | ||||||||
Right of use lease asset | ||||||||
Goodwill, other intangible assets and lease rights | ||||||||
Deferred financing expenses | ||||||||
Notes receivable, net | ||||||||
Other assets | ||||||||
Total Assets | $ | $ | ||||||
Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | $ | ||||||
Bonds, net | ||||||||
Notes payable and other debt | ||||||||
Operating lease liability | ||||||||
Other liabilities | ||||||||
Total Liabilities | $ | $ | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Equity | ||||||||
Common stock, $ | par value, shares authorized, and shares issued and outstanding||||||||
Preferred stock, $ | par value, shares authorized, shares issued and outstanding||||||||
Additional paid in capital | $ | $ | ||||||
Accumulated other comprehensive income (loss) | ( | ) | ||||||
Retained earnings | ||||||||
Total Stockholders’ Equity | $ | $ | ||||||
Noncontrolling interest | $ | $ | ||||||
Total Equity | $ | $ | ||||||
Total Liabilities and Equity | $ | $ |
See accompanying notes to consolidated financial statements.
3 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(Amounts in $000’s, except share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues | ||||||||||||||||
Rental revenues | $ | $ | $ | $ | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation | $ | $ | $ | $ | ||||||||||||
Amortization | ||||||||||||||||
General and administrative expenses | ||||||||||||||||
Property taxes | ||||||||||||||||
Facility rent expenses | ||||||||||||||||
(Credit) provision for doubtful accounts | ( | ) | ( | ) | ||||||||||||
Total expenses | $ | $ | $ | $ | ||||||||||||
Income from operations | ||||||||||||||||
Interest expense, net | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | |||||
Amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Mortgage insurance premium | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total interest expense | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Other (loss) income: | ||||||||||||||||
Gain from sale of real estate investments | ||||||||||||||||
Foreign currency transaction loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total other loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Less: | ||||||||||||||||
Net income attributable to predecessor | ( | ) | ||||||||||||||
Net income attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income attributable to common stockholders | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||
Gain (loss) due to foreign currency translation | ( | ) | ||||||||||||||
Reclassification of foreign currency transaction losses | ||||||||||||||||
Comprehensive income attributable to predecessor | ( | ) | ||||||||||||||
Comprehensive (income) loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
Comprehensive income | $ | $ | $ | $ | ||||||||||||
Net income attributable to common stockholders | $ | $ | ||||||||||||||
Basic and diluted income per common share | $ | $ | $ | $ | ||||||||||||
Weighted average number of common shares outstanding |
See accompanying notes to consolidated financial statements
4 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in $000’s, except share data)
Number of common shares | Additional Paid-in Capital | Accumulated other comprehensive income (loss) | Retained Earnings / (Accumulated Deficit) | Non- controlling interest | Total | |||||||||||||||||||
Balance, December 31, 2020 (Predecessor) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||
Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
Preferred dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
Net income (unaudited) | - | |||||||||||||||||||||||
Balance March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
Net change in foreign currency translation (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
Preferred dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
Members’ distributions | - | ( | ) | ( | ) | |||||||||||||||||||
Net income (unaudited) | - | |||||||||||||||||||||||
Balance June 7, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
Formation transactions | ( | ) | ||||||||||||||||||||||
Net change in foreign currency translation (unaudited) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Net Income (unaudited) | - | |||||||||||||||||||||||
Balance, June 30, 2021 (unaudited) | ( | ) | ||||||||||||||||||||||
Issuance of operating partnership units | - | |||||||||||||||||||||||
Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
Net Income (unaudited) | - | |||||||||||||||||||||||
Balance, September 30, 2021 (unaudited) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
Balance, December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
Net loss (unaudited) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Balance, March 31, 2022 (unaudited) | ( | ) | ( | ) | ||||||||||||||||||||
Issuance of common shares in exchange for OP units | ||||||||||||||||||||||||
Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
Net income (unaudited) | - | |||||||||||||||||||||||
Balance, June 30, 2022 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
Reallocation of noncontrolling interest (unaudited) | - | ( | ) | |||||||||||||||||||||
Net income (unaudited) | - | |||||||||||||||||||||||
Balance, September 30, 2022 (unaudited) | $ | $ | $ | $ | $ |
See accompanying notes to consolidated financial statements
5 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in $000’s)
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Gain from sale of Real Estate Investments | ( | ) | ||||||
Amortization of bond issuance costs | ||||||||
Amortization of deferred financing costs | ||||||||
Decrease (increase) in other assets | ( | ) | ||||||
Amortization of right of use asset | ||||||||
Foreign currency transaction loss | ||||||||
Foreign currency translation adjustments | ( | ) | ||||||
Increase in straight-line rent receivables | ( | ) | ( | ) | ||||
Decrease in accounts payable and accrued liabilities and other liabilities | ( | ) | ( | ) | ||||
Repayment of operating lease liability | ( | ) | ( | ) | ||||
Net cash provided by operating activities | $ | $ | ||||||
Cash flow from investing activities: | ||||||||
Purchase of Real estate investments | ( | ) | ||||||
Proceeds from the sale of Real estate investments | $ | $ | ||||||
Increase in notes receivable | ( | ) | ||||||
Principal payments of notes receivable | ||||||||
Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
Cash flows from financing activities: | ||||||||
Proceeds from notes payable and other debt | $ | $ | ||||||
Debt financing costs | ( | ) | ||||||
Proceeds from issuance of bonds, net of issuance costs | ||||||||
Repayment of bonds | ( | ) | ( | ) | ||||
Proceeds from the sale of bonds | ||||||||
Repayment of senior debt | ( | ) | ( | ) | ||||
Noncontrolling interest distributions | ( | ) | ||||||
Payment of Preferred dividends | ( | ) | ||||||
Net cash (used in) provided by financing activities | $ | ( | ) | $ | ||||
Decrease in cash and cash equivalents and restricted cash and equivalents | $ | ( | ) | $ | ( | ) | ||
Cash and cash equivalents and restricted cash and equivalents at the beginning of the period | ||||||||
Cash and cash equivalents and restricted cash and equivalents at the end of the period | $ | $ |
6 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Amounts in $000’s)
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid during the period for interest | $ | $ | ||||||
Supplemental schedule of noncash investing activities: | ||||||||
Accumulated other comprehensive income: | ||||||||
Foreign currency translation adjustments | $ | $ | ||||||
Note receivable in connection with real estate investment sale | $ | $ | ||||||
Buyer assumption of senior debt in connection with real estate investment sale | $ | $ | ||||||
OP units issued in connection with purchase of real estate investments | $ | $ |
See accompanying notes to consolidated financial statements
7 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Business
Overview
The Company
STRAWBERRY FIELDS REIT Inc. (the “Company”) is a Maryland corporation formed in July 2019. The Company commenced operations on June 8, 2021, following the completion of the formation transactions described below. The Company conducts its business through a traditional UPREIT structure in which substantially all of its assets are owned by subsidiaries of Strawberry Fields Realty, LP, a Delaware limited partnership formed in July 2019 (the “Operating Partnership”). The Company is the general partner of the Operating Partnership.
The
Company completed the formation transactions on June 8, 2021. In connection with the formation transaction, the Company, the Operating
Partnership and Strawberry Fields REIT, LLC (the “Predecessor Company” or “Predecessor”) entered into a contribution
agreement, pursuant to which the Predecessor Company contributed all of its assets to the Operating Partnership, and the Operating Partnership
assumed all of its liabilities. In exchange, the Operating Partnership issued limited partnership interests designated as common units
(the “OP units”) to the Predecessor Company, which immediately distributed them to its members and beneficial owners. The
Company offered certain of the holders of these OP units the opportunity to exchange their OP units for shares of common stock of the
Company on a one for one basis. The Company limited the number of OP units that could be exchanged by some of the holders so that such
holders would not become beneficial owners of more than
As the sole general partner of the Operating Partnership, the Company has the exclusive power under the partnership agreement to manage and conduct the business affairs of the Operating Partnership, subject to certain limited approval and voting rights of the limited partners. The Company may cause the Operating Partnership to issue additional OP units in connection with property acquisitions, compensation or otherwise. The Company became a publicly traded entity on September 21, 2022.
As of September 30, 2022, the Company owned 78 properties and leased one property that it in turn subleased to a tenant.
Predecessor Company
The Predecessor Company, Strawberry Fields, REIT LLC, was an Indiana limited liability company organized on August 4, 2014.
The Predecessor Company primarily invested in real estate serving the healthcare industry in the United States. The Predecessor Company through its subsidiaries owned skilled nursing facilities, assisted nursing facilities, long-term acute care hospitals, and other healthcare related properties in the States of Illinois, Indiana, Michigan, Texas, Ohio, Tennessee, Kentucky, Oklahoma, and Arkansas. Prior to the formation transactions, the Predecessor Company owned 72 properties and leased one property that was subleased by the Predecessor Company to a tenant.
8 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Business (Cont.)
Interim Consolidated Financial Statements
The accompanying unaudited, consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying interim consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2022, and the consolidated results of operations and cash flows for the periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2022.
Variable Interest Entity
The Company consolidates the Operating Partnership, a variable interest entity (“VIE”) in which the Company is considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
Non-Controlling Interest
A
non-controlling interest is defined as the portion of the equity in an entity not attributable, directly or indirectly, to the primary
beneficiary. Non-controlling interests are required to be presented as a separate component of equity on a consolidated balance sheets.
Accordingly, the presentation of net income is modified to present the income attributed to controlling and non-controlling interests.
The non-controlling interest on the Company’s consolidated balance sheets represents OP units not held by the Company and represents
approximately
9 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Business (Cont.)
Basis of Presentation
The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
The following summary of the Predecessor Company’s Consolidated Statement of Income for the periods from January 1, 2021, through June 7, 2021, and the Company’s Statement of Income for the period from June 8, 2021, to September 30, 2021. These amounts are included in the accompanying Consolidated Statements of Income herein for the nine month period ended September 30, 2021.
Interim Consolidated Financial Statements
(Amounts in $000’s)
Predecessor | SF REIT, INC. | |||||||||||
January 1, 2021 through June 7, 2021 | June 8, 2021 through September 30, 2021 | TOTAL | ||||||||||
Revenues | ||||||||||||
Rental revenues | $ | $ | $ | |||||||||
Expenses: | ||||||||||||
Depreciation | $ | $ | $ | |||||||||
Amortization | ||||||||||||
General and administrative expenses | ||||||||||||
Property taxes | ||||||||||||
Facility rent expenses | ||||||||||||
Provision for doubtful accounts | ||||||||||||
Total expenses | $ | $ | $ | |||||||||
Income from operations | ||||||||||||
Interest expense, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ||||||
Mortgage insurance premium | ( | ) | ( | ) | ( | ) | ||||||
Total interest expense | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Other income (loss) | ||||||||||||
Gain from sale of real estate investments | ||||||||||||
Foreign currency transaction loss | ( | ) | ( | ) | ( | ) | ||||||
Net income | $ | $ | $ | |||||||||
Less net income attributable to non-controlling interest | $ | ( | ) | ( | ) | |||||||
Net Income attributable to Predecessor Company | ( | ) | ||||||||||
Net income attributable to common stockholders | $ | $ |
10 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies
Fiscal Year End
The Company has adopted a fiscal year end of December 31.
Use of Estimates
Management is required to make estimates and assumptions in the preparation of the consolidated financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from management’s estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Predecessor Company, the Operating Partnership and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short-term investments with original maturities of three months or less when purchased.
The
Company’s cash, cash equivalents and restricted cash and cash equivalents periodically exceed federally insurable limits. The Company
monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could
be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date,
the Company has experienced no loss or lack of access to the cash in its operating accounts. On September 30, 2022 and December 31, 2021,
the Company had $
Restricted Cash and Cash Equivalents
Restricted cash primarily consists of amounts held by mortgage lenders to provide for real estate tax expenditures, tenant improvements, capital expenditures and security deposits, as well as escrow accounts related to principal and interest payments on Bonds.
Real Estate Depreciation
Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated over the expected life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. The Company considers the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant’s lease term or expected useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Building and improvements | ||
Equipment and personal property |
11 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (cont.)
Real Estate Valuation
The Company makes estimates as part of its allocation of the purchase price of acquisitions to the various components of the acquisition based upon the fair value of each component. In determining fair value, current appraisals or other third-party valuations are used. The most significant components of these allocations are typically the allocation of fair value to land and buildings and, for certain of its acquisitions, in place leases and other intangible assets. In the case of the fair value of buildings and the allocation of value to land and other intangibles, the estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term. In the case of the value of in place leases, the Company makes best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease up periods, market conditions and costs to execute similar leases. These assumptions affect the amount of future revenue that the Company will recognize over the remaining lease term for the acquired in place leases.
The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. Transaction costs related to acquisitions that are not deemed to be businesses are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be businesses are expensed as incurred.
Revenue Recognition
Rental income from operating leases is generally recognized on a straight-line basis over the terms of the leases. Substantially all of the Company’s leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on specific provisions of each lease as follows:
(i) | a specified annual increase over the prior year’s
rent, generally between | |
(ii) | a calculation based on the Consumer Price Index; or | |
(iii) | specific dollar increases. |
Contingent revenue is not recognized until all possible contingencies have been eliminated. The Company considers the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. The Company follows a policy related to rental income whereby a lease is considered to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.
Rental revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis. Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset included in our accompanying consolidated balance sheets. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the straight-line rent receivable asset decreasing to zero over the remainder of the lease term. The Company assesses the collectability of straight-line rent in accordance with the applicable accounting standards and our reserve policy. If the lessee becomes delinquent in rent owed under the terms of the lease, we may provide a reserve against the recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be recoverable.
12 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Revenue Recognition (Cont.)
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market leases are accreted to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
The Company reports revenues and expenses within our triple-net leased properties for real estate taxes that are escrowed and obligations of the tenants in accordance with their respective lease with us.
Gain from sale of real estate investments is recognized when control of the property is transferred and it is probable that substantially all consideration will be collected.
Allowance for Doubtful Accounts
The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA (defined as earnings before interest, tax, and depreciation and amortization), along with other liquidity measures. The Company evaluates, on a monthly basis or immediately upon a significant change in circumstance, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company.
The Company maintains an allowance for doubtful accounts for straight-line rent receivables resulting from tenants’ inability to make contractual rent and tenant recovery payments or lease defaults. For straight-line rent receivables, the Company’s assessment is based on amounts estimated to be recoverable over the lease term.
Impairment of Long-Lived Assets and Goodwill
The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected future undiscounted cash flows to the carrying value of the real estate assets. The expected future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If the carrying value exceeds the expected future undiscounted cash flows, an impairment loss will be recognized to the extent that the carrying value of the real estate assets is greater than their fair value.
Goodwill is tested for impairment at least annually based on certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its’ carrying value. Potential impairment indicators include a significant decline in real estate values, significant restructuring plans, current macroeconomic conditions, state of the equity and capital markets or a significant decline in the Company’s market capitalization. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its’ carrying value, the Company applies the required two-step quantitative approach. The quantitative procedures of the two-step approach (i) compare the fair value of a reporting unit with its carrying value, including goodwill, and, if necessary, (ii) compare the implied fair value of reporting unit goodwill with the carrying value as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the fair value of assets and liabilities, excluding goodwill, is the implied value of goodwill and is used to determine the impairment amount, if any. The Company has selected the fourth quarter of each fiscal year to perform its annual impairment test.
13 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and cash equivalents, notes receivable and operating leases on owned properties. The Company’s financial instruments, notes receivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. Cash and cash equivalents, restricted cash and equivalents are held with various financial institutions. From time to time, these balances exceed the federally insured limits. These balances are maintained with high quality financial institutions which management believes limits the risk.
With respect to notes receivable, the Company obtains various collateral and other protective rights, and continually monitor these rights, in order to reduce such possibilities of loss. In addition, the Company provides reserves for potential losses based upon management’s periodic review of our portfolio.
On
September 30, 2022, the Company held four notes receivable with an outstanding balance of $
Market Concentration Risk
Debt and Capital Raising Issuance Costs
Costs incurred in connection with the issuance of equity interests are recorded as a reduction of additional paid-in capital. Debt issuance costs related to debt instruments, excluding line of credit arrangements, are deferred, recorded as a reduction of the related debt liability, and amortized to interest expense over the remaining term of the related debt liability utilizing the interest method. Deferred financing costs related to line of credit arrangements are deferred, recorded as an asset and amortized to interest expense over the remaining term of the related line of credit arrangement utilizing the interest method.
Penalties incurred to extinguish debt and any remaining unamortized debt issuance costs, discounts and premiums are recognized as income or expense in the consolidated statements of income at the time of extinguishment.
Segment Reporting
Accounting guidance regarding disclosures about segments of an enterprise and related information establishes standards for the manner in which public business enterprises report information about operating segments. The Company’s investment decisions in health care properties, and resulting investments are managed as a single operating segment for internal reporting and for internal decision-making purposes. Therefore, the Company has concluded that it operates as a single segment.
14 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
The Company calculates basic income per common share by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. At September 30, 2022, there were OP units outstanding which were potentially dilutive securities. During the periods ended September 30, 2022 and 2021 the assumed conversion of the OP units had no impact on basic income per share.
Foreign Currency Translation and Transactions
Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during the related period. Gains or losses resulting from translation are included in accumulated other comprehensive income (loss), a component of equity on the consolidated balance sheets.
Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates of the transactions. The effects of transaction gains or losses, if any, are included in other (loss) income, in the consolidated statements of income.
Fair Value Measurement
The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
● Level 1—quoted prices for identical instruments in active markets;
● Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
● Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1. In instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies the asset or liability in Level 2. If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow valuation models.
15 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Stock-Based Compensation
The Company accounts for share-based payment awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements. ASC 718 requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions. The Company recognizes share-based payments over the vesting period.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption.
Upon adoption of ASU 2016-13, the Company is required to reassess its financing receivables, including leases and notes receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. On October 16, 2019 the FASB approved ASU 2019-10 which extends the effective date of ASU 2016-13 to January 1, 2023, for smaller reporting companies. Adoption of ASU 2016-13 on January 1, 2023, is not expected to be material to the Company’s consolidated financial position and results of operations.
16 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. Restricted Cash and Equivalents
The following table presents the Company’s restricted cash and equivalents and escrow deposits:
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
(amounts in $000’s) | ||||||||
Escrow with trustee | $ | $ | ||||||
MIP escrow accounts | ||||||||
Other escrow and debt deposits | ||||||||
Property tax and insurance escrow | ||||||||
Interest reserve bonds escrow | ||||||||
HUD replacement reserves | ||||||||
Total restricted cash and equivalents | $ | $ |
Escrow with trustee - The Company transfers funds to the trustee for its Series A Bonds and Series C Bonds to cover principal and interest payments prior to the payment date.
MIP escrow accounts - The Company is required to make monthly escrow deposits for mortgage insurance premiums on the HUD guaranteed mortgage loans.
Other escrow and debt deposits – The Company funds various escrow accounts under certain of its loan agreements, primarily to cover debt service on underlying loans.
Property tax and insurance escrow - The Company funds escrows for real estate taxes and insurance under certain of its loan agreements.
Interest reserve bonds escrow - The indentures for the Series A Bonds and Series C Bonds require the funding of a six-month interest reserve. See Note 7 - Notes Payable and Other Debt.
HUD replacement reserves - The Company is required to make monthly payments into an escrow for replacement and improvement of the project assets covered by HUD guaranteed mortgage loans. A portion of the replacement reserves are required to be maintained until the applicable loan is fully paid.
NOTE 4. Real Estate Investments, net
Real estate investments consist of the following:
Estimated | September 30, | December 31, | ||||||||||
Useful Lives | 2022 | 2021 | ||||||||||
(Years) | (Amounts in $000’s) | |||||||||||
Buildings and improvements | $ | $ | ||||||||||
Equipment and personal property | ||||||||||||
Land | - | |||||||||||
Less: accumulated depreciation | ( | ) | ( | ) | ||||||||
Real estate investments, net | $ | $ |
For
the nine-month periods ended September 30, 2022 and 2021, total depreciation expense was $
In
August 2022, the Company executed a contract to sell one of its assets used as a skilled nursing facility and a long term acute care facility to a
third party for a purchase price of $
17 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. Intangible Assets and Goodwill
Intangible assets consist of the following goodwill, Certificate of Need (“CON”) licenses and lease rights:
Goodwill including CON Licenses | Lease Rights | Total | ||||||||||
(Amounts in $000’s) | ||||||||||||
Balances, December 31, 2020 | ||||||||||||
Gross | $ | $ | $ | |||||||||
Accumulated amortization | ( | ) | ( | ) | ||||||||
Net carrying amount | ||||||||||||
Amortization | ( | ) | ( | ) | ||||||||
Balances, September 30, 2021 | ||||||||||||
Gross | ||||||||||||
Accumulated amortization | ( | ) | ( | ) | ||||||||
Net carrying amount | $ | $ | $ | |||||||||
Balances, December 31, 2021 | ||||||||||||
Gross | $ | $ | $ | |||||||||
Accumulated amortization | ( | ) | ( | ) | ||||||||
Net carrying amount | ||||||||||||
Amortization | ( | ) | ( | ) | ||||||||
Balances, September 30, 2022 | ||||||||||||
Gross | ||||||||||||
Accumulated amortization | ( | ) | ( | ) | ||||||||
Net carrying amount | $ | $ | $ |
Estimated amortization expense for all lease rights for each of the future years ending December 31, is as follows:
Amortization of Lease Rights | ||||
(Amounts in $000’s) | ||||
2022 (three months) | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
Total | $ |
18 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Leases
As of September 30, 2022 and December 31, 2021, the Company had leased 79 properties to tenant/operators in the States of Illinois, Indiana, Michigan, Ohio, Texas, Kentucky, Tennessee, Oklahoma and Arkansas. As of September 30, 2022 and December 31, 2021, except for two former long-term acute care hospitals (“LTACH”) facilities, all of the Company’s facilities were leased. Most of these facilities are leased on a triple net basis, meaning that the lessee (i.e., operator of the facility) is obligated under the lease for all expenses of the property in respect to insurance, taxes and property maintenance, as well as the lease payments.
The following table provides additional information regarding the properties owned/leased by the for the periods indicated:
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Cumulative number of properties | ||||||||
Cumulative number of operational beds |
The following table provides additional information regarding the properties/facilities leased by the Company as of September 30, 2022:
State | Number of Operational Beds/Units | Owned by Company | Leased by Company | Total | ||||||||||||
Illinois | ||||||||||||||||
Indiana | ||||||||||||||||
Michigan | ||||||||||||||||
Ohio | ||||||||||||||||
Tennessee | ||||||||||||||||
Kentucky | ||||||||||||||||
Arkansas | ||||||||||||||||
Oklahoma (*) | ||||||||||||||||
Texas (*) | ||||||||||||||||
Total properties | ||||||||||||||||
Facility Type | ||||||||||||||||
Skilled Nursing Facilities | ||||||||||||||||
Long-Term Acute Care Hospitals | ||||||||||||||||
Assisted Living Facility | ||||||||||||||||
Total facilities |
(*) |
As of September 30, 2022, total future minimum rental revenues for the Company’s tenants are as follows:
Year | Amount | |||
(Amounts in $000s) | ||||
2022 (three-month period) | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
Total | $ |
19 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Leases (cont.)
The following table provides summary information regarding the number of operational beds associated with a property leased by the Company and subleased to third-party operators:
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Number of facilities leased and subleased to third-parties | ||||||||
Number of operational beds |
Future minimum operating lease payments under non-cancellable leases as of September 30, 2022, reconciled to the Company’s operating lease liability presented on the consolidated balance sheets:
(Amounts in $000s) | ||||
2022 (three-month period) | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
Total | $ | |||
Less Interest | ( |
) | ||
Total operating lease liability | $ |
Other Properties leased by the Company
The
Company, through one of its subsidiaries, leases its office spaces from related parties. Rental expense under the leases for the nine-month
periods ended September 30, 2022 and 2021, was $
NOTE 7. Notes Payable and Other Debt
Notes Payable and Other Debt consist of the following:
Weighted Interest Rate at September 30, | September 30, | December 31, | ||||||||||
2022 | 2022 | 2021 | ||||||||||
(Amounts in $000s) | ||||||||||||
HUD guaranteed loans | % | $ | $ | |||||||||
Bank loans | % | |||||||||||
Series A, Series B and Series C Bonds | % | |||||||||||
Loans from others | $ | |||||||||||
Gross Notes Payable and other Debt | $ | $ | ||||||||||
Debt issuance costs | ( | ) | ( | ) | ||||||||
Net Notes Payable and other Debt | $ | $ |
20 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (Cont.)
Principal payments on the Notes Payable and Other Debt payable through maturity are as follows (amounts in $000s):
Year Ending December 31, | ||||
2022 (three-month period) | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
$ |
Debt Covenant Compliance
As of September 30, 2022 and December 31, 2021, the Company was party to approximately 41 and 42 outstanding credit related instruments, respectively. These instruments included credit facilities, mortgage notes, bonds and other credit obligations. Some of the instruments include financial covenants. Covenant provisions include, but are not limited to, debt service coverage ratios, and minimum levels of EBITDA (defined as earnings before interest, tax, and depreciation and amortization) or EBITDAR (defined as earnings before interest, tax, depreciation and amortization and rental expense). Some covenants are based on annual financial metric measurements, and some are based on quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant provisions. As of September 30, 2022, the Company was in compliance with all financial and administrative covenants.
Bank loans/repayment of Series B Bonds
On
March 21, 2022, the Company closed a mortgage loan facility with a commercial bank pursuant to which the Company borrowed
approximately $
The
new credit facility financial covenants consist of
Mortgage Loans Guaranteed by HUD
As
of September 30, 2022 and December 31, 2021, the Company had HUD guaranteed mortgage loans from financial institutions of approximately
$
21 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (Cont.)
Series A Bonds
In
November 2015, Strawberry Fields REIT, LTD, a wholly-owned subsidiary of the Company (“BVI Company”) issued Series A Bonds
in the face amount of NIS
Interest
The
rate was increased to
Payment Terms
The
principal amount of the Series A Bonds is payable in eight annual installments due on July 1 of each of the years 2017 through 2024.
The first four principal payments were equal to
The Series A Bonds are not secured except for an interest reserve. The indenture for the Series A Bonds requires the BVI Company to maintain an interest reserve with the trustee equal to the next interest payment on the Series A Bonds. In addition, the BVI Company committed not to further encumber its assets under a general lien without obtaining the approval of the holders of the Series A Bonds, provided that the BVI Company may grant specific liens on its properties and also to provide guarantees; and its subsidiaries are entitled to register general and specific liens on their assets.
Financial Covenants
The
financial covenants of the BVI Company are measured based on its financial statements prepared in accordance with IFRS accounting principles.
The annual rate of interest on the Series A Bonds will increase by 0.5%, but only once with respect to each breach of any such covenant,
if: (i) the shareholders’ equity of the BVI Company (excluding minority interests) is less than $
Dividend Restrictions
The indenture for the Series A Bonds limits the amount of dividends that may be paid by the BVI Company to its stockholders. The BVI Company may not make any distribution unless all of the following conditions are fulfilled (with all amounts calculated under IFRS):
●
The distribution amount may not exceed
●
The ratio of the consolidated stockholders’ equity of the BVI Company to its total consolidated balance sheet may not be less than
● The distributable profits for which no distribution was performed in a specific year will be added to the following quarters.
●
The BVI Company’s equity at the end of the last quarter, before the distribution of dividends, less the dividends distributed,
may not be less than $
● The BVI Company meets the financial conditions described above, and the Company is not in violation of all and/or any of its material undertakings to the holders of the Series A Bonds.
Increase in Interest Rate
Additionally,
the annual rate of interest on the Series A Bonds will increase by
Security
The BVI Company committed not to pledge its assets under general liens without obtaining the consent in advance of the debenture holders. Nevertheless, the BVI Company is entitled to register specific liens on its properties and also to provide guarantees; and its subsidiaries are entitled to register liens, including general and specific, on their assets.
22 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (cont.)
Series A Bonds (cont.)
Redemption Provisions
The BVI Company may, at its discretion, call the Series A Bonds for early repayment. In the event of the redemption of all of the Series A Bonds, the BVI Company would be required to pay the highest of the following amounts:
● | the market value of the balance of the Series A Bonds in circulation which will be determined based on the average closing price of the Series A Bonds for thirty (30) trading days before the date on which the board of directors resolves to undertake the early redemption; |
● | the par value of the Series A Bonds available for early redemption in circulation (i.e., the principal balance of the Series A Bonds plus accrued interest until the date of the actual early redemption); or |
● | the balance of the payments
under the Series A Bonds (consisting of future payments of principal and interest), when discounted to their present value based
on the annual yield of the Israeli government bonds plus an “additional rate.” The additional rate will be |
Change of Control
The holders of a majority of the Series A Bonds may accelerate the outstanding balance of the Bonds if the control of the BVI Company is transferred, directly or indirectly, unless the transfer of control is approved by the holders of a majority of the Series A Bonds.
For purposes of the Series A Bonds, the “controlling stockholders” of the BVI Company are deemed to be Moishe Gubin, Tira Gubin and Michael Blisko.
For the purpose of this provision, a transfer of control means a change of control of the BVI Company such that the BVI Company has a controlling stockholder that is not any of the “controlling stockholders” and/or is in the hands of any of their immediate family members (including through trusts that the controlling stockholders and/or any of their immediate family members are the beneficiaries under and/or are their managers)., “Control” is defined in the Israeli Companies Law.
Bond Repurchases
On
March 19, 2020, the Board of Directors of the BVI Company approved a $
Series C Bonds
In
July 2021, the BVI Company completed an initial offering on the Tel Aviv Stock Exchange (“TASE”) of Series C Bonds with a
par value of NIS
Interest
The
Series C Bonds initially bore interest at a rate of
Interest on the Series C Bonds is payable semi-annually in arrears. The first two interest payments were paid on January 31, 2022 and July 31, 2022. The interest rate may increase if certain financial ratios are not achieved, as discussed below.
Payment Terms
The
principal amount of the Series C Bonds is payable in five annual instalments due on July 31 of each of the years 2022 through 2026. The
first four principal payments are equal to
Financial Covenants
Until the date of full repayment of the Series C Bonds, the BVI Company must comply with certain financial covenants described below. The application of the covenants is based on the financial statements of the BVI Company as prepared under the IFRS accounting method. The financial covenant are as follows:
●
The stockholders’ equity of the BVI Company may not be less than $
●
The ratio of the consolidated stockholders’ equity of the BVI Company to its total consolidated balance sheet may not be less than
● The ratio of the adjusted net financial debt to adjusted EBITDA of the BVI Company (for the past four quarters) may not exceed 12.
●
The ratio of the outstanding amount of the Series C Bonds to the fair market value of the collateral may not exceed
23 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (cont.)
Series C Bonds (cont.)
Dividend Restrictions
The indenture for the Series C Bonds limits the amount of dividends that may be paid by the BVI Company to its stockholders. The BVI Company may not make any distribution unless all of the following conditions are fulfilled (with all amounts calculated under IFRS):
●
The distribution amount may not exceed
●
The ratio of the consolidated stockholders’ equity of the BVI Company to its total consolidated balance sheet may not be less than
● The distributable profits for which no distribution was performed in a specific year will be added to the following quarters.
●
The BVI Company’s equity at the end of the last quarter, before the distribution of dividends, less the dividends distributed,
may not be less than $
● The BVI Company meets the financial conditions described above, and the Company is not in violation of all and/or any of its material undertakings to the holders of the Series C Bonds.
Increase in Interest Rate
In the event that:
(i)
the stockholders’ equity of BVI Company (excluding minority interests) is less than $
(ii) the ratio of the adjusted net financial debt to adjusted EBITDA (for the latest four quarters) exceeds 11;
(iii)
the ratio of the consolidated equity of the BVI Company to total consolidated assets of the BVI Company is below
(iv)
the ratio of outstanding amount of the Series C Bonds to the fair market value of the collateral for the Series B Bonds exceeds
then,
in each case, the interest on the Series C Bonds will increase by an additional
Additionally,
if a decline in the rating of the Series C Bonds should take place, then for each single ratings decrease, the interest will be increased
by
In
any case, the total increase in the interest rate as a result of the above adjustments will not exceed
24 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (cont.)
Series C Bonds (cont.)
Security
The Series C Bonds are secured by first mortgage liens on eight properties. In addition, the Series C Bonds are also secured by interest and expenses reserves. The BVI Company has agreed not to pledge its assets pursuant to a general lien without obtaining the prior consent of the holders of the Series C Bonds, provided that the BVI Company is entitled to register specific liens on its properties and also to provide guarantees and its subsidiaries are entitled to register general and specific liens on their assets.
Additional Bonds
The
BVI Company can issue additional Series C Bonds at any time not to exceed to a maximum of NIS
Redemption Provisions
The BVI Company may, at its discretion, call the Series C Bonds for early repayment. In the event of the redemption of all of the Series C Bonds, the BVI Company would be required to pay the highest of the following amounts:
● | the market value of the balance of the Series C Bonds in circulation which will be determined based on the average closing price of the Series B Bonds for thirty (30) trading days before the date on which the board of directors resolves to undertake the early redemption; |
● | the par value of the Series C Bonds available for early redemption in circulation (i.e., the principal balance of the Series C Bonds plus accrued interest until the date of the actual early redemption); or |
● | the balance of the payments
under the Series C Bonds (consisting of future payments of principal and interest), when discounted to their present value based
on the annual yield of the Israeli government bonds plus an “additional rate.” The additional rate will be |
Change of Control
The holders of a majority of the Series C Bonds may accelerate the outstanding balance of the Bonds if the control of the BVI Company is transferred, directly or indirectly, unless the transfer of control is approved by the holders of a majority of the Series C Bonds.
For purposes of the Series C Bonds, the “controlling stockholders” of the BVI Company are deemed to be Moishe Gubin and Michael Blisko.
25 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Notes Payable and Other Debt (cont.)
Change of Control (Cont.)
For the purpose of this provision, a transfer of control means a change of control of the BVI Company such that the BVI Company has a controlling stockholder that is not any of the “controlling stockholders” and/or is in the hands of any of their immediate family members (including through trusts that the controlling stockholders and/or any of their immediate family members are the beneficiaries under and/or are their managers). In this regard, “control” is defined in the Israeli Companies Law.
Other Debt
As
of September 30, 2022 the Company had no other debt. As of December 31, 2021, the Company had $
NOTE 8. Commitments and Contingencies
Commitments
The Company guarantees from time-to-time obligations of its wholly-owned subsidiaries.
Contingencies
The Company’s operating results and financial condition are dependent on the ability of its tenants to meet their lease obligations to us.
Although the amount of rent that the Company receives from its tenants is not dependent on the tenants’ operating results, the tenants’ ability to fulfill their lease obligations, including the payment of rent, could be adversely affected if our tenants encountered significant financial difficulties due to a pandemic. To date, the Company does not believe that the recent coronavirus outbreak has had a material adverse impact on its tenants.
In March 2020, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a complaint in the U.S. District Court for the Northern District of Illinois against Moishe Gubin, Michael Blisko, the Predecessor Company and 21 of its subsidiaries, as well as the operators of 17 of the facilities operated at our properties. The complaint was related to the Predecessor Company’s acquisition of 16 properties located in Arkansas and Kentucky that were completed between May 2018 and April 2019 and the attempt to purchase additional 5 properties located in Massachusetts. The complaint was dismissed by the court in 2020 for lack of subject matter jurisdiction. The plaintiffs did not file an appeal with respect to this action, and the time for an appeal has expired.
In August 2020, Joseph Schwartz, Rosie Schwartz and several companies controlled by them filed a second complaint in the Circuit Court in Pulaski County, Arkansas. The second complaint had nearly identical claims as the federal case, but was limited to matters related to the Predecessor Company’s acquisition of properties located in Arkansas. The sellers, which were affiliates of Skyline Health Care, had encountered financial difficulties and requested the Predecessor Company to acquire these properties. The defendants have filed an answer denying the plaintiffs’ claims and asserting counterclaims based on breach of contract. The parties are currently engaged in discovery.
In January 2021, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a third complaint in Illinois state court in Cook County, Illinois, which has nearly identical claims to the initial federal case but was limited to claims related to the Kentucky and Massachusetts properties. The complaint has not been properly served on any of the defendants, and, accordingly, the defendants have not responded to the complaint.
26 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. Commitments and Contingencies (Cont.)
In each of these complaints, the plaintiffs asserted claims for fraud, breach of contract and rescission arising out of the defendants alleged failure to perform certain post-closing obligations under the purchase contracts. We have potential direct exposure for these claims because the subsidiaries of the Predecessor Company that were named as defendants are now subsidiaries of the Operating Partnership. Additionally, the Operating Partnership is potentially liable for the claims made against Moishe Gubin, Michael Blisko and the Predecessor Company pursuant to the provisions of the contribution agreement, under which the Operating Partnership assumed all of the liabilities of the Predecessor Company and agreed to indemnify the Predecessor Company and its affiliates for such liabilities. We and the named defendants believe that the claims set forth in the complaints are without merit. The named defendants intend to vigorously defend the litigation and to assert counterclaims against the plaintiffs based on their failure to fulfill their obligations under the purchase contracts, interim management agreement, and operations transfer agreements. We believe this matter will be resolved without a material adverse effect to the Company.
As
noted above, the March 2020 and January 2021 complaints also related to the Predecessor Company’s planned acquisition of five properties
located in Massachusetts. Certain subsidiaries of the Predecessor Company purchased loans related to these properties in 2018 for a price
of $
Note 9. Equity Incentive Plan
The Company has adopted the 2021 Equity Incentive Plan (the “Plan”). The Plan permits the grant of both options qualifying under Section 422 of the Internal Revenue Code (“incentive stock options”) and options not so qualifying, and the grant of stock appreciation rights, stock awards, incentive awards, performance units, and other equity-based awards. A total of shares under the equity incentive plan during the nine months ended September 30, 2021. The Company recognized approximately $ of expense in connection with the stock issuance. shares have been authorized to be granted under the Plan. As of September 30, 2022, shares were available for grant. shares were issued during the nine-month period ended September 30, 2022. The Company issued
27 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. Stockholders’ Equity and Distributions
The
Company intends to elect and qualify to be treated as a REIT commencing with the taxable year ending December 31, 2022.
As of September 30, 2022, there were a total of 420 stockholders of record, including certain affiliates of the Company who held of these shares. shares of common stock issued in connection with our formation transactions, other transaction and shares granted to employees and employees of affiliated entities under the equity incentive plan. The outstanding shares were held by a total of
At September 30, 2022 there were OP units outstanding. Under the terms of the Operating Partnership agreement, such holders have the right to request the redemption of their OP units, in cash. If a holder requests redemption, the Company will have the option of issuing shares of common stock to the requesting holder instead of cash. In addition, OP unit holders are required to obtain Company approval prior to the sale or transfer of any or all of such OP unit holders’ interest.
In addition, the Company has reserved a total of (a) shares of common stock of which are available for grant at September 30, 2022 for future issuance under the equity incentive plan, and (b) shares of common stock that may be issued, at the Company’s option, upon redemption of the OP units outstanding as of September 30, 2022.
Prior
to the formation transactions, the Predecessor Company’s outstanding equity consisted of
28 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence
The following entities and individuals are considered to be Related Parties:
Moishe Gubin | Chairman of the Board and a stockholder of the Company | |
Michael Blisko | Director and a stockholder of the Company | |
Ted Lerman | Director of the Predecessor Company and a stockholder of the Company | |
Nahman Eingal | Chief Financial Officer and a stockholder of the Company | |
Operating entities | See list below |
Lease Agreements with Related Parties
As of September 30, 2022 and December 31, 2021, each of the Company’s facilities except for two were leased and operated by separate tenants. Each tenant is a special purpose entity that, directly or indirectly, leases the facility from one of the Company’s subsidiaries and it is operated as a healthcare facility. The Company had 41 tenants out of 79 who were related parties as of September 30, 2022 and December 31, 2021. Most of the lease agreements are triple net leases.
On
April 4, 2022, an affiliated tenant in Illinois notified the Company of its intent to default with respect to two master lease agreements.
Each lease included three nursing home facilities with a combined rent of $
In
April 2021, tenants for 13 of our properties located in Arkansas agreed to assign their leases to a group of unaffiliated third parties.
The prior tenants were related parties of the Company. The facilities located on these properties consist of 12 SNFs and 2 ALFs, with
one property housing both a SNF and an ALF. There were no changes to the terms of the existing leases. The change of licensure approval of the leases was
subject to the approval by the State of Arkansas, which was received in December 2021. In connection with the lease assignments, the
Company granted the new tenants an option to purchase the properties for an aggregate price of $
29 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
The following table sets forth details of the lease agreements in force between the Company and its subsidiaries and lessees that are related parties:
Related Party Ownership in Tenant/Operator (see notes (1) and (2)) | ||||||||||||||||||||||||||||||||
State | Lessor / Company Subsidiary | Tenant /Operator | Moishe Gubin /Gubin Enterprises LP | Michael Blisko /Blisko Enterprises LP | Ted Lerman /A&F Realty LLC | Average annual rent over life of lease | Annual Escalation | % of total rent | Lease maturity | Extension options | ||||||||||||||||||||||
Master Lease Indiana | ||||||||||||||||||||||||||||||||
IN | The Waters of Princeton II, LLC | % | % | % | $ | % | % | |||||||||||||||||||||||||
IN | The Waters of Dillsboro – Ross Manor II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Scottsburg II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Covington II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Greencastle II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Huntingburg II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Martinsville II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Indianapolis II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Rising Sun II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Clifty Falls II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Batesville II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of Muncie II LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IN | The Waters of New Castle II LLC | % | % | % | % | % |
30 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
State | Lessor / Company Subsidiary | Tenant /Operator | Moishe Gubin /Gubin Enterprises LP | Michael Blisko /Blisko Enterprises LP | Ted Lerman /A&F Realty LLC | Average annual rent over life of lease | Annual Escalation | % of total rent | Lease maturity | Extension options | ||||||||||||||||||||||
Master Lease Tennessee | ||||||||||||||||||||||||||||||||
TN | Lakebridge, a Waters Community, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Roan Highlands, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Springfield, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Cheatham, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Smyrna, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Johnson City, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | The Waters of Shelbyville, LLC | % | % | % | % | % |
State | Lessor / Company Subsidiary | Tenant /Operator | Moishe Gubin /Gubin Enterprises LP | Michael Blisko /Blisko Enterprises LP | Ted Lerman / A&F Realty LLC | Average annual rent over life of lease | Annual Escalation | % of total rent | Lease maturity | Extension options | ||||||||||||||||||||||
Master Lease Tennessee 2 | ||||||||||||||||||||||||||||||||
TN | Agape Rehabilitation & Nursing Center, A Water’s Community LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | Waters of McKenzie, A Rehabilitation & Nursing Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | Waters of Memphis, A Rehabilitation & Nursing Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | Waters of Sweetwater, A Rehabilitation & Nursing Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
TN | Waters of Bristol, A Rehabilitiation & Nursing Center, LLC | % | % | % | % | % |
31 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
Related Party Ownership in Tenant/Operator (see notes (1) and (2)) | ||||||||||||||||||||||||||||||||
State | Lessor / Company Subsidiary | Tenant / Operator | Moishe Gubin /Gubin Enterprises LP | Michael Blisko /Blisko Enterprises LP | Ted Lerman /A&F Realty LLC | Average Annual rent over life of lease | Annual Escalation | % of total rent | Lease maturity | Extension options | ||||||||||||||||||||||
IL | Parker Nursing & Rehabilitation Center, LLC | % | % | % | $ | % | ||||||||||||||||||||||||||
IN | Westpark, a Waters Community, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Ambassador Nursing and Rehabilitation Center II, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Momence Meadows Nursing & Rehabilitation Center, LLC | % | % | % | % | |||||||||||||||||||||||||||
IL | Oak Lawn Respiratory and Rehabilitation Center, LLC | % | % | % | % | |||||||||||||||||||||||||||
IL | Forest View Rehabilitation and Nursing Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Lakeview Rehabilitation and Nursing Center, LLC | % | % | % | % | |||||||||||||||||||||||||||
IL | Continental Nursing and Rehabilitation Center, LLC | % | % | % | % | |||||||||||||||||||||||||||
IL | City View Multicare Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Belhaven Nursing and Rehabilitation Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | West Suburban Nursing & Rehabilitation Center, LLC | % | % | % | % |
32 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
Related Party Ownership in Tenant/Operator (see notes (1) and (2)) | ||||||||||||||||||||||||||||||||
State | Lessor / Company Subsidiary | Tenant / Operator | Moishe Gubin /Gubin Enterprises LP | Michael Blisko /Blisko Enterprises LP | Ted Lerman /A&F Realty LLC | Average Annual rent over life of lease | Annual Escalation | % of total rent | Lease maturity | Extension options | ||||||||||||||||||||||
IN | The Waters of Lebanon, LLC | % | % | % | $ | % | % | |||||||||||||||||||||||||
IL | Niles Nursing & Rehabilitation Center LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Parkshore Estates Nursing and Rehabilitation Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Midway Neurological and Rehabilitation Center, LLC | % | % | % | % | % | ||||||||||||||||||||||||||
IL | Hope Creek Nursing and Rehabilitation Center, LLC | % | % | % | % | % |
33 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
(1) | |
(2) |
Guarantees from Related Parties
As
of September 30, 2022 Mr. Gubin and Mr. Blisko were not parties to any guarantees of any debt of the Company and its subsidiaries. As
of December 31, 2021, Mr. Gubin and Mr. Blisko guaranteed $
Balances with Related Parties
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
(amounts in $000s) | ||||||||
Straight-line rent receivable | $ | $ | ||||||
Tenant portion of replacement reserve | $ | $ |
Payments from and to Related Parties
Nine Months ended September 30, | Three Months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(amounts in $000s) | (amounts in $000s) | |||||||||||||||
Rental income received from related parties | $ | $ |
Other Related Party Relationships
On
September 30, 2022 and December 31, 2021, the Company and the Predecessor Company had approximately $
34 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. Income Taxes
The Company intends to elect and qualify to be taxed as a REIT for federal income tax purposes commencing with the year ending December 31, 2022. The Company qualification as a REIT will depend upon its ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of the Company’s gross income, the composition and values of the Company’s assets, the Company’s distribution levels and the diversity of ownership of the Company’s capital stock. The Company believes that it will be organized in conformity with the requirements for qualification as a REIT under the Code and that its intended manner of operation will enable the Company to meet the requirements for qualification and taxation as a REIT for federal income tax purposes commencing with the Company’s taxable year ending December 31, 2022.
As a REIT, the Company generally will not be subject to federal income tax on its net taxable income that it distributes currently to its stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If the Company fails to qualify for taxation as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company’s income for that year will be taxed at regular corporate rates, and the Company would be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. Even if the Company qualifies as a REIT for federal income tax purposes, it may still be subject to state and local taxes on its income and assets and to federal income and excise taxes on its undistributed income.
For the period prior to qualifying as a REIT, the Company is taxed at regular corporate rates for Federal and State income taxes.
The members of the Predecessor Company elected to be taxed as a partnership for federal and state income tax purposes. For federal and state income tax purposes, all items of income and expenses flowed through to its members based on their respective ownership percentages, therefore no provision or liability for income taxes is reflected in the Predecessor Company’s consolidated financial statements.
The Company and the Predecessor Company followed recent accounting guidance relating to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-than-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. The Predecessor Company’s status as a partnership is defined as a tax position under this accounting guidance. As of the date of the formation transactions, management was not aware of any uncertain tax positions that would have material effect on the Company’s consolidated financial statements.
35 |
STRAWBERRY FIELDS REIT, Inc. and Subsidiaries and Predecessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. Fair Value of Financial Instruments
There
were
The Company is required to disclose the fair value of financials instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below:
September 30, 2022 | December 31, 2021 | ||||||||||||||||||
(amounts in $000s) | Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||
Senior debt and bonds | 3 | $ | $ | ||||||||||||||||
Notes receivable | 3 | $ | $ |
The fair value of the senior debt, bonds and notes receivable are estimated using a discounted cash flow analysis.
NOTE 14. Subsequent Events
In
October 2022, the Company executed a line of credit with a value of $
NOTE 15. Financing Income (Expenses), Net
Nine months ended September 30, | Three months ended September 30 | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(amounts in $000s) | (amounts in $000s) | |||||||||||||||
Financing expenses | ||||||||||||||||
Interest expenses with respect to bonds | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Interest expenses on loans from banks and others | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Interest expenses with respect to leases | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other financing expenses (including related parties), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total financing expenses | $ | ( | ) | $ | ( | ) | $ | ( | ) | ( | ) | |||||
Financing income | $ | $ | $ | |||||||||||||
Interest Expense, Net | $ | ( | ) | $ | ( | ) | $ | ( | ) | ( | ) |
36 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain statements in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations.
Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: (i) the COVID-19 pandemic and the measures taken to prevent its spread and the related impact on our business or the businesses of our tenants; (ii) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we have entered into with them, including, without limitation, their respective obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities; (iii) the ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (iv) the ability and willingness of our tenants to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant, as well as any obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (v) the availability of and the ability to identify (a) tenants who meet our credit and operating standards, and (b) suitable acquisition opportunities, and the ability to acquire and lease the respective properties to such tenants on favorable terms; (vi) the ability to generate sufficient cash flows to service our outstanding indebtedness; (vii) access to debt and equity capital markets; (viii) fluctuating interest rates; (ix) the ability to retain our key management personnel; (x) the ability to maintain our status as a real estate investment trust (“REIT”); (xi) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (xii) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and (xiii) any additional factors included under “Risk Factors” in our Registration Statement on Form 10 dated July 12, 2022, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).
Forward-looking statements speak only as of the date of this report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based.
Overview
Strawberry Fields REIT, Inc. (the “Company”) is engaged in the ownership, acquisition, financing and triple-net leasing of skilled nursing facilities and other post-acute healthcare properties. Currently, our portfolio consists of 79 healthcare properties with an aggregate of 10,426 licensed beds. We hold fee title to 78 of these properties and hold one property under a long term lease. These properties are located in Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas. We generate substantially all our revenues by leasing our properties to tenants under long-term leases primarily on a triple-net basis, under which the tenant pays the cost of real estate taxes, insurance and other operating costs of the facility and capital expenditures. Each healthcare facility located at our properties is managed by a qualified operator with an experienced management team.
37 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview (continued)
We employ a disciplined approach in our investment strategy by investing in healthcare real estate assets. We seek to invest in assets that will provide attractive opportunities for dividend growth and appreciation in asset value, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value. We expect to grow our portfolio by diversifying our investments by tenant, facility type and geography.
We are entitled to monthly rent paid by the tenants and we do not receive any income or bear any expenses from the operations of such facilities. As of September 30, 2022, the aggregate annualized average base rent under the leases for our properties was approximately $82.3 million.
We intend to elect to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2022. We are organized in an UPREIT structure in which we own substantially all of our assets and conduct substantially all of our business through the Operating Partnership. We are the general partner of the Operating Partnership and as of the date of the report own approximately 11.3% of the outstanding OP units.
Recent Developments
COVID-19 Update
The pandemic caused by the coronavirus known as COVID-19 has not had a material adverse effect on the Company’s financial performance, results of operations, liquidity or access to financing. However, the Company’s operations and financial performance are dependent on the ability of its tenants to meet their lease obligations to the Company.
To the Company’s knowledge and based on information provided to the Company by our tenants, the financial effects of the pandemic on the Company’s tenants have increased operating costs resulting from the implementation of safety protocols and procedures our tenants are taking to prevent and mitigate the potential outbreak and spread of COVID-19 at their facilities. Our tenants are also experiencing labor shortages resulting in limited admissions, reduced occupancy and higher agency expenses. The Company believes that the declines in occupancy were primarily due to declining referrals as a result of hospitals postponing elective surgeries as well as patients’ concerns regarding the risk of infection from COVID-19.
As a result of the COVID-19 pandemic, our tenants have received financial support under several government programs. These programs consisted of forgivable loans under Paycheck Protection Program, grants to operators under the Coronavirus Aid, Relief and Economic Security (CARES) Act in an amount equal to 2% of their historical annual revenues, accelerated payments under Medicare, and increased funding for Medicaid patients by some state governments.
The Company’s management does not expect that the discontinuation of these government programs will have a material adverse effect on the tenants’ ability to pay rent for four reasons. First, the Company’s management believes that most nursing home residents in the United States have received vaccines for COVID-19, which have been highly effective in preventing cases of COVID-19. Second, occupancy significantly increased between April 2021 and October 2022. Third, the source of the tenants’ revenues has partially shifted from Medicaid to Medicare because more patients have become eligible for Medicare due to changes in the eligibility criteria. The tenants receive larger payments from Medicare than Medicaid. Fourth, most of the Company’s tenants have the ability to maintain profitability notwithstanding the decrease in revenues because approximately 85% to 90% of their operating costs are variable items (such as labor costs, food, drugs and supplies, including personal protection equipment and cleaning supplies) that can be reduced when occupancy decreases.
To the Company’s knowledge, its tenants are complying with all applicable governmental requirements and guidelines for addressing the risks posed by COVID-19. Although there have been a limited number of confirmed cases of COVID-19 at the facilities operated by the Company’s tenants, to its knowledge, other than our tenants operating under a master lease for six facilities in central Illinois, these cases have not had a material impact on any of the operators.
38 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent developments (continued)
On April 4, 2022, we were notified that the tenants under the master leases for 6 facilities located in central Illinois intended to default with respect to their lease agreements due to operating losses. The tenants indicated that their operating losses were due in part to decreased occupancy caused by COVID-19. The tenants are affiliates of Steven Blisko, who is the brother of Michael Blisko, one of our directors. These leases provided for a combined rent of $225,000 per month, or $2.7 million per year. All payments due under these leases were paid through mid-June 2022. On July 1, 2022, the Company entered into new lease agreements with an unaffiliated third-party operator to lease these properties. The new leases have terms of 10 years each and provide for combined average base rent of $180,000 per month, or $2.3 million per year over the life of the leases. The Company recognized a loss of approximately $1,075,000 in the second quarter of 2022 due to the write-off of straight-line rent receivable related to the former leases.
In August 2022, the Company made a loan of $1 million to an unaffiliated nursing home operator in Kentucky. If the Company acquires the property, this interest-bearing note will be repaid at closing.
In August 2022, the Company executed a contract to sell one of its assets used as a skilled nursing facility and a long-term acute care facility located in Plano, Texas to a third party for a purchase price of $12 million. The anticipated gain on sale is approximately $5.1 million and the transaction is expected to close in early December 2022.
In October 2022, the Company executed a line of credit with a value of $2.5 million with the new tenants of the Southern Illinois properties. This line of credit is collateralized against tenant accounts receivable. Interest on this line of credit is Prime Rate of no less than 4% plus margin of 2.75% and maturity is through August 31, 2024.
As of the date of this report, none of the Company’s tenants are delinquent on the payment of rent, and none of them have requested the Company to amend the terms of their leases to reduce current or future lease payments.
Related Party Tenants
As a landlord, the Company does not control the operations of its tenants, including related party tenants, and is not able to cause its tenants to take any specific actions to address trends in occupancy at the facilities operated by its tenants, other than to monitor occupancy and income of its tenants, discuss trends in occupancy with tenants and possible responses, and, in the event of a default, to exercise its rights as a landlord. However, Moishe Gubin, our Chairman and Chief Executive Officer, and Michael Blisko, one of our directors, as the controlling members of 41 of our tenants and related operators, have the ability to obtain information regarding these tenants and related operators and cause the tenants and operators to take actions, including with respect to occupancy.
39 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Operating Results
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021:
Three Months Ended September 30, | Increase / | Percentage | ||||||||||||||
(dollars in thousands) | 2022 | 2021 | (Decrease) | Difference | ||||||||||||
Revenues: | ||||||||||||||||
Rental revenues | $ | 24,235 | $ | 23,548 | $ | 687 | 2.9 | % | ||||||||
Expenses: | ||||||||||||||||
Depreciation | 6,335 | 6,069 | 266 | 4.4 | % | |||||||||||
Amortization | 757 | 757 | - | 0.0 | % | |||||||||||
General and administrative expenses | 730 | 2,388 | (1,658 | ) | (69.4 | %) | ||||||||||
Property and other taxes | 3,873 | 3,350 | 523 | 15.6 | % | |||||||||||
Facility rent expenses | 139 | 357 | (218 | ) | (61.1 | %) | ||||||||||
Credit for doubtful accounts | (5,100 | ) | - | (5,100 | ) | 100 | % | |||||||||
Total Expenses | 6,734 | 12,921 | (6,187 | ) | (47.9 | %) | ||||||||||
Interest expense, net | 6,863 | 5,473 | 1,390 | 25.4 | % | |||||||||||
Amortization of interest expense | 129 | 75 | 54 | 72 | % | |||||||||||
Mortgage Insurance Premium | 426 | 466 | (40 | ) | (8.6 | )% | ||||||||||
Total Interest Expenses | 7,418 | 6,014 | 1,404 | 23.3 | % | |||||||||||
Other loss | ||||||||||||||||
Foreign currency transaction loss | (833 | ) | (1,931 | ) | 1,098 | 56.9 | % | |||||||||
Net Income | 9,250 | 2,682 | 6,568 | 244.9 | % | |||||||||||
Net income attributable to noncontrolling interest | (8,232 | ) | (2,390 | ) | (5,842 | ) | 244.4 | % | ||||||||
Net Income attributable to common stockholders | 1,018 | 292 | 726 | 248.6 | % | |||||||||||
Basic and diluted income per common share | $ | 0.17 | $ | 0.05 |
Rental revenues: Rental revenues for the three months ended September 30, 2022, increased by $0.7 million or 2.9% due to the six new properties acquired in August 2021.
Depreciation and Amortization: Increase in depreciation of $0.27 million or 4.4% is primarily due to an increase in new real estate investments made in the third quarter of 2021.
General and administrative expenses: Decrease in general and administrative expenses of $1.7 million or 69.4% is primarily due to internal costs incurred related to the Series C Bonds and the acquisition of the new Tennessee properties in the third quarter of 2021.
Property and other Taxes: Increase in property taxes of $0.5 million or 15.6% is primarily due to increases in county taxes paid in the third quarter of 2022.
(Credit) Provision for Doubtful Accounts: In the third quarter of 2022, the Company recognized income of $4.4 million as a result of the successful foreclosure of mortgages held by the Company on properties located in Massachusetts.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations (continued)
Interest expense, net: The increase in interest expense of $1.4 million or 25.4% is primarily caused by increases in the floating rate on mortgage loan facility.
Foreign currency transaction loss: Decrease in realized foreign currency transaction loss of $1.1 million was due to lower foreign currency transaction losses incurred in connection with bond payments in the third quarter of 2022 compared to losses incurred from bond repayments that occurred during the nine months ended September 30, 2021 as a result of changes in the value of the U.S. dollar relative to the New Israeli Shekel.
Net Income: Increase in net income from $2.7 million during the third quarter of 2021, to $9.2 million during the third quarter of 2022 (244.9%) is primarily result of recoveries recognized from the successful foreclosure of mortgages in the third quarter of 2022.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021:
Nine Months Ended September 30, | Increase / | Percentage | ||||||||||||||
(dollars in thousands) | 2022 | 2021 | (Decrease) | Difference | ||||||||||||
Revenues: | ||||||||||||||||
Rental revenues | $ | 68,972 | $ | 64,051 | $ | 4,921 | 7.7 | % | ||||||||
Expenses: | ||||||||||||||||
Depreciation | 19,386 | 17,855 | 1,531 | 8.6 | % | |||||||||||
Amortization | 2,271 | 2,271 | - | 0.0 | % | |||||||||||
General and administrative expenses | 4,150 | 4,674 | (524 | ) | (11.2 | %) | ||||||||||
Property and other taxes | 9,494 | 7,892 | 1,602 | 20.3 | % | |||||||||||
Facility rent expenses | 398 | 603 | (205 | ) | (34.0 | % | ||||||||||
(Credit) Provision for doubtful accounts | (4,437 | ) | 93 | (4,530 | ) | (4,871.0 | %) | |||||||||
Total Expenses | 31,262 | 33,388 | (2,126 | ) | (6.4 | %) | ||||||||||
Interest expense, net | 15,902 | 15,479 | 423 | 2.7 | % | |||||||||||
Amortization of interest expense | 317 | 227 | 90 | 39.6 | % | |||||||||||
Mortgage Insurance Premium | 1,287 | 1,294 | (7 | ) | (0.5 | %) | ||||||||||
Total Interest Expenses | 17,506 | 17,000 | 506 | 3.0 | % | |||||||||||
Other (loss) income | ||||||||||||||||
Gain from sale of real estate investments | - | 3,842 | (3,842 | ) | - | |||||||||||
Foreign currency transaction loss | (10,932 | ) | (8,775 | ) | (2,157 | ) | 24.6 | % | ||||||||
Net Income | 9,272 | 8,730 | 542 | 6.2 | % | |||||||||||
Net income attributable to noncontrolling interest | (8,252 | ) | (3,368 | ) | (4,884 | ) | 145.0 | % | ||||||||
Net income attributable to predecessor | - | (4,943 | ) | 4,943 | - | |||||||||||
Net Income Attributable to common stockholders | 1,020 | 419 | 601 | 143.4 | % | |||||||||||
Basic and diluted income per common share | $ | 0.17 | $ | 0.07 |
Rental revenues: Rental revenues during the first nine months of 2022 increased by $4.9 million or 7.7% due to the six new properties acquired in in August of 2021. This increase was offset by a one-time loss of $1.1 million in the second quarter of 2022 due to the write-offs of straight-line rent receivables related to certain defaulted leases. Additionally, revenue was increased by $1.1 million due to additional property taxes being reimbursed by the tenants.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations (continued)
Depreciation and Amortization: Increase in depreciation of $1.5 million or 8.6% is primarily due to an increase of $1.5 million related to new real estate investments made in the third quarter of 2021.
General and Administrative Expense: Decrease in general and administrative expenses of $0.5 million or 11.2% is primarily due to costs incurred related to the Series C Bonds and the acquisition of the new Tennessee properties in the third quarter of 2021.
Property and other Taxes: The increase in property taxes of $1.6 million or 20.3% is primarily due to increases in real estate taxes and franchise taxes paid by new properties acquired in the third quarter of 2021.
(Credit) Provision for Doubtful Accounts: In the third quarter of 2022, the Company recognized $4.4 million in income from the successful foreclosure of mortgages held by the Company on properties located in Massachusetts with respect to loans written off at December 31, 2021. The decrease in the provision for doubtful accounts of $4.5 million or 4,871% is primarily related to this recovery.
Interest expense, net: The increase in interest expense of $0.4 million or 2.7% is primarily related to increases in floating rate interest on mortgage loan facility.
Gain from Sale of Real Estate Investments: There were no gains from the sale of real estate during the first nine months of 2022 because there were no asset dispositions during this period.
Foreign Currency Transaction Loss: Increase in realized foreign currency transaction loss of $2.2 million was due to higher losses incurred in connection with the repayment of the Series B Bonds in March 2022 compared to losses incurred from bond repayments that occurred during the nine months ended September 30, 2021 as a result of changes in the value of the U.S. dollar relative to the New Israeli Shekel.
Net Income: The increase in net income from $8.7 million during the nine months ended September 30, 2021 to $9.3 million in the nine months ended September 30, 2022 is mainly due to a decrease in total expenses as a result of the aforementioned mortgage recoveries, the increase in foreign currency transaction losses of $2.2 million, and the absence of the $3.8 million in gain from sale of real estate investments recorded in 2021.
Liquidity and Capital Resources
To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors.
As of September 30, 2022, we had cash and cash equivalents and restricted cash and equivalents of $37.2 million. We also had the ability to offer additional Series C Bonds from the current outstanding of $53.9 million up to $177 million subject to compliance with covenants and market conditions.
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. Our primary sources of cash include operating cash flows, stock sales and borrowings. Our primary uses of cash include funding acquisitions and investments consistent with our investment strategy, repaying principal and interest on any outstanding borrowings, making distributions to our equity holders, funding our operations and paying accrued expenses.
Our long-term liquidity needs consist primarily of funds necessary to pay for the costs of acquiring additional healthcare properties and principal and interest payments on our debt. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances or debt offerings, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources (continued)
We may utilize various types of debt to finance a portion of our acquisition activities, including long-term, fixed-rate mortgage loans, variable-rate term loans and secured revolving lines of credit. As of September 30, 2022, on a consolidated basis, we had total indebtedness of approximately $459.0 million, consisting of $277.6 million in HUD guaranteed debt, $75.3 million in net Series A Bonds and Series C Bonds outstanding and $106.1 million in commercial mortgages. Under our Bonds and our commercial mortgages, we are subject to continuing covenants, and future indebtedness that we may incur, may contain similar provisions. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations, and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our stockholders.
Our debt arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make the balloon payments due under our existing and future indebtedness will depend on our working capital at the time of repayment, our ability to obtain additional financing or our ability to sell any property securing such indebtedness. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original bond or loan or sell any related property at a price sufficient to make the balloon payment. In addition, balloon payments and payments of principal and interest on our indebtedness may leave us with insufficient cash to pay the distributions that we are required to pay to qualify and maintain our qualification as a REIT.
Through 2027 there are two balloon payment obligations consisting of a payment of $44.6 million due under the Series C Bonds in 2026 and a payment of $86.0 million due under our commercial bank term loan due in 2027. We may also obtain additional financing that contains balloon payment obligations. These types of obligations may materially adversely affect us, including our cash flows, financial condition and ability to make distributions.
The Company believes that its overall level of indebtedness is appropriate for the Company’s business in light of its cash flow from operations and value of its properties and is generally typical for owners of multiple healthcare properties. The Company expects to generate sufficient positive cash flow from operations to meet its ongoing debt service obligations and the distribution requirements for maintaining REIT status commencing in 2022.
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the periods presented:
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
(Predecessor) | ||||||||
(dollars in thousands) | ||||||||
Net cash provided by operating activities | $ | 37,421 | $ | 31,244 | ||||
Net cash used in investing activities | (8,469 | ) | (63,350 | ) | ||||
Net cash (used in) provided by financing activities | (43,850 | ) | 25,596 | |||||
Net decrease in cash and cash equivalents and restricted cash and cash equivalents | (14,898 | ) | (6,510 | ) | ||||
Cash and cash equivalents, and restricted cash and cash equivalents beginning of period | 52,128 | 42,059 | ||||||
Cash and cash equivalents and restricted cash and cash equivalents, end of period | $ | 37,230 | $ | 35,549 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cash Flows (continued)
Net cash provided by operating activities increased $4.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to a decrease of $5.9 million in accounts payable and accrued liabilities as well as an increase in foreign currency transaction losses and the absence of the gain on real estate sale during the nine month period ended on September 30, 2022.
Cash used in investing activities for the nine months ended September 30, 2022 was comprised of a net increase in notes receivable of $8.5 million, of which $8.0 million is a result of a note purchased related to our Arkansas properties and a note receivable of $1.0 million made by an unaffiliated nursing home operator in Kentucky in favor of the Company in the third quarter 2022. The decrease of $54.9 million compared to the nine months ended September 30, 2021 is due to the decrease in real estate purchases.
Cash flows used in financing activities for the nine months ended September 30, 2022 were primarily comprised of $14.2 million in principal bond payments, a $10.9 million in distribution to the non-controlling holders and a decrease of $17.4 million in net borrowings as a result of $105.0 million new borrowing under a mortgage loan facility that was used to repay $91.8 million in Series B bonds and non-HUD bank debt of $29.1 million.
Cash flows used in financing activities for the nine months ended September 30, 2021 were primarily comprised of $63 million in new bond proceeds, $22.5 million in principal bond payments, $15.1 million of repayment of senior debt and payment of preferred dividends of $1.5 million. These uses were offset by proceeds from the sale of bonds held by a subsidiary of $1.7 million.
Indebtedness
Mortgage Loans Guaranteed by HUD
As of September 30, 2022, we had non-recourse mortgage loans of $277.6 million from third party lenders that were guaranteed by HUD.
Each loan is secured by first mortgages on certain specified properties, interests in the leases for these properties and second liens on the operator’s assets. In the event of default on any single loan, the loan agreement provides that the applicable lender may require the tenants for the property securing the loan to make all rental payments directly to the lender. In exchange for the HUD guarantee, we pay HUD, on an annual basis, 0.65% of the principal balance of each loan as mortgage insurance premium, in addition to the interest rate denominated in each loan agreement. As a result, the overall average interest rate paid with respect to the HUD guaranteed loans as of September 30, 2022, was 3.88% per annum (including the mortgage insurance payments). The loans have an average maturity of 25.0 years.
Commercial Bank Term Loan
On March 21, 2022, the Company closed a mortgage loan facility with a commercial bank pursuant to which the Company borrowed approximately $105 million. The facility provides for monthly payments of principal based on a 20-year amortization with a balloon payment due in March 2027. The rate is based on the one-month Secured Overnight Financing Rate (“SOFR”) plus a margin of 3.5% and a floor of 4% (as of the September 30, 2022 the rate was 6.1%). As of September 30, 2022, total outstanding principal amount was $103.26 million. This loan is collateralized by 21 properties owned by the Company. The new loan proceeds were used to repay the Series B Bonds and prepay commercial loans not secured by HUD guarantees. The Company recognized a foreign currency transaction loss of approximately $10.1 million in connection with the repayment of the Series B Bonds.
The new credit facility financial covenants consist of (i) a covenant that the ratio of the Company’s indebtedness to its EBITDA cannot exceed 8.0 to 1, (ii) a covenant that the ratio of the Company’s net operating income to its debt service before dividend distribution is at least 1.20 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement (iii) a covenant that the ratio of the Company’s net operating income to its debt service after dividend distribution is at least 1.05 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, and (iii) a covenant that the Company’s GAAP equity is at least $20,000,000. As of September 30, 2022, the Company is in compliance with the loan covenants.
Other Debt
As of September 30, 2022 and December 31, 2021, the Company had $0 and $1.4 million, respectively, in outstanding amounts due under notes due to sellers of properties.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Indebtedness (continued)
Outstanding Bond Debt
The Company has issued Series A Bonds and Series C Bonds.
Series A Bonds
In November 2015, Strawberry Fields REIT, Ltd., a wholly owned subsidiary of the Company (“BVI Company”) issued Series A Bonds in the face amount of New Israeli Shekels (“NIS”) 265.2 million ($68 million) and received the net amount, after issuance costs, NIS 251.2 million ($64.3 million). During September 2016, the BVI Company issued additional Series A Bonds in the face amount of NIS 70.0 million ($18.6 million) and raised a net amount of NIS 70.8 million ($18.8 million). These Series A Bonds were issued at a premium of 103.6%. During May 2017, the BVI Company issued additional Series A Bonds in the face amount of NIS 39.0 million ($10.7 million) and raised a net amount of NIS 40.9 million ($11.3 million). These Series A Bonds were issued at a premium of 105.9%.
A portion of the Series A Bonds have been repurchased by a subsidiary of the BVI Company. As of September 30, 2022, the aggregate principal amount of the Series A Bonds was NIS 74.9 million ($21.1 million). As of September 30, 2022 we held NIS 3.7 million ($1.0 million) of these Bonds that we have repurchased. On July 4, 2022, Standard & Poor’s upgraded the rating on Bond A from ilA- to ilA, and interest rate was decreased from 6.9% to 6.4%.
The Series A Bonds are traded on the Tel Aviv Stock Exchange Ltd. (“TASE”).
Series C Bonds
In July 2021, the Company completed an initial offering of Series C Bonds with a par value of NIS 208.0 million ($64.7 million). The Series C Bonds were issued at par.
As of September 30, 2022, the outstanding principal amount of the Series C Bonds was NIS 195.5 million ($55.2 million).
The Series C Bonds are traded on the TASE.
Summary of fixed and variable loans
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
(Amounts in $000s) | ||||||||
Fixed rate loans | $ | 352,912 | $ | 479,388 | ||||
Variable rate loans | 106,111 | 24,789 | ||||||
Gross Notes Payable and other Debt | $ | 459,023 | $ | 504,177 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Funds From Operations (“FFO”)
The Company believes that net income as defined by GAAP is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined in accordance with the definition used by the National Association of Real Estate Investment Trusts (“NAREIT”), and adjusted funds from operations (“AFFO”) are important non-GAAP supplemental measures of our operating performance. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined as net income, computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization. AFFO is defined as FFO excluding the impact of straight-line rent, above-/below-market leases, non-cash compensation and certain non-recurring items. For the nine and three months ended September 30, 2022 and 2021, we excluded as non-recurring items the amount of $10.9 million, $8.8 million, $0.8 million and $1.9 million, respectively, in reclassification of foreign currency transaction losses the Company recorded with respect to foreign currency fluctuations that the Company realized at the time of bond principal payment. We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and makes comparisons of operating results among REITs more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding the applicable items listed above, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies.
While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO also do not consider the costs associated with capital expenditures related to our real estate assets nor do they purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do.
The following table reconciles our calculations of FFO and AFFO for the nine and three months ended September 30, 2022 and 2021, to net income, the most directly comparable GAAP financial measure, for the same periods (in thousands):
FFO and AFFO
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(dollars in $1,000s) | (Predecessor) | (Predecessor) | ||||||||||||||
Net income | $ | 9,272 | $ | 8,730 | $ | 9,250 | $ | 2,682 | ||||||||
Depreciation and amortization | 21,657 | 20,126 | 7,092 | 6,826 | ||||||||||||
(Credit) Provision for doubtful accounts* | (4,437 | ) | - | (5,100 | ) | - | ||||||||||
Gain from Sale of Real Estate Investments | - | (3,842 | ) | - | - | |||||||||||
Funds from Operations | 26,492 | 25,014 | 11,242 | 9,508 | ||||||||||||
Adjustments to FFO: | ||||||||||||||||
Straight-line rent | (2,138 | ) | (1,724 | ) | (2,284 | ) | (1,022 | ) | ||||||||
Straight-line rent receivable write-off** | 1,075 | - | 1,075 | - | ||||||||||||
Foreign currency transaction loss | 10,932 | 8,775 | 833 | 1,931 | ||||||||||||
Funds from Operations, as Adjusted | $ | 36,361 | $ | 32,065 | $ | 10,866 | $ | 10,417 |
* The Company recovered $4.4 million with respect to foreclosure sales of assets in Massachusetts.
** The Company recognized a loss of $1,075,000 in the second quarter of 2022 due to the write-off of straight-line rent receivables related to the Western Illinois facilities
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Subsequent Events
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP for interim financial information set forth in the Accounting Standards Codification, as published by the Financial Accounting Standards Board. GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Registration Statement on Form 10, filed with the SEC on July 12, 2022, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes in such critical accounting policies during the nine months ended September 30, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business and investment objectives, we expect that the primary market risk to which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties. As of September 30, 2022, we had $20.1 million net outstanding under our Series A Bonds, which bear interest at a fixed rate of 6.4% per annum, $55.2 million outstanding under our Series C Bonds, which bear interest at a fixed rate of 5.7% per annum, and $383.7 million in senior debt notes, of which $277.6 are HUD guaranteed debt at fixed interest rate of 3.88% and $106.1 million (23.1% of total debt) of floating rate debt, in which $103.3 million of the debt bears interest at variable rate equal to one month SOFR plus a margin of 3.5% and a floor of 4% (as of September 30, 2022 the rate was 6.1%), and $2.8 million of it bears interest of Prime plus a margin of 0.5% (as of September 30, 2022 the rate was 6.75%). At September 30, 2022, one-month SOFR was 2.98% and Prime was 6.25%. Assuming no increase in the amount of our variable interest rate debt, if one-month SOFR and one-month Prime increased 100 basis points, our annual cash flow would decrease by approximately $1,061,000. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We also may enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks (continued)
In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions, change in currency rates between the Israeli Shekel and the U.S. Dollar and changes in the creditworthiness of tenants/operators, which may affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. 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.
As of September 30, 2022, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
We are not currently a party to any material legal proceedings other than the following:
In March 2020, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a complaint in the U.S. District Court for the Northern District of Illinois against Moishe Gubin, Michael Blisko, the Predecessor Company and 21 of its subsidiaries, as well as the operators of 17 of the facilities operated at our properties. The complaint was related to the Predecessor Company’s acquisition of 16 properties located in Arkansas and Kentucky that were completed between May 2018 and April 2019 and the attempt to purchase additional 5 properties located in Massachusetts. The complaint was dismissed by the court in 2020 for lack of subject matter jurisdiction. The plaintiffs did not file an appeal with respect to this action, and the time for an appeal has expired.
In August 2020, Joseph Schwartz, Rosie Schwartz and several companies controlled by them filed a second complaint in the Circuit Court in Pulaski County, Arkansas. The second complaint had nearly identical claims as the federal case, but was limited to matters related to the Predecessor Company’s acquisition of properties located in Arkansas. The sellers, which were affiliates of Skyline Health Care, had encountered financial difficulties and requested the Predecessor Company to acquire these properties. The defendants have filed an answer denying the plaintiffs’ claims and asserting counterclaims based on breach of contract. The parties are currently engaged in discovery.
In January 2021, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a third complaint in Illinois state court in Cook County, Illinois, which has nearly identical claims to the initial federal case, but was limited to claims related to the Kentucky and Massachusetts properties. The complaint has not been properly served on any of the defendants, and, accordingly, the defendants have not responded to the complaint.
In each of these complaints, the plaintiffs asserted claims for fraud, breach of contract and rescission arising out of the defendants alleged failure to perform certain post-closing obligations under the purchase contracts. We have potential direct exposure for these claims because the subsidiaries of the Predecessor Company that were named as defendants are now subsidiaries of the Operating Partnership. Additionally, the Operating Partnership is potentially liable for the claims made against Moishe Gubin, Michael Blisko and the Predecessor Company pursuant to the provisions of the contribution agreement, under which the Operating Partnership assumed all of the liabilities of the Predecessor Company and agreed to indemnify the Predecessor Company and its affiliates for such liabilities. We and the named defendants believe that the claims set forth in the complaints are without merit. The named defendants intend to vigorously defend the litigation and to assert counterclaims against the plaintiffs based on their failure to fulfill their obligations under the purchase contracts, interim management agreement, and operations transfer agreements. We believe this matter will be resolved without a material adverse effect to the Company.
As noted above, the March 2020 and January 2021 complaints also related to the Predecessor Company’s planned acquisition of five properties located in Massachusetts. Certain subsidiaries of the Predecessor Company purchased loans related to these properties in 2018 for a price of $7.74 million with the expectation that the subsidiaries would acquire title to the properties and the loans would be retired. The subsidiaries subsequently advanced $3.1 million under the loans to satisfy other liabilities related to the properties. The planned acquisition/settlement with the sellers/owners/borrowers was cancelled because they were forced to surrender their licenses to operate healthcare facilities on these properties due to their cash flow issues. In July 2022, the Company as lender sold these five properties through a mortgage foreclosure sale for the total amount of $7.5 million. As of September 30th, 2022, the Company has received $4.4 million from four closings and is in the process of pursuing collection efforts with respect to the last property and plans to pursue the guarantors of the loans to recover the unpaid principal balances as well as protective advances and collection costs.
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
No redemptions occurred in the third quarter of 2022.
Item 5. Other Information
Item 6–Exhibits
Exhibit No. | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Strawberry Fields REIT Inc.* | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Strawberry Fields REIT Inc.* | |
32.1 | Section 1350 Certification of the Chief Executive Officer of Strawberry Fields REIT Inc.* | |
32.2 | Section 1350 Certification of the Chief Financial Officer of Strawberry Fields REIT Inc.* | |
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |
104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
* Exhibits that are filed herewith.
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SIGNATURES
Pursuant to the requirements 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.
Strawberry Fields REIT, Inc. | ||
Date: November 14, 2022 | By: | /s/ Moishe Gubin |
Name: | Moishe Gubin | |
Title: | Chief Executive Officer and Chairman | |
Date: November 14, 2022 | By: | /s/ Nahman Eingal |
Name: | Nahman Eingal | |
Title: | Chief Financial Officer |
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