American Healthcare REIT, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Figures are unaudited. Amounts are in U.S. dollars. Comparisons are affected by the October 1, 2021 merger and acquisition: 2022 results include the combined company, while 2021 results primarily reflect GAHR III; management cautions that period-to-period comparisons may not be meaningful.
Business context
The REIT owned or operated 312 buildings and integrated senior health campuses, totaling approximately 19.4 million square feet, across six segments. It operates both leased healthcare properties and senior-care facilities under RIDEA structures. Following the merger and AHI acquisition, the company became self-managed. Indiana represented 42.3% of portfolio annualized base rent or NOI.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue and grant income | $426.2m | $317.5m | $1,190.6m | $916.9m |
| GAAP net loss | $7.6m | $4.0m | $24.1m | $28.3m |
| Net loss attributable to controlling interest | $13.5m | $5.2m | $33.8m | $24.8m |
| Basic and diluted loss per share attributable to controlling interest | $0.05 | $0.03 | $0.13 | $0.14 |
| Operating cash flow | Not separately presented for the quarter | $113.4m | $(1.5)m | |
| Segment NOI (non-GAAP) | $73.8m | $52.5m | $225.1m | $140.1m |
| FFO attributable to controlling interest (non-GAAP) | $26.5m | $16.6m | $91.8m | $44.8m |
Revenue increased 34% for the quarter and 30% year to date, driven substantially by the larger portfolio, improved resident occupancy, acquisitions and grant income. Reported NOI was approximately 17.3% of revenue and grant income in Q3 and 18.9% year to date; these are simple calculations using the company’s non-GAAP NOI. Results included $6.5m of Q3 and $22.7m of year-to-date grant income, primarily from COVID-19 relief programs. Excluding grants, management reported NOI of $67.3m for Q3 and $202.4m year to date.
Q3 GAAP net loss included a $21.9m real estate impairment charge, partly offset by a $19.6m gain from remeasuring the previously held RHS interest. Year-to-date impairment charges were $39.2m. Interest expense was $27.5m for Q3 and $71.2m year to date, up from $18.9m and $57.7m, respectively, in the statements of operations. Increased borrowings, higher variable rates and debt-extinguishment costs contributed.
Balance sheet, debt and liquidity
- At September 30, total assets were $4.76bn; real estate investments, net, were $3.53bn.
- Mortgage loans were $1.177bn gross ($1.159bn net). Lines of credit and term loans were reported at $1.292bn net on the balance sheet; MD&A reports $1.293bn of aggregate credit-facility borrowings. Total debt was approximately $2.47bn.
- Cash and cash equivalents were $79.4m and restricted cash was $44.9m, for combined cash of $124.3m. The company reported $117.1m of remaining availability under its credit facilities.
- Weighted-average effective interest rates were 3.85% on mortgages, 5.04% on lines of credit and term loans, and 4.47% across outstanding debt. A 0.50 percentage-point increase in market rates was estimated to add $8.4m to annualized interest expense.
- Debt represented 48.0% of the company’s stated combined market value of real estate and related investments. The company said it was in compliance with debt covenants at quarter-end and believed available resources would meet foreseeable cash requirements.
Operating cash flow of $113.4m exceeded investing outflows of $122.5m, which included $75.1m for real estate acquisitions and $51.4m for development and capital expenditures. Financing provided $8.0m. Cash, cash equivalents and restricted cash ended at $124.3m, versus $151.3m a year earlier.
Material changes, outlook and risks
- Acquisitions included the consolidation of RHS, which owns or operates 16 Indiana campuses, and an integrated senior health campus in Kentucky. The company also acquired four previously leased properties and disposed of one campus.
- Operating costs remain pressured by healthcare labor shortages, higher wages, agency and temporary labor, supply-chain disruption and inflation. Management said occupancies at integrated campuses and leased senior housing and skilled nursing facilities had improved to near pre-pandemic levels, while SHOP recovery lagged. Combined SHOP and integrated-campus occupancy was 81.8% at quarter-end; leased non-RIDEA properties were 92.6% leased.
- Management provided no quantified full-year earnings or revenue guidance. It cited ongoing uncertainty from COVID-19, labor and inflation costs, interest-rate increases, refinancing needs, foreign currency and the LIBOR-to-SOFR transition. Development and expansion work is exposed to cost overruns, delays and leasing risk.
- The company had $39.2m of year-to-date SHOP impairments and reported rising receivable allowances: $14.3m at quarter-end, with $16.5m of allowance additions and $9.1m of write-offs year to date.
- A proposed public offering and NYSE listing remained subject to regulatory effectiveness, exchange approval and market conditions; completion and pricing were uncertain. Subsequent to quarter-end, the board approved a one-for-four reverse stock split effective November 15, 2022, and suspended the DRIP and share repurchase plan beginning with the quarter ending December 31, 2022.
- The company declared a $0.10-per-share Q3 distribution, paid in October. It reported that year-to-date distributions of $61.5m were funded by operating cash flow and equaled reported FFO attributable to controlling interest; distributions may include return of capital.
- Management reported no material litigation or environmental matters and concluded disclosure controls were effective as of September 30, 2022.
Investor verification points
- Reconcile acquisition-driven growth with comparable-property occupancy, operating costs and margins; 2021 comparisons exclude the merged company’s portfolio.
- Assess recurring earnings and cash available for distributions without COVID-related grants, acquisition gains and other nonrecurring items; compare GAAP results with the company’s non-GAAP NOI, FFO and MFFO definitions.
- Review the maturity schedule, variable-rate exposure, refinancing capacity and covenant headroom, particularly given the company’s stated $117.1m undrawn facility availability.
- Evaluate the severity and assumptions behind SHOP impairments, resident and tenant receivables, and the slower SHOP occupancy recovery.
- Confirm the status and terms of any proposed offering and listing, and the practical effects of suspending the DRIP and repurchase plan on liquidity and shareholders.