American Healthcare REIT, Inc. annual report, FY2022

American Healthcare REIT, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. The filing was signed March 17, 2023. The REIT owns and operates healthcare real estate in the U.S., U.K. and Isle of Man, across medical office buildings (MOBs), integrated senior health campuses, senior housing, skilled nursing facilities (SNFs) and hospitals. Some senior housing and campus properties use RIDEA structures, under which the company bears operating risks and participates in operating results.

Financial performance and position

Metric	2022	2021
Total revenues and grant income	$1,643.2 million	$1,282.3 million
Net loss	$(73.4) million	$(53.3) million
Net loss attributable to controlling interest	$(81.3) million	$(47.8) million
Net loss per share	$(1.24)	$(0.95)
Net operating income (NOI; non-GAAP)	$302.0 million	$213.3 million
Funds from operations (FFO; non-GAAP), attributable to controlling interest	$94.6 million; $1.44 per share	$69.7 million; $1.39 per share
Modified FFO (MFFO; non-GAAP), attributable to controlling interest	$128.4 million; $1.95 per share	$77.6 million; $1.55 per share
Net cash provided by operating activities	$147.8 million	$17.9 million
Cash, cash equivalents and restricted cash at year-end	$111.9 million	$125.5 million

Revenue increased 28%; NOI increased 42%. Comparisons are not like-for-like: the October 2021 merger added GAHR IV’s portfolio, and 2021 pre-merger results reflect GAHR III only. The filing cautions that period comparisons may not be meaningful.
Revenue included $25.7 million of government grant income in 2022, primarily pandemic-related. Excluding grants, management reported FFO of approximately $75.0 million and MFFO of $108.8 million for 2022.
Interest expense, including derivative fair-value effects, was approximately $105.5 million, up from $72.7 million. The increase reflected a larger debt portfolio, higher floating rates, lower derivative gains and debt-extinguishment costs.
At December 31, 2022, total debt was $2.537 billion: $1.254 billion of mortgage loans and $1.283 billion of lines of credit and term loans. The weighted-average effective interest rate was 5.82%; borrowings were 48.5% of the company’s defined combined market value of real estate and related investments.
Of total debt, $1.651 billion was variable-rate and unhedged at year-end. A 0.50 percentage-point rate increase was estimated to increase annualized interest expense by $8.4 million. A subsequent swap hedged $275 million of floating-rate term debt, effective February 1, 2023.
Available capacity under credit facilities was $167.4 million at year-end. The company reported compliance with debt covenants then in effect.
Portfolio at year-end: 314 buildings/campuses, approximately 19.9 million square feet and $4.624 billion aggregate contract purchase price. Leased properties were 92.2% occupied, excluding RIDEA assets; resident occupancy was 84.5% at integrated campuses and 77.0% in SHOP.

Material changes and unusual items

2022 net loss worsened despite higher revenue and NOI. The company recorded $54.6 million of real estate impairment charges, affecting 12 SHOP facilities, and a $23.3 million impairment that fully wrote off SHOP goodwill.
Results also included a $19.6 million gain from remeasuring the previously held equity interest when the company acquired control of RHS Partners, which owns or operates 16 integrated senior health campuses. The gain is nonrecurring.
The company acquired additional healthcare properties and interests, including seven Texas senior housing facilities after borrowers defaulted on required debt payments; it assumed approximately $110.6 million of related mortgage principal. It also reported $4.4 million in business acquisition expenses, down from $13.0 million in 2021.
Distributions declared were $1.60 per share for 2022. The tax characterization was 46.5% ordinary income and 53.5% return of capital. The company reported $87.9 million of distributions paid or reinvested and stated they were covered by operating cash flow and FFO for the year.
As of March 15, 2023, the board reduced the quarterly distribution from $0.40 to $0.25 per share, an annualized rate of $1.00, citing higher rates, liquidity preservation and closer alignment with available cash flow.
The board suspended the distribution reinvestment offering and share repurchase plan beginning with the quarter ended December 31, 2022. Repurchase requests from that quarter were canceled. There is no established public trading market; the proposed NYSE listing and offering remained subject to market conditions and regulatory approvals.
The board’s estimated NAV fell from $37.16 per share as of December 31, 2021 to $31.40 as of December 31, 2022, a decrease of about 15.5%. The company stresses that this unaudited estimate is not GAAP fair value and does not assure that shares could be sold at that price.

Outlook, risks and contingencies

Management’s stated priorities include occupancy recovery and expense control in senior housing and campuses, selective acquisitions, campus development with Trilogy, and MOB occupancy and rent growth. Management said resident occupancy had improved toward pre-pandemic levels, but did not provide quantitative earnings or revenue guidance.
Labor shortages, wage and other inflation, elevated interest rates, and the end of the federal COVID-19 public health emergency (announced for May 11, 2023) could affect operating costs, reimbursement support, occupancy and cash flow. Government grants helped support reported performance.
Concentration is significant: integrated senior health campuses contributed 46.8% of annualized base rent/NOI, and MOBs 33.4%. Trilogy is managed by a single operator and represents a substantial portion of the portfolio; Indiana alone contributed 36.2% of portfolio annualized base rent/NOI.
Refinancing and rate risk merit attention. The contractual-obligations table shows approximately $490.8 million of variable-rate principal payments due in 2023; the 2019 Trilogy credit facility, with $316.7 million outstanding at year-end, matures September 2023 and has a conditional extension option. A March 2023 amendment revised certain 2022 Credit Agreement financial covenants for a limited period.
Other major risks include tenant/operator financial distress, healthcare regulation and reimbursement changes, operational exposure under RIDEA, geographic and healthcare-sector concentration, property valuation and impairment, and continued illiquidity absent a successful listing or other liquidity event.
The filing reported no material litigation or known material environmental liability. Deloitte issued an unqualified opinion on the financial statements and identified impairment-indicator assessment for real estate as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal control.

Most important facts for investors to verify

Review the full debt maturity schedule, facility extension terms and covenant amendments, particularly near-term maturities and the impact of higher rates after the $275 million swap.
Assess whether resident occupancy, staffing costs and operating margins continue to improve, especially at SHOP and integrated campuses, and whether government support has ended or changed.
Examine the assumptions behind the $54.6 million property impairments, the SHOP goodwill write-off and the decline in estimated NAV; NAV is not a market price or audited value.
Confirm distribution sustainability against recurring cash flow, including the lower $0.25 quarterly rate, the substantial return-of-capital component and the shift to cash distributions while the DRIP is suspended.
Track Trilogy’s operating performance and management relationship, Indiana concentration, and progress and terms of any proposed public offering or NYSE listing; neither listing nor liquidity is assured.