Strawberry Fields REIT, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Unless otherwise stated, financial amounts below are in millions of dollars. The REIT owns and leases healthcare properties, primarily skilled nursing facilities, under long-term triple-net leases. At quarter-end it reported 80 properties and 10,351 licensed beds across nine states; substantially all revenue is rental income.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Rental revenue | $24.247 | $22.959 in Q1 2022; up 5.6% |
| Income from operations | $9.492 | $9.761 in Q1 2022 |
| Net income (loss) | $4.139 | $(5.316) in Q1 2022 |
| Net income (loss) attributable to common stockholders; diluted EPS | $0.495; $0.08 per share | $(0.585); $(0.10) per share in Q1 2022 |
| Operating margin | 39.1% of rental revenue | 42.5% in Q1 2022 |
| Operating cash flow | $9.976 provided | $(2.731) used in Q1 2022 |
| Investing / financing cash flow | $(4.523) / $1.769 | $0.162 / $(11.368) in Q1 2022 |
| Cash and restricted cash | $52.926 combined; $32.396 unrestricted cash and $20.530 restricted | $45.704 combined at December 31, 2022 |
| Total assets / total liabilities | $549.568 / $499.426 | $547.000 / $497.616 at December 31, 2022 |
| Debt | Approximately $461.2 net carrying amount | $455.4 at December 31, 2022 |
Debt includes approximately $273.9 of HUD-guaranteed loans, $104.3 of bank loans, and $83.0 of net Series A and C bonds. The bank loan is floating-rate; its rate was 8.37% at quarter-end. The filing reports compliance with applicable financial and administrative covenants as of March 31, 2023.
Management’s non-GAAP measures were FFO of $13.578 and adjusted FFO of $13.087, versus $1.967 and $11.573, respectively, in Q1 2022. These measures are not substitutes for GAAP earnings or operating cash flow.
Material changes versus Q1 2022
- Rental revenue grew $1.288, which management attributed to lease renewals and increased property taxes collected from tenants.
- GAAP net income improved by $9.455, principally because Q1 2022 included a $10.1 foreign-currency transaction loss related to Series B Bonds repayment. Q1 2023 earnings included a $2.451 real estate impairment.
- Total expenses rose 11.8% to $14.755. The impairment and a 26.3% increase in property taxes were partly offset by lower G&A expenses and no doubtful-account provision.
- Net interest expense increased; management cited higher floating rates on the commercial mortgage. Operating cash flow improved to $9.976, while cash flow statements show a net increase of $7.222 in cash and restricted cash.
- The Company acquired a Kentucky facility for $6.0, adding 120 licensed beds to an existing master lease with initial annual rent of $0.6 and approximately 3% annual escalations. It also issued additional Series C Bonds, raising gross proceeds of about $10.7.
Outlook, risks and unusual items
- Outlook: The filing provides no specific earnings or FFO guidance. Management expects operating cash flow to cover ongoing debt service and REIT distribution requirements, and anticipates using operating cash, debt and potential equity offerings to fund liquidity needs and acquisitions. This is not a guarantee of future results.
- Debt and rate exposure: Management identifies balloon maturities of approximately $52.8 in 2026 under Series C Bonds and $86.0 in 2027 under the commercial bank loan. A 100-basis-point increase in one-month SOFR, assuming unchanged variable-rate debt, would reduce annual cash flow by approximately $1.043. Refinancing may not be available on favorable terms.
- Tenant and sector exposure: Rent depends on tenants’ ability to pay, while tenant operations are exposed to labor costs and shortages, occupancy, and Medicare and Medicaid reimbursement and regulatory changes. Illinois accounts for 25% of properties and 40.83% of beds. Management reported no tenants delinquent on rent as of the report date and no material adverse COVID-19 impact on the Company, but described tenant cost and labor pressures.
- Related parties: 41 of 83 tenants were related parties. Related-party tenants generated $11.838 of Q1 2023 rent receipts. Management and director affiliates have interests in these tenants; the filing also reports Company deposits at a bank whose chairman is the Company’s CEO.
- Property impairment and sale: A Southern Illinois facility closed at the tenant’s request and was listed for sale. The Company wrote off its remaining book value, recording a $2.451 impairment; rent under the master lease with five other facilities continued without interruption at the same amount. Two properties were classified as held for sale at March 31, 2023.
- Legal and other contingencies: The Company disclosed ongoing Arkansas litigation and a newly refiled Illinois complaint involving predecessor-company property transactions. Defendants dispute the claims; management believes the matter will not have a material adverse effect. The Company is also pursuing recovery of amounts tied to Massachusetts properties and loans.
- Subsequent events: On May 1, 2023, the Company paid $15.593 to redeem 1,454,308 OP units. On May 9, the board approved a $0.11-per-share dividend payable before June 30, 2023. These events occurred after quarter-end.
Most important facts for investors to verify
- Reconcile reported common shares: the balance sheet and equity note report 6,365,856 shares at March 31, while the cover page reports 6,356,856 shares outstanding as of May 15, 2023.
- Confirm the post-quarter $15.593 OP-unit redemption’s effect on cash, outstanding OP units, and potential common-share dilution.
- Review the debt maturity schedule, floating-rate exposure, and compliance headroom under the bank and bond covenants, including the 2026 and 2027 balloon payments.
- Assess related-party tenant concentration, tenant credit and rent coverage, and the extent to which lease receipts depend on operators with common ownership or management ties.
- Track sale proceeds and recovery prospects for the impaired Southern Illinois facility and the foreclosed Massachusetts property, as well as the outcome of the disclosed litigation.
- Note that the filing reports both $461.2 of net debt carrying value and $463.1 of gross debt; confirm the appropriate basis when comparing leverage across periods.