Strawberry Fields REIT, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Dollar amounts are in millions unless stated otherwise. The company began operations on June 8, 2021, so 2021 comparison periods include the predecessor and are not fully comparable.
Business context
The company owns or leases 79 healthcare properties with 10,426 licensed beds across nine states, primarily skilled nursing facilities. It generally leases properties on a triple-net basis. At June 30, 2022, it owned 78 properties and leased one property that it subleased to an operator. Annualized average base rent was approximately $82.7 million; disclosed future minimum rental revenues totaled $489.0 million.
Financial performance and position
- Revenue: Q2 rental revenue was $21.8 million, up 12.5% from $19.4 million. Six-month revenue was $44.7 million, up 10.5% from $40.5 million, principally reflecting six properties acquired in August 2021.
- Profit and margins: Q2 operating income was $10.4 million versus $10.1 million; operating margin was approximately 48.0%, compared with 52.3%. Q2 net income was $5.3 million versus $4.4 million, with $0.6 million attributable to common stockholders versus $0.1 million. For six months, net income was $22,000 versus $6.0 million and income attributable to common stockholders was $2,000 versus $125,000. The six-month comparison was affected by foreign-currency transaction losses and a prior-year property-sale gain. Six-month FFO was $14.6 million versus $15.5 million; adjusted FFO was $24.8 million versus $21.6 million, including adjustments for currency losses and a rent-receivable write-off.
- Expenses: Six-month general and administrative expense rose 49.6% to $3.4 million, primarily due to stock-based and executive compensation. Doubtful-account provision increased to $0.7 million from $0.1 million. Six-month interest expense fell 8.2% to $10.1 million.
- Cash flow: Six-month operating cash flow was $18.0 million, down from $24.7 million, mainly because accounts payable and accrued liabilities declined. Investing activities used $7.6 million, primarily for notes receivable; financing activities used $19.5 million. Cash and restricted cash ended at $43.0 million, including $9.6 million unrestricted cash and $33.4 million restricted cash.
- Debt and liquidity: Gross debt was $477.8 million, down from $504.2 million at year-end 2021; net debt carrying value was $475.3 million. Debt included $279.5 million of HUD-guaranteed loans and approximately $107.0 million of commercial bank loans. The company reported compliance with financial and administrative covenants. Major disclosed balloon obligations include $45.2 million under Series C Bonds in 2026 and $86.0 million under a commercial loan in 2027.
- Balance sheet: Total assets were $554.7 million, total liabilities $500.4 million, and total equity $54.3 million at June 30, 2022.
Material changes, outlook and risks
- In March 2022, the company borrowed approximately $105 million under a bank mortgage facility, with a variable rate based on one-month SOFR plus 3.5% and a 4% floor. Proceeds refinanced Series B Bonds and other commercial debt. The repayment generated a $10.1 million foreign-currency transaction loss. Management estimated that a further 100-basis-point increase in SOFR or LIBOR, assuming unchanged variable-rate debt, would reduce annual cash flow by about $1.1 million.
- Tenants of six central Illinois facilities notified the company of intended lease defaults. On July 1, 2022, the company re-leased the facilities to an unaffiliated operator under 10-year leases at average base rent of $180,000 per month, below the former $225,000 monthly rent. The company recorded a $1.075 million rent-receivable write-off in Q2. Management reported that, as of the report date, no tenants were delinquent or had requested rent reductions.
- Management said COVID-19 had not materially harmed the company’s financial performance, but reported tenant labor shortages, higher agency costs and occupancy pressures. Tenant ability to pay remains exposed to operating conditions and government reimbursement programs, including Medicare and Medicaid.
- The company intended to elect REIT tax treatment beginning with 2022 and expected operating cash flow to support debt service and REIT distribution requirements. It stated that distributions remain subject to board discretion. No numerical earnings or revenue guidance was provided.
- Material risks include tenant concentration and related-party relationships: 47 of 79 tenants were related parties. A continuing Arkansas lawsuit alleges fraud and breach of contract relating to earlier property transactions; the company disputes the claims and expects no material adverse effect. A separate Illinois complaint had not been properly served. The company also reported a $17.4 million portfolio of three current notes receivable, including loans connected with disputed property transactions.
- Management expected the company to become publicly traded in Q3 2022, with anticipated OTCQX trading under “STRW.” It also reported that disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether the new central Illinois leases remain current and how the lower rent affects collections and property-level economics.
- Tenant financial strength, occupancy and reimbursement exposure, particularly among related-party operators.
- Variable-rate debt exposure, refinancing capacity and ability to meet the 2026 and 2027 balloon payments while maintaining distributions.
- Progress and recoveries on the Massachusetts foreclosure-related notes and the status and potential exposure of the ongoing litigation.
- REIT qualification and the effect of distributions, OP-unit redemptions and potential dilution: 47.2 million OP units were outstanding compared with 6.0 million common shares.
- The cover page indicates the company had not filed all required Exchange Act reports during the preceding 12 months; investors should verify the filing-status context given the company’s recent commencement of operations and reporting history.