Strawberry Fields REIT, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company owns, acquires, finances and triple-net leases skilled nursing and other post-acute healthcare properties. At quarter-end, its portfolio comprised 98 properties and 107 facilities with 12,203 licensed beds across nine states; 97 properties were owned and one was leased.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Rental revenue | $25.771m | $24.235m | $74.325m | $68.972m |
| Income from operations | $13.056m | $17.501m | $35.063m | $37.710m |
| Net income | $4.704m | $9.250m | $14.525m | $9.272m |
| Net income attributable to common stockholders | $0.589m | $1.018m | $1.782m | $1.020m |
| Basic and diluted EPS | $0.09 | $0.17 | $0.28 | $0.17 |
| Net cash from operating activities | Not separately provided for quarter | $42.006m | $37.421m |
Margins: Operating margin, calculated as income from operations divided by rental revenue, was approximately 50.7% in Q3 2023 versus 72.2% in Q3 2022, and 47.2% for the first nine months versus 54.7%. Comparisons are affected by the prior-year credit-loss provision reversal, which reduced expenses by $5.1m in Q3 and $4.4m year to date.
Q3 revenue increased 6.3%, primarily from the Indiana acquisition, lease renewals and tenant reimbursements. Q3 net income fell 49.1%, reflecting the prior-year credit-loss benefit, higher general and administrative costs, and higher interest expense. For the nine months, net income rose 56.7%, helped by higher rent and the absence of the prior-year $10.9m foreign-currency transaction loss, partly offset by increased interest expense, property taxes and a real estate impairment.
Reported nine-month FFO was $35.791m, versus $30.929m; adjusted FFO was $37.929m, versus $36.361m. Q3 FFO was $11.995m versus $16.342m, while adjusted FFO was $11.469m versus $10.866m. These are non-GAAP measures and are not substitutes for operating cash flow or GAAP income.
Balance sheet, debt and liquidity
- At September 30, 2023, total assets were $629.820m, including net real estate investments of $525.527m. Total liabilities were $575.922m and total equity was $53.898m.
- Cash and cash equivalents were $9.540m; restricted cash was $25.480m, for combined cash and restricted cash of $35.020m. Operating cash flow was $42.006m for the first nine months; investing used $113.550m, principally for property acquisitions and notes receivable. Financing provided $60.860m.
- Net notes payable and other debt were $543.194m, including $273.3m of HUD-guaranteed loans, $165.7m of bank loans and $104.2m of net bonds. Gross debt was $546.460m. Net debt increased from $455.415m at year-end 2022. The company reported compliance with its financial and administrative covenants at quarter-end.
- Commercial bank facilities have floating rates based on one-month SOFR plus 3.5%, with a 4% floor; the reported rate was 8.83%. Management estimates a 100-basis-point SOFR increase would reduce annual cash flow by approximately $1.6m, assuming variable-rate debt remains unchanged.
- Management cited future balloon payments of $49.9m and $35.2m on Series C and D bonds in 2026, $86.1m on a bank mortgage in 2027, and $60.7m on another bank mortgage in 2028. It expects operating cash flow to cover current debt service and REIT distributions, and expects to refinance balloon maturities as needed.
Material developments, outlook and risks
- In August, the company acquired 24 Indiana healthcare facilities for $102m, funded in part with a $66m commercial mortgage. The acquisition increased the portfolio and contributed to revenue growth. The facilities are leased under a master lease to tenants affiliated with directors Moishe Gubin and Michael Blisko; the tenants have a purchase option after six years for $127m. Overall, 64 of 107 tenants were related parties at quarter-end.
- The company recorded a $2.451m impairment after a southern Illinois skilled nursing facility closed and lost its operating license. Aggregate rent under its master lease continued without interruption; the company is seeking to sell the property.
- Rental income depends on tenants’ ability to pay, while tenant operations are exposed to Medicare and Medicaid reimbursement and healthcare regulation. Other identified risks include interest rates, refinancing and capital availability, tenant credit, geographic concentration, currency movements, REIT qualification and pending litigation.
- A lawsuit relating to predecessor-company property acquisitions remains in discovery in Arkansas; the company says it believes the claims lack merit and does not expect a material adverse effect. Other related complaints were dismissed. The company is also pursuing recovery related to loans on Massachusetts properties.
- No formal financial guidance is provided. Management reported no tenant rent delinquencies or requests to amend or reduce lease payments as of the report date.
- Subsequent events: a 10-year lease for three Texas facilities is scheduled to begin December 1, 2023, with 2.5% annual increases. Series A bonds were paid off November 8, 2023, with a $900 prepayment penalty. The board approved a $0.12-per-share dividend, payable by year-end 2023.
Important facts for investors to verify
- Tenant rent coverage, liquidity and concentration—especially among related-party operators and in Indiana and Illinois.
- Terms, collateral, refinancing plans and covenant headroom for floating-rate loans and the 2026–2028 balloon maturities.
- Whether the Indiana acquisition’s related-party lease economics and purchase option support durable rent collection and property value.
- Cash available for dividends after debt service, acquisitions and required REIT distributions; the $0.12 dividend was approved after quarter-end.
- Progress on the impaired Illinois property sale and the outcome or potential exposure from pending litigation and Massachusetts loan recoveries.