American Healthcare REIT, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results. The REIT owns and operates healthcare properties, including integrated senior health campuses, medical office buildings (MOBs), senior housing, skilled nursing facilities (SNFs) and hospitals. At June 30, it owned or operated 300 buildings and campuses.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue and grant income | $467.6 million | $388.3 million | $919.8 million | $764.4 million |
| Net loss | $11.9 million | $15.5 million | $39.5 million | $16.4 million |
| Net loss attributable to controlling interest | $12.2 million | $17.3 million | $38.1 million | $20.3 million |
| Loss per common share | $0.19 | $0.26 | $0.58 | $0.31 |
| Segment NOI (non-GAAP) | $80.4 million | $77.6 million | $147.3 million | $151.3 million |
Q2 segment NOI was about 17.2% of revenue, versus 20.0% a year earlier; six-month NOI margin was about 16.0%, versus 19.8%. Revenue grew primarily with higher resident fees and services, including the RHS acquisition, improved occupancy and rates, expanded ancillary services, and the addition of properties. Higher property operating costs and lower grant and leased-property revenue weighed on performance. Six-month interest expense, including derivative fair-value effects, was $75.2 million, up from $43.2 million.
Cash flow: For the six months, operating cash flow was $43.6 million, down from $56.1 million. Investing activities provided $9.7 million, compared with $97.4 million used in the prior-year period, mainly reflecting higher property-sale proceeds and lower acquisition spending. Financing activities used $71.6 million, versus $19.9 million provided. Cash, cash equivalents and restricted cash ended at $93.8 million, including $48.4 million of cash and cash equivalents.
Non-GAAP measures: Six-month FFO attributable to controlling interest was $39.3 million ($0.59 per share), down from $65.3 million ($0.99 per share); normalized FFO was $44.4 million ($0.67 per share), down from $75.5 million ($1.15 per share). These measures are company-defined supplements, not substitutes for GAAP results or cash flows.
Financial position and material changes
- Total assets were $4.67 billion, down from $4.79 billion at December 31, 2022. Real estate investments, net, were $3.48 billion.
- Mortgage principal was $1.26 billion; lines of credit and term-loan borrowings were $1.28 billion. Combined borrowings were $2.54 billion. Cash and cash equivalents were $48.4 million; restricted cash was $45.3 million.
- Aggregate capacity under the two credit facilities was $1.45 billion, with $167.5 million available at June 30. The weighted-average effective rate on outstanding debt, including the interest-rate swap, was 5.69%.
- The $400 million 2019 Trilogy Credit Facility was scheduled to mature September 5, 2023, with a one-year extension option. Management said it intended to satisfy the conditions and pay the fee to extend. Mortgage principal payments due in 2024 were $332.9 million.
- The company sold five SHOP properties and 11 MOBs during the first half for total contract prices of $93.4 million and recorded a net disposition loss of $2.0 million. It acquired an integrated senior health campus and land in Kentucky and Ohio. No real estate impairment was recorded in the 2023 period; the prior-year comparison included a $17.3 million SHOP impairment.
- The quarterly distribution was reduced from $0.40 to $0.25 per share in 2023 to preserve liquidity and align distributions with cash flows. Six-month distributions totaled $43.1 million; the company reported that 91.1% was covered by FFO and 8.9% was sourced from borrowings. The DRIP and share repurchase plan were suspended.
Outlook, commentary and risks
- Management stated that liquidity sources should be sufficient for cash requirements over the next 12 months and longer term, while noting the need to fund operations, debt service, capital spending and REIT distributions. The filing provides no numerical earnings or revenue guidance.
- Management estimated $69.4 million of unspent discretionary capital and tenant improvements for the second half of 2023. It also reported $16.6 million of restricted cash in loan impounds and reserve accounts for capital expenditures.
- At June 30, properties excluding SHOP and integrated campuses were 92.5% leased; combined SHOP and integrated campuses were 82.6% leased/occupied. Resident-unit occupancy was 83.9% at integrated campuses and 78.6% at SHOP. Management said occupancy was improving but had not returned to pre-pandemic levels across all asset types.
- Inflation, elevated labor costs and staffing shortages continue to pressure operating costs and margins. COVID-related relief programs have ended or are being phased out, and the impact of their withdrawal on operators and occupancy is uncertain. Other identified risks include interest-rate changes, refinancing and debt-extension capacity, tenant and resident credit, geographic concentration, foreign currency, and REIT qualification.
- After quarter-end, the company entered an interest-rate swap effective August 8, 2023, covering $275 million of floating-rate debt. Beginning September 1, it is to pay a fixed 4.41% rate through January 2026. The proposed NYSE listing and related offering registration were not yet effective.
- The company reported compliance with debt covenants at June 30 and no material litigation known to management. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Trilogy credit facility extension was completed, and the associated fee and revised maturity.
- How the substantial 2024 mortgage maturities will be refinanced or repaid, and how much credit availability remains after subsequent activity.
- Whether occupancy and property-level margins improve enough to offset labor, inflation and reduced government support.
- Whether operating cash flow and FFO can support the reduced distribution without further borrowing or asset sales.
- The status and terms of the proposed listing and offering, and the effect of any subsequent financing or portfolio transactions.