American Healthcare REIT, Inc. — Filing summary
Registrant clarification: The filing identifies the registrant as Griffin-American Healthcare REIT IV, Inc., not American Healthcare REIT, Inc.
Business context and reporting period
Unaudited Form 10-Q for the three and nine months ended September 30, 2018, compared with the same 2017 periods. The externally advised healthcare-property REIT reported four segments: medical office buildings, senior housing, senior housing operated under a RIDEA structure, and skilled nursing.
At quarter-end, the company owned 56 properties comprising 58 buildings, with approximately 3.39 million square feet and an aggregate contract purchase price of $714.5 million. It completed 10 acquisitions during the first nine months of 2018, including a 10-facility Missouri skilled-nursing portfolio.
Financial and operating performance
| Metric | Q3 2018 | Nine months 2018 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $22.3 million | $59.1 million | $8.5 million and $18.7 million, respectively |
| Net income (loss) | $(1.7) million | $(4.9) million | $0.8 million and $1.3 million, respectively |
| FFO attributable to controlling interest | $7.3 million | $19.1 million | $4.2 million and $8.9 million, respectively |
| MFFO attributable to controlling interest | $6.6 million | $17.2 million | $3.7 million and $8.0 million, respectively |
| Cash provided by operating activities | Not presented for quarter alone | $15.7 million | $8.8 million |
Revenue rose substantially year over year, primarily reflecting acquisitions and the addition of RIDEA resident-fee revenue; the periods are not directly comparable in portfolio scope. Q3 RIDEA resident fees were $9.8 million, with $8.0 million of property operating expenses. Total segment NOI was $11.1 million for Q3 and $29.1 million for the nine months. Higher depreciation and amortization, interest costs, and corporate expenses contributed to GAAP losses despite growth in revenue and FFO.
At September 30, total assets were $756.7 million, versus $480.2 million at year-end 2017; real estate investments, net, were $638.6 million. Cash and cash equivalents were $30.8 million, plus $0.2 million of restricted cash. Total liabilities were $258.9 million. Debt consisted of $200.0 million outstanding on the line of credit and term loan and $17.4 million of mortgage principal ($17.0 million net carrying value). The credit facility had $350 million of capacity, leaving $150 million available. Weighted average effective interest on outstanding debt was 4.01%; the variable-rate balance was $200 million and scheduled to mature in 2019, subject to extension rights. The company reported compliance with debt covenants.
Nine-month investing cash use was $257.8 million, mainly acquisitions; financing cash provided was $266.0 million. Net cash, cash equivalents and restricted cash increased by $23.9 million to $31.0 million.
Material changes versus the prior comparable period
- Revenue increased 162% in Q3 and 216% for the nine months, while the company moved from GAAP net income to a net loss in both comparisons.
- The property portfolio grew from 30 buildings at September 30, 2017 to 58 at September 30, 2018. New skilled-nursing and RIDEA operations contributed revenue but also added operating costs.
- Debt outstanding increased from $95.7 million at December 31, 2017 to $217.4 million of mortgage and credit-facility principal at September 30, 2018. The credit facility’s borrowing capacity expanded to $350 million in a September amendment.
- Operating cash flow increased to $15.7 million from $8.8 million; nine-month distributions declared per share remained $0.45.
Outlook, commentary, risks and unusual items
- Management said available offering proceeds, operating cash flow and borrowings were expected to meet cash needs for the foreseeable future, with no anticipated need for other funding within 12 months. It expected acquisitions to increase operating and investing activity. No earnings or revenue guidance was provided.
- The company declared distributions at an annualized rate of $0.60 per share through December 31, 2018. Nine-month distributions totaled $22.3 million, including reinvested distributions; 70.4% was attributed to operating cash flow and 29.6% to offering proceeds. On an FFO basis, 14.1% was attributed to offering proceeds. The filing warns distributions may include a return of capital and could be funded from borrowings or other sources.
- Non-RIDEA properties were 95.5% leased; RIDEA facilities had average occupancy of 76.7% for the nine-month period. Missouri and Florida represented 16.1% and 12.1% of portfolio annualized base rent or NOI, respectively. One skilled-nursing tenant represented 14.4%, creating tenant and geographic concentration exposure.
- Key risks include tenant financial health and rent collection, healthcare reimbursement and regulatory changes, access to offering capital, variable interest rates, property occupancy, and the ability to refinance debt. A 0.50 percentage-point rate increase was estimated to raise annualized interest expense by about $1.0 million.
- Subsequent event: effective October 1, 2018, the company acquired a 6% interest in the Trilogy Joint Venture for $48 million cash, funded with offering proceeds and borrowings. It accrued approximately $2.1 million each for a base acquisition fee and a contingent advisor payment.
- The estimated $9.65 per-share NAV was based on December 31, 2017 valuations, was not audited, and may not reflect sale or liquidation value. The company also disclosed that adoption of the new lease standard on January 1, 2019 was expected to recognize lessee operating leases on the balance sheet; the full impact remained under evaluation.
- The filing reported no material litigation, no material change in risk factors other than those discussed, and effective disclosure controls as of September 30, 2018.
Important facts for investors to verify
- Confirm the legal registrant and distinguish it from similarly named healthcare REITs.
- Assess distribution coverage from recurring operations and the extent to which distributions rely on offering proceeds, reinvestment, or debt.
- Review tenant credit quality, especially the major skilled-nursing tenant, and geographic concentrations in Missouri and Florida.
- Check 2019 credit-facility maturity and extension conditions, covenant headroom, and exposure to variable rates.
- Evaluate the Trilogy investment, related-party acquisition fees, and the assumptions underlying the non-audited $9.65 estimated NAV.