American Healthcare REIT, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company owns and operates healthcare real estate across medical office, senior housing, skilled nursing, hospitals, senior housing operating properties (SHOP), and integrated senior health campuses. It reported 182 properties comprising 191 buildings, plus 122 integrated senior health campuses, at quarter-end.
Comparability: The October 2021 merger with Griffin-American Healthcare REIT IV and acquisition of AHI expanded the portfolio and made the company self-managed. Q1 2022 reflects the combined company, while Q1 2021 reflects GAHR III as accounting predecessor; management cautions that year-over-year comparisons may not be meaningful.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue and grant income | $376.1 million | $291.3 million |
| Net loss | $0.9 million; controlling-interest loss $3.0 million | $16.3 million; controlling-interest loss $11.8 million |
| Net loss per share, basic and diluted | $0.01 | $0.07 |
| Segment net operating income (NOI; non-GAAP) | $73.7 million | $38.1 million |
| Cash from operating activities | $22.4 million | $(5.3) million |
| Cash used in investing activities | $(27.4) million | $(106.8) million |
| Cash, cash equivalents and restricted cash | $119.2 million | $125.5 million at 2021 year-end |
| Total assets / total liabilities | $4.56 billion / $2.75 billion | $4.58 billion / $2.75 billion at 2021 year-end |
- Revenue rose about 29%, largely reflecting the larger post-merger portfolio, improved occupancy and higher Medicare and Medicaid reimbursement. Grant income declined to $5.2 million from $8.2 million.
- Property operating expenses were $287.2 million and rental expenses were $15.3 million. Management cited portfolio expansion and higher labor costs. General and administrative expense rose to $11.1 million from $7.3 million, including costs of employing the acquired workforce, partly offset by elimination of former-advisor fees.
- Interest expense as presented in the results was $23.3 million, including $4.6 million of debt-extinguishment losses. Management’s separate interest-expense discussion reports $22.8 million after presentation adjustments; the filing does not make these figures directly interchangeable.
- Mortgage debt principal was $1.122 billion; lines of credit and term loans were $1.239 billion, for approximately $2.361 billion of borrowings. The weighted-average effective interest rate on outstanding debt was 2.72%. The company reported $170.9 million of availability under its credit facilities.
- At March 31, the company reported 92.7% leased occupancy excluding SHOP and integrated campuses; those resident units were 77.8% leased in combination. SHOP occupancy remained about 11.5% below February 2020 levels, based on information available April 29.
Material changes and capital allocation
- On January 19, 2022, the company replaced its prior corporate credit facilities with a $1.05 billion facility: a $500 million revolving facility and a $550 million term loan. It also had a separate $360 million Trilogy facility. The new corporate facility uses SOFR-based rates.
- Investing cash outflow was lower than the prior-year quarter, primarily due to reduced acquisitions and development spending and higher disposition proceeds. The company acquired an integrated senior healthcare campus in Kentucky for a contract price of $27.8 million, with a $20.8 million mortgage placed on it. It also sold approximately 77% interests in certain development assets for $19.6 million, retaining approximately 23%.
- Distributions paid in cash and reinvested totaled $26.3 million. Management reported that 85% was funded by operating cash flow and 15% by borrowings. The stated annualized distribution rate was $0.40 per share; beginning with Q3 2022, any distributions would be authorized quarterly at the board’s discretion.
- The company repurchased 448,375 shares for $4.1 million at $9.22 per share, under a plan limited to requests related to death or qualifying disability. The board’s estimated NAV was $9.29 per share, approved March 24, 2022.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said existing resources, including cash flow and borrowing capacity, were expected to meet cash requirements for the foreseeable future.
- Management continued to identify COVID-19 effects, labor shortages, supply-chain disruption, occupancy recovery, and inflation as risks. It warned that higher labor and service costs could pressure profitability and that long-term leases may not adjust quickly enough to offset inflation.
- A 0.50 percentage-point increase in market rates was estimated to increase annualized interest expense on variable-rate debt by $7.6 million. The company also noted uncertainty in transitioning LIBOR-linked debt to alternative benchmarks.
- Properties in Indiana represented 31.4% of portfolio annualized base rent or NOI, creating geographic concentration. The company reported compliance with debt covenants at March 31, except that approval for a merger-related change of control on two mortgages totaling $14.1 million was received in April 2022.
- The company reported no material litigation or known environmental liability and no material changes to previously disclosed risk factors. It noted ordinary-course real estate commitments and property sale/acquisition rights.
- Management said government relief grants mitigated pandemic effects; without recognized relief funds, the pandemic would have materially adversely affected FFO, MFFO and NOI. These are non-GAAP measures, not substitutes for GAAP results or operating cash flow.
Most important facts for investors to verify
- How much of reported revenue and NOI improvement reflects the merger and portfolio growth versus same-property operating improvement; review occupancy, labor costs, and results excluding grant income.
- Debt maturities, variable-rate exposure, covenant headroom, and the company’s ability to refinance or absorb higher interest rates.
- The sustainability and funding of distributions, including the board’s quarterly discretion and the share-repurchase plan’s restrictions.
- SHOP occupancy recovery, especially against the disclosed pre-pandemic decline, and the effect of labor shortages and inflation on operating margins.
- Valuation assumptions underlying the $9.29 estimated NAV, the retained development interests, and the material Indiana concentration.