Business context and reporting period
This summary covers Griffin-American Healthcare REIT IV, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing entity is Griffin-American Healthcare REIT IV, Inc. The company is an externally advised healthcare REIT investing in medical office buildings, senior housing, senior housing operated under a RIDEA structure, and skilled nursing facilities. At quarter-end it owned 43 properties in 45 buildings, with approximately 2.727 million square feet of gross leasable area.
Financial performance and position
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $19.0 million | $6.2 million in Q2 2017 |
| Net income (loss) | $(1.0) million; $(0.02) per share | $0.6 million; $0.03 per share in Q2 2017 |
| Six-month revenue | $36.9 million | $10.3 million in first-half 2017 |
| Six-month net income (loss) | $(3.2) million; $(0.06) per share | $0.5 million; $0.03 per share in first-half 2017 |
| Six-month operating cash flow | $9.7 million | $5.0 million in first-half 2017 |
| Cash, cash equivalents and restricted cash | $27.0 million | $7.1 million at December 31, 2017 |
| Total assets | $573.4 million | $480.2 million at December 31, 2017 |
| Debt | $17.5 million mortgage principal and $74.4 million line-of-credit/term-loan borrowings | $11.6 million and $84.1 million, respectively, at December 31, 2017 |
Six-month segment net operating income (NOI, a non-GAAP measure) was $18.0 million, versus $7.5 million a year earlier. NOI was 51.0% of revenue in Q2 2018, compared with 74.0% in Q2 2017; for the first half, the corresponding figures were 48.7% and 72.7%. The lower ratios reflect the larger contribution from RIDEA operations, where property operating costs are borne by the company. Depreciation and amortization was $15.0 million for the first half, and interest expense was $2.2 million.
At June 30, the company had $125.6 million of remaining capacity under its $200 million corporate credit facilities. The weighted-average effective interest rate on outstanding debt was 3.95%; $74.4 million of variable-rate borrowings carried a 3.82% rate. A 0.50 percentage-point increase in market rates was estimated to increase annualized interest expense by approximately $377,000. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was primarily attributable to portfolio expansion and the addition of RIDEA and skilled nursing operations; the company owned 45 buildings at June 30, 2018, versus 28 a year earlier. RIDEA contributed $8.4 million of Q2 revenue and $16.8 million for the first half, with no comparable RIDEA revenue in 2017.
- Four acquisitions were completed in the first half for a total contract purchase price of $70.0 million. Real estate investments, net, rose to $479.1 million from $419.7 million at year-end 2017.
- Despite higher revenue and NOI, the company reported net losses in 2018, as depreciation and amortization, interest expense, and operating costs increased with the expanded portfolio.
- Six-month distributions declared totaled $14.4 million. Of $13.8 million in cash distributions and DRIP reinvestments during the period, 70.0% was attributed to operating cash flow and 30.0% to offering proceeds. On an FFO basis, 85.5% was covered by FFO and 14.5% by offering proceeds. Distributions were $0.15 per share for Q2, or $0.30 per share for the first half.
Outlook, commentary, risks and unusual items
- Management said it believes available resources will meet cash requirements for the foreseeable future and does not anticipate needing other funding sources within 12 months. It expects operating cash flow to increase as additional properties are acquired, while also anticipating higher investing outflows, financing activity, and general and administrative costs as the portfolio and equity raise grow. No earnings or revenue guidance was provided.
- The board’s distribution authorization was set at an annualized $0.60 per share through September 30, 2018, subject to legally available funds and board discretion. Management cautioned that distributions may include a return of capital and may be funded from offering proceeds or, in the future, borrowings. Such funding can reduce capital available for investment or increase interest expense.
- Management estimated $2.8 million of capital and tenant-improvement spending for the second half of 2018; restricted cash for these expenditures was $162,000. It estimated $1.8 million of interest and $248,000 of principal payments on debt for the remainder of 2018.
- Four post-quarter acquisitions totaling $82.6 million were completed by August 1, 2018; $80.9 million was funded with corporate-line borrowings. The company owned approximately 98% of the two RIDEA joint ventures.
- Key risks include dependence on continued offering proceeds and access to financing; variable-rate debt exposure; healthcare reimbursement and regulatory changes that could weaken tenants’ ability to pay rent; geographic concentration (Florida, Nevada and Alabama each represented at least 10% of portfolio annualized base rent or NOI at quarter-end); and tenant concentration. Colonial Oaks Master Tenant represented 10.6% of annualized base rent or NOI.
- The estimated NAV of $9.65 per share was approved in April 2018, based on December 31, 2017 information. The filing says it is not audited, is not a GAAP fair value, and may not reflect resale or liquidation proceeds. The company also disclosed material related-party fees and an advisory agreement expiring February 16, 2019, subject to renewal.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material changes to internal control over financial reporting. It adopted ASC 606 in January 2018 without material impact. It was still evaluating the impact of adopting the new lease standard in 2019.
Important facts for investors to verify
- Whether operating cash flow and FFO can support distributions without continued reliance on offering proceeds or borrowing; review the distribution sources and return-of-capital disclosures.
- Whether RIDEA occupancy and operating costs improve: reported leased occupancy was 76.7% for Q2 and 76.5% for the first half of 2018.
- Debt maturity, refinancing and interest-rate exposure, including the $74.4 million variable-rate balance and the 2019 facility maturity.
- Tenant and geographic concentration, tenant credit quality, and the effects of healthcare reimbursement or regulatory changes on rent-paying capacity.
- Acquisition economics and related-party costs, including contingent advisor payments, stockholder servicing fees, and the use of credit facilities to fund post-quarter acquisitions.
- The assumptions and limitations behind the $9.65 estimated NAV and the timing of a subsequent valuation or liquidity event.