Strawberry Fields REIT, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Dollar amounts are in millions unless otherwise noted. The company owns and triple-net leases post-acute healthcare real estate; its portfolio comprised 79 properties and 10,351 licensed beds across nine states. All facilities were leased at period-end.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Rental revenue | $24.3 | $21.8 | $48.6 | $44.7 |
| Income from operations | $12.5 | $10.4 | $22.0 | $20.2 |
| Net income | $5.7 | $5.3 | $9.8 | $0.02 |
| Net income attributable to common stockholders | $0.70 | $0.59 | $1.19 | $0.002 |
| Basic and diluted EPS | $0.11 | $0.10 | $0.19 | Less than $0.01 |
- Revenue increased 11.6% year over year in Q2 and 8.5% for the first half, which management attributed to rent escalations, lease renewals or renegotiations, the Kentucky acquisition, and tenant reimbursements of property taxes.
- Q2 operating income margin was approximately 51.5% and net income margin 23.4%; first-half margins were approximately 45.3% and 20.2%, respectively. These are calculated from reported GAAP figures.
- First-half 2023 net income improved substantially from 2022, principally because the prior-year period included a $10.1 million foreign-currency transaction loss associated with repayment of Series B Bonds. Q2 net income rose 6.4% year over year.
- FFO was $12.7 million for Q2 and $23.8 million for the first half; adjusted FFO was $13.4 million and $26.5 million, respectively. These are non-GAAP measures and should not be treated as operating cash flow or cash available for distributions.
| Balance-sheet and cash-flow metric | June 30, 2023 | December 31, 2022 or comparable period |
|---|---|---|
| Total assets | $557.7 | $547.0 |
| Real estate investments, net | $430.0 | $438.9 |
| Cash and cash equivalents | $37.6 | $20.2 |
| Restricted cash | $29.5 | $25.5 |
| Total debt, net of issuance costs | $478.6 | $455.4 |
| Total equity | $52.1 | $49.4 |
| Operating cash flow, six months | $25.6 | $18.0 in 2022 |
| Investing cash flow, six months | $(4.4) | $(7.6) in 2022 |
| Financing cash flow, six months | $0.3 | $(19.5) in 2022 |
Cash and restricted cash totaled $67.1 million. Debt included $275.2 million of HUD-guaranteed loans, $100.6 million of commercial bank loans, and approximately $102.7 million of Series A, C, and D Bonds, net. The commercial loan was floating-rate debt at 8.67% at quarter-end; HUD debt carried an overall rate of 3.88%, including mortgage insurance. The filing reports all financial and administrative covenants were met at June 30.
Material changes, outlook, and risks
- Financing and interest costs: The company issued additional Series C Bonds and its first Series D Bonds in 2023; the Series D Bonds carried a 9.1% rate. First-half total interest expense increased 11.1% to $11.2 million, with management citing the higher floating rate on the commercial loan and new bond debt. July 2023 issuance raised a further $19.2 million gross.
- Acquisitions and commitments: In January, the company acquired a 120-bed Kentucky skilled nursing facility for $6.0 million, with initial annual rent of $0.6 million. It agreed to buy 24 Indiana healthcare facilities for $102.0 million, with closing expected in Q3 2023; funding was expected from working capital and a third-party lender. The transaction includes an approximately $6.5 million loan to sellers due within 60 days after closing. The facilities are leased to tenants affiliated with two directors, under a master lease providing $9.5 million annual rent.
- Property impairment: A southern Illinois facility closed at the tenant’s request. The closure did not reduce rent under its master lease, but the company recorded a $2.5 million impairment and is seeking to sell the property.
- Debt and liquidity risks: The filing identifies significant future balloon obligations, including $51.6 million on Series C Bonds and $19.7 million on Series D Bonds in 2026, and an $86.0 million commercial mortgage balloon in 2027. Management expects operating cash flow to cover debt service and REIT distribution requirements, but notes that refinancing or alternative capital may not be available on attractive terms. A 100-basis-point increase in SOFR would reduce annual cash flow by approximately $1.0 million, assuming variable-rate debt remains unchanged.
- Distributions: The company paid $1.4 million in common dividends during the first half. On August 10, the board approved a $0.11-per-share dividend, payable by September 29, 2023. Dividend payments remain subject to board discretion and debt-indenture restrictions.
- Other risks and unusual items: Q2 included a $1.0 million fee to cancel a proposed financing agreement. The company disclosed ongoing Arkansas litigation alleging fraud, breach of contract, and rescission; related Illinois complaints were dismissed, while the Arkansas case remained in discovery. The company believes the claims are without merit and does not expect a material adverse effect. Other risks include healthcare reimbursement and regulation, tenant ability to pay rent, interest rates, financing access, and property and tenant concentration. Illinois represented 40.8% of portfolio beds.
- Related parties: 41 of 83 tenants were related parties, and related-party tenants generated $26.3 million of first-half rental income. This creates governance and tenant-credit considerations alongside the disclosed director-affiliated Indiana lease.
Important facts for investors to verify
- Whether and when the Indiana acquisition closed, how the $102.0 million purchase was financed, and whether the seller loan was repaid as scheduled.
- Tenant rent collection, facility-level operating performance, and the credit quality of related-party tenants; management reported no tenants delinquent as of the report date.
- Refinancing plans and covenant headroom for the 2026 and 2027 balloon payments, including sensitivity to floating rates and bond-market access.
- Progress and expected proceeds from selling the closed Illinois facility and the foreclosed Massachusetts property, and any further impairment or collection losses.
- Developments in the Arkansas litigation, the status of the declared dividend, and compliance with REIT distribution and debt-indenture requirements.