Business context and reporting period
Strawberry Fields REIT, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The REIT owns, acquires, finances and triple-net leases healthcare properties, primarily skilled nursing facilities. At quarter-end it reported 79 properties and 10,426 beds across nine states: 78 properties owned and one leased and subleased. It began public trading on September 21, 2022 and operates through an UPREIT; the company held approximately 11.3% of the Operating Partnership units, with the remainder presented as noncontrolling interest. The 2021 comparison includes predecessor-period results before the company’s June 8, 2021 formation, limiting comparability.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
- Revenue: Third-quarter rental revenue was $24.2 million, up 2.9% year over year; nine-month revenue was $69.0 million, up 7.7%. Management attributed growth mainly to six properties acquired in August 2021, partly offset by a $1.1 million second-quarter straight-line rent write-off.
- Profit: Third-quarter operating income was $17.5 million versus $10.6 million; net income was $9.25 million versus $2.68 million. Net income attributable to common stockholders was $1.02 million, or $0.17 per diluted share, compared with $0.29 million, or $0.05 per share. Nine-month net income was $9.27 million versus $8.73 million; common-stockholder income was $1.02 million versus $0.42 million, or $0.17 versus $0.07 per share. Most consolidated earnings are allocated to noncontrolling OP-unit holders.
- Notable earnings item and operating costs: Third-quarter expenses include a $5.1 million credit for doubtful accounts, which management attributed to recovery following mortgage foreclosures on Massachusetts properties. Nine-month credit was $4.44 million. Excluding that credit, reported operating improvement would be materially different. Nine-month depreciation rose 8.6% to $19.4 million and property taxes rose 20.3% to $9.5 million; G&A fell 11.2% to $4.15 million.
- Interest and currency: Nine-month total interest expense was $17.5 million, up 3.0%. A $10.9 million foreign-currency transaction loss was recorded, largely associated with repayment of Series B Bonds; the corresponding amount was $8.8 million in 2021. Nine-month net income also compares against a $3.84 million real-estate sale gain in 2021.
- Cash flow: Nine-month operating cash flow was $37.4 million versus $31.2 million. Investing used $8.5 million, primarily reflecting increased notes receivable, compared with $63.4 million used in 2021, which included property purchases. Financing used $43.9 million, including debt repayments and $10.9 million in distributions to noncontrolling holders. Cash and restricted cash declined $14.9 million to $37.2 million, including $13.9 million unrestricted cash and $23.4 million restricted cash.
- Debt and liquidity: Gross debt was approximately $459.0 million at quarter-end: $277.6 million of HUD-guaranteed loans, $75.3 million of bonds and $106.1 million of bank loans. The balance sheet reports $457.5 million net of debt issuance costs. HUD debt’s stated overall rate, including insurance premiums, was 3.88%; the $103.3 million bank facility was floating-rate at 6.1% at September 30. Management reported compliance with financial and administrative covenants. Scheduled principal includes $57.1 million in 2026 and $86.0 million due under a commercial term loan in 2027; management also identified a $44.6 million Series C balloon in 2026.
- Other metrics: Annualized average base rent was approximately $82.3 million; future minimum rental revenue under leases totaled $472.9 million. Nine-month FFO was $26.5 million and adjusted FFO was $36.4 million; third-quarter FFO was $11.2 million and adjusted FFO was $10.9 million. These are non-GAAP supplemental measures, not substitutes for operating cash flow or GAAP earnings.
Material changes versus prior comparable period
- Rental revenue increased, primarily reflecting the six properties acquired in August 2021. Property and depreciation costs also increased.
- Third-quarter net income rose sharply, principally because of the Massachusetts foreclosure recovery recorded as a credit to doubtful accounts, rather than solely recurring rent growth.
- Interest costs increased, including from higher floating rates. Nine-month foreign-currency losses increased, while 2021 included a real-estate sale gain absent in 2022.
- Debt structure shifted: a $105 million commercial mortgage facility closed in March 2022 and was used to repay Series B Bonds and other non-HUD bank debt. The facility bears SOFR plus 3.5%, subject to a 4% floor, and matures in March 2027 with a balloon payment.
- One affiliated tenant defaulted on leases covering six central Illinois facilities. New unaffiliated operators took leases effective July 1, 2022, at average combined base rent of approximately $2.3 million annually over the new 10-year terms, versus $2.7 million annually under the former leases.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expects operating cash flow to cover ongoing debt service and distributions required to maintain intended REIT status, and expects to qualify as a REIT beginning with tax year 2022. Qualification and required distributions remain subject to statutory and operational tests; the company stated it intends, but is not contractually bound, to pay regular quarterly dividends.
- Management said COVID-19 had not materially harmed the company’s performance, liquidity or financing access, but tenants faced labor shortages, higher costs and occupancy/admissions pressure. Management cited occupancy recovery and tenants’ variable cost structures as mitigating factors; tenant rent-paying capacity remains a key exposure.
- Approximately 41 of 79 tenants were related parties. The portfolio is geographically concentrated: Illinois represented 21 properties and 41.5% of beds. Tenant revenues depend substantially on Medicare and Medicaid reimbursement and regulation. Management reported no tenants delinquent on rent as of the report date.
- Interest-rate exposure is material: management estimated that a 100-basis-point increase in relevant floating benchmarks would reduce annual cash flow by approximately $1.06 million, assuming no change in variable-rate debt. Refinancing, debt covenants, balloon maturities, tenant credit and access to capital markets are additional risks.
- Pending Arkansas and Illinois state-court claims allege fraud, breach of contract and rescission relating to prior property transactions. The company disputes the claims and expects no material adverse effect, but litigation remains ongoing. From Massachusetts foreclosure sales totaling $7.5 million, $4.4 million had been received by September 30; collection efforts for the remaining property and amounts were ongoing.
- A planned sale of a Texas facility for $12 million, with an anticipated gain of approximately $5.1 million, was expected to close in early December 2022. In October, the company also established a $2.5 million line of credit for new Southern Illinois tenants, secured by tenant receivables.
- Management concluded disclosure controls were effective as of September 30, 2022 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported earnings and FFO depends on the $4.4 million Massachusetts foreclosure recovery and other nonrecurring items, and what collections remain outstanding?
- Whether tenant rent coverage and occupancy—particularly among related-party operators and Illinois facilities—remain adequate after the lease default and replacement.
- Floating-rate debt costs, covenant headroom and refinancing capacity ahead of the 2026 and 2027 balloon obligations.
- Actual completion and proceeds of the planned Texas property sale, and the final recovery from the Massachusetts foreclosure assets.
- REIT qualification and distribution capacity, including the effect of debt service, OP-unit distributions and bond-indenture restrictions.
- Outcome and potential exposure from the pending state-court litigation, and continued compliance with all debt covenants.