American Healthcare REIT, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The company is a self-managed healthcare REIT operating in the U.S., U.K. and Isle of Man. Its four segments are integrated senior health campuses, outpatient medical (OM), triple-net leased properties and senior housing operating properties (SHOP). Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Financial and operating results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue and grant income | $1,866.6 | $1,643.2 |
| Net loss | $(76.9) | $(73.4) |
| Net loss attributable to controlling interest | $(71.5) | $(81.3) |
| Net operating income (NOI, non-GAAP) | $306.8 | $302.0 |
| Net cash from operating activities | $98.5 | $147.8 |
| NAREIT FFO attributable to controlling interest (non-GAAP) | $65.6 | $94.6 |
| Normalized FFO attributable to controlling interest (non-GAAP) | $92.4 | $131.9 |
- Revenue rose 13.6%, led by resident fees and services revenue, up to $1,668.7 million from $1,412.2 million. Real estate revenue declined to $190.4 million from $205.3 million, while grant income fell to $7.5 million from $25.7 million.
- Property operating expenses increased to $1,502.3 million from $1,281.5 million; management cited inflation, labor costs, increased occupancy, acquisitions and transitions of certain facilities into RIDEA operations. Interest expense increased to $164.1 million from $105.5 million.
- NOI improved modestly, but operating cash flow and both reported FFO measures declined. FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- At year-end, assets were $4,577.9 million, total liabilities $3,118.8 million, and total equity $1,425.3 million. Cash and cash equivalents were $43.4 million; restricted cash was $47.3 million.
- Debt totaled approximately $2,551.0 million: $1,326.3 million of mortgage loans and $1,224.7 million under credit facilities and term loans. Reported total liquidity was $268.7 million, including $225.3 million of available credit and $43.4 million of cash. The weighted-average effective interest rate on debt, factoring in swaps, was 5.72%.
- Portfolio at December 31 included 296 buildings/campuses and 18.8 million square feet. Leased percentage was 91.3% for non-RIDEA properties; resident occupancy for SHOP and integrated campuses was 84.4% combined.
Material changes and notable items
- FY2023 revenue growth reflected improved occupancy and pricing at integrated campuses and SHOP, the RHS acquisition, and expanded ancillary services. Some facilities shifted from triple-net leases to RIDEA structures, increasing resident revenue and operating expenses while reducing leased-property revenue.
- The company disposed of 22 properties for an aggregate contract sales price of $194.6 million and recognized a net gain on real estate dispositions of $32.5 million. It recorded $13.9 million of real estate impairment charges and a $10.5 million impairment of Trilogy trade-name intangibles.
- Operating cash flow declined by $49.2 million year over year. Investing activities provided $9.4 million, versus $118.6 million used in 2022, reflecting higher disposition proceeds and lower acquisition spending. Financing activities used $129.1 million.
- Annual distributions were $1.00 per share, or $76.3 million paid in cash. For tax purposes, 97.1% of 2023 distributions were classified as return of capital. The company reported that borrowings funded $10.7 million, or 14%, of distributions when compared with FFO; distributions remain subject to board discretion.
- The board authorized a $0.25 quarterly distribution for the first quarter of 2024. The company stated that it believes available liquidity sources are sufficient for cash requirements over the next 12 months and thereafter; it provided no specific earnings or financial forecast.
Outlook, risks and subsequent events
- Management’s stated priorities include targeted acquisitions, campus development, occupancy and lease-spread growth in OM, and balance-sheet flexibility. Management noted that inflation continues to pressure labor, services, energy and supplies; higher RIDEA resident charges were implemented to help offset costs.
- Key risks include substantial debt and exposure to interest rates, tenant/operator financial distress, healthcare reimbursement and regulatory changes, labor and insurance costs, development risks, and geographic and asset-type concentration. Indiana represented 35.3% and Michigan 10.4% of portfolio annualized base rent/NOI. Integrated senior health campuses represented 51.0% of that measure and are managed by Trilogy’s manager.
- At year-end, 31.8% of debt was unhedged variable-rate debt. The company entered into swaps during 2023 covering $750 million of variable-rate debt. A 0.50 percentage-point rate increase was estimated to raise annualized interest expense by $5.1 million.
- On February 9, 2024, the company completed a public offering of 64.4 million shares at $12 per share, generating $772.8 million gross and $724.6 million net proceeds. It reported using proceeds primarily to repay $176.1 million of mortgage debt and $545.0 million of credit-facility borrowings. Shares began NYSE trading on February 7 under AHR.
- On February 14, 2024, the company replaced its credit agreement with a facility providing up to $1.15 billion of capacity and extending the revolving facility maturity to February 2028. The company also acquired 12 Oregon senior housing facilities in February by assuming $94.5 million of mortgage principal.
- The company has an option to buy NHI subsidiaries’ 24% interest in Trilogy REIT Holdings; it had not exercised the option as of December 31, 2023. The all-cash price ranges from $240.5 million to $260.0 million depending on closing date; a cash/preferred-stock alternative is also available.
- No material litigation was reported. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2023; the auditor did not provide an opinion on internal control effectiveness.
Important facts for investors to verify
- Whether operating cash flow, same-property NOI and occupancy trends improve enough to support distributions without recurring borrowing or asset sales.
- Debt maturities, covenant headroom, variable-rate exposure and the effect of post-year-end offering proceeds and debt repayments on leverage and interest expense.
- Trilogy operating performance, the manager’s capacity and the costs and financing implications if the company exercises its minority-interest purchase option.
- Portfolio exposure to Indiana, senior housing and RIDEA operations, including labor costs, reimbursement trends and occupancy recovery.
- Assumptions behind property impairments and valuations, and the company’s progress leasing or disposing of assets with weaker performance.
- Potential dilution and selling pressure following the NYSE listing, including the August 2024 conversion of Class T and Class I shares into listed common stock.