Filing summary
Issuer identity: The supplied filing is for Griffin-American Healthcare REIT IV, Inc., not American Healthcare REIT, Inc. Verify that this is the intended filing before relying on the figures.
Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. The REIT invests primarily in healthcare real estate and reports medical office buildings and senior housing as its two segments. At quarter-end it owned 29 properties comprising 30 buildings, with approximately 1.418 million square feet of gross leasable area. The portfolio was 95.7% leased, with an 8.5-year weighted-average remaining lease term. Management estimated a 6.9% portfolio capitalization rate using forward-looking year-one property projections.
Comparisons with 2016 are substantially affected by the company’s early stage: it began material operations in 2016 and had five buildings at September 30, 2016, versus 30 at September 30, 2017.
Financial and operating performance
- Revenue: Third-quarter revenue was $8.488 million, versus $0.312 million a year earlier. Nine-month revenue was $18.738 million, versus $0.338 million. 2017 revenue included $15.456 million from medical office buildings and $3.282 million from senior housing.
- Profit: Third-quarter net income was $0.754 million, compared with a $2.092 million loss. Nine-month net income was $1.290 million, compared with a $2.855 million loss. Nine-month diluted earnings per share were $0.05, versus a $2.12 loss per share.
- Property-level results: Nine-month segment NOI, a non-GAAP measure, was $13.845 million ($10.913 million medical office buildings; $2.932 million senior housing), compared with $0.217 million in the prior-year period. Depreciation and amortization rose to $7.619 million from $0.064 million as the portfolio expanded.
- Cash flow: Nine-month operating cash flow was $8.849 million, versus cash used of $2.391 million. Investing activities used $222.118 million, principally for acquisitions; financing activities provided $215.429 million. Cash and cash equivalents at quarter-end were $4.397 million.
- Debt and liquidity: At September 30, debt included $11.718 million of mortgage principal and $26.0 million drawn on a $100 million revolving credit line, leaving $74 million available. Weighted-average effective interest on outstanding debt was 4.09%; the line-of-credit rate was 3.72%. The company reported covenant compliance. Total assets were $371.512 million and total liabilities were $65.365 million.
- Distributions: Distributions declared were $0.15 per share for the quarter and $0.45 year to date, compared with $0.15 and $0.25, respectively, in 2016. The stated annualized rate was $0.60 per share. Of $9.498 million in nine-month distributions, $4.006 million was paid in cash and $5.492 million reinvested through the DRIP. The filing attributes 93.2% to operating cash flow and 6.8% to offering proceeds; it also cautions that distributions may include a return of capital.
Material changes and significant items
- Real estate investments, net increased to $318.942 million from $117.942 million at year-end 2016. The company completed eight acquisitions in the first nine months of 2017 for an aggregate contract price of $217.820 million.
- Common shares issued and outstanding increased to 36.230 million from 11.377 million at year-end 2016. The company reported $353.510 million of accepted primary-offering subscriptions as of September 30, excluding DRIP shares.
- The company early adopted ASU 2017-01 and treated its 2017 acquisitions as asset acquisitions; related direct acquisition costs were capitalized. This differs from the 2016 acquisitions, which were accounted for as business combinations, affecting period comparability.
- Subsequent to quarter-end, the company expanded its credit facilities to aggregate capacity of $200 million, comprising a $150 million revolver and a $50 million term-loan facility. It also acquired a Central Florida senior-housing portfolio on November 1 for $109.5 million, using $112 million of credit-facility borrowings; its effective joint-venture ownership was approximately 98%.
Outlook, risks and contingencies
Management said available resources should meet cash requirements for the foreseeable future and that it did not anticipate needing other funding sources within 12 months. It expected operating cash flow and acquisition activity to grow, but provided no specific earnings or revenue guidance. Management noted that interim results may not indicate full-year performance.
Key risks include dependence on continuing offering proceeds and access to financing; the possibility that distributions may be funded partly from offering proceeds or borrowings; tenant and geographic concentration; lease renewals, occupancy and capital needs; variable-rate debt exposure; and healthcare reimbursement, regulatory and policy changes that could weaken tenants’ ability to pay rent. Two tenants represented 15.1% and 14.0% of annualized base rent at quarter-end, and Nevada, Alabama and California represented 17.2%, 15.3% and 12.6%, respectively. A 0.50 percentage-point increase in variable rates was estimated to raise annualized interest expense by $132,000.
The company reported no material litigation, no material environmental liability known to it, no off-balance-sheet arrangements, and no material changes to disclosure controls; management considered disclosure controls effective. It stated that it was in compliance with debt covenants at September 30, 2017. The filing also describes related-party compensation and accrued amounts payable to affiliates, including $8.065 million outstanding at quarter-end.
Important facts for investors to verify
- Confirm the issuer is Griffin-American Healthcare REIT IV, Inc., rather than the company named in the request.
- Review whether distributions are sustainable from recurring property cash flows; reported distributions exceeded operating cash flow and included some offering-proceeds funding.
- Assess the impact of the November 2017 acquisition and expanded credit facilities on leverage, interest expense and liquidity after quarter-end.
- Examine tenant and state concentration, tenant credit quality, lease expirations and exposure to healthcare reimbursement changes.
- Compare performance using consistent acquisition accounting and distinguish GAAP earnings from non-GAAP NOI, FFO and MFFO.
- Review related-party fees, offering costs, share dilution and the terms of the ongoing public offering.