American Healthcare REIT, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company was then known as Griffin-American Healthcare REIT IV, Inc. The unaudited results cover the pre-merger company; the merger with Griffin-American Healthcare REIT III and the acquisition of its advisor business closed October 1, 2021.
Business context
The REIT owned 87 properties comprising 92 buildings and approximately 4.8 million square feet, plus a 6% interest in a joint venture. Its four segments were medical office, senior housing, senior housing under a RIDEA operating structure, and skilled nursing. Following the October merger, the combined company reported a portfolio of 311 buildings and campuses across 36 U.S. states, the United Kingdom and the Isle of Man, and became self-managed.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue and grant income | $37.2 million | $41.3 million | $112.2 million | $117.6 million |
| Net loss | $5.9 million | $5.2 million | $13.8 million | $14.2 million |
| Net loss attributable to controlling interest | $5.8 million | $4.9 million | $13.3 million | $13.6 million |
| Segment NOI | $16.3 million | $18.0 million | $49.5 million | $55.0 million |
| Operating cash flow | Not presented quarterly | $16.6 million | $29.9 million |
- Q3 revenue declined about 10%; nine-month revenue declined about 5%. Real estate revenue rose modestly, but resident fees and services fell 20% in Q3 and 11% for nine months, chiefly reflecting lower senior housing occupancy. No grant income was recorded in 2021, versus $864,000 in 2020.
- Nine-month property-level NOI fell about 10%. Senior housing-RIDEA NOI was $2.0 million versus $7.9 million; medical office NOI rose to $33.0 million from $32.6 million. NOI is a non-GAAP measure.
- Nine-month FFO attributable to controlling interest was $23.1 million, down from $29.4 million; MFFO was $23.1 million, down from $28.8 million. These non-GAAP measures are not substitutes for net income or operating cash flow.
- At September 30, total assets were $1.064 billion, total liabilities $546.0 million, and equity $515.3 million. Cash and restricted cash totaled $17.2 million. Debt included $488.9 million under the 2018 Credit Facility and $18.3 million of mortgage principal ($17.4 million net carrying amount). The credit facility had $41.1 million of capacity remaining and was scheduled to mature November 19, 2021.
- For the nine months, distributions declared were $27.2 million; cash operating activities were $16.6 million and FFO was $23.1 million. The filing attributes 39.1% of distributions to borrowings on a cash-flow basis and 15.0% to borrowings relative to FFO. The annualized distribution rate had been reduced from $0.60 to $0.40 per share.
Material changes and unusual items
- Merger and advisor acquisition costs drove business acquisition expense to $6.6 million for nine months, versus $74,000 in 2020; the filing identifies $6.753 million of merger-related legal and professional costs.
- Derivative fair-value changes produced a $4.4 million gain for the first nine months of 2021, compared with a $2.3 million loss in 2020, contributing to lower reported net interest expense.
- Two senior housing properties were sold in April for $6.8 million, with a $184,000 net loss. A small additional property unit was acquired for a $2.95 million contract price.
- Effective October 1, the merger consideration was 0.9266 Class I shares for each GAHR III share. The advisor-business acquisition consideration was approximately $131.7 million in partnership units, with a possible uncapped earnout subject to conditions. Former GAHR IV stockholders and former GAHR III stockholders held approximately 31.3% and 68.7%, respectively, of the combined company based on September 30 share counts.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said it expects COVID-19-related trends to continue and cannot reliably predict their duration or full financial effect. Delta-variant impacts, occupancy recovery, labor availability and operating costs remain key uncertainties.
- Senior housing-RIDEA occupancy averaged 69.7% for the first nine months, down from 77.2% a year earlier. Non-RIDEA properties were 95.7% leased at September 30; RIDEA occupancy was 71.1% in Q3. Management reported that substantially all contractual rent from leased senior housing, skilled nursing and medical office tenants had been collected through September, while cautioning that prior collections do not assure future payment.
- COVID-related occupancy and expense pressures, reliance on operators, geographic and tenant concentration, and inflation and variable-rate borrowing are material risks. One tenant represented 11.3% of annualized base rent/NOI; Missouri and Michigan represented 12.4% and 10.6% of portfolio annualized base rent/NOI, respectively, at September 30.
- The $488.9 million 2018 facility was near maturity. Management intended to extend it and later stated it planned to combine it with the assumed GAHR III corporate facility. As of October 31, the combined company reported $1.206 billion borrowed against $1.370 billion aggregate facility capacity, with $164.4 million available. These are post-merger figures, not September 30 balances.
- LIBOR transition could affect borrowing costs and derivatives. A 0.50% increase in variable rates was estimated to add approximately $983,000 to annualized interest expense on the pre-merger variable-rate facility.
- The company reported no material litigation and no material environmental liability known to it. It was in compliance with applicable debt covenants at September 30. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Post-merger debt balances, maturity extensions, refinancing terms, covenant compliance and actual available liquidity.
- Senior housing and integrated-campus occupancy trends, staffing costs, rent collections and the financial condition and performance of operating partners.
- How the combined company’s self-management costs compare with former advisory fees, and whether the potential earnout becomes payable.
- Distribution coverage from recurring cash flow and FFO, especially given the use of borrowing to fund distributions.
- The combined company’s updated NAV and the potential dilution and resale implications of partnership units and registration rights. The cited $9.22 NAV was calculated as of September 30, 2020, before the merger.