Strawberry Fields REIT, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 14, 2024. The REIT owns, acquires, finances and triple-net leases post-acute healthcare properties. Its portfolio comprised 100 properties and 12,449 licensed beds across nine states; substantially all revenue comes from tenant rent. Figures below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Rental revenue | $27.834 million | $24.247 million | +14.8% |
| Operating income | $14.285 million | $9.492 million | +50.5% |
| Net income | $5.992 million | $4.139 million | +44.8% |
| Net income attributable to common stockholders | $0.746 million | $0.495 million | +50.7% |
| Basic and diluted EPS | $0.12 | $0.08 | +$0.04 |
| Operating cash flow | $2.125 million | $9.976 million | Down $7.851 million |
| FFO / adjusted FFO | $14.090 million / $13.122 million | $11.127 million / $13.087 million | FFO +26.6%; adjusted FFO broadly flat |
Operating margin was approximately 51.3%, compared with 39.1% a year earlier; consolidated net margin was approximately 21.5%, compared with 17.1%. These are calculated from reported figures. Higher rental revenue and the absence of the prior-year impairment charge supported earnings, while higher interest and depreciation costs offset part of the benefit.
Balance sheet, debt and liquidity
- At March 31, 2024, total assets were $634.9 million and total liabilities were $586.7 million. Real estate investments, net, were $511.1 million, down from $518.3 million at year-end 2023.
- Cash and cash equivalents were $15.1 million and restricted cash was $23.6 million, totaling $38.7 million. Restricted balances include lender reserves and escrows and are not all freely available.
- Gross debt was approximately $560.4 million: $269.4 million of HUD-guaranteed loans, $163.9 million of commercial bank loans and $127.0 million of Series C and D bonds. Net carrying debt was approximately $558.9 million after issuance costs.
- Debt increased from $539.1 million gross at December 31, 2023. The company raised approximately $26.7 million net from an additional Series D bond issuance in February. Commercial bank debt carried an 8.84% floating rate; HUD loans averaged 3.91% including insurance premiums. A 100-basis-point SOFR increase would reduce annual cash flow by an estimated $1.6 million, assuming unchanged variable-rate borrowings.
- Quarterly cash flow from operations fell to $2.1 million, primarily reflecting an $8.1 million decrease in accounts payable, accrued liabilities and other liabilities. Investing used $17.6 million, largely for the $18.0 million Indiana master-lease rights payment; financing provided $16.4 million.
- Scheduled debt principal payments total $17.1 million for the remaining nine months of 2024, $124.8 million in 2026 and $96.3 million in 2027. Management identifies significant balloon payments in 2026–2028 and expects to refinance as needed.
Changes, developments and management commentary
- Rental revenue rose $3.6 million, primarily from new Indiana and Texas master leases, partly offset by lower revenue from the Landmark master lease. The company reported no tenant rent delinquencies or requests to reduce or amend rent as of the report date.
- Interest expense, net, increased 60.8% to $7.7 million, driven by Series D bonds, the bank loan associated with the 2023 Indiana acquisition and higher floating rates.
- In February, the company paid $18.0 million to terminate a tenant purchase option and obtain replacement lease rights for Indiana properties acquired in 2023. The replacement lease was with tenants affiliated with two directors; initial annual base rent is $14.5 million with 3% annual increases.
- The company began leasing two Tennessee skilled nursing facilities with 226 beds on January 1; the lease includes a purchase option. It also agreed to buy an Indiana skilled nursing and assisted-living property for $5.85 million, with closing expected June 1, 2024.
- After quarter-end, an Indiana master lease was renewed for 10 years, with two five-year options and first-year base rent of $15.5 million plus 3% annual increases. On April 30, a property was sold to a municipality for $1; the company paid $1.2 million in related debt and closing fees.
- Management said the company was in compliance with financial and administrative covenants at March 31 and expects operating cash flow to support debt service and REIT distribution requirements. No quantitative earnings or FFO guidance was provided.
Risks, contingencies and other notable items
- Tenant/operator performance is a core risk: the company depends on tenants to pay rent, and healthcare operators are exposed to Medicare and Medicaid reimbursement and regulatory changes. Illinois and Indiana together account for 59.9% of licensed beds.
- Floating-rate debt, refinancing access and the large 2026–2028 maturities expose liquidity and distributions to rate and capital-market conditions. Additional Series C and D issuance capacity was disclosed, subject to covenants and market conditions.
- Related-party exposure is substantial: 66 of 109 facilities were leased to related-party tenants. The company also reported related-party straight-line rent receivables of $15.5 million and notes receivable of $6.9 million. Investors should consider governance and tenant-credit implications.
- A new Arkansas lawsuit was filed in April 2024 concerning predecessor-company property transactions. The company believes the claims are without merit and expects no material adverse effect; outcomes remain uncertain. A separate dispute has also prevented delivery of title needed for tenants to exercise a purchase option tied to an $8 million note.
- The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether operating cash flow recovers from the sharp year-over-year decline and whether cash available after restricted balances can support obligations and distributions.
- Refinancing plans and covenant headroom for the 2026–2028 debt maturities, including sensitivity to SOFR and bond terms.
- Collection and credit quality of rent and straight-line rent receivables, particularly for related-party tenants and concentrated states.
- Returns and lease economics from the $18.0 million Indiana lease-rights payment, and completion and funding of the announced acquisition.
- Developments in the Arkansas litigation, the related $8 million note and title/purchase-option restrictions, as well as the financial effect of the post-quarter property sale.