American Healthcare REIT, Inc. quarterly report, Q1 FY2023

American Healthcare REIT, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Amounts are in U.S. dollars. The company is a self-managed healthcare REIT operating 314 buildings and campuses across six segments, with approximately 20.0 million square feet of gross leasable area.

Financial performance and condition

Metric	Q1 2023	Q1 2022 / prior date
Total revenue and grant income	$452.2 million	$376.1 million
Net loss	$27.6 million	$0.9 million
Net loss attributable to controlling interest	$25.9 million; $0.39 per share	$3.0 million; $0.05 per share
Net operating income (NOI), non-GAAP	$66.9 million	$73.7 million
FFO attributable to controlling interest, non-GAAP	$11.7 million; $0.18 per share	$32.6 million; $0.50 per share
Normalized FFO, non-GAAP	$20.2 million; $0.31 per share	$37.8 million; $0.58 per share
Cash from operating activities	$23.9 million	$22.4 million

Revenue increased 20.2%, led by resident fees and services, up to $408.6 million from $319.0 million. Real estate revenue fell to $43.6 million from $51.9 million; Q1 2022 included $5.2 million of grant income, compared with none in Q1 2023.
Total property operating and rental expenses were $385.3 million, versus $302.4 million. Property operating expenses equaled 90.6% of resident fees and services revenue, up from 88.6%; rental expenses were 34.9% of real estate revenue, versus 29.4%.
Interest expense reported in the income statement was $39.0 million, compared with $23.3 million. Higher variable rates were a primary driver; Q1 2022 also included $4.6 million of debt extinguishment losses.
At March 31, total assets were $4.75 billion and total liabilities were $3.16 billion. Real estate investments, net, were $3.57 billion. Mortgage loans were $1.26 billion gross; lines of credit and term-loan borrowings were approximately $1.31 billion gross.
Cash and cash equivalents were $41.3 million, with restricted cash of $46.9 million. Combined cash and restricted cash declined to $88.2 million from $111.9 million at year-end 2022. Available capacity under credit facilities was $135.9 million.
Operating cash flow exceeded the $23.9 million reported by $9.5 million? No—cash from operations was $23.9 million, while investing and financing used $33.3 million and $14.3 million, respectively; total cash, cash equivalents and restricted cash decreased by $23.8 million.
Common distributions paid were $26.5 million. The company reported that 90.1% were covered by operating cash flow and 9.9% by borrowings; on an FFO basis, 55.9% were funded by borrowings. The board reduced the quarterly distribution from $0.40 to $0.25 per share, effective for the distribution authorized in April 2023.

Material changes versus Q1 2022

Revenue growth largely reflected the acquisition of a 50% controlling interest in RHS in August 2022, the acquisition of seven Texas senior housing facilities in December 2022, improved occupancy and higher resident billing rates.
Losses widened as operating costs and financing costs rose. Management cited inflation-related increases in labor, services, energy and supplies; property operating expenses also rose with acquisitions and higher occupancy.
NOI fell to $66.9 million from $73.7 million. Excluding recognized government grants, NOI was approximately $66.7 million in Q1 2023 and $68.5 million in Q1 2022.
Q1 2023 FFO and normalized FFO were lower year over year. Excluding government grants, management reported FFO of approximately $11.5 million and normalized FFO of approximately $20.1 million for Q1 2023, versus $28.2 million and $33.4 million, respectively, in Q1 2022.
In March 2023, the company transitioned certain Central Wisconsin skilled nursing facilities to a RIDEA operating structure. The transition included full amortization of $8.1 million of above-market leases and $0.9 million of in-place leases.

Outlook, risks and unusual items

Management said it believes available resources will meet cash requirements over the next 12 months and longer term. The $400 million Trilogy secured credit facility matures September 5, 2023; management intends to satisfy conditions and pay the fee to extend it for one year.
The company reported compliance with debt covenants at March 31, 2023. A March 1 amendment to its $1.05 billion 2022 Credit Facility revised certain financial covenants for a limited period.
Aggregate borrowings were 53.4% of the company’s stated combined market value of real estate and related investments. The weighted average effective interest rate on debt, factoring in the swap, was 5.56%. Management estimated that a 0.50% increase in market rates would add $7.2 million to annualized interest expense on the identified variable-rate debt.
Management highlighted inflation and labor-market pressures, lingering effects of COVID-19, interest-rate and refinancing risk, and uncertainty about pandemic-related government relief after the public health emergency ended May 11, 2023. It said senior housing and skilled nursing occupancy had almost returned to pre-pandemic levels as of March 31, while operating expenses remained elevated.
At March 31, non-RIDEA properties were 91.7% leased, with 6.2% of leased area scheduled to expire during the rest of 2023. SHOP and integrated senior health campuses were 82.4% leased. Indiana accounted for 32.4% of portfolio annualized base rent or NOI, a geographic concentration.
The company held an $83.955 million subordinate commercial mortgage-backed debt security, with a stated 4.24% coupon and anticipated 10.0% yield to maturity; it matures in August 2025. Its estimated fair value was $93.2 million.
In March 2023, the board set estimated NAV at $31.40 per share, down from $37.16 approved in March 2022. The contemplated NYSE listing and related offering registration statement were not yet effective.
The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. It recorded a $0.7 million gain on remeasurement of its previously held interest in Memory Care Partners after acquiring the remaining interest.

Most important facts for investors to verify

Whether the Trilogy facility extension is completed and how the September 2023 maturity is addressed.
Progress against debt covenants and liquidity needs, including the timing and sources of funds for debt maturities and capital expenditures.
Whether operating margins, occupancy and cash generation improve enough to support distributions without borrowing.
The effects of higher interest rates, labor costs and the end of pandemic-related relief on RIDEA operations and property-level performance.
The assumptions and limitations behind the $31.40 estimated NAV and the status, terms and timing of any proposed public listing.

FFO, normalized FFO and NOI are non-GAAP measures; the filing cautions that they are supplemental and may not be comparable with similarly named measures at other REITs.