American Healthcare REIT, Inc. quarterly report, Q1 FY2019

Business context and reporting period

Griffin-American Healthcare REIT IV, Inc. (the registrant named in this filing) is a non-traded healthcare REIT. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same 2018 period. Its portfolio spans medical office buildings, senior housing, RIDEA senior housing and skilled nursing facilities. At quarter-end, it owned 68 properties comprising 71 buildings, with about 3.9 million square feet of gross leasable area, and held a 6% interest in a joint venture.

Financial and operating highlights

Revenue increased 44.8%, primarily reflecting acquisitions made after March 31, 2018. Segment net operating income (NOI), a non-GAAP measure, rose to $13.4 million from $8.3 million. Operating cash flow covered 58.8% of total distributions declared and paid or reinvested; the company reported that offering proceeds funded the remainder.

Material changes and key financial details

• Portfolio expansion: 71 buildings at quarter-end versus 42 a year earlier. Q1 acquisitions comprised two buildings for a combined contract price of $17.6 million. Subsequent to quarter-end, the company acquired seven buildings for $58 million.
• Real estate revenue was $15.1 million, up from $9.4 million; resident fees and services were $10.7 million, up from $8.4 million. RIDEA occupancy was 82.2%, compared with 76.3% a year earlier. Excluding RIDEA, properties were 95.8% leased, with a 9.1-year remaining weighted-average lease term.
• Expenses increased: total expenses were $32.8 million versus $19.0 million. Depreciation and amortization more than doubled to $16.1 million, while general and administrative expense increased to $4.2 million from $2.1 million.
• Interest expense, including financing-cost amortization and the $2.0 million derivative fair-value loss, was $5.6 million versus $1.1 million. The derivative loss reflects swaps that were not designated for hedge accounting.
• Investing activities used $21.0 million; financing activities provided $45.5 million, including $90.5 million of common-stock proceeds, partially offset by debt repayments, offering costs and distributions.
• Debt at March 31 included $250 million outstanding under the credit facility and $17.1 million of mortgage principal ($16.8 million net on the balance sheet). The credit facility had $150 million of unused capacity and matures November 2021, subject to a one-year extension option. The weighted-average effective interest rate on debt, after swaps, was 4.25%; the company reported compliance with debt covenants.
• The company adopted lease accounting Topic 842 on January 1, 2019, recognizing $11.2 million of operating lease right-of-use assets and $5.4 million of lease liabilities at March 31; prior-period figures were not restated.

Outlook, risks and unusual items

No numerical earnings or revenue guidance was provided. Management expected operating cash flows to increase in 2019 as acquisitions contributed a fuller period of operations, while investing needs were expected to rise with further acquisitions. The company stated that cash, borrowing availability and operating resources should meet foreseeable requirements and that it did not expect to need other funding within 12 months. It estimated $9.5 million of interest and $0.4 million of principal payments for the remainder of 2019, plus $8.3 million of discretionary capital and tenant improvements.

The initial public offering ended February 15, 2019; the company continues a distribution reinvestment offering. The board authorized distributions at an annualized $0.60 per share through June 30, 2019. In Q1, distributions totaled $10.6 million, including $5.9 million reinvested; 56.9% of distributions were funded from offering proceeds when compared with FFO, and 41.2% when compared with operating cash flow. Management cautioned that distributions may include a return of capital and may be funded from offering proceeds or borrowings, reducing funds available for investment or increasing interest costs.

Key risks include reliance on significant tenants and geographic concentrations: RC Tier Properties represented 12.5% of annualized base rent or NOI at March 31; Missouri, Florida and Michigan represented 13.8%, 11.4% and 10.3%, respectively. Other risks include occupancy and lease-renewal performance, healthcare-operator creditworthiness, interest rates, capital availability, acquisition execution and the external-advisor relationship. The company reported no material litigation, no material change in previously reported risk factors other than distribution-funding disclosures, and no off-balance-sheet arrangements. The April 4, 2019 estimated NAV was $9.54 per share, down from $9.65; the filing stresses that this unaudited estimate is not GAAP fair value and may not be realizable.

Important facts for investors to verify

• Whether operating cash flow and FFO can increasingly cover distributions, given the disclosed use of offering proceeds and potential reliance on borrowing.
• Lease and occupancy trends, especially RIDEA occupancy, upcoming lease expirations, and the financial condition of RC Tier Properties.
• Credit-facility refinancing and covenant headroom ahead of the November 2021 maturity, as well as the effect of interest-rate changes and swaps.
• Acquisition returns, capital-improvement requirements and the impact of rising depreciation, amortization, financing and related-party fees.
• The assumptions and limitations underlying the $9.54 estimated NAV and any future NAV updates.