HEALTHCARE TRUST, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements ofHealthcare Trust, Inc. and the notes thereto. As used herein, the terms the "Company," "we," "our" and "us" refer toHealthcare Trust, Inc. , aMaryland corporation, including, as required by context,Healthcare Trust Operating Partnership, LP (our "OP"), aDelaware limited partnership, and its subsidiaries. The Company is externally managed byHealthcare Trust Advisors, LLC (our "Advisor"), aDelaware limited liability company. Capitalized terms used herein, but not otherwise defined, have the meaning ascribed to those terms in "Part I - Financial Information" included in the notes to the consolidated financial statements and contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations ofHealthcare Trust, Inc. ("we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. These forward-looking statements are subject to risks, uncertainties, and other factors, many of which are outside of our control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. Some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements are set forth in the Risk Factors section of our Annual Report on Form 10-K for the year endedDecember 31, 2021 as well as Part II - Other Information, Item IA - Risk Factors below. Overview We are an externally managed entity that forU.S. federal income tax purposes has qualified as a real estate investment trust ("REIT"). We acquire, own and manage a diversified portfolio of healthcare-related real estate focused on medical office and other healthcare-related buildings and senior housing operating properties. Prior toDecember 31, 2021 , we had three reportable segments: 1) Former MOBs, 2) Former NNN and 3) SHOPs. As a result of strategic property divestitures in our Former NNN segment, and transitions of certain properties reported in our Former NNN segment into our SHOP segment, we have combined the properties in our Former NNN segment with the properties in our Former MOB segment to form a single set of MOBs. As a result, effectiveDecember 31, 2021 we determined that we have two reportable segments, with activities related to investing in MOBs and SHOPs. Upon concluding that a change in our reporting segments has occurred, we retroactively restated the historical segment reporting presentation for the three years endedDecember 31, 2021 as presented in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Below, we have restated the prior quarterly and year-to-date periods to conform to our current segment reporting structure for comparative purposes. As ofSeptember 30, 2022 , we owned 201 properties located in 33 states and comprised of 9.1 million rentable square feet. Substantially all of our business is conducted through the OP, aDelaware limited partnership, and its wholly-owned subsidiaries. Our Advisor manages our day-to-day business with the assistance ofHealthcare Trust Properties, LLC (our "Property Manager"). Our Advisor and Property Manager are under common control withAR Global Investments, LLC ("AR Global") and these related parties receive compensation and fees for providing services to us. We also reimburse these entities for certain expenses they incur in providing these services to us.Healthcare Trust Special Limited Partnership, LLC (the "Special Limited Partner"), which is also under common control with AR Global, also has an interest in us through ownership of interests in our OP. We operate in two reportable business segments for management and internal financial reporting purposes: MOBs and SHOPs. In our MOB operating segment, we own, manage, and lease single- and multi-tenant MOBs where tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. Our Property Manager or third-party managers manage our MOBs. In our SHOP segment, we invest in seniors housing properties using the RIDEA structure. As ofSeptember 30, 2022 , we had four eligible independent contractors operating 50 SHOPs (not including two land parcels). All of our properties across both business segments are located throughoutthe United States . 48 -------------------------------------------------------------------------------- SinceOctober 2020 , we have declared and paid quarterly dividends solely in shares of our common stock. Stock Dividends paid inJanuary 2021 were equal to 0.01349 shares of common stock on each share of outstanding common stock. The Stock Dividends paid inApril 2021 ,July 2021 ,October 2021 andJanuary 2022 were equal to 0.014655 shares of common stock on each share of outstanding common stock. The Stock Dividends paid inApril 2022 ,July 2022 andOctober 2022 were equal to 0.014167 shares of common stock on each share of outstanding common stock. Dividends payable entirely in shares of our common stock are treated in a fashion similar to a stock split for accounting purposes specifically related to per-share calculations for the current and prior periods. The aggregate impact of these Stock Dividends was an increase of 0.13567 shares, cumulatively, for every one share of common stock. No additional shares, except for the dividends paid in the form of additional shares of common stock, were issued during the nine months endedSeptember 30, 2022 . Additionally, other references to weighted-average shares outstanding and per-share amounts have been retroactively adjusted for the Stock Dividends and are noted as such throughout this Quarterly Report on Form 10-Q. OnApril 1, 2022 , we published a new Estimated Per-Share NAV equal to$15.00 as ofDecember 31, 2021 . Our previous Estimated Per-Share NAV was equal to$14.50 as ofDecember 31, 2020 . The Estimated Per-Share NAV has not been adjusted since publication and will not be adjusted until the Board determines a new Estimated Per-Share NAV. Dividends paid in the form of additional shares of common stock will, all things equal, cause the value of each share of common stock to decline because the number of shares outstanding will increase when dividends paid in stock are issued; however, because each stockholder will receive the same number of new shares, the total value of our common stockholder's investment, all things equal, will not change assuming no sales or other transfers. We intend to publish Estimated Per-Share NAV periodically at the discretion of the Board, provided that such estimates will be made at least once annually unless we list our common stock.
Management Update on the Impacts of the COVID-19 Pandemic
The COVID-19 global pandemic created several risks and uncertainties that have had and may continue to have an impact on our business, including our financial condition, future results of operations and our liquidity. The extent to which the global COVID-19 pandemic, including the outbreaks that have occurred and may occur in markets where we own properties, impacts our operations and those of our tenants and third-party operators, will continue to depend on future developments, including the scope, severity and duration of the pandemic, and the actions taken to contain the COVID-19 pandemic or treat its impact, among others, which are highly uncertain and cannot be predicted with confidence, but could be material. As ofSeptember 30, 2022 , our MOB segment had an occupancy of 90.4% with a weighted-average remaining lease term of 5.0 years, (based on annualized straight-line rent as ofSeptember 30, 2022 ), and our SHOP segment had an occupancy of 75.8% weighted by unit count. Since the second quarter of 2021, we have experienced relative stability in occupancy and operating costs in our SHOP portfolio, however, during the first nine months of 2022, we needed to increase our use of temporary contract labor and agencies, and to a lesser extent, the amount we pay for overtime wages and bonuses, in response to a shortage of workers, largely due to, among other things, the spread of more transmissible COVID-19 variants, increased inflation raising the cost of labor generally and lack of qualified personnel that we are able to employ on a permanent basis. Utilization of contract labor and agencies for care providers increased operating costs in our SHOP segment for the three and nine months endedSeptember 30, 2022 , by$2.0 million and$6.7 million , respectively, as compared to the three and nine months endedSeptember 30, 2021 . Future developments in the course of the pandemic, inflation increases, labor shortages and supply chain disruptions may cause further adverse impacts on our occupancy and cost levels. Occupancy and operating costs in our MOB segment were relatively stable during these quarters. The negative impact of the pandemic on our results of operations and cash flows has impacted and could continue to impact our ability to comply with covenants in our Credit Facility, and the amount available for future borrowings thereunder. For example, we would have been in default of a covenant contained in the Credit Facility requiring us to maintain a certain minimum fixed charge coverage ratio for the four fiscal quarter period endedJune 30, 2022 of 1.50 to 1.00. As a result, we entered into the Fourth Amendment onAugust 11, 2022 , in which the lenders agreed to reduce this covenant to permit us to avoid any Default or Event of Default. Specifically, this covenant was reduced to (a) 1.20 to 1.00 for the period commencing with the quarter endedJune 30, 2022 through the quarter endingJune 30, 2023 , (b) 1.35 to 1.00 for the period commencing with the quarter endingSeptember 30, 2023 through the quarter endingDecember 31, 2023 and (c) 1.45 to 1.00 for the period commencing with the quarter endingMarch 31, 2024 and continuing thereafter, among other changes (see the Liquidity and Capital Resources section below and see Note 5 - Credit Facilities to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information). There can be no assurance our lenders will consent to any further amendments that may become necessary in order to comply with the terms of the Credit Facility. For additional information on the risks and uncertainties associated with the COVID-19 pandemic, please see Item 1A. "Risk Factors - We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 24, 2022 and all other filings with theSEC after that date, as such risks and uncertainties may be updated from time to time in our subsequent reports.
Rent Collections
49
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We experienced delays in rent collection in the second, third and fourth
quarters of 2020 and the first quarter of 2021. We took several steps to
mitigate the impact of the pandemic on our business. We were in direct contact
with our tenants and operators when the crisis began, cultivating open dialogue
and deepening the fundamental relationships that we have carefully developed
through prior transactions and historic operations. We achieved mutually
agreeable solutions with our MOB tenants and in some cases, during the year
ended December 31, 2020 , we executed lease amendments wherein we agreed to defer
payment. Based on this approach and the overall financial strength and
creditworthiness of our tenants, we believe that we had positive results in our
cash rent collections during the pandemic. We have not entered into any rent
deferral agreements with any of our tenants since the year ended December 31,
2020 , and all amounts previously deferred under prior rent deferral agreements
have been collected.
We collected approximately 100% of the original cash rent due for the fourth
quarter of 2020 and throughout 2021 and 2022 in our MOB segment. Cash rental
payments for our 50 SHOPs are primarily paid by the residents through private
payer insurance or directly, and to a lesser extent, by government reimbursement
programs such as Medicaid and Medicare; therefore we have not provided the
amount of quarterly cash rent collected for our SHOP segment.
"Original cash rent" refers to contractual rents on a cash basis due from
tenants as stipulated in their original executed lease agreement at inception or
as amended, prior to any rent deferral agreement. We calculate "original cash
rent collections" by comparing the total amount of rent collected during the
period to the original cash rent due. Total rent collected during the period
includes both original cash rent due and payments made by tenants pursuant to
rent deferral agreements. Eliminating the impact of deferred rent paid, we
collected nearly 100% of original cash rent due for each quarter of 2021 and the
first, second and third quarters of 2022.
We have also granted rent concessions which serve to reduce revenue in our SHOP
segment. We offered $0.7 million and $2.7 million of rent concessions,
respectively, during the three and nine months ended September 30, 2022 , and
$1.0 million and $1.1 million , respectively, during the three and nine months
ended September 30, 2021 .
Seniors Housing Properties
During the nine months ended September 30, 2022 , we experienced a significant
increase in labor costs in our SHOP segment, largely due to, among other things,
increased inflation raising the cost of labor generally and a lack of qualified
personnel that we are able to employ on a permanent basis. As a result, we were
forced to increase our use of temporary contract labor and agencies in our SHOP
segment. During the three months ended September 30, 2022 , our use of temporary
contract labor and agencies began to decline relative to the second quarter,
however, there is no assurance that this trend will continue. In our total SHOP
segment, we recorded over $2.0 million and $6.7 million in temporary contract
labor and agency-related costs for care providers for the three and nine months
ended September 30, 2022 , respectively, as compared to almost no temporary
contract labor and agency-related costs for care providers for the three and
nine months ended September 30, 2021 . Using temporary contract labor and
agencies is typically more costly to us than our internal staffing. As a result
of the decreased use of temporary contract labor and agencies, as well as the
continuing impact of the national labor shortage, the amounts we pay for
salaries, wages, overtime and bonuses to meet our labor needs in our SHOP
segment continued to increase during the three months ended September 30, 2022
as compared to the three months ended September 30, 2021 . Because occupancy
levels have not yet recovered to their pre-pandemic rates (as noted in the table
below) and resident fees have not increased enough to counteract these lower
occupancy rates, our results of operations in our SHOP segment have been
significantly adversely affected by the increase in our labor costs. There is no
guarantee the occupancy levels in our SHOP segment will increase and return to
their pre-pandemic levels, that we will be able to raise resident fee levels at
rates that are commensurate with these increases in labor costs or that we will
reduce our reliance on contract labor. Therefore, our results of operations and
financial condition in our SHOP segment could continue to be negatively impacted
if the national labor shortage continues.
During the COVID pandemic, occupancy in our SHOP portfolio trended lower from
85.1% as of December 31, 2019 to a low of 72.0% as of March 31, 2021 , and has
subsequently begun to stabilize. As of September 30, 2022 , occupancy in this
segment reached 75.8%. The below table presents SHOP occupancy since the onset
of our downward occupancy trends, which was exacerbated by the COVID-19 pandemic
in March 2020 :
50
--------------------------------------------------------------------------------As of Number of Properties(1) Rentable Units Percentage Leased December 31, 2019 59 4,926 85.1% March 31, 2020 63 5,198 84.4% June 30, 2020 63 5,198 79.2% September 30, 2020 67 5,350 77.4% December 31, 2020 59 4,878 74.5% March 31, 2021 55 4,682 72.0% June 30, 2021 54 4,530 73.2% September 30, 2021 54 4,494 74.3% December 31, 2021 54 4,494 74.1% March 31, 2022 50 4,378 75.9% June 30, 2022 50 4,374 76.3% September 30, 2022 50 4,374 75.8% ________
(1)Exclusive of two land parcels.
The declines in revenue we experienced during the three and nine months endedSeptember 30, 2022 as compared to the three and nine months endedSeptember 30, 2021 , were primarily attributable to the fact that we sold SHOP properties which reduced the average number of rentable units over the periods, partially offset by an increase in occupancy and rental rate increases on some of the properties effective inJanuary 2022 . In addition, although operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies as early asMarch 2020 , during the nine months endedSeptember 30, 2022 , these trends became more prominent as we relied more on the use of contract labor and agencies and had to increase the amounts we pay for salaries, wages, overtime and bonuses, as noted above. At the SHOP facilities, we generally bear these cost increases, some of which were partially offset by funds received under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and to a lesser extent, cost recoveries for personal protective equipment from residents. See below for additional information on the CARES Act. There can be no assurance, however, that future developments in the course of the pandemic, inflation increases, labor shortages and supply chain disruptions will not cause further adverse impacts to our occupancy, revenues and cost levels, and these trends may continue to impact us and have a material adverse effect on our revenues and income in future quarters. We believe that our vaccination participation achieved in 2021 for both residents and staff populations mitigated certain adverse impacts of COVID-19. Furthermore, as infections decline and more vaccinations and boosters are administered during the remainder of 2022, our occupancy may further increase as it did during the nine months endedSeptember 30, 2022 . However, there can be no assurance as to when or if we will be able to approach pre-pandemic levels of occupancy. The pandemic raises the risk of an elevated level of resident exposure to illness and restrictions on move-ins at our SHOPs, and increases the general level of frailty for our incoming residents, which has and could also continue to adversely impact resident length of stay, occupancy and revenues, as well as increase costs. We believe that the actions we have taken help reduce (but not eliminate) the incidences of COVID-19 at our properties. Any incidences, or the perception that outbreaks may occur, could materially and adversely affect our revenues and income, as well as cause reputational harm to us and our tenants, managers and operators. The extent to which the global COVID-19 pandemic, including the outbreaks that have occurred and may occur in markets where we own properties, impacts our operations and those of our tenants and third-party operators, will continue to depend on future developments, including the scope, severity and duration of the pandemic, and the actions taken to contain the COVID-19 pandemic or treat its impact, among others, which are highly uncertain and cannot be predicted with confidence, but could be material. OnMarch 27, 2020 , the CARES Act was signed into law and it provides funding to Medicare providers in order to provide financial relief during the COVID-19 pandemic. Funds provided under the program were to be used for the preparation, prevention, and medical response to COVID-19, and were designed to reimburse providers for healthcare related expenses and lost revenues attributable to COVID-19. During the three and nine months endedSeptember 30, 2022 , we received$4.3 million and$4.5 million in CARES Act funds. During the three months endedSeptember 30, 2021 , we did not receive any such funds, and during the nine months endedSeptember 30, 2021 , we received$5.1 million in CARES Act funds. We received$3.6 million in CARES Act funds during the year endedDecember 31, 2020 . For accounting purposes, we treat the funds as a grant contribution from the government and the full amounts were recognized as a reduction of property operating and maintenance expenses in our consolidated statements of operations during the three and nine months endedSeptember 30, 2022 51 -------------------------------------------------------------------------------- and 2021. We do not anticipate that any further funds under the CARES Act will be received, and there can be no assurance that the program will be extended or any further amounts received under currently effective or potential future government programs.
Significant Accounting Estimates and Critical Accounting Policies
For a discussion about our significant accounting estimates and critical accounting policies, see the "Significant Accounting Estimates and Critical Accounting Policies" section of our 2021 Annual Report on Form 10-K. Except for those required by new accounting pronouncements discussed below, there have been no material changes from these significant accounting estimates and critical accounting policies.
Recently Issued Accounting Pronouncements
Please see Note 2 - Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to our consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
Properties
The following table presents certain additional information about the properties
we owned as of
Weighted Average
Remaining
Number Rentable Lease Term in Gross Asset
Portfolio of Properties Square Feet Percentage Leased(1) Years (2) Value (3)
(In thousands)
Medical Office and Other
Healthcare Related Buildings 149 5,069,296 90.4% 5 $ 1,418,577
Seniors Housing - Operating (4) Properties 50 4,030,413 75.8% N/A 1,144,115 Land 2 - N/A N/A 3,665 Total Portfolio 201 9,099,709$ 2,566,357 _______________ (1)Inclusive of leases signed but not yet commenced as ofSeptember 30, 2022 . (2)Weighted-average remaining lease term in years is calculated based on square feet as ofSeptember 30, 2022 . (3)Gross asset value represents total real estate investments, at cost ($2.6 billion total as ofSeptember 30, 2022 ) net of gross market lease intangible liabilities ($22.4 million total as ofSeptember 30, 2022 ). Impairment charges are already reflected within gross asset value. (4)Weighted by unit count as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , we had 4,374 rentable units in our SHOP segment. N/A Not applicable. 52 --------------------------------------------------------------------------------
Results of Operations
Information based on Same Store, Acquisitions and Dispositions (as each are defined below) allows us to evaluate the performance of our portfolio based on a consistent population of properties owned for the entire period of time covered. As ofSeptember 30, 2022 , we owned 201 properties. There were 181 properties owned for the entire year endedDecember 31, 2021 and the nine months endedSeptember 30, 2022 (our "Same Store" properties), including two vacant land parcels. SinceJanuary 1, 2021 , we acquired 20 properties (our "Acquisitions") and disposed of 12 properties (our "Dispositions").
The following table presents a roll-forward of our properties owned from
MOB SHOP Total
Number of properties, January 1, 2021 132 61 193
Acquisition activity during the year ended
17 - 17
Disposition activity during the year ended
(3) (5) (8)
Number of properties, December 31, 2021 146 56 202
Acquisition activity during the nine months ended
September 30, 2022 3 - 3
Disposition activity during the nine months ended
September 30, 2022 - (4) (4)
Number of properties, September 30, 2022 149 52 201
Number of Same Store Properties 129 52 181
In addition to the comparative period-over-period discussions below, please see
the "Overview - Management Update on the Impacts of the COVID-19 Pandemic"
section above for additional information on the risks and uncertainties
associated with the COVID-19 pandemic and management's responses, and please see
the Inflation and Part II - Item 1A. Risk Factors Sections below (as well as
Part I, Item 1A "Risk Factors" in our Annual Report on From 10-K for the year
ended December 31, 2021 ) for additional information on the risks and
uncertainties associated with inflation, rising interest rates and labor
shortages and costs.
53
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Comparison of the Three Months Ended
Net loss attributable to common stockholders was$23.3 million and$42.0 million for the three months endedSeptember 30, 2022 , and 2021, respectively. The following table shows our results of operations for the three months endedSeptember 30, 2022 and 2021 and the period to period change by line item of the consolidated statements of operations: Increase Three Months Ended September 30, (Decrease) (Dollars in thousands) 2022 2021 $ Revenue from tenants$ 83,460 $ 82,006 $ 1,454 Operating expenses: Property operating and maintenance 51,198 51,218 (20) Impairment charges 8,949 26,642 (17,693) Operating fees to related parties 6,333 6,045 288 Acquisition and transaction related 199 2,198 (1,999) General and administrative 4,471 4,723 (252) Depreciation and amortization 20,854 19,786 1,068 Total expenses 92,004 110,612 (18,608) Operating loss before gain on sale of real estate investments (8,544) (28,606) 20,062 Gain on sale of real estate investments 194 - 194 Operating loss (8,350) (28,606) 20,256 Other income (expense): Interest expense (13,284) (11,775) (1,509) Interest and other income 10 4 6 Gain (loss) on non-designated derivatives 1,826 (33) 1,859 Total other expenses (11,448) (11,804) 356 Loss before income taxes (19,798) (40,410) 20,612 Income tax expense (77) (55) (22) Net loss (19,875) (40,465) 20,590 Net (income) loss attributable to non-controlling interests 22 331 (309) Allocation for preferred stock (3,450) (1,834) (1,616) Net loss attributable to common stockholders$ (23,303) $ (41,968) $ 18,665 Net Operating Income NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other financial statement amounts included in net income (loss) attributable to common stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures included elsewhere in this Quarterly Report for additional disclosure and a reconciliation to our net income (loss) attributable to common stockholders. 54 --------------------------------------------------------------------------------
Segment Results - Medical Office Buildings
The following table presents the components of NOI and the period to period change within our MOB segment for the three months endedSeptember 30, 2022 and 2021: Same Store (1) Acquisitions (2) Dispositions (3) Segment Total (4) Three Months Ended September Increase Three Months Ended Increase Increase Three Months Ended September Increase 30, (Decrease)September 30 , (Decrease) Three Months EndedSeptember 30 , (Decrease) 30, (Decrease) (Dollars in thousands) 2022 2021 $ 2022 2021 $ 2022 2021 $ 2022 2021 $ Revenue from tenants$ 30,153 $ 29,428 $
725
- $ 985 $ (985) $ 33,185 $ 30,813 $ 2,372
Less: Property operating
and maintenance 9,005 8,247 758 372 108 264 - 448 (448) 9,377 8,803 574
NOI $ 21,148 $ 21,181 $ (33) $ 2,660 $ 292 $ 2,368 $ - $ 537 $ (537) $ 23,808 $ 22,010 $ 1,798 _______________
(1)Our MOB segment included 129 Same Store properties. (2)Our MOB segment included 20 Acquisition properties. (3)Our MOB segment included three Disposition properties. (4)Our MOB segment included 149 properties.
Revenue from tenants primarily reflects contractual rent received from tenants in our MOBs and operating expense reimbursements. These reimbursements generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent. During the three months endedSeptember 30, 2022 , revenue from tenants increased by$2.4 million in our MOB segment as compared to the three months endedSeptember 30, 2021 , which was primarily driven by an increase in revenue from tenants of$2.6 million due to our Acquisitions and an increase in revenue from tenants of$0.7 million due to our Same Store properties, partially offset by a decrease in revenue from tenants of$1.0 million due to our Dispositions.
The increase in our Same Store properties revenue from tenants was primarily
driven by an increase of operating expense reimbursement revenue of
Property operating and maintenance expenses reflect the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, and unaffiliated third-party property management fees.
Segment Results -
The following table presents the components of NOI and the period to period change within our SHOP segment for the three months endedSeptember 30, 2022 and 2021: Same Store (1) Acquisitions (2) Dispositions (3) Segment Total (4) Three Months Ended September Increase Increase Three Months Ended September Increase Three Months Ended September Increase 30, (Decrease) Three Months EndedSeptember 30 , (Decrease) 30, (Decrease) 30, (Decrease) (Dollars in thousands) 2022 2021 $ 2022 2021 $ 2022 2021 $ 2022 2021 $ Revenue from tenants$ 51,600 $ 48,964 $ 2,636 $ - $ - $ -$ (1,325) $ 2,229 $ (3,554) $ 50,275 $ 51,193 $ (918) Less: Property operating and maintenance 42,311 40,566 1,745 - - - (490) 1,849 (2,339) 41,821 42,415 (594) NOI$ 9,289 $ 8,398 $ 891 $ - $ - $ -$ (835) $ 380 $ (1,215) $ 8,454 $ 8,778 $ (324) ________
(1)Our SHOP segment included 52 Same Store properties, including two land parcels. (2)Our SHOP segment included zero Acquisition properties. (3)Our SHOP segment included nine Disposition properties. (4)Our SHOP segment included 52 properties, including two land parcels.
Revenue from tenants within our SHOP segment are generated in connection with
rent and services offered to residents in our SHOPs depending on the level of
care required, as well as fees associated with other ancillary services.
Property operating and maintenance expenses relate to the costs associated with
staffing to provide care for the residents in our SHOPs, as well as food,
marketing, real estate taxes, management fees paid to our third-party operators,
and costs associated with maintaining the physical site.
55
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During the three months ended September 30, 2022 , revenue from tenants decreased
by $0.9 million in our SHOP segment as compared to the three months ended
September 30, 2021 , which was primarily driven by a decrease in revenue from
tenants of $3.6 million due to our Disposition properties, partially offset by
an increase in revenue from tenants of $2.6 million due to our Same Store
properties.
The increase to our Same Store properties revenue from tenants was primarily
driven by higher leasing rates during the three months ended September 30, 2022
as compared to the three months ended September 30, 2021 . Our revenue from
tenants also improved in the three months ended September 30, 2022 due to higher
occupancy as compared to lower occupancy in the three months ended September 30,
2021 . Additionally, we offered less rent concessions during the three months
ended September 30, 2022 , which amounted to $0.7 million as compared to
$1.0 million of rent concessions offered during the three months ended September
30, 2021 .
We also previously generated a portion of our SHOP revenue from skilled nursing
facilities ("SNFs") (which include ancillary revenue from non-residents) at two
of our Same Store SHOPs and one of our Disposition SHOPs. This revenue was
$0.2 million during the quarter ended September 30, 2021 and was not significant
during the quarter ended September 30, 2022 as a result of transitioning our SNF
units to other types of units at our Same Store properties, as well as from
disposing of our SNF in Wellington , Florida in May 2021 . This property's results
are presented in Disposition properties in the table above. As a result of these
unit transitions and dispositions, we do not expect ancillary revenue to be a
significant source of revenue in future periods. Additionally, during the three
months ended September 30, 2022 , we concluded that $1.3 million of legacy
receivables from our Disposition properties were not recoverable, and
accordingly we recorded $1.3 million of bad debt expense which is reflected as a
reduction of revenue.
During the three months ended September 30, 2022 , property operating and
maintenance expenses decreased $0.6 million in our SHOP segment as compared to
the quarter ended September 30, 2021 , primarily due to a decrease in property
operating and maintenance expenses of $2.3 million from our Disposition
properties, partially offset by an increase in property operating and
maintenance expenses of $1.7 million in our Same Store properties.
The increase to our Same Store property operating and maintenance expenses was
primarily attributable to higher contract labor and agency costs of
$2.0 million , and amounts we pay for overtime wages and bonuses, as well as by
overall inflation on wages and supplies in the three months ended September 30,
2022 . For additional information on the risks and uncertainties associated with
increases in inflation and labor costs, see the Inflation and Part II - Item 1A.
Risk Factors sections below. The total increase in Same Store property operating
and maintenance expenses was partially offset by funds received through the
CARES Act in the three months ended September 30, 2022 . These funds are
reflected as offsets to costs incurred from the COVID-19 pandemic when they are
received. Of the $4.3 million of CARES Act funds received by us in the three
months ended September 30, 2022 , $3.7 million was recognized as a reduction to
our Same Store properties operating and maintenance expenses in the table above
and $0.6 million was attributable to our Disposition properties. No amounts were
received in the three months ended September 30, 2021 . There can be no assurance
that the program will be extended or any further amounts received. See the
"Overview - Management Update on the Impacts of the COVID-19 Pandemic" section
above for additional information on the risks and uncertainties associated with
the COVID-19 pandemic and management's actions taken in response.
Other Results of Operations
Impairment Charges
We recorded impairment charges of$8.9 million during the three months endedSeptember 30, 2022 , which related to six held for use SHOP properties of eight total properties that we are actively marketing for sale. These impairment charges were recorded to reduce the carrying value of these six properties to their fair values, respectively, as determined by estimated discounted cash flows over our intended holding period. The incremental impairment charges recorded in the three months endedSeptember 30, 2022 resulted from a deterioration of market conditions and rising interest rates. We recorded impairment charges of$26.6 million during the three months endedSeptember 30, 2021 , which related to four disposed triple-net leased properties inTexas (the "LaSalle Properties "). These impairment charges were recorded to reduce the carrying value of theLaSalle Properties to their fair values, respectively, as determined by estimated discounted cash flows over our intended holding period.
See Note 3 - Real Estate Investments to our consolidated financial statements in this Quarterly Report on Form 10-Q for additional information on the impairment charges.
Operating Fees to Related Parties
Operating fees to related parties were
Our Advisor and Property Manager are paid for asset management and property
management services for managing our properties on a day-to-day basis. We pay a
fixed base management fee equal to
56
--------------------------------------------------------------------------------
portion of the base management fee is equal, per month, to one-twelfth of 1.25%
of the cumulative net proceeds of any equity raised subsequent to February 17,
2017 . Asset management fees were $5.5 million and $5.2 million for the three
months ended September 30, 2022 and 2021, respectively. The increase in asset
management fees was due to an increase in variable asset management fees
resulting from equity offerings completed in October of 2021 which increased the
variable asset management fee in the three months ended September 30, 2022
relative to the three months ended September 30, 2021 . Variable asset management
fees will further increase if we issue additional equity securities in the
future. There were no incentive fees incurred in either of the three months
ended September 30, 2022 or 2021.
Property management fees increased to $1.1 million from $1.0 million for the
three months ended September 30, 2022 and 2021, respectively. Property
management fees increase or decrease in direct correlation with gross revenues
of the properties managed and depending on the mix of properties managed, as the
fee payable for different types of properties varies.
See Note 9 - Related Party Transactions and Arrangements to our consolidated
financial statements in this Quarterly Report on Form 10-Q which provides detail
on our fees and expense reimbursements.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses were approximately$0.2 million for the three months endedSeptember 30, 2022 , compared to approximately$2.2 million for the three months endedSeptember 30, 2021 . The decrease was due to certain transactions that occurred in the three months endedSeptember 30, 2021 which did not occur in the three months endedSeptember 30, 2022 . The transaction costs recorded in the three months endedSeptember 30, 2021 consisted of: i) the write-off of offering costs relating to the Preferred Stock Equity Line of$1.2 million , ii)$0.6 million of litigation costs related to ourMichigan dispositions which occurred in the first quarter of 2021 and iii)$0.2 million of settlement charges related to ourJupiter, Florida disposition which occurred in the second quarter of 2021. The$0.2 million of transaction costs recorded in the three months endedSeptember 30, 2022 related to dead deal costs.
General and Administrative Expenses
General and administrative expenses decreased by$0.3 million to$4.5 million for the three months endedSeptember 30, 2022 compared to$4.7 million for the three months endedSeptember 30, 2021 , which includes$2.4 million and$2.1 million for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively, incurred in expense reimbursements. The decrease in general and administrative expenses was primarily driven by$0.3 million of decreased legal fees and$0.3 million of decreased miscellaneous costs.
Depreciation and Amortization Expenses
Depreciation and amortization expense increased$1.1 million to$20.9 million for the three months endedSeptember 30, 2022 from$19.8 million for the three months endedSeptember 30, 2021 . The increase was primarily due to additional depreciation from our recent acquisitions partially offset by reduced depreciation and amortization as a result of our dispositions. The increase was also partially attributable to$0.5 million of accelerated depreciation we recorded in the three months endedSeptember 30, 2022 on one MOB property inFlorida which incurred damages as a result of Hurricane Ian.
Gains on Sale of Real Estate Investments
We did not dispose of any properties in the three months endedSeptember 30, 2022 and 2021, however, we recorded a gain on sale of$0.2 million in the three months endedSeptember 30, 2022 related to the settlement of a lien on formerly disposed properties. Interest Expense Interest expense increased by$1.5 million to$13.3 million for the three months endedSeptember 30, 2022 from$11.8 million for the three months endedSeptember 30, 2021 . The increase in interest expense resulted from higher average rates partially offset by lower average balances of amounts outstanding under our Revolving Credit Facility during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . As ofSeptember 30, 2022 , our outstanding debt obligations were$1.1 billion at a weighted average interest rate of 4.29% per year. As ofSeptember 30, 2021 , we had total borrowings of$1.2 billion , at a weighted average interest rate of 3.56% per year. Our interest expense in future periods will vary based on our level of future borrowings and the cost of borrowings, among other factors. Recent and continuing increases in interest rates may adversely impact the terms on which we may borrow in the future and thus our results of operations.
Interest and Other Income
Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. Interest and other income was approximately$10,000 and$4,000 for the three months endedSeptember 30, 2022 and 2021, respectively. 57 --------------------------------------------------------------------------------
Gains (Losses) on Non-Designated Derivatives
The gain in the three months endedSeptember 30, 2022 and the loss in the three months endedSeptember 30, 2021 on non-designated derivative instruments related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. The gain recorded in the three months endedSeptember 30, 2022 was due to significant increases in interest rates during the period.
Income Tax Expense
Income taxes generally relate to our SHOPs, which are leased to our TRS. We
recorded an income tax expense of
Because of our TRS's recent operating history of losses and the impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, in the third quarter of 2020, we were not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets and recorded a full valuation allowance. Since that time, our TRS's operating performance has not significantly improved and thus we have recorded a 100% valuation allowance on our net deferred tax assets as ofSeptember 30, 2022 . If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statements of comprehensive income (loss).
Net Loss (Income) Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was approximately$22,000 for the three months endedSeptember 30, 2022 and net loss attributable to non-controlling interests was approximately$0.3 million for the three months endedSeptember 30, 2021 . These amounts represent the portion of our net loss that is related to the Series A Preferred Units held by third parties (issued in connection with a property acquisition inSeptember 2021 ), Common OP Units held by third parties, and non-controlling interest holders in our subsidiaries that own certain properties. 58 --------------------------------------------------------------------------------
Comparison of the Nine Months Ended
Information based on Same Store, Acquisitions and Dispositions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Net loss attributable to common stockholders was$71.2 million and$70.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The following table shows our results of operations for the nine months endedSeptember 30, 2022 and 2021 and the period to period change by line item of the consolidated statements of operations: Increase Nine Months Ended September 30, (Decrease) (Dollars in thousands) 2022 2021 $ Revenue from tenants$ 250,936 $ 246,602 $ 4,334 Operating expenses: Property operating and maintenance 156,880 152,133 4,747 Impairment charges 25,786 33,601 (7,815) Operating fees to related parties 19,003 17,851 1,152 Acquisition and transaction related 1,153 2,453 (1,300) General and administrative 13,369 13,318 51 Depreciation and amortization 61,525 59,390 2,135 Total expenses 277,716 278,746 (1,030)
Operating loss before gain on sale of real estate investments (26,780)
(32,144) 5,364
Gain (loss) on sale of real estate investments (109) 2,284 (2,393)
Operating loss (26,889) (29,860) 2,971
Other income (expense):
Interest expense (37,098) (36,016) (1,082)
Interest and other income 24 60 (36)
Gain on non-designated derivatives 3,212 (32) 3,244
Total other expenses (33,862) (35,988) 2,126
Loss before income taxes (60,751) (65,848) 5,097
Income tax expense (159) (162) 3
Net loss (60,910) (66,010) 5,100
Net (income) loss attributable to non-controlling interests 100 229 (129)
Allocation for preferred stock (10,349) (4,402) (5,947)
Net loss attributable to common stockholders $ (71,159) $ (70,183) $ (976)
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating
performance of our real estate portfolio. NOI is equal to revenue from tenants
less property operating and maintenance expenses. NOI excludes all other
financial statement amounts included in net income (loss) attributable to common
stockholders. We believe NOI provides useful and relevant information because it
reflects only those income and expense items that are incurred at the property
level and presents such items on an unlevered basis. See Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Non-GAAP Financial Measures included elsewhere in this Quarterly Report for
additional disclosure and a reconciliation to our net income (loss) attributable
to common stockholders.
59
--------------------------------------------------------------------------------Segment Results - Medical Office Buildings
The following table presents the components of NOI and the period to period change within our MOB segment for the nine months endedSeptember 30, 2022 and 2021: Same Store(1) Acquisitions(2) Dispositions(3) Segment Total Nine Months Ended September Increase Nine Months Ended September Increase
Nine Months Ended Increase Nine Months Ended September Increase
30, (Decrease) 30, (Decrease) September 30 , (Decrease) 30, (Decrease)
(Dollars in thousands) 2022 2021 $ 2022 2021 $ 2022 2021 $ 2022 2021 $
Revenue from tenants $ 85,824 $ 85,665 $
159 $ 12,193 $ 2,027 $ 10,166 $ 9 $ 3,060 $ (3,051) $ 98,026 $ 90,752 $ 7,274
Less: Property operating and
maintenance 23,947 23,275 672 2,476 609 1,867 (6) 2,089 (2,095) 26,417 25,973 444
NOI $ 61,877 $ 62,390 $ (513) $ 9,717 $ 1,418 $ 8,299 $ 15 $ 971 $ (956) $ 71,609 $ 64,779 $ 6,830
_______________(1)Our MOB segment included 129 Same Store properties. (2)Our MOB segment included 20 Acquisition properties. (3)Our MOB segment included three Disposition properties. (4)Our MOB segment included 149 properties.
Revenue from tenants primarily reflects contractual rent received from tenants in our MOBs and operating expense reimbursements. These reimbursements generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent. During the nine months endedSeptember 30, 2022 , revenue from tenants increased by$7.3 million in our MOB segment as compared to the nine months endedSeptember 30, 2021 , primarily as a result of increased revenue from tenants of$10.2 million generated from our Acquisitions and increased revenue from tenants of$0.2 million from our Same Store properties, partially offset by a decrease in revenue from tenants of$3.1 million from our Dispositions. Property operating and maintenance expenses reflect the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, and unaffiliated third-party property management fees.
Segment Results -
The following table presents the components of NOI and the period to period change within our SHOP segment for the nine months endedSeptember 30, 2022 and 2021: Same Store (1) Acquisitions (2) Dispositions (3) Segment Total Increase Increase Nine Months Ended September Increase Increase Nine Months EndedSeptember 30 , (Decrease) Nine Months EndedSeptember 30 , (Decrease) 30, (Decrease) Nine Months EndedSeptember 30 , (Decrease) (Dollars in thousands) 2022 2021 $ 2022 2021 $ 2022 2021 $ 2022 2021 $ Revenue from tenants$ 152,903 $ 146,369 $ 6,534 $ - $ - $ -$ 7 $ 9,481 $ (9,474) $ 152,910 $ 155,850 $ (2,940) Less: Property operating and maintenance 128,583 116,098 12,485 - - - 1,880 10,062 (8,182) 130,463 126,160 4,303 NOI$ 24,320 $ 30,271 $ (5,951) $ - $ - $ -$ (1,873) $ (581) $ (1,292) $ 22,447 $ 29,690 $ (7,243) _______________
(1)Our SHOP segment included 52 Same Store properties, including two land parcels. (2)Our SHOP segment included zero Acquisition properties. (3) Our SHOP segment included nine Disposition property. (4)Our SHOP segment included 52 properties, including two land parcels.
Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance expenses relate to the costs associated with staffing to provide care for the residents in our SHOPs, as well as food, marketing, real estate taxes, management fees paid to our third-party operators, and costs associated with maintaining the physical site. During the nine months endedSeptember 30, 2022 , revenue from tenants decreased by$2.9 million in our SHOP segment as compared to the nine months endedSeptember 30, 2021 , which was primarily driven by a decrease in revenue from tenants of$9.5 million due to our Disposition properties, partially offset by an increase in revenue from tenants of$6.5 million due to our Same Store properties. 60 -------------------------------------------------------------------------------- The increase to our Same Store properties revenue from tenants was primarily driven by higher leasing rates in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Our revenue from tenants also improved due to higher and recovering occupancy in the nine months endedSeptember 30, 2022 as compared to lower and declining occupancy in the nine months endedSeptember 30, 2021 . These increases were partially offset by an increase in rent concessions offered during the nine months endedSeptember 30, 2022 of$2.7 million , as compared to$1.1 million in the nine months endedSeptember 30, 2021 . We also previously generated a portion of our SHOP revenue from SNFs (which include ancillary revenue from non-residents) at two of our Same Store SHOPs and one of our Disposition SHOPs. This revenue was$1.1 million during the nine months endedSeptember 30, 2021 and was not significant during the nine months endedSeptember 30, 2022 as a result of transitioning our SNF units to other types of units at our Same Store properties, as well as from disposing of our SNF inWellington ,Florida inMay 2021 . This property's results are presented in Disposition properties in the table above. As a result of these unit transitions and dispositions, we do not expect ancillary revenue to be a significant source of revenue in future periods. Additionally, during the nine months endedSeptember 30, 2022 , we concluded that$1.3 million of legacy receivables from our Disposition properties were not recoverable, and accordingly we recorded$1.3 million of bad debt expense which is reflected as a reduction of revenue. During the nine months endedSeptember 30, 2022 , property operating and maintenance expenses increased$4.3 million in our SHOP segment as compared to the nine months endedSeptember 30, 2021 , primarily due to an increase in property operating and maintenance expenses of$12.5 million from our Same Store properties, partially offset by a decrease in property operating and maintenance expenses of$8.2 million from our Disposition properties. Our Same Store properties operating and maintenance expenses increased significantly and were primarily attributable to contract labor and agency costs of$6.7 million , and amounts we pay for overtime wages and bonuses, as well as by overall inflation on wages and supplies in the nine months endedSeptember 30, 2022 . For additional information on the risks and uncertainties associated with increases in inflation and labor costs, see the Inflation and Part II - Item 1A. Risk Factors sections below. The total increase in Same Store properties operating and maintenance expenses was also impacted by the receipt of$4.5 million of funds through the CARES Act in the nine months endedSeptember 30, 2022 , as compared to$5.1 million during the nine months endedSeptember 30, 2021 , which offset costs incurred from the COVID-19 pandemic. Of the$4.5 million of CARES Act funds received by us in the nine months endedSeptember 30, 2022 ,$3.9 million was recognized as a reduction to our Same Store property operating and maintenance expenses in the table above, with the remainder attributable to our Disposition properties. Of the$5.1 million of CARES Act funds received in the nine months endedSeptember 30, 2021 ,$4.5 million was attributable to our Same Store property operating and maintenance expenses with the remainder attributable to our Disposition properties. There can be no assurance that the program will be extended or any further amounts received. See the "Overview - Management Update on the Impacts of the COVID-19 Pandemic" section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management's actions taken in response.
Other Results of Operations
Impairment Charges
We recorded impairment charges of$25.8 million during the nine months endedSeptember 30, 2022 , of which$10.6 million related to seven skilled nursing facilities in our MOB segment located inIllinois , and$15.1 million related to six held for use SHOP properties of eight total properties that we are actively marketing for sale. The incremental impairment charge recorded in the three months endedSeptember 30, 2022 on the held for use SHOP properties resulted from a deterioration of market conditions and rising interest rates. All of these impairment charges were recorded to reduce the carrying value of the properties to their fair values, respectively, as determined by estimated discounted cash flows over our intended holding periods. We recorded impairment charges of$33.6 million during the nine months endedSeptember 30, 2021 , of which (i)$26.6 million related to our disposedLaSalle Properties , (ii)$6.1 million related to our MOB property located inSun City, Arizona (the "Sun City MOB") and (iii)$0.9 million related to our disposedWellington ,Florida skilled nursing facility.The LaSalle Properties and the Sun City MOB were impaired to reduce their carrying values to their estimated fair values, respectively, as determined by their estimated discounted cash flows over our intended holding periods. TheWellington ,Florida skilled nursing facility was impaired to adjust the carrying value to its fair value as determined by its amended purchase and sale agreement.
See Note 3 - Real Estate Investments to our consolidated financial
statements in this Quarterly Report on Form 10-Q for additional information on
the impairment charges for the nine months ended
Operating Fees to Related Parties
Operating fees to related parties increased$1.2 million to$19.0 million for the nine months endedSeptember 30, 2022 from$17.9 million for the nine months endedSeptember 30, 2021 . 61 -------------------------------------------------------------------------------- Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis (see - Results of Operations - Comparison of the Three Months EndedSeptember 30, 2022 and 2021 for additional information). Asset management fees were$16.4 million and$15.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in asset management fees was due to an increase in variable asset management fees resulting from equity offerings completed in May andOctober 2021 , which increased the variable asset management fee in the nine months endedSeptember 30, 2022 relative to the nine months endedSeptember 30, 2021 . Variable asset management fees will further increase if we issue additional equity securities in the future. There were no incentive fees incurred in either of the nine months endedSeptember 30, 2022 or 2021. Property management fees increased$0.2 million to$3.1 million for the nine months endedSeptember 30, 2022 from$2.8 million for the nine months endedSeptember 30, 2021 . Property management fees increase or decrease in direct correlation with gross revenues of the properties managed and depending on the mix of properties managed, as the fee payable for different types of properties varies. See Note 9 - Related Party Transactions and Arrangements to our consolidated financial statements in this Quarterly Report on Form 10-Q which provides detail on our fees and expense reimbursements.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses were$1.2 million for the nine months endedSeptember 30, 2022 and$2.5 million for the nine months endedSeptember 30, 2021 . This decrease was due to certain transactions that occurred in the nine months endedSeptember 30, 2021 which did not occur in the nine months endedSeptember 30, 2022 . The transaction costs recorded in the nine months endedSeptember 30, 2021 consisted of: i) the write-off of offering costs relating to the Preferred Stock Equity Line of$1.2 million , ii)$0.6 million of litigation costs related to ourMichigan dispositions which occurred in the first quarter of 2021 and iii)$0.2 million of settlement charges related to ourJupiter, Florida disposition which occurred in the second quarter of 2021. These decreases were partially offset by fees from dead deal costs of$0.5 million ,$0.2 million of legal fees related to terminated SHOP operators and$0.1 million of penalties on our mortgage repayments.
General and Administrative Expenses
General and administrative expenses increased$0.1 million to$13.4 million for the nine months endedSeptember 30, 2022 compared to$13.3 million for the nine months endedSeptember 30, 2021 , which includes$6.7 million and$7.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively, incurred in expense reimbursements. The increase in general and administrative expenses was primarily driven by a professional fee credit of$1.0 million during the nine months endedSeptember 30, 2021 related to an adjustment for bonuses (see Note 9 - Related Party Transactions and Arrangements for additional information) which did not recur in the nine months endedSeptember 30, 2022 , partially offset by decreased legal costs of$0.6 million .
Depreciation and Amortization Expenses
Depreciation and amortization expense increased$2.1 million to$61.5 million for the nine months endedSeptember 30, 2022 from$59.4 million for the nine months endedSeptember 30, 2021 . The increase was due to our acquisitions of approximately$4.5 million , partially offset by a decrease in Same Store depreciation and amortization of$0.5 million primarily due to several intangible assets becoming fully amortized and a decrease due to dispositions of$1.7 million . The increase was also partially attributable to$0.5 million of accelerated depreciation we recorded in the nine months endedSeptember 30, 2022 on one MOB property inFlorida which incurred damages as a result of Hurricane Ian.
Gain (Loss) on Sale of Real Estate Investments
During the third quarter of 2021, we began to actively market theLaSalle Properties for sale, and a non-binding letter of intent was signed in the fourth quarter of 2021 for an aggregate contract sales price of$12.4 million . We completed the sale of theLaSalle Properties in the first quarter of 2022 and, as a result, we recorded a loss on sale of$0.3 million for the nine months endedSeptember 30, 2022 . We had previously recorded$34.0 million of impairment charges on theLaSalle Properties in the year endedDecember 31, 2021 . We also recorded a gain on sale of$0.2 million in the nine months endedSeptember 30, 2022 related to the settlement of a lien on formerly disposed properties. 62 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2021 , we transferred the remaining four SHOPs inMichigan to the buyer at a second closing in the first quarter of 2021 and as a result, we recorded a loss on sale of$0.2 million . The first closing of the transaction occurred during the year endedDecember 31, 2020 when the purchase price for all 11 properties subject to the transaction was actually received from the buyer. We also sold our skilled nursing facility inWellington ,Florida and our development property inJupiter, Florida , which resulted in gains on sale of$0.1 million and$2.4 million , respectively. As a result of these dispositions, we recorded an aggregate gain on sale of$2.3 million during the nine months endedSeptember 30, 2021 . We previously recorded impairments of$42.2 million ,$13.1 million and$34.4 million related to the 11 Michigan SHOPs,Wellington property, andJupiter property, respectively.
Interest Expense
Interest expense increased$1.1 million to$37.1 million for the nine months endedSeptember 30, 2022 from$36.0 million for the nine months endedSeptember 30, 2021 . The increase in interest expense resulted from higher average rates partially offset by lower average balances of amounts outstanding under our Revolving Credit Facility during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2022 , we had total borrowings of$1.1 billion , at a weighted average interest rate of 4.29% per year. As ofSeptember 30, 2021 , we had total borrowings of$1.2 billion , at a weighted average interest rate of 3.56% per year.
Our interest expense in future periods will vary based on our level of future borrowings and the cost of borrowings, among other factors.
Interest and Other Income
Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. Interest and other income was approximately$24,000 for the nine months endedSeptember 30, 2022 and approximately$60,000 for the nine months endedSeptember 30, 2021 .
Gain (Loss) on Non-Designated Derivatives
Gain (loss) on non-designated derivative instruments for the nine months endedSeptember 30, 2022 and 2021 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with the Fannie Mae Master Credit Facilities, which have floating interest rates. The gain recorded in the nine months endedSeptember 30, 2022 was due to significant increases in interest rates during the period.
Income Tax Benefit (Expense)
Income taxes generally relate to our SHOPs, which are leased to our TRS. We
recorded an income tax expense of approximately
Because of our TRS's recent operating history of losses and the impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, in the third quarter of 2020, we were not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets and recorded a full valuation allowance. Since that time, our TRS's operating performance has not significantly improved and thus we have recorded a 100% valuation allowance on our net deferred tax assets throughSeptember 30, 2022 . If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statements of comprehensive income (loss).
Net Loss (Income) Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was approximately$0.1 million for the nine months endedSeptember 30, 2022 and net loss attributable to non-controlling interests was approximately$0.2 million for the nine months endedSeptember 30, 2021 , which represents the portion of our net income that is related to the Series A Preferred Units held by third parties (issued in connection with a property acquisition in September, 2021), Common OP Units held by third parties, and other non-controlling interest holders in our subsidiaries that own certain properties. 63 --------------------------------------------------------------------------------
Cash Flows from Operating Activities
During the nine months endedSeptember 30, 2022 , net cash provided by operating activities was$21.1 million . The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows included non-cash items of$30.4 million (net loss of$60.9 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges) and, a decrease in prepaid expenses and other assets of$1.0 million . These cash inflows were partially offset by a decrease in accounts payable and accrued expenses of$4.9 million related to timing of payments for real estate taxes, property operating expenses and professional and legal fees, a decrease in deferred rent and other liabilities of$2.2 million and by a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of$1.2 million . During the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$26.0 million . The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of$30.2 million (net loss of$66.0 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges) and a decrease in prepaid expenses and other assets of$0.2 million . These cash inflows were partially offset by a decrease in accounts payable and accrued expenses of$2.8 million related to timing of payments for real estate taxes, property operating expenses and professional and legal fees, a decrease of deferred rent of$0.5 million and by a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of$0.7 million .
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months endedSeptember 30, 2022 was$22.7 million . The cash used in investing activities included$17.8 million for the acquisition of three properties and$16.7 million in capital expenditures, partially offset by$11.8 million from the sale of the fourLaSalle Properties . Net cash used in investing activities during the nine months endedSeptember 30, 2021 was$63.2 million . The cash used in investing activities included$146.1 million for the acquisition of one property and$11.5 million in capital expenditures, partially offset by$94.5 million of proceeds from sales of real estate investments.
Cash Flows from Financing Activities
Net cash used in financing activities of$19.8 million during the nine months endedSeptember 30, 2022 was comprised of cash outflows of payments of deferred financing costs of$0.9 million , dividends paid to holders of Series A Preferred Stock of$5.5 million , dividends to paid holders of Series B Preferred Stock of$4.8 million , payments for derivative instruments of$39,000 and principal payments on mortgages of$8.3 million . Net cash provided by financing activities of$2.7 million during the nine months endedSeptember 30, 2021 related to cash inflows from proceeds of the sale of preferred stock of$56.9 million , partially offset by cash outflows of payments of deferred financing costs of$0.2 million , dividends paid to preferred stockholders of$3.3 million , payments for derivative instruments of$0.1 million , net payments on credit facilities of$49.1 million and principal payments on mortgages of$0.9 million .
Liquidity and Capital Resources
Our existing principal demands for cash are to fund acquisitions, capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), and dividends to holders of our Series A Preferred Stock and holders of our Series B Preferred Stock. We closely monitor our current and anticipated liquidity position relative to our current and anticipated demands for cash and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as the impact of COVID-19 on our tenants and operators. Further, recent and continuing increases in inflation brought about by labor shortages, supply chain disruptions and increases in interest rates may adversely impact our results of operations and thus ultimately our liquidity. Moreover, these increases in the rate of inflation, the ongoing war inUkraine and related sanctions, supply chain disruptions and increases in interest rates, may also impact our tenants' ability to pay rent and hence our results of operations and liquidity. For more information about the risks and uncertainties associated with inflation, the ongoing war inUkraine and related sanctions, and labor shortages and labor costs, please see the Inflation and Part II - Item 1A. Risk Factors sections below. 64 -------------------------------------------------------------------------------- We expect to fund our future short-term operating liquidity requirements, including dividends to holders of Series A Preferred Stock and holders of Series B Preferred Stock, through a combination of current cash on hand, net cash provided by our property operations and draws on the Revolving Credit Facility, which may include amounts reborrowed following the repayments we were or are required to make thereunder. As ofSeptember 30, 2022 we had$40.1 million of cash and cash equivalents, and our ability to use this cash on hand is restricted. Under our Credit Facility, we are required to maintain a combination of cash, cash equivalents and availability for future borrowings under our Revolving Credit Facility totaling at least$50.0 million . As ofSeptember 30, 2022 ,$222.8 million was available for future borrowings under our Revolving Credit Facility, of which$92.0 million was available for general corporate purposes and acquisitions, with the remainder available to repay other existing debt obligations. Certain other restrictions and conditions described below, including those on paying cash dividends, will no longer apply starting in the "Commencement Quarter " which is a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least$100.0 million , giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%, and our Fixed Charge Coverage Ratio is not less than 1.50 to 1.00 for the most recently ended four fiscal quarters. The fiscal quarter endedJune 30, 2021 was the first quarter that could have been theCommencement Quarter . We satisfied the conditions during the quarter endedSeptember 30, 2022 in order to elect the quarter endingDecember 31, 2022 as theCommencement Quarter , but did not make the election to do so. There can be no assurance as to if, or when, we will, or will be able to, elect theCommencement Quarter , including to the extent we may be unable to satisfy these conditions in future periods. We may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of our common stock) on our common stock until theCommencement Quarter . Moreover, beginning in theCommencement Quarter , we may only pay cash distributions provided that the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock, Series B Preferred Stock or any other class of preferred stock that may be issued) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after theCommencement Quarter . Our Credit Facility also restricts our uses of liquidity. Until the first day of theCommencement Quarter , we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to repay amounts outstanding under the Revolving Credit Facility, to the extent there are any such amounts outstanding. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. The availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the increases in operating costs, primarily costs arising from the use of contract labor for care providers and, to a lesser extent, the amount we pay in overtime wages and bonuses, that have resulted from the effects of the COVID-19 pandemic and may persist for some time.
Financings
As ofSeptember 30, 2022 , our total debt leverage ratio (total debt divided by total gross asset value) was approximately 41.0%. Net debt totaled$1.0 billion , which represents gross debt ($1.1 billion ) less cash and cash equivalents ($40.1 million ). Gross asset value totaled$2.6 billion , which represents total real estate investments, at cost ($2.6 billion ) net of gross market lease intangible liabilities ($22.4 million ). Impairment charges are already reflected within gross asset value. As ofSeptember 30, 2022 , we had total gross borrowings of$1.1 billion , at a weighted average interest rate of 4.29%. As ofDecember 31, 2021 , we had total gross borrowings of$1.1 billion at a weighted average interest rate of 3.44%. As ofSeptember 30, 2022 , the carrying value of our real estate investments, at cost was$2.6 billion , with$0.9 billion of this asset value pledged as collateral for mortgage notes payable,$0.6 billion of this asset value pledged to secure advances under the Fannie Mae Master Credit Facilities and$0.9 billion of this asset value comprising the borrowing base of the Credit Facility. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable, unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the Credit Facility, which would impact availability thereunder. We expect to utilize proceeds from our Credit Facility to fund future property acquisitions, as well as, subject to the terms of our Credit Facility, other sources of funds that may be available to us. These actions may require us to add some or all of our unencumbered properties to the borrowing base under our Credit Facility. Unencumbered real estate investments, at cost as ofSeptember 30, 2022 was$0.1 billion . There can be no assurance as to the amount of liquidity we would be able to generate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility. Pursuant to the Credit Facility, any resulting net proceeds from dispositions prior to theCommencement Quarter must be used to repay amounts outstanding under the Revolving Credit Facility, to the extent there are any such amounts outstanding.
Mortgage Notes Payable
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As of
Credit Facility
Our Credit Facility consists of two components, the Revolving Credit Facility and our Term Loan. The Revolving Credit Facility is interest-only and matures onMarch 13, 2023 , subject to one one-year extension at our option. Our Term Loan is interest-only and matures onMarch 13, 2024 . Loans under our Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty, subject to customary breakage costs. Any amounts repaid under our Term Loan may not be re-borrowed. The total commitments under the Credit Facility are$655.0 million including$505.0 million under the Revolving Credit Facility. The Credit Facility includes an uncommitted "accordion feature" that may, subject to conditions, be used to increase the commitments under either component of the Credit Facility by up to an additional$370.0 million to over$1.0 billion . As ofSeptember 30, 2022 ,$150.0 million was outstanding under our Term Loan, and no amounts were outstanding under the Revolving Credit Facility. The unused borrowing availability under the Credit Facility was$222.8 million based on the current borrowing base, of which$92.0 million was available for general corporate purposes and acquisitions, with the remainder available to repay other existing debt obligations. The amount available for future borrowings under the Credit Facility is based on either the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, or a minimum debt service coverage ratio with respect to the borrowing base. Both of these amounts are calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and, therefore, availability under our Credit Facility has been adversely affected by the increases in operating costs, primarily costs arising from the use of contract labor for care providers and, to a lesser extent, the amount we pay in overtime wages and bonuses, due to the effects of the COVID-19 pandemic, and may continue to be adversely affected. See also the discussion above regarding the need to maintain certain levels of liquidity until theCommencement Quarter . The equity interests and related rights in our wholly-owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Credit Facility also contains a subfacility for letters of credit of up to$25.0 million . The applicable margin used to determine the interest rate under both the Term Loan and Revolving Credit Facility components of the Credit Facility varies based on our leverage. As ofSeptember 30, 2022 , the Term Loan had an effective interest rate per annum equal to 5.12%. Under the Credit Facility, we must comply with covenants governing the maximum ratio of consolidated total indebtedness to consolidated total asset value, and requiring us to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges (the "Fixed Charge Coverage Ratio") on a quarterly basis, a minimum consolidated tangible net worth and a minimum debt service coverage ratio. We entered into the Fourth Amendment to the Credit Facility onAugust 11, 2022 . As described above, pursuant to the Fourth Amendment, the Fixed Charge Coverage Ratio we must satisfy, based on the four most recently ended fiscal quarters, is (a) 1.20 to 1.00 for the period commencing with the quarter endedJune 30, 2022 through the quarter endingJune 30, 2023 , (b) 1.35 to 1.00 for the period commencing with the quarter endingSeptember 30, 2023 through the quarter endingDecember 31, 2023 and (c) 1.45 to 1.00 for the period commencing with the quarter endingMarch 31, 2024 and continuing thereafter, provided, however, that from and after theCommencement Quarter , we must satisfy a minimum Fixed Charge Coverage Ratio of 1.50 to 1.00. Without the Fourth Amendment, we would have been in default of the pre-amendment Fixed Charge Coverage Ratio for the four fiscal quarter period endedJune 30, 2022 . However, we were in compliance with the new covenants under the Credit Facility for the four fiscal quarter period endedSeptember 30, 2022 . There can be no assurance our lenders will consent to any further amendments that may become necessary in order to comply with the terms of the Credit Facility in the future. See Note 5 - Credit Facilities for additional information on the Fourth Amendment.
Fannie Mae Master Credit Facilities
As ofSeptember 30, 2022 ,$353.1 million was outstanding under the Fannie Mae Master Credit Facilities. We may request future advances under the Fannie Mae Master Credit Facilities by adding eligible properties to the collateral pool subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. We do not expect to draw any further amounts on the Fannie Mae Master Credit Facilities. Borrowings under the Fannie Mae Master Credit Facilities bear annual interest at a rate that varies on a monthly basis and is equal to the sum of the current LIBOR for one monthU.S. dollar-denominated deposits and 2.62%, with a combined floor of 2.62%. The Fannie Mae Master Credit Facilities mature onNovember 1, 2026 . Future scheduled principal payments on our Fannie Mae Master Credit Facilities for the remainder of 2022 and 2023 are$1.1 million and$5.8 million , respectively.
Capital Expenditures
During the nine months ended
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--------------------------------------------------------------------------------the MOB and SHOP segments throughout 2022, however, the recent economic uncertainty created by the COVID-19 global pandemic will continue to impact our decisions on the amount and timing of future capital expenditures.
Acquisitions - Nine Months Ended
During the nine months ended
Acquisitions - Subsequent to
We have not acquired any properties subsequent toSeptember 30, 2022 . We have entered into three non-binding letters of intent to acquire six properties for an aggregate contract purchase price of$41.7 million . There can be no assurance we will complete these acquisitions on their contemplated terms, or at all. We anticipate primarily using cash on hand and, if necessary, proceeds from borrowings under our Revolving Credit Facility to fund the consideration required to complete this acquisitions.
Dispositions - Nine Months Ended
During the nine months endedSeptember 30, 2022 , we completed the sale of theLaSalle Properties for an aggregate contract sales price of$12.4 million . We had previously recorded$34.0 million of impairment charges on theLaSalle Properties in the year endedDecember 31, 2021 .
Dispositions - Subsequent to
Subsequent to
Share Repurchase Program
Under the Credit Facility, we are restricted from repurchasing shares until theCommencement Quarter . Thus, the Board suspended repurchases under the SRP effectiveAugust 14, 2020 . No further repurchase requests under the SRP may be made unless and until the SRP is reactivated. There can be no assurance, however, as to whether our SRP will be reactivated or on what terms. Beginning in theCommencement Quarter , we will be permitted to repurchase up to$50.0 million of shares of our common stock (including amounts previously repurchased during the term of the Revolving Credit Facility) if, after giving effect to the repurchases, we maintain cash and cash equivalents of at least$30.0 million and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 55.0%.
No assurances can be made as to when or if our SRP will be reactivated.
Non-GAAP Financial Measures
This section discusses the non-GAAP financial measures we use to evaluate our
performance including Funds from Operations ("FFO"), Modified Funds from
Operations ("MFFO") and NOI. While NOI is a property-level measure, MFFO is
based on our total performance as a company and therefore reflects the impact of
other items not specifically associated with NOI such as, interest expense,
general and administrative expenses and operating fees to related parties.
Additionally, NOI as defined herein, includes straight-line rent which is
excluded from MFFO. A description of these non-GAAP financial measures and
reconciliations to the most directly comparable GAAP measure, which is net
income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative. Because of these factors, theNational Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP. We calculate FFO, a non-GAAP measure, consistent with the standards established over time by theBoard of Governors of NAREIT, as restated in a White Paper approved by theBoard of Governors of NAREIT effective inDecember 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect our proportionate share of FFO attributable to our stockholders. Our FFO calculation complies with NAREIT's definition. 67 -------------------------------------------------------------------------------- We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings. Because of these factors, theInstitute of Portfolio Alternatives ("IPA"), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP. We calculate MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA inNovember 2010 , except that we adjust for deferred tax asset allowances based on management's determination. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline (with the added adjustment for deferred tax asset allowances based on management's determination as noted above) and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses and capitalized interest. In addition, because we currently believe that concessions granted to our tenants as a result of the COVID-19 pandemic are collectable (see Accounting Treatment of Rent Deferrals below), we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these deferrals, which is not considered by the Practice Guideline. We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance. Our Modified FFO (as defined in our Credit Facility) is similar but not identical to MFFO as discussed in this Quarterly Report on Form 10-Q. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs. Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to pay dividends and other distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO. 68 -------------------------------------------------------------------------------- Neither theSEC , NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, updates to the White Paper or the Practice Guideline may be published or theSEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
Accounting Treatment of Rent Deferrals
All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the "Overview - Management Update on the Impacts of the COVID-19 Pandemic" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information). As a result of relief granted by the FASB andSEC related to lease modification accounting, rental revenue used to calculate Net Income and NAREIT FFO has not been, and we do not expect it to be, significantly impacted by these types of deferrals. As ofSeptember 30, 2022 , all deferred amounts have been collected and we have not deferred any additional amounts since the year endedDecember 31, 2020 . For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 - Significant Accounting Polices to our consolidated financial statements included in this Quarterly Report on Form 10-Q. The table below reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests. Three Months
Ended
2022 2021 2022 2021
Net loss attributable to common stockholders (in
accordance with GAAP) $ (23,303)
20,361 19,376 60,308 58,102
Impairment charges 8,949 26,642 25,786 33,601
(Gains) losses on sale of real estate investment (194) - 109 (2,284)
Adjustments for non-controlling interests (3) (124) (208) (386) (409)
FFO (as defined by NAREIT) attributable to
stockholders 5,689 3,842 14,658 18,827
Acquisition and transaction related 199 2,198 1,153 2,453
Accretion of market lease and other intangibles, net (176) (61) (421) (100)
Straight-line rent adjustments (183) (148) (1,236) (693)
Straight-line rent (rent deferral agreements) (2) - (46) - (280)
Amortization of mortgage premiums and discounts, net 23 14 28 42
(Gain) loss on non-designated derivatives (1,826) 33 (3,212) 32
Deferred tax asset valuation allowance (3) 216 17 1,358 (1,009)
Adjustments for non-controlling interests (4) 9 (8) 14 2
MFFO attributable to stockholders $ 3,951 $ 5,841 $ 12,342 $ 19,274
_______
(1)Net of non-real estate depreciation and amortization.
(2)Represents amounts related to deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our balance sheets but are considered to be earned revenue attributed to the current period for rent that was deferred, for purposes of MFFO, as they are expected to be collected. Accordingly, when the deferred amounts are collected, the amounts reduce MFFO. As ofMarch 31, 2021 , all deferred amounts have been collected and we have not deferred any additional amounts since the year endedDecember 31, 2020 .
(3)This is a non-cash item and is added back as it is not considered a part of operating performance.
(4)Represents the portion of the adjustments allocable to non-controlling interests.
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level
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performance and to make decisions concerning the operation of the properties.
Further, we believe NOI is useful to investors as a performance measure because,
when compared across periods, NOI reflects the impact on operations from trends
in occupancy rates, rental rates, operating expenses and acquisition activity on
an unleveraged basis, providing perspective not immediately apparent from net
income (loss).
NOI excludes certain components from net income (loss) in order to provide
results that are more closely related to a property's results of operations. For
example, interest expense is not necessarily linked to the operating performance
of a real estate asset and is often incurred at the corporate level. In
addition, depreciation and amortization, because of historical cost accounting
and useful life estimates, may distort operating performance at the property
level. NOI presented by us may not be comparable to NOI reported by other REITs
that define NOI differently. We believe that in order to facilitate a clear
understanding of our operating results, NOI should be examined in conjunction
with net income (loss) as presented in our consolidated financial statements.
NOI should not be considered as an alternative to net income (loss) as an
indication of our performance or to cash flows as a measure of our liquidity or
ability to pay distributions.
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The following table reflects the items deducted from or added to net loss
attributable to stockholders in our calculation of Same Store, Acquisitions and
Dispositions NOI for the three months ended
(In thousands) Same Store Acquisitions Dispositions Non-Property Total
MOBs SHOPs MOBs SHOPs MOBs SHOPs Specific
Net income (loss) attributable
to common stockholders (in
accordance with GAAP) $ 9,465 $ (7,875) $ 1,323 $ - $ - $ (641) $ (25,575) $ (23,303)
Impairment charges - 8,949 - - - - - 8,949
Operating fees to related
parties - - - - - - 6,333 6,333
Acquisition and transaction
related - - 1 - - - 198 199
General and administrative 22 - - - - - 4,449 4,471
Depreciation and amortization 11,641 7,877 1,336 - - - - 20,854
Interest expense 21 338 - - - - 12,925 13,284
Interest and other income (1) - - - - - (9) (10)
Gain on sale of real estate
investments - - - - - (194) - (194)
Gain on non-designated
derivative instruments - - - - - - (1,826) (1,826)
Income tax (benefit) expense - - - - - - 77 77
Allocation for preferred stock - - - - - - 3,450 3,450
Net loss attributable to
non-controlling interests - - - - - - (22) (22)
NOI $ 21,148 $ 9,289 $ 2,660 $ - $ - $ (835) $ - $ 32,262
The following table reflects the items deducted from or added to net income
(loss) attributable to stockholders in our calculation of Same Store,
Acquisitions and Dispositions NOI for the three months ended September 30, 2021 :
(In thousands) Same Store Acquisitions Dispositions Non-Property Total
MOBs SHOPs MOBs SHOPs MOBs SHOPs Specific
Net income (loss) attributable
to common stockholders (in
accordance with GAAP) $ 9,664 $ 493 $ 74 $ - $ 281 $ (26,600) $ (25,880) $ (41,968)
Impairment charges - - - - - 26,642 - 26,642
Operating fees to related
parties - - - - - - 6,045 6,045
Acquisition and transaction
related - - - - - - 2,198 2,198
General and administrative 25 1 - - - - 4,697 4,723
Depreciation and amortization 11,414 7,560 218 - 256 338 - 19,786
Interest expense 80 344 - - - - 11,351 11,775
Interest and other income (2) - - - - - (2) (4)
Loss on non-designated
derivative instruments - - - - - - 33 33
Income tax (benefit) expense - - - - - - 55 55
Allocation for preferred stock - - - - - - 1,834 1,834
Net income attributable to
non-controlling interests - - - - - - (331) (331)
NOI $ 21,181 $ 8,398 $ 292 $ - $ 537 $ 380 $ - $ 30,788
71-------------------------------------------------------------------------------- The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store, Acquisitions and Dispositions NOI for the nine months endedSeptember 30, 2022 : (In thousands) Same Store Acquisitions Dispositions Non-Property Total MOBs SHOPs MOBs SHOPs MOBs SHOPs Specific Net income (loss) attributable to common stockholders (in accordance with GAAP)$ 18,801 $ (15,291) $ 4,013 $ -$ 24 $ (2,324) $ (76,382) $ (71,159) Impairment charges 10,644 15,142 - - - - - 25,786 Operating fees to related parties - - - - - - 19,003 19,003 Acquisition and transaction related 212 - 1 - - - 940 1,153 General and administrative 66 3 - - - - 13,300 13,369 Depreciation and amortization 32,063 23,417 5,703 - - 342 - 61,525 Interest expense 95 1,050 - - - - 35,953 37,098 Interest and other income (4) (1) - - (9) - (10) (24) Loss on sale of real estate investments - - - - - 109 - 109 Gain on non-designated derivative instruments - - - - - - (3,212) (3,212) Income tax (benefit) expense - - - - - - 159 159 Allocation for preferred stock - - - - - - 10,349 10,349 Net loss attributable to non-controlling interests - - - - - - (100) (100) NOI$ 61,877 $ 24,320 $ 9,717 $ -$ 15 $ (1,873) $ -$ 94,056 The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store, Acquisitions and Dispositions NOI for the nine months endedSeptember 30, 2021 : (In thousands) Same Store Acquisitions Dispositions Non-Property Total MOBs SHOPs MOBs SHOPs MOBs SHOPs Specific Net income (loss) attributable to common stockholders (in accordance with GAAP)$ 23,476 $ 6,546 $ 238 $ -$ 1,571 $ (29,438) $ (72,576) $ (70,183) Impairment charges 6,082 - - - - 27,519 - 33,601 Operating fees to related parties - - - - - - 17,851 17,851 Acquisition and transaction related - 3 - - - - 2,450 2,453 General and administrative 70 11 - - - - 13,237 13,318 Depreciation and amortization 32,538 22,650 1,180 - 1,743 1,279 - 59,390 Interest expense 242 1,062 - - - - 34,712 36,016 Interest and other income (18) (1) - - - - (41) (60) Gains (losses) on sale of real estate investments - - - - (2,343) 59 - (2,284) Gain on non-designated derivative instruments - - - - - - 32 32 Income tax (benefit) expense - - - - - - 162 162 Allocation for preferred stock - - - - - - 4,402 4,402 Net loss attributable to non-controlling interests - - - - - - (229) (229) NOI$ 62,390 $ 30,271 $ 1,418 $ -$ 971 $ (581) $ -$ 94,469
Dividends and Other Distributions
Dividends on our Series A Preferred Stock accrue in an amount equal to$1.84375 per share each year ($0.460938 per share per quarter) to Series A Preferred Stock holders, which is equivalent to 7.375% of per annum in the$25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us. 72 -------------------------------------------------------------------------------- Dividends on our Series B Preferred Stock accrue in an amount equal to$1.78125 per share each year ($0.445313 per share per quarter) to Series B Preferred Stock holders, which is equivalent to 7.125% of per annum in the$25.00 liquidation preference per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us. The first dividend on the Series B Preferred Stock was paid inJanuary 2022 . OnFebruary 20, 2018 , the Board authorized the rate at which we pay monthly distributions to stockholders, effective as ofMarch 1, 2018 , which is$0.85 per annum per share of common stock. Also, onAugust 13, 2020 , the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the COVID-19 pandemic and to comply with the Credit Facility at the time. Under this distribution policy, distributions authorized by the Board on shares of our common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at the estimated per share asset value in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. We declared and issued Stock Dividends of 0.01349 shares of our common stock on each share of our outstanding common stock inOctober 2020 andJanuary 2021 and 0.014655 shares of our common stock on each share of our outstanding common stock inApril 2021 ,July 2021 ,October 2021 andJanuary 2022 . We declared and issued Stock Dividends of 0.014167 shares of our common stock on each share of our outstanding common stock inApril 2022 ,July 2022 andOctober 2022 . The Board may further change our common stock distribution policy at any time, reduce the amount of distributions paid or suspend distribution payments at any time, and therefore distribution payments are not assured. Under our Credit Facility we may not pay distributions to holders of common stock in cash or make any other cash distributions (including repurchases of shares of our common stock), subject to certain exceptions. These exceptions include paying cash dividends on the Series A Preferred Stock and the Series B Preferred Stock or any other preferred stock we may issue and paying any cash distributions necessary to maintain our status as a REIT. We may not pay any cash distributions (including dividends on Series A Preferred Stock and Series B Preferred Stock) if a default or event of default exists or would result therefrom. The restrictions on paying cash distributions will no longer apply starting in the quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter, we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least$100.0 million , giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5% and our Fixed Charge Coverage Ratio is not less than 1.50 to 1.00 for the most recently ended four fiscal quarters. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We may only pay cash distributions on our common stock beginning in theCommencement Quarter and the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock, Series B Preferred Stock or any other class of preferred stock that may be issued) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after theCommencement Quarter . In addition, our ability to pay cash distributions may be limited by financial covenants in the Credit Facility, including our requirement to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges and a minimum debt service coverage ratio. Until four full fiscal quarters have elapsed after the commencement of theCommencement Quarter , the aggregate amount of permitted distributions and Modified FFO will be determined by using only the fiscal quarters that have elapsed from and after theCommencement Quarter and annualizing those amounts. Subject to the restrictions in our Credit Facility, the amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements ofMaryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986 (the "Code"). Distribution payments are dependent on the availability of funds. The Board may reduce the amount of dividends or distributions paid or suspend dividend or distribution payments at any time and therefore dividend and distribution payments are not assured. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock or Series B Preferred Stock become part of the liquidation preference thereof. 73 -------------------------------------------------------------------------------- The following table shows the sources for the payment of distributions to preferred stockholders, including distributions on unvested restricted shares and Common OP Units, but excluding distributions related to ClassB Units as these distributions are recorded as an expense in our consolidated statements of operations and comprehensive loss, for the periods indicated: Three Months Ended Year-To-DateMarch 31, 2022 June 30, 2022 September 30, 2022 September 30, 2022 Percentage of Percentage of Percentage of Percentage of (In thousands) Distributions Distributions Distributions Distributions Distributions: Dividends to holders of Series A Preferred Stock$ 1,833 $ 1,833 $ 1,834 $ 5,500 Dividends to holders of Series B Preferred Stock 1,527 1,706 1,616 4,849 Distributions paid to holders of Series A OP Units 46 46 46 138 Total distributions$ 3,406 $ 3,585 $ 3,496 $ 10,487 Source of distribution coverage: Cash flows provided by operations (1)$ 3,406 100.0 %$ 3,585 100.0 %$ 3,496 100.0 % $ 10,487 100.0 % Total source of distribution coverage$ 3,406 100.0 %$ 3,585 100.0 %$ 3,496 100.0 % $ 10,487 100.0 % Cash flows provided by operations (in accordance with GAAP)$ 5,882 $ 7,855 $ 7,358 $ 21,095 Net loss (in accordance with GAAP)$ (23,400) $ (17,635) $ (19,875) $ (60,910) ______
(1)Assumes the use of available cash flows from operations before any other sources.
For the nine months endedSeptember 30, 2022 , cash flows provided by operations were$21.1 million . We had not historically generated sufficient cash flows from operations to fund the payment of dividends and other distributions at the current rate prior to switching from paying cash dividends to stock dividends on our common stock. As shown in the table above, we funded dividends to holders of Series A Preferred Stock and Series B Preferred Stock with cash flows provided by operations. Because shares of common stock are only offered and sold pursuant to the DRIP in connection with the reinvestment of distributions paid in cash, participants in the DRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in stock instead of cash. Our ability to pay dividends on our Series A Preferred Stock and Series B Preferred Stock and starting with theCommencement Quarter , other distributions and maintain compliance with the restrictions on the payment of distributions in our Credit Facility depends on our ability to increase the amount of cash we generate from property operations which in turn depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective. We may still pay any cash distributions necessary to maintain our status as a REIT and may not pay any cash distributions (including dividends on Series A Preferred Stock and Series B Preferred Stock) if a default or event of default exists or would result therefrom under the Credit Facility.
Loan Obligations
The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities required interest only payments throughNovember 2021 and principal and interest payments thereafter. Our loan agreements 74
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require us to comply with specific financial and reporting covenants. Pursuant to the terms of the Fourth Amendment entered into onAugust 11, 2022 , as described above, the prior Fixed Charge Coverage Ratio, based on the four most recently ended fiscal quarters, of 1.50 to 1.00 was reduced to (a) 1.20 to 1.00 for the period commencing with the quarter endedJune 30, 2022 through the quarter endingJune 30, 2023 , (b) 1.35 to 1.00 for the period commencing with the quarter endingSeptember 30, 2023 through the quarter endingDecember 31, 2023 and (c) 1.45 to 1.00 for the period commencing with the quarter endingMarch 31, 2024 and continuing thereafter; provided, however, that from and after theCommencement Quarter , we must satisfy a minimum Fixed Charge Coverage Ratio of 1.50 to 1.00. There can be no assurance our lenders will consent to any further amendments that may become necessary in order to comply with the terms of the Credit Facility in the future. See Note 5 - Credit Facilities for additional information on the Fourth Amendment. Under our Credit Facility, until the first day of theCommencement Quarter , we must use all the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to repay amounts outstanding under the Revolving Credit Facility, to the extent there are any such amounts outstanding. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year endedDecember 31, 2013 . Commencing with that taxable year, we have been organized and operated in a manner so that we qualify as a REIT under the Code. We intend to continue to operate in such a manner but we can provide no assurances that we will operate in a manner so as to remain qualified for taxation as a REIT. To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and comply with a number of other organizational and operational requirements. If we continue to qualify as a REIT, we generally will not be subject toU.S. federal corporate income tax on the portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well asU.S. federal income and excise taxes on our undistributed income. Inflation We may be adversely impacted by inflation on the leases with tenants in our MOB segment that do not contain indexed escalation provisions, or those leases which have escalations at rates which do not exceed or approximate current inflation rates. As ofSeptember 30, 2022 , the increase to the 12-month CPI for all items, as published by theBureau of Labor Statistics , was 8.2%. To help mitigate the adverse impact of inflation, approximately 90% of our leases with our tenants in our MOB segment contain rent escalation provisions which increase the cash that is due under these leases over time by an average of 2.3% per year. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). Approximately 85.9% are fixed-rate, 4.1% are based on the Consumer Price Index and 10% do not contain any escalation provisions. In addition to base rent, depending on the specific lease, MOB tenants are generally required to pay either (i) their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors or (ii) their share of increases in property operating and maintenance expenses to the extent they exceed the properties' expenses for the base year of the respective leases. Property operating and maintenance expenses include common area maintenance costs, real estate taxes and insurance. Increased operating costs paid by our tenants under these net leases could have an adverse impact on our tenants if increases in their operating expenses exceed increases in their revenue, which may adversely affect our tenants' ability to pay rent owed to us or property expenses to be paid, or reimbursed to us, by our tenants. Renewals of leases or future leases for our net lease properties may not be negotiated on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs. Leases with residents at our SHOPs typically do not have rent escalations, however, we are able to renew leases at market rates as they mature due to their short-term nature. As inflation rates increase or persist at high levels, the cost of providing medical care at our SHOPs, particularly labor costs, will increase. If we are unable to admit new residents or renew resident leases at market rates, while bearing these increased costs from providing services to our residents, our results of operations may be affected.
Related-Party Transactions and Agreements
Please see Note 9 - Related Party Transactions and Arrangements to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.
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