NORTHSTAR HEALTHCARE INCOME, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part I, Item 1. "Financial Statements" and the risk factors in Part II, Item 1A. "Risk Factors." References to "we," "us," "our," or "NorthStar Healthcare " refer toNorthStar Healthcare Income, Inc. and its subsidiaries unless the context specifically requires otherwise.
Overview
We were formed to acquire, originate and asset manage a diversified portfolio of equity, debt and securities investments in healthcare real estate, directly or through joint ventures, with a focus on the mid-acuity seniors housing sector, which we define as assisted living, memory care, skilled nursing and independent living facilities and continuing care retirement communities. We also invest in other healthcare property types, including medical office buildings, hospitals, rehabilitation facilities and ancillary healthcare services businesses. Our investments are predominantly inthe United States , but we also selectively make international investments. We were formed inOctober 2010 as aMaryland corporation and commenced operations inFebruary 2013 . We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with the taxable year endedDecember 31, 2013 . We conduct our operations so as to continue to qualify as a REIT forU.S. federal income tax purposes. We are externally managed and have no employees. OnFebruary 28, 2022 , our former Sponsor,DigitalBridge Group, Inc. (NYSE: DBRG), or our Former Sponsor, completed the previously announced disposition of its wellness infrastructure platform, or the Sponsor Transaction. Following completion of the Sponsor Transaction,NRF Holdco, LLC , or NRF or our New Sponsor (and together with our Former Sponsor, our Sponsor as the context requires), ownsCNI NSHC Advisors, LLC , or our Advisor, as well as its own diversified portfolio of medical office buildings, senior housing facilities, skilled nursing facilities and specialty hospitals. NRF is wholly owned byCWP Bidco LP , an entity affiliated with Highgate, a privately held real estate investment and hospitality management company, andAurora Health Network LLC , a privately held healthcare-focused investment firm. In addition, upon completion of the Sponsor Transaction, employees of our Former Sponsor focused on the wellness infrastructure platform became employees of our New Sponsor. Our Advisor, now a subsidiary of our New Sponsor, will continue to manage our day-to-day operations pursuant to an advisory agreement. From inception throughMarch 31, 2022 , we raised$2.0 billion in total gross proceeds from the sale of shares of our common stock in our continuous, public offerings, including$232.6 million pursuant to our distribution reinvestment plan, or our DRP, collectively referred to as our Offering.
Significant Developments
Operating Performance
The following is a summary of the performance of our investment segments for the three months endedMarch 31, 2022 as compared to the three months endedDecember 31, 2021 . The world continues to experience the broad effects of the COVID-19 pandemic. Our healthcare real estate business and investments have been challenged by suboptimal occupancy levels, lower labor force participation rates, which drove increased labor costs, and inflationary pressures on other operating expenses. We continue to monitor the progression of the economic recovery from COVID-19 and its effects on our results of operations and assess recoverability of value across our assets as conditions change. For additional information on financial results, refer to "-Results of Operations."
Direct Investments - Operating
During the three months endedMarch 31, 2022 , our direct operating investments experienced an 11.6% increase in the number of resident move-ins over the three months endedDecember 31, 2021 , while the number of move-outs increased 3.0% over the same period. A summary of average occupancy by manager is as follows: 32
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Average Monthly Occupancy Average Quarterly Occupancy
Operator / Manager March 2022 December 2021 Variance Q1 2022 Q4 2021 Variance
Watermark Retirement
Communities(1) 77.0 % 77.2 % (0.2) % 77.4 % 77.1 % 0.3 %
Solstice Senior Living 78.4 % 77.2 % 1.2 % 78.0 % 77.1 % 0.9 %
Avamere Health Services 86.8 % 85.0 % 1.8 % 85.4 % 85.2 % 0.2 %
Integral Senior Living 97.5 % 97.5 % - % 96.7 % 99.2 % (2.5) %
Direct Investments -
Operating 78.7 % 77.9 % 0.8 % 78.5 % 77.9 % 0.6 %
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(1)Average monthly and annual occupancy excludes properties sold.
On a same store basis, rental and resident fee income of our direct operating investments increased to$43.1 million for the three months endedMarch 31, 2022 as compared to$42.3 million for the three months endedDecember 31, 2021 as a result of improved occupancy. On a same store basis, excluding COVID-19 related expenses, property operating expenses of our direct operating investments increased to$32.7 million for the three months endedMarch 31, 2022 as compared to$31.4 million for the three months endedDecember 31, 2021 . The increase was attributable to inflationary pressures on operating costs and staffing challenges, which in turn have resulted in additional overtime hours, use of agency and contract labor and increased salaries and wages expense. Overall, on a same store basis, rental and resident fee income, net of property operating expenses, of our direct operating investments decreased to$10.4 million for the three months endedMarch 31, 2022 as compared to$10.9 million for the three months endedDecember 31, 2021 .
Our direct operating investments, on a same store basis, incurred COVID-19
related expenses totaling
Direct Investments -
The operator of our Arbors portfolio has failed to remit contractual rent and satisfy other lease conditions. Contractual monthly rent obligations have been remitted throughMay 2021 and we have recorded rental income to the extent rental payments were received during the three months endedMarch 31, 2022 . The Arbors portfolio recognized rental income of$0.2 million for the three months endedMarch 31, 2022 , as compared to$0.5 million for the three months endedDecember 31, 2021 . Unconsolidated Investments Overall, our unconsolidated investment portfolios experienced similar operational challenges as our direct operating investments. Equity in earnings totaled$2.5 million for the three months endedMarch 31, 2022 as compared to equity in losses of$2.0 million for the three months endedDecember 31, 2021 . The increase was primarily a result of improved operational performance in the Trilogy joint venture. Additionally, equity in earnings includes our proportionate share of net gains from a sale transaction in the Espresso joint venture, which totaled$0.7 million for the three months endedMarch 31, 2022 . Equity in losses for the three months endedDecember 31, 2021 includes our proportionate share of impairment losses recorded by the Eclipse joint venture, which totaled$1.8 million . During the three months endedMarch 31, 2022 , we received distributions from our unconsolidated investments, which totaled$7.1 million as compared to$11.1 million for the three months endedDecember 31, 2021 . Distributions continued to be limited by reinvestment and development in the Trilogy joint venture and operational challenges in the Diversified US/UK and Eclipse joint ventures.
The following is a summary of operations and performance for the Trilogy,
Diversified US/
•Trilogy: The joint venture's facilities experienced improvements to resident occupancy, however, labor shortages and inflationary pressures continued to impact its portfolio. Additionally, the joint venture continued to receive and recognize federal and state COVID-19 provider relief grants as income. •Diversified US/UK : The joint venture continues to receive substantially all contractual monthly rent from its MOB tenants. The operators of the joint venture's net lease portfolios, including its portfolio in theUnited Kingdom , continue to face occupancy and expense pressures, which has affected their ability and willingness to pay rent. CCRC, SNF and ALF operating portfolios continue to sustain suboptimal occupancy levels and experienced staffing challenges. 33
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•Espresso: The joint venture received full contractual rent from its net lease operators. InMarch 2022 , we received$2.2 million of distributions from the joint venture. As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 108 properties have been classified as held for sale as ofMarch 31, 2022 . For additional information on distributions, refer to "-Recent Developments."
Recent Developments
The following is a discussion of material events which have occurred subsequent
to
Distribution Reinvestment Plan
On
Special Distribution
OnApril 20, 2022 , our board of directors declared a special distribution of$0.50 per share, or the Special Distribution, for each stockholder of record onMay 2, 2022 . The Special Distribution paid in cash on or aroundMay 5, 2022 totaled$97.0 million .
Distribution From Unconsolidated Venture
In
Our Investments
We have invested in independent living facilities, or ILFs, assisted living facilities, or ALFs, memory care facilities, or MCFs, and continuing care retirement communities, or CCRCs, which we collectively refer to as seniors housing facilities, skilled nursing facilities, or SNFs, medical office buildings, or MOBs, and hospitals.
Our investments are categorized as follows:
•Direct Investments - Operating - Healthcare properties operated pursuant to management agreements with healthcare managers.
•Direct Investments -
•Unconsolidated Investments - Healthcare joint ventures, including properties operated under net leases with an operator or pursuant to management agreements with healthcare managers, in which we own a minority interest. We generate revenues from resident fees and rental income. Resident fee income from our seniors housing facilities is recorded when services are rendered and includes resident room and care charges and other resident charges. Rental income is generated from our real estate for the leasing of space to various types of healthcare operators/tenants/residents. Additionally, we report our proportionate interest of revenues and expenses from unconsolidated joint ventures, which own healthcare real estate, through equity in earnings (losses) of unconsolidated ventures on our consolidated statements of operations.
For financial information regarding our reportable segments, refer to Note 11, "Segment Reporting" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
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The following table presents a summary of investments as of
Properties(1)(2)
Ownership
Investment Type / Portfolio Amount(2)(3) Seniors Housing MOB SNF Hospitals Total Primary Locations Interest
Direct Investments -
Operating
Winterfell $ 904,985 32 - - - 32 Various 100.0%
Rochester 219,518 10 - - - 10 Northeast 97.0%
Watermark Aqua 77,521 4 - - - 4 Southwest/Midwest 97.0%
Avamere 99,438 5 - - - 5 Northwest 100.0%
Oak Cottage 19,427 1 - - - 1 West 100.0%
Other(4) 2,030 - - - - - West 97.0%
Subtotal $ 1,322,919 52 - - - 52
Direct Investments -
Net Lease
Arbors $ 126,825 4 - - - 4 Northeast 100.0%
Unconsolidated Investments
Diversified US/UK $ 445,855 92 106 39 9 246 Various 14.3%
Trilogy(5) 400,972 22 - 68 - 90 Southwest/Midwest 23.2%
Eclipse 37,291 42 - 9 - 51 Various 5.6%
Espresso(6) - - - - - - Various 36.7%
Solstice(7) - - - - - - 20.0%
Subtotal $ 884,118 156 106 116 9 387
Total Investments $ 2,333,862 212 106 116 9 443
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(1)Classification based on predominant services provided, but may include other services. (2)Excludes properties held for sale. (3)Based on cost for real estate equity investments, which includes purchase price allocations related to net intangibles, deferred costs, other assets, if any, and adjusted for subsequent capital expenditures. For real estate equity investments, includes cost associated with purchased land parcels that are not included in the count. (4)Represents seven condominium units for which we hold future interests. (5)Includes institutional pharmacy, therapy businesses and lease purchase buy-out options in connection with the Trilogy investment, which are not subject to property count. (6)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 108 properties have been classified as held for sale as ofMarch 31, 2022 . (7)Represents our investment inSolstice Senior Living, LLC , or Solstice, the manager of the Winterfell portfolio. Solstice is a joint venture between affiliates ofIntegral Senior Living, LLC , or ISL, a management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and us, who owns 20.0%. 35
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The following presents our real estate equity portfolio diversity across property type and geographic location based on cost:
Real Estate Equity by Property Type(1) Real Estate Equity by Geographic Location
[[Image Removed: nshi-20220331_g1.jpg]] [[Image Removed: nshi-20220331_g2.jpg]]
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(1)Classification based on predominant services provided, but may include other services.
Our investments include the following types of healthcare facilities as of
•Seniors Housing Facilities. We define seniors housing facilities to include
ILFs, ALFs, MCFs and CCRCs, as described in further detail below. Revenues
generated by seniors housing facilities typically come from private pay sources,
including private insurance, and to a much lesser extent government
reimbursement programs, such as Medicare and Medicaid.
•Assisted living facilities. ALFs provide services that include minimal
assistance for activities in daily living and permit residents to maintain some
of their privacy and independence as they do not require constant supervision
and assistance. Services bundled within one regular monthly fee usually include
three meals per day in a central dining room, daily housekeeping, laundry,
medical reminders and 24-hour availability of assistance with the activities of
daily living, such as eating, dressing and bathing. Professional nursing and
healthcare services are usually available at the facility on call or at
regularly scheduled times. ALFs typically are comprised of one and two bedroom
suites equipped with private bathrooms and efficiency kitchens.
•Independent living facilities. ILFs are age-restricted multi-family properties
with central dining facilities that provide services that include security,
housekeeping, nutrition and limited laundry services. ILFs are designed
specifically for independent seniors who are able to live on their own, but
desire the security and conveniences of community living. ILFs typically offer
several services covered under a regular monthly fee.
•Memory care facilities. MCFs offer specialized options for seniors with
Alzheimer's disease and other forms of dementia. Purpose built, free-standing
MCFs offer an attractive alternative for private-pay residents affected by
memory loss in comparison to other accommodations that typically have been
provided within a secured unit of an ALF or SNF. These facilities offer
dedicated care and specialized programming for various conditions relating to
memory loss in a secured environment that is typically smaller in scale and more
residential in nature than traditional ALFs. Residents require a higher level of
care and more assistance with activities of daily living than in ALFs.
Therefore, these facilities have staff available 24 hours a day to respond to
the unique needs of their residents.
•Continuing care retirement community. CCRCs provide, as a continuum of care,
the services described for ILFs, ALFs and SNFs in an integrated campus. CCRCs
can be structured to offer services covered under a regular monthly rental fee
or under a one-time upfront entrance fee, which is partially refundable in
certain circumstances.
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•Skilled Nursing Facilities. SNFs provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. A typical SNF includes mostly one and two bed units, each equipped with a private or shared bathroom and community dining facilities. Revenues generated from SNFs typically come from government reimbursement programs, including Medicare and Medicaid, as well as private pay sources, including private insurance. •Medical Office Buildings. MOBs are typically either single-tenant properties associated with a specialty group or multi-tenant properties leased to several unrelated medical practices. Tenants include physicians, dentists, psychologists, therapists and other healthcare providers, who require space devoted to patient examination and treatment, diagnostic imaging, outpatient surgery and other outpatient services. MOBs are similar to commercial office buildings, although they require greater plumbing, electrical and mechanical systems to accommodate physicians' requirements such as sinks in every room, brighter lights and specialized medical equipment. •Hospitals. Services provided by operators and tenants in hospitals are paid for by private sources, third-party payers (e.g., insurance and Health Maintenance Organizations), or through the Medicare and Medicaid programs. Our hospital properties typically will include acute care, long-term acute care, specialty and rehabilitation hospitals and generally are leased to operators under triple-net lease structures.
Direct Investments - Operating
For our operating properties, we enter into management agreements that generally provide for the payment of a fee to a manager, typically 4-5% of gross revenues with the potential for certain incentive compensation, and have direct exposure to the revenues and operating expenses of a property. As a result, our operating properties allow us to participate in the risks and rewards of the operations of healthcare facilities. Revenue derived from ILFs within our direct operating investments is classified as rental income on our consolidated statements of operations. Revenue derived from ALFs and MCFs within our direct operating investments is classified as resident fee income on our consolidated statements of operations.
The weighted average resident occupancy of our operating properties was 78.5%
for the three months ended
Direct Investments -
For our net lease properties, we enter into net leases that generally provide for fixed rental payments, subject to periodic increases based on certain percentages or the consumer price index, and obligate the operator to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. Revenue derived from our net lease properties is classified as rental income on our consolidated statements of operations. Our remaining four net lease properties are leased and operated byArcadia Management with a lease term that expires inAugust 2029 . However, the operator has failed to remit rent and comply with other contractual terms of its lease agreements, which resulted in defaults under the operator's leases as ofMarch 31, 2022 . 37
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Table of Contents Operators and Managers
The following table presents the operators and managers of our direct investments (dollars in thousands):
As of March 31, 2022 Three Months Ended March 31, 2022
Units Under Property and Other % of Total Property
Operator / Manager Properties Under Management Management(1) Revenues(2) and Other Revenues
Solstice Senior Living(3) 32 4,000 $ 26,068 60.2 %
Watermark Retirement
Communities 14 1,753 11,028 25.4 %
Avamere Health Services 5 453 4,771 11.0 %
Integral Senior Living 1 44 1,198 2.8 %
Arcadia Management(4) 4 572 249 0.6 %
Other(5) - - 18 - %
Total 56 6,822 $ 43,332 100.0 %
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(1)Represents rooms for ALFs and ILFs and beds for MCFs and SNFs, based on predominant type. (2)Includes rental income received from our net lease properties as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from our ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges. (3)Solstice is a joint venture of which affiliates of ISL own 80%. (4)During the three months endedMarch 31, 2022 , we recorded rental income to the extent rental payments were received. (5)Consists primarily of interest income earned on corporate-level cash accounts.Watermark Retirement Communities and Solstice, together with their affiliates, manage substantially all of our operating properties. As a result, we are dependent upon their personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our properties efficiently and effectively. Through our 20.0% ownership of Solstice, we are entitled to certain rights and minority protections. As Solstice is a joint venture formed exclusively to operate the Winterfell portfolio, Solstice has generated, and may continue to generate, operating losses if declines in occupancy and operating revenues at our Winterfell portfolio continue.
Unconsolidated Investments
The following table presents our unconsolidated investments (dollars in
thousands):
Properties as of March 31, 2022 (1)
Equity
Portfolio Partner Acquisition Date Ownership AUM(2) Investment(3) Seniors Housing Facilities MOB SNF Hospitals TotalDiversified US/UK NRF and Partner Dec-2014 14.3 %$ 445,855 $ 243,544 92 106 39 9 246 American Healthcare REIT / Management Team of TrilogyTrilogy Investors, LLC Dec-2015 23.2 % 400,972 189,032 22 - 68 - 90 NRF and Partner/ Formation Capital, Eclipse LLC May-2014 5.6 % 37,291 23,400 42 - 9 - 51 Formation Capital, LLC/Safanad Espresso(4)Management Limited Jul-2015 36.7 % - 55,146 - - - - - Subtotal$ 884,118 $ 511,122 156 106 116 9 387 Solstice Jul-2017 20.0 % - 402 - - - - - Total$ 884,118 $ 511,524 156 106 116 9 387
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(1)Excludes properties classified as held for sale. (2)Represents assets under management based on cost, which includes purchase price allocations related to net intangibles, deferred costs, other assets, if any, and adjusted for subsequent capital expenditures. Does not include cost of properties held for sale. (3)Represents initial and subsequent contributions to the underlying joint venture throughMarch 31, 2022 . (4)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 108 properties have been classified as held for sale as ofMarch 31, 2022 . 38
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•Diversified US/
•Trilogy. Portfolio of predominantly SNFs located in the Midwest and operated pursuant to management agreements withTrilogy Health Services , as well as ancillary services businesses, including a therapy business and a pharmacy business.American Healthcare REIT, Inc. , or AHR, and management of Trilogy own the remaining 76.8% of this portfolio. •Eclipse. Portfolio of SNFs and ALFs leased to, or managed by, a variety of different operators/managers acrossthe United States . Our Sponsor and other minority partners and Formation own 86.4% and 8.0% of this portfolio, respectively. •Espresso. Portfolio of predominantly SNFs, located in various regions acrossthe United States , and organized in sub-portfolios under net leases. An affiliate of Formation acts as the general partner and manager of this investment.Formation and Safanad Management Limited own the remaining 63.3% of this portfolio.
•Solstice. Operator platform joint venture established to manage the operations of the Winterfell portfolio. An affiliate of ISL owns the remaining 80.0%.
Our Strategy
Our primary objective is to maximize value and generate liquidity for shareholders. Although our short-term strategy may continue to be impacted by the effects of the COVID-19 pandemic, the key elements of our strategy include:
•Grow the Operating Income Generated by Our Portfolio. Through active portfolio
management, we will continue to review and implement operating strategies and
initiatives in order to enhance the performance of our existing investment
portfolio.
•Deploy Strategic Capital Expenditures. We will continue to invest capital into
our operating portfolio in order to maintain market position, functional and
operating standards, and provide an optimal mix of services and enhance the
overall value of our assets.
•Pursue Dispositions and Opportunities for Asset Repositioning and Other
Strategic Initiatives to Maximize Value. We will actively pursue dispositions of
assets and portfolios where we believe the disposition will achieve a desired
return and generate value for shareholders. Additionally, we will continue to
assess the need for strategic repositioning or sale of assets, joint ventures,
operators and markets to position our portfolio for optimal performance. We will
also opportunistically explore other strategic initiatives to create value for
shareholders.
Portfolio Management
Our Advisor and its affiliates maintain a comprehensive portfolio management
process that generally includes oversight by asset management and capital
markets teams, regular management meetings and operating results review process.
These processes are designed to enable management to evaluate and proactively
identify asset-specific issues and trends on a portfolio-wide, sub-portfolio or
asset type basis. Nevertheless, we cannot be certain that our Advisor's review
will identify all issues within our portfolio due to, among other things,
adverse economic conditions or events adversely affecting specific assets;
therefore, potential future losses may also stem from issues that are not
identified during these portfolio reviews or the asset and portfolio management
process.
Our Advisor's asset management and capital markets teams are experienced and use
many methods to actively manage our asset base to enhance or preserve our
income, value and capital and mitigate risk. Our Advisor's asset management and
capital markets teams seek to identify opportunities for our investments that
may involve replacing, converting or renovating facilities in our portfolio
which, in turn, would allow us to provide optimal mix of services and enhance
the overall value of our assets. To manage risk, our Advisor's asset management
and capital markets teams engage in frequent review and dialogue with
operators/managers/borrowers/third party advisors and periodic inspections of
our owned properties and collateral. During the COVID-19 pandemic, we performed
virtual site tours of our properties in order to comply with safety measures and
restrictions and began resuming in person inspections as conditions have
allowed. In addition, our Advisor's asset management and capital market teams
consider the impact of regulatory changes on the performance of our portfolio.
We will continue to monitor the performance of, and actively manage, all of our
investments. However, there can be no assurance that our investments will
continue to perform in accordance with the contractual terms of the governing
documents or underwriting and we may, in the future, record impairment, as
appropriate, if required.
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Table of Contents Outlook and Recent Trends The healthcare industry, which includes ILFs, ALFs, MCFs, CCRCs, SNFs, MOBs and hospitals, continues to experience the effects of COVID-19, including declines in resident occupancy, lower operating cash flows and compressed operating margins. Healthcare industry operating results will continue to be impacted to the extent occupancy remains below pre-pandemic levels. Further, the healthcare industry anticipates operating margins will continue to be impacted by cost inflation, labor pressures, additional staffing needs and related cost burdens. The healthcare industry's operational and financial recovery from the impact of the COVID-19 will depend on a variety of factors, which may differ considerably across regions, fluctuate over time and are highly uncertain. The healthcare industry experienced a higher pace of move-ins during the first quarter of 2022 as compared to the fourth quarter of 2021. As a result of overall increase in resident demand, improving consumer sentiment and easing restrictions on visitation and admissions, the seniors housing industry occupancy average rose to 80.6% during the first quarter of 2022 from 80.4% in the fourth quarter of 2021. In addition, annual inventory growth decreased to 1.8% during the first quarter of 2022, while construction versus inventory ratio of 5.3% remained elevated in the first quarter of 2022 (source:The National Investment Centers for Seniors Housing & Care , or NIC). The CARES Act has provided over$100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. Licensed assisted living providers became eligible to apply for funding under the Provider Relief Fund Phase 2 General Distribution allocation and remain eligible under the Provider Relief Fund Phase 3 and Phase 4 General Distributions. In addition, the CMS has provided accelerated and advance payments to Medicare providers. Operators continue to evaluate their options for financial assistance, such as utilizing programs within the CARES Act as well as other state and local government relief programs. However, the uncertainty regarding future availability of such relief, and its ultimate impact, including the extent to which relief funds from such programs will provide meaningful support for lost revenue and increasing costs, is uncertain. Additionally, although we continue to evaluate and monitor the terms and conditions associated with relief programs, we cannot ensure ultimate compliance with all the requirements related to the assistance received. If any of our operators fail to comply with all of the terms and conditions, they may be required to repay some or all of the grants received and may be subject to other enforcement action, which could have a material adverse impact on our business and financial condition.Seniors Housing Notwithstanding the demographics and forecasted spending growth, economic and healthcare market uncertainty, development, and competitive pressures have had a negative impact on the seniors housing industry, weakening the market's fundamentals and ultimately reducing operating income for managers and operators. Supply growth, which has outpaced demand, has challenged the seniors housing industry over the past several years. New inventory, coupled with the average move-in age of seniors housing residents increasing over time, has resulted in declining occupancy for the industry on average. Further, to remain competitive with the new supply, owners and operators of older facilities have increased capital expenditure spending, which in turn has negatively affected cash flow. While off its peak of 7.7% in the fourth quarter of 2017, seniors housing under construction as a share of inventory was 5.3% in the first quarter of 2022 (source: NIC). It is expected that, as demographics and demand continue to increase long-term, supply growth will follow. As a result of increased supply, the seniors housing industry has experienced competitive pressures that have limited rent growth over the past several years. Average market rent growth reached its peak of 4.2% in 2016 and has since decreased to 3.3% as of the first quarter of 2022, with pressures caused by the COVID-19 pandemic contributing to the decline (source: NIC). Limited future supply growth and reestablishing normal operations in a post-pandemic environment will be factors in achieving near and long term revenue growth for the industry. Further, prior to the COVID-19 pandemic, a tight labor market and competition to attract quality staff had resulted in increased wages and personnel costs, resulting in lower margins. The COVID-19 pandemic has further exacerbated operating expense growth, with increased staffing needs and personal protective equipment requirements. While it is expected that the increases in expenses to combat the effects of the COVID-19 pandemic will be temporary, wage and benefits increases may continue to impact the industry's margins in the future, as labor represents 60% of the seniors housing industry's operating expenses (source:Green Street ). 40
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Table of Contents SkilledNursing While generally impacted by the same conditions as the seniors housing industry, SNF operators are currently facing various operational, reimbursement, legal and regulatory challenges. Increased wages and labor costs, narrowing of referral networks, shorter lengths of stay, staffing shortages, expenses associated with inspections, enforcement proceedings and legal actions related to professional and general liability claims have contributed to compressed margins and declines in cash flow. SNF operators receive a majority of their revenues from governmental payors, primarily Medicare and Medicaid. With a dependence on government reimbursement as the primary source of their revenues, SNF operators are also subject to intensified efforts to impose pricing pressures and more stringent cost controls, through value-based payments, managed care and similar programs, which could result in lower daily reimbursement rates, lower lease coverage, decreased occupancy and declining operating margins, liquidity and financial conditions. OnFebruary 28, 2022 , theWhite House announced a set of reforms, developed by and implemented throughU.S. Department of Health and Human Services , or HHS, aimed at improving safety and quality of nursing home care. The new initiatives include establishing a minimum nursing home staffing requirement, reducing resident room crowding and reinforcing safeguards against unnecessary medications and treatments. To ensure compliance, in addition to increased government inspections, theWhite House Administration plans to expand the financial penalties and other enforcement sanctions against facilities not meeting the set standards. These reforms might further increase the cost burdens for our SNF operators and expose them to financial penalties.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's subjective and complex judgments, and for which the impact of changes in estimates and assumptions could have a material effect on our financial statements. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time.
For a summary of our accounting policies, refer to Note 2, "Summary of Significant Accounting Policies" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
We highlight below accounting estimates that we believe are critical based on the nature of our operations and/or require significant management judgment and assumptions: •Impairment Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including healthcare sector conditions, together with asset and market specific circumstance, among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. Fair values can be estimated based upon the income capitalization approach, using net operating income for each property and applying indicative capitalization and discount rates or sales comparison approach, using what other purchasers and sellers in the market have agreed to as price for comparable properties.
Impairment
During the three months ended
Accumulated impairment losses for operating real estate that we continue to hold as ofMarch 31, 2022 totaled$149.7 million . Refer to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and 2020 for additional information regarding impairment recorded in prior years. During the three months endedMarch 31, 2022 , we did not impair any of our investments in unconsolidated ventures, however, our unconsolidated ventures have recorded impairments and reserves on properties in their respective portfolios, which have been recognized through our equity in earnings (losses), of which our proportionate share was de minimis. 41
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Due to uncertainties over the extent and duration of the COVID-19 pandemic, at this time, it is difficult to assess and estimate the further economic effects of COVID-19 with any meaningful precision. As the future impact of COVID-19 will depend on many factors beyond our control and knowledge, the resulting effect on impairment of our operating real estate and investments in unconsolidated ventures may materially differ from our current expectations and further impairment charges may be recorded in the future.
Results of Operations
Impact of COVID-19
The world continues to experience the broad effects of the COVID-19 pandemic. Our healthcare real estate business and investments are challenged by suboptimal occupancy levels, lower labor force participation rates, which has driven increased labor costs, and inflationary pressures on other operating expenses. We continue to monitor the progression of the economic recovery from COVID-19 and its effects on our results of operations and assess recoverability of value across our assets as conditions change. Comparison of the Three Months EndedMarch 31, 2022 toMarch 31, 2021 (dollars in thousands) Three Months Ended March 31, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 10,755 $ 28,282 $ (17,527) (62.0) % Rental income 32,559 29,051 3,508 12.1 % Other revenue 18 1 17 1,700.0 % Total property and other revenues 43,332 57,334 (14,002) (24.4) % Interest income Interest income on debt investments - 2,213 (2,213) (100.0) %
Expenses
Property operating expenses 32,894 45,618 (12,724) (27.9) % Interest expense 10,309 16,025 (5,716) (35.7) % Transaction costs - 54 (54) (100.0) % Asset management fees - related party 2,647 2,769 (122) (4.4) % General and administrative expenses 3,686 3,033 653 21.5 % Depreciation and amortization 9,923 15,387 (5,464) (35.5) % Impairment loss - 786 (786) (100.0) % Total expenses 59,459 83,672 (24,213) (28.9) % Other income, net 72 7,360 (7,288) (99.0) % Realized gain (loss) on investments and other 587 7,515 (6,928) (92.2) % Equity in earnings (losses) of unconsolidated ventures 2,502 (890) 3,392 (381.1) % Income tax expense (15) (15) - - % Net income (loss)$ (12,981) $ (10,155) $ (2,826) 27.8 % Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 10,755 $ 9,915 $ 840 8.5 %
Properties sold - 18,367 (18,367) (100.0) %
Total resident fee income $ 10,755 $ 28,282 $ (17,527) (62) %
Resident fee income decreased $17.5 million as a result of property sales during
2021. The Watermark Fountains portfolio sold in December 2021 , the Kansas City
portfolio in June 2021 and a property within the Aqua portfolio sold in March
2021 .
Excluding properties sold, resident fee income increased by
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Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 32,310 $ 29,827 $ 2,483 8.3 %
Same store net lease properties (excludes
properties sold)
Rental payments 249 998 (749) (75.1) %
Straight-line rental income (loss) - (7,350) 7,350 (100.0) %
Properties sold - 5,576 (5,576) (100.0) %
Total rental income $ 32,559 $ 29,051 $ 3,508 12.1 %
Rental income increased by $3.5 million primarily as a result of the write-off
of straight-line rent receivables at our Arbors portfolio during 2021, partially
offset by the loss of revenues from properties sold in 2021.
On a same store basis, rental income at our ILFs increased as a result of
improved occupancy, while rental payments from our net lease properties
decreased as compared to the three months ended
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the three
months ended
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 8,479 $ 6,793 $ 1,686 24.8 %
ILF properties 24,197 21,275 2,922 13.7 %
Net lease properties 25 25 - - %
COVID-19 related expenses 157 1,005 (848) (84.4) %
Properties sold 36 16,520 (16,484) (99.8) %
Total Property operating expenses $ 32,894 $ 45,618 $ (12,724) (27.9) %
Overall, total operating expenses decreased
On a same store basis, operating expenses increased$4.6 million , primarily as a result of our operators experiencing staffing challenges, which has increased salaries and wages due to additional overtime hours and use of agency and contract labor to fill open positions. In addition, sales and marketing expenses have increased with the improved volume of resident move-ins, while the resumption of normalized business operations has allowed our managers to complete deferred repairs and maintenance projects. 43
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Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,378 $ 1,373 $ 5 0.4 %
ILF properties 8,033 8,246 (213) (2.6) %
Net lease properties 898 920 (22) (2.4) %
Properties sold - 5,169 (5,169) (100.0) %
Corporate - 317 (317) (100.0) %
Total interest expense $ 10,309 $ 16,025 $ (5,716) (35.7) %
Interest expense decreased $5.7 million primarily as a result of the repayment
of mortgage notes payable which were collateralized by properties sold during
the year ended December 31, 2021 . In addition, average mortgage notes principal
balances decreased as compared to March 31, 2021 due to continued principal
amortization. Corporate interest expense represents interest resulting from the
borrowings under our revolving line of credit from an affiliate of our Sponsor,
or the Sponsor Line, which was repaid in full in July 2021 .
Asset Management Fees -
Our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value. EffectiveJanuary 1, 2022 , according to the amendment to our advisory agreement, the monthly management fee is reduced if our corporate cash balances exceed$75.0 million , resulting in a$0.1 million decrease in asset management fees.
General and Administrative Expenses
General and administrative expenses increased$0.7 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to our Advisor over the term of the policy, beginning inDecember 2021 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,813 $ 1,729 $ 84 4.9 %
ILF properties 7,247 7,245 2 - %
Net lease properties 863 861 2 0.2 %
Properties sold - 5,552 (5,552) (100.0) %
Total depreciation and amortization $ 9,923 $ 15,387 $ (5,464) (35.5) %
Depreciation and amortization expense decreased
Impairment Loss
During the three months ended
During the three months endedMarch 31, 2021 , impairment losses on operating real estate totaled$0.8 million for our Smyrna net lease property, which was sold inMay 2021 . 44
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Table of Contents Other Income, Net Other income, net for the three months endedMarch 31, 2022 consisted of$0.1 million in COVID-19 testing reimbursements received and recognized at our Avamere portfolio. During the three months endedMarch 31, 2021 , we received and recognized$7.4 million in federal COVID-19 provider relief grants from HHS.
Realized Gain (Loss) on Investments and Other
During the three months endedMarch 31, 2022 we recognized a$0.2 million gain on a distribution that exceeded our carrying value for our investment in the Espresso joint venture. Additionally, we recorded a gain on the change in value of our mortgage note payable interest rate caps, which totaled$0.3 million .
During the three months ended
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Three Months Ended March
Three Months Ended March 31, 31,
2022 2021 2022 2021 2022 2021 2022 2021
Equity in Earnings, after FFO
Portfolio Equity in Earnings (Losses) FFO and MFFO adjustments(1) and MFFO adjustments Increase (Decrease) Cash Distributions
Eclipse $ (295) $ (140) $ 288 $ 339 $ (7) $ 199 $ (206) (103.5) % $ 620 $ -
Diversified US/UK (1,148) (2,698) 3,810 6,996 2,662 4,298 (1,636) (38.1) % 1,932 859
Espresso 1,954 5,257 477 (2,318) 2,431 2,939 (508) (17.3) % 2,200 -
Trilogy 2,027 (3,277) 3,968 4,027 5,995 750 5,245 699.3 % 2,301 -
Subtotal $ 2,538 $ (858) $ 8,543 $ 9,044 $ 11,081 $ 8,186 $ 2,895 35.4 % $ 7,053 $ 859
Solstice (36) (32) - - (36) (32) (4) 12.5 % - -
Total $ 2,502 $ (890) $ 8,543 $ 9,044 $ 11,045 $ 8,154 $ 2,891 35.5 % $ 7,053 $ 859 _______________________________________
(1)Represents our proportionate share of revenues and expenses excluded from the calculation of FFO and MFFO for unconsolidated investments. Refer to "-Non-GAAP Financial Measures" for additional discussion. Our equity in earnings generated by our unconsolidated investments increased by$3.4 million primarily due to improvements in operational performance in the Trilogy joint venture and a write-off of straight-line rent receivables at the Diversified US/UK joint venture during the three months endedMarch 31, 2021 , partially offset by less recognized gains on assets sold in the Espresso joint venture during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . Equity in earnings, after FFO and MFFO adjustments, increased by$2.9 million as a result of the improvements in the Trilogy joint venture, partially offset by a tax benefit recognized in the Diversified US/UK portfolio for the three months endedMarch 31, 2021 . Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or NAREIT, as net income (loss) (computed in accordance withU.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures. Changes in the accounting and reporting rules underU.S. GAAP that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being expensed. Additionally, publicly registered, non-traded REITs are typically different from traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation as 45
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compared to later years when the proceeds from their initial public offering have been fully invested and when they may seek to implement a liquidity event or other exit strategy. However, it is likely that we will make investments past the acquisition and development stage, albeit at a substantially lower pace. Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments have been amortized over the life of the investment as an adjustment to interest income, while fees paid to our Advisor in connection with the acquisition of equity investments were generally expensed underU.S. GAAP. In both situations, the fees were included in the computation of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures underU.S. GAAP. We adjusted MFFO for the amortization of acquisition fees in the period when such amortization was recognized underU.S. GAAP or in the period in which the acquisition fees were expensed. Acquisition fees were paid in cash that would otherwise have been available to distribute to our stockholders. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties. However, in general, we earned origination fees for debt investments from our borrowers in an amount equal to the acquisition fees paid to our Advisor. EffectiveJanuary 1, 2018 , our Advisor no longer receives an acquisition fee in connection with our acquisition of real estate properties or debt investments. Due to certain of the unique features of publicly-registered, non-traded REITs, theInstitute for Portfolio Alternatives , or IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO adjustments for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither theU.S. Securities and Exchange Commission , orSEC , nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, theSEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO. MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined underU.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, since impairment is taken into account in determining net asset value but not in determining MFFO. We define MFFO in accordance with the concepts established by the IPA, and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. Similarly, we adjust for the non-cash effect of unrealized gains or losses on unconsolidated ventures. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's operating performance. The IPA's definition of MFFO excludes from FFO the following items:
•acquisition fees and expenses;
•non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting underU.S. GAAP to a cash basis of accounting);
•amortization of a premium and accretion of a discount on debt investments;
•non-recurring impairment of real estate-related investments that meet the
specified criteria identified in the rules and regulations of the
•realized gains (losses) from the early extinguishment of debt;
•realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
•unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•adjustments related to contingent purchase price obligations; and
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•adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments. MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the consolidated balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property's value is considered impaired if a triggering event is identified and our estimate of the aggregate future undiscounted cash flow to be generated by the property is less than the carrying value of the property. The value of our investments may be impaired and their carrying values may not be recoverable due to our limited life. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT's anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event. We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering, and acquisition and development stages are complete. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy. However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on debt investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions. Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance withU.S. GAAP and should not be construed to be more relevant or accurate than theU.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance. 47
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The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):
Three Months Ended
2022 2021
Funds from operations:
Net income (loss) attributable to
$ (12,936) $ (10,463) Adjustments: Depreciation and amortization 9,923 15,387
Depreciation and amortization related to non-controlling interests
(72) (145)
Depreciation and amortization related to unconsolidated ventures
7,170 7,808
Realized (gain) loss from sales of property (29) (7,528)
Realized gain (loss) from sales of property related to non-controlling interests
1 226
Realized (gain) loss from sales of property related to unconsolidated ventures
(2,311) (6,522)
Impairment losses of depreciable real estate - 786
Impairment losses of depreciable real estate held by unconsolidated ventures
20 -
Funds from operations attributable to
$ 1,766 $ (451)
Modified funds from operations:
Funds from operations attributable to NorthStar Healthcare
Income, Inc. common stockholders $ 1,766 $ (451)
Adjustments:
Transaction costs - 54
Straight-line rental (income) loss - 7,639
Amortization of premiums, discounts and fees on investments and borrowings
969 1,152
Realized (gain) loss on investments and other (558) 13
Adjustments related to unconsolidated ventures(1) 3,664 7,758
Adjustments related to non-controlling interests 7 (14)
Modified funds from operations attributable to
$
5,848
_______________________________________
(1)Primarily represents our proportionate share of liability extinguishment gains, loan loss reserves, transaction costs and amortization of above/below market debt adjustments, straight-line rent adjustments, debt extinguishment losses and deferred financing costs, incurred through our investments in unconsolidated ventures.
Liquidity and Capital Resources
Our current principal liquidity needs are to fund: (i) operating expenses, including corporate general and administrative expenses; (ii) principal and interest payments on our borrowings and other commitments; and (iii) capital expenditures, including capital calls in connection with our unconsolidated joint venture investments.
Our current primary sources of liquidity include the following: (i) cash on hand; (ii) proceeds from full or partial realization of investments; (iii) cash flow generated by our investments, both from our operating activities and distributions from our unconsolidated joint ventures; and (iv) secured or unsecured financings from banks and other lenders, including investment-level financing and/or a corporate credit facility. We generated significant liquidity in 2021 from proceeds from asset sales and other realization events. As a result, onApril 20, 2022 , our board of directors declared the Special Distribution of$0.50 per share for each stockholder of record onMay 2, 2022 . The Special Distribution paid in cash on or aroundMay 5, 2022 totaled$97.0 million . While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives. As ofMay 12, 2022 , we had approximately$107.1 million of unrestricted cash and currently believe that our capital resources are sufficient to meet our capital needs for the following 12 months. Cash From Operations 48
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We primarily generate cash flow from operations through net operating income from our operating properties and rental income from our net lease properties. In addition, we received distributions from our investments in unconsolidated ventures, which are classified as cash flows from investing activities on our consolidated statements of cash flows. Net cash used in operating activities was$10.8 million for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2022 , debt service payments, which include principal amortization, on our borrowings exceeded our cash flow from operations. We have utilized cash reserves generated from asset realizations to fund debt service payments, which is expected to continue until occupancy and revenues of our direct investments improve from current levels. A substantial majority of our direct investments are operating properties whereby we are directly exposed to various operational risks. While our direct operating investments have not experienced any significant issues collecting rents or other fees from residents as a result of COVID-19, cash flow has continued to be negatively impacted by, among other things, suboptimal occupancy levels, rate pressures, increased labor and benefits costs, as well as rising real estate taxes. We expect that these factors will continue to materially impact our revenues, expenses and cash flow generated by the communities of our direct operating investments. The operator of our Arbors net lease portfolio has been impacted by the same COVID-19 factors discussed above, which has and will continue to affect its ability and willingness to pay rent. As ofMay 12, 2022 , the operator continues to make partial rental payments based on availability of cash and liquidity and has not satisfied full contractual rent obligations. The operator has applied for and benefited from federal relief assistance, however, the operator's ability to pay rent in the future is currently unknown. Numerous state, local, federal and industry-initiated efforts have also affected or may affect the landlord and its ability to collect rent and/or enforce remedies for the failure to pay rent. We have significant joint ventures and may not be able to control the timing of distributions, if any, from these investments. As ofMarch 31, 2022 , our unconsolidated joint ventures and consolidated joint ventures represented 37.9% and 12.8%, respectively, of our total real estate equity investments, based on cost. Our unconsolidated joint ventures, which have been similarly impacted by COVID-19 as our direct investments, may continue to limit distributions to preserve liquidity.
Borrowings
We use asset-level financing as part of our investment strategy to leverage our investments while managing refinancing and interest rate risk. We typically finance our investments with medium to long-term, non-recourse mortgage loans, though our borrowing levels and terms vary depending upon the nature of the assets and the related financing. In addition, our Sponsor has made available our Sponsor Line to provide additional short-term liquidity as needed. We are required to make recurring principal and interest payments on our borrowings. As ofMarch 31, 2022 , we had$939.6 million of consolidated asset-level borrowings outstanding and paid$13.3 million in recurring principal and interest payments on borrowings during the three months endedMarch 31, 2022 . Our unconsolidated joint ventures also have significant asset level borrowings, which may require capital to be funded if favorable refinancing is not obtained. During the three months endedMarch 31, 2022 , the operator for the Arbors portfolio failed to remit contractual rent and satisfy other conditions under its leases, which resulted in defaults under the operator's leases, and in turn, resulted in a non-monetary default under the mortgage notes collateralized by the properties as ofMarch 31, 2022 . We have remitted contractual debt service and are in compliance with the other contractual terms under the mortgage notes collateralized by the properties. As the impact of COVID-19 continues to influence our investments' performance, we may experience defaults in the future and it may have a negative impact on our ability to service or refinance our borrowings. Our charter limits us from incurring borrowings that would exceed 300.0% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by a majority of our independent directors. We would need to disclose any such approval to our stockholders in our next quarterly report along with the justification for such excess. An approximation of this leverage limitation, excluding indirect leverage held through our unconsolidated joint venture investments and any securitized mortgage obligations to third parties, is 75.0% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofMarch 31, 2022 , our leverage was 53.7% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofMarch 31, 2022 , indirect leverage on assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation, held through our unconsolidated joint ventures was 59.5%. For additional information regarding our borrowings, including principal repayments, timing of maturities and loans currently in default, refer to Note 5, "Borrowings" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements." 49
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Capital Expenditures Activities
We are responsible for capital expenditures for our operating properties and, from time to time, may also fund capital expenditures for certain net lease properties. We continue to invest capital into our operating portfolio in order to maintain market position, functional and operating standards, increase operating income, achieve property stabilization and enhance the overall value of our assets. However, there can be no assurance that these initiatives will achieve these intended results. We are also party to certain agreements that contemplate development of healthcare properties funded by us and our joint venture partners. Although we may not be obligated to fund such capital contributions or capital projects, we may be subject to adverse consequences under our joint venture governing documents for any such failure to fund.
Realization and Disposition of Investments
We will actively pursue dispositions of assets and portfolios where we believe the disposition will achieve a desired return, improve our liquidity position and generate value for shareholders. We have made significant investments through both consolidated and unconsolidated joint ventures with third parties. We may share decision-making authority for these joint ventures that could prevent us from selling properties or our interest in the joint venture. InMay 2022 , we received a distribution totaling$16.0 million from the sale of 12 properties within our Espresso joint venture.
Further, as the impact of COVID-19 continues to influence the property's performance, it may have a negative impact on our ability to generate desired returns on dispositions.
Distributions To continue to qualify as a REIT, we are required to distribute annually dividends equal to at least 90% of our taxable income, subject to certain adjustments, to stockholders. We have generated net operating losses for tax purposes and, accordingly, are currently not required to make distributions to our stockholders to qualify as a REIT. Refer to "-Distributions Declared and Paid" for further information regarding our distributions.
Repurchases
We adopted a share repurchase program, or the Share Repurchase Program, effectiveAugust 7, 2012 , which enabled stockholders to sell their shares to us in limited circumstances. Our board of directors may amend, suspend or terminate our Share Repurchase Program at any time, subject to certain notice requirements. InOctober 2018 , our board of directors approved an amended and restated Share Repurchase Program, under which we only repurchased shares in connection with the death or qualifying disability of a stockholder. OnApril 7, 2020 , our board of directors suspended all repurchases under our existing Share Repurchase Program effectiveApril 30, 2020 in order to preserve capital and liquidity. Other Commitments We expect to continue to make payments to our Advisor, or its affiliates, pursuant to our advisory agreement, as applicable, in connection with the management of our assets and costs incurred by our Advisor in providing services to us. In connection with the Sponsor Transaction, our advisory agreement was renewed for an additional one-year term commencing onFebruary 28, 2022 . Refer to "-Related Party Arrangements" for further information regarding our advisory fees. Cash Flows The following presents a summary of our consolidated statements of cash flows (dollars in thousands): Three Months Ended March 31, 2022 vs. 2021 Cash flows provided by (used in): 2022 2021 Change Operating activities$ (10,843) $ (6,660) $ (4,183) Investing activities 4,716 44,675 (39,959) Financing activities (4,297) (20,343) 16,046 Net increase (decrease) in cash, cash equivalents and restricted cash$ (10,424) $ 17,672 $ (28,096) Operating Activities Net cash used in operating activities totaled$10.8 million for the three months endedMarch 31, 2022 , as compared to$6.7 million net cash used in operating activities for the three months endedMarch 31, 2021 . The change in cash flow from operating 50
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activities was a result of portfolio sales during the year endedDecember 31, 2021 , which resulted in lower rent and resident fees collected during the three months endedMarch 31, 2022 .
Investing Activities
Our cash flows from investing activities are primarily proceeds from investment dispositions, net of any capital expenditures. Net cash provided by investing activities was$4.7 million for the three months endedMarch 31, 2022 as compared to$44.7 million for the three months endedMarch 31, 2021 . Cash flows provided by investing activities for the three months endedMarch 31, 2022 were from distributions received from our unconsolidated investments. Cash inflows were used to fund recurring capital expenditures for existing investments and for general operations. Cash flows provided by investing activities for the three months endedMarch 31, 2021 were from collections of outstanding principal on our real estate debt investment and proceeds from the sale of a property within our Aqua portfolio.
The following table presents cash used for capital expenditures, excluding our unconsolidated ventures (dollars in thousands):
Three Months Ended March 31,
2022 2021 2022 vs. 2021 Change
Capital Expenditures $ 2,337 $ 2,416 $ (79)
Financing Activities
Cash flows used in financing activities was $4.3 million for the three months
ended March 31, 2022 compared to $20.3 million for the three months ended
March 31, 2021 . For the three months ended March 31, 2022 , net cash flows used
in financing activities were primarily continued principal amortization on our
mortgage notes. Cash flows used in financing activities during the three months
ended March 31, 2021 , represented principal amortization and the repayment of
the mortgage note payable that was collateralized by the property sold within
our Aqua portfolio.
Off-Balance Sheet Arrangements
As ofMarch 31, 2022 , we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in unconsolidated ventures. Refer to Note 4, "Investments inUnconsolidated Ventures " in Part I. Item 1. "Financial Statements" for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.
Inflation
Macroeconomic trends such as increases in inflation and rising interest rates can have a substantial impact on our business and financial results. Many of our costs are subject to inflationary pressures. These include labor, repairs and maintenance, food costs, utilities, insurance and other operating costs. Our managers' ability to offset increased costs by increasing the rates charged to residents may be limited, therefore, cost inflation may substantially affect the net operating income of our operating properties as well as the ability of our net lease operator to make payments to us.
Distributions Declared and Paid
Since inception of our first investment, throughMarch 31, 2022 , we declared$433.8 million in distributions and generated cumulative FFO of$133.6 million . From the date of our first investment onApril 5, 2013 throughDecember 31, 2017 , we declared an annualized distribution amount of$0.675 per share of our common stock. FromJanuary 1, 2018 throughJanuary 31, 2019 , we declared an annualized distribution amount of$0.3375 per share of our common stock. EffectiveFebruary 1, 2019 , our board of directors suspended recurring distributions in order to preserve capital and liquidity. OnApril 20, 2022 , our board of directors declared a Special Distribution of$0.50 per share, for each stockholder of record onMay 2, 2022 . The Special Distribution paid in cash on or aroundMay 5, 2022 totaled$97.0 million . While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives. To the extent distributions are paid from sources other than FFO, the ownership interest of our public stockholders will be diluted. Future distributions declared and paid may exceed FFO and cash flow provided by operations. FFO, as defined, may not reflect actual cash available for distributions. 51
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Table of Contents Related Party Arrangements Advisor Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on our behalf. Our Advisor may delegate certain of its obligations to affiliated entities, which may be organized under the laws ofthe United States or foreign jurisdictions. References to our Advisor include our Advisor and any such affiliated entities. For such services, to the extent permitted by law and regulations, our Advisor receives fees and reimbursements from us. Pursuant to our advisory agreement, our Advisor may defer or waive fees in its discretion. Below is a description and table of the fees and reimbursements incurred to our Advisor. In connection with the Sponsor Transaction, our advisory agreement was renewed for an additional one-year term commencing onFebruary 28, 2022 , upon terms identical to those in effect throughFebruary 28, 2022 , but for certain updates to remove our Former Sponsor and add NRF as our New Sponsor for certain limited provisions. Fees to Advisor Asset Management Fee EffectiveJanuary 1, 2018 , our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value, as may be subsequently adjusted for any special distribution declared by our board of directors in connection with a sale, transfer or other disposition of a substantial portion of our assets. EffectiveJuly 1, 2021 , the asset management fee is paid entirely in shares of our common stock at a price per share equal to the most recently published net asset value per share, and effectiveJanuary 1, 2022 , the fee is reduced if our corporate cash balances exceed$75.0 million , subject to the terms and conditions set forth in the advisory agreement.
Incentive Fee
Our Advisor is entitled to receive distributions equal to 15.0% of our net cash flows, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 6.75% cumulative, non-compounded annual pre-tax return on such invested capital. From inception throughMarch 31, 2022 , our Advisor has not received any incentive fees. Acquisition Fee
Effective
Disposition Fee
EffectiveJune 30, 2020 , our Advisor no longer has the potential to receive a disposition fee in connection with the sale of real estate properties or debt investments. Reimbursements to Advisor Operating Costs Our Advisor is entitled to receive reimbursement for direct and indirect operating costs incurred by our Advisor in connection with administrative services provided to us. Our Advisor allocates, in good faith, indirect costs to us related to our Advisor's and its affiliates' employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the advisory agreement with our Advisor. The indirect costs include our allocable share of our Advisor's compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing our affairs, based upon the percentage of time devoted by such personnel to our affairs. The indirect costs also include rental and occupancy, technology, office supplies and other general and administrative costs and expenses. However, there is no reimbursement for personnel costs related to our executive officers (although there may be reimbursement for certain executive officers of our Advisor) and other personnel involved in activities for which our Advisor receives an acquisition fee or a disposition fee. Our Advisor allocates these costs to us relative to its and its affiliates' other managed companies in good faith and has reviewed the allocation with our board of directors, including our independent directors. Our Advisor updates our board of directors on a quarterly basis of any material changes to the expense allocation and provides a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. We reimburse our Advisor quarterly for operating costs (including the asset management fee) based on a calculation, or the 2%/25% Guidelines, for the four preceding fiscal quarters not to exceed the greater of: (i) 2.0% of our average invested assets; or (ii) 25.0% of our net income determined without reduction for any additions to reserves for depreciation, loan losses or other similar 52
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non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, we may reimburse our Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. We calculate the expense reimbursement quarterly based upon the trailing twelve-month period. As ofMarch 31, 2022 , our Advisor did not have any unreimbursed operating costs which remained eligible to be allocated to us.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred and paid to our Advisor (dollars in thousands):
Three Months Ended March 31, Due to Related
Due to Related 2022 Party as of
Party as of March 31, 2022
Type of Fee or Reimbursement Financial Statement Location December 31, 2021 Incurred Paid (Unaudited)
Fees to Advisor Entities
Asset management Asset management fees-related
party
$ 937
Operating costs General and administrative
expenses 6,401 3,286 (6,401) 3,286
Total $ 7,338 $ 5,933 $ (9,130) $ 4,141
Pursuant to our advisory agreement, for the three months ended March 31, 2022 ,
we issued 0.7 million shares totaling $2.7 million based on the estimated value
per share on the date of each issuance, to an affiliate of our Advisor as part
of its asset management fee. As of March 31, 2022 , our Advisor, our Sponsor and
their affiliates owned a total of 8.1 million shares, or $31.7 million of our
common stock based on our most recent estimated value per share. As of March 31,
2022 , our Advisor, our Sponsor and their affiliates owned 4.2% of the total
outstanding shares of our common stock.
Investments in Joint Ventures
Solstice, the manager of the Winterfell portfolio, is a joint venture between affiliates of ISL, who owns 80.0%, and us, who owns 20.0%. For the three months endedMarch 31, 2022 , we recognized property management fee expense of$1.3 million paid to Solstice related to the Winterfell portfolio.
The below table indicates our investments for which our Sponsor is also an
equity partner in the joint venture. Each investment was approved by our board
of directors, including all of its independent directors. Refer to Note 4,
"Investments in
Portfolio Partner(s) Acquisition Date Ownership
NRF and Partner/
Eclipse Formation Capital, LLC May 2014 5.6%
Diversified US/UK NRF and Partner December 2014 14.3%
Line of Credit -
InOctober 2017 , we obtained our Sponsor Line, which was approved by our board of directors, including all of our independent directors. InApril 2020 , we borrowed$35.0 million under the Sponsor Line to improve our liquidity position in response to the COVID-19 pandemic. InJuly 2021 , we repaid, in full, the$35.0 million outstanding borrowing and as ofMarch 31, 2022 , we had no outstanding borrowings under our Sponsor Line. Our Sponsor Line has a borrowing capacity of$35.0 million at an interest rate of 3.5% plus LIBOR and has a maturity date ofFebruary 2024 .
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