NORTHSTAR HEALTHCARE INCOME, INC.

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05/13NORTHSTAR HEALTHCARE INCOME, INC. : Regulation FD Disclosure (form 8-K)
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05/13NORTHSTAR HEALTHCARE INCOME, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
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05/13NorthStar Healthcare Income, Inc. Reports Earnings Results for the First Quarter Ended March 31, 2022
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NORTHSTAR HEALTHCARE INCOME, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/13/2022 | 03:31pm EDT
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 to NorthStar 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 in the United States, but we also selectively make
international investments.

We were formed in October 2010 as a Maryland corporation and commenced
operations in February 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 ended December 31, 2013. We conduct our operations so as to
continue to qualify as a REIT for U.S. federal income tax purposes.

We are externally managed and have no employees. On February 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), owns CNI 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 by CWP Bidco LP, an entity affiliated with
Highgate, a privately held real estate investment and hospitality management
company, and Aurora 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 through March 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 ended March 31, 2022 as compared to the three months ended
December 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 ended March 31, 2022, our direct operating investments
experienced an 11.6% increase in the number of resident move-ins over the three
months ended December 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:




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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  %

_______________________________________

(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 ended March 31, 2022
as compared to $42.3 million for the three months ended December 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 ended March 31, 2022 as compared to $31.4 million for the three
months ended December 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 ended March 31, 2022 as compared to $10.9 million
for the three months ended December 31, 2021.

Our direct operating investments, on a same store basis, incurred COVID-19 related expenses totaling $0.2 million for the three months ended March 31, 2022, as compared to $0.6 million for the three months ended December 31, 2021.

Direct Investments - Net Lease


The operator of our Arbors portfolio has failed to remit contractual rent and
satisfy other lease conditions. Contractual monthly rent obligations have been
remitted through May 2021 and we have recorded rental income to the extent
rental payments were received during the three months ended March 31, 2022. The
Arbors portfolio recognized rental income of $0.2 million for the three months
ended March 31, 2022, as compared to $0.5 million for the three months ended
December 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 ended March 31, 2022 as compared to
equity in losses of $2.0 million for the three months ended December 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 ended March 31, 2022.
Equity in losses for the three months ended December 31, 2021 includes our
proportionate share of impairment losses recorded by the Eclipse joint venture,
which totaled $1.8 million.

During the three months ended March 31, 2022, we received distributions from our
unconsolidated investments, which totaled $7.1 million as compared to
$11.1 million for the three months ended December 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/UK, and Espresso joint ventures for the three months ended March 31, 2022:


•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 the United 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.




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•Espresso: The joint venture received full contractual rent from its net lease
operators. In March 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 of March 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 March 31, 2022 through May 12, 2022.

Distribution Reinvestment Plan

On April 12, 2022, our board of directors elected to suspend our distribution reinvestment plan, or the DRP, effective April 30, 2022.

Special Distribution


On April 20, 2022, our board of directors declared a special distribution of
$0.50 per share, or the Special Distribution, for each stockholder of record on
May 2, 2022. The Special Distribution paid in cash on or around May 5, 2022
totaled $97.0 million.

Distribution From Unconsolidated Venture

In May 2022, the Espresso joint venture completed the sale of 12 properties. As a result of the sale, we received a distribution totaling $16.0 million.

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 - Net Lease - Healthcare properties operated under net leases with an operator.


•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 March 31, 2022 (dollars in thousands):


                                                                                           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

_______________________________________

(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 of March 31, 2022.
(7)Represents our investment in Solstice Senior Living, LLC, or Solstice, the
manager of the Winterfell portfolio. Solstice is a joint venture between
affiliates of Integral 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%.















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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]]

_______________________________________

(1)Classification based on predominant services provided, but may include other services.

Our investments include the following types of healthcare facilities as of March 31, 2022:


•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 March 31, 2022.

Direct Investments - Net Lease


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 by Arcadia
Management with a lease term that expires in August 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 of
March 31, 2022.



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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  %

_______________________________________

(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 ended March 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           Total
Diversified US/UK              NRF and Partner                   Dec-2014                       14.3  %       $ 445,855          $       243,544                          92                       106                 39                    9              246
                               American Healthcare
                               REIT / Management
                               Team of Trilogy
Trilogy                        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

_______________________________________

(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 through March 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 of March 31, 2022.



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•Diversified US/UK. Portfolio of SNFs, ALFs, MOBs and hospitals across the United States and care homes in the United Kingdom. Our Sponsor and other minority partners own the remaining 85.7% of this portfolio.


•Trilogy. Portfolio of predominantly SNFs located in the Midwest and operated
pursuant to management agreements with Trilogy 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 across the 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 across
the 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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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).




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Skilled Nursing

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.

On February 28, 2022, the White House announced a set of reforms, developed by
and implemented through U.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, the White 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 in the United States, or U.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 March 31, 2022, we did not record impairment losses for any of our direct investments.


Accumulated impairment losses for operating real estate that we continue to hold
as of March 31, 2022 totaled $149.7 million. Refer to our Annual Report on Form
10-K for the fiscal year ended December 31, 2021 and 2020 for additional
information regarding impairment recorded in prior years.

During the three months ended March 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.




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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 Ended March 31, 2022 to March 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 $0.8 million primarily as a result of an increase in occupancy and rates at our ALFs and MCF.





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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 March 31, 2021.

Interest Income on Debt Investments

There was no interest income on debt investments recognized during the three months ended March 31, 2022 as a result of receiving the full repayment of outstanding principal on our mezzanine loan debt investment in August 2021.

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 $12.7 million primarily as a result of property sales during the year ended December 31, 2021.


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.




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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 - Related Party


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. Effective
January 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 in December
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 $5.5 million, primarily as a result of properties sold during the year ended December 31, 2021.

Impairment Loss

During the three months ended March 31, 2022, we did not incur any impairment losses on operating real estate assets.


During the three months ended March 31, 2021, impairment losses on operating
real estate totaled $0.8 million for our Smyrna net lease property, which was
sold in May 2021.




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Other Income, Net

Other income, net for the three months ended March 31, 2022 consisted of
$0.1 million in COVID-19 testing reimbursements received and recognized at our
Avamere portfolio. During the three months ended March 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 ended March 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 March 31, 2021 we recognized a $7.5 million gain on the sale of a property within the Aqua portfolio.

Equity in Earnings (Losses) of Unconsolidated Ventures


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 ended March 31, 2021,
partially offset by less recognized gains on assets sold in the Espresso joint
venture during the three months ended March 31, 2022 as compared to the three
months ended March 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
ended March 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 the National Association of Real Estate Investment
Trusts, or NAREIT, as net income (loss) (computed in accordance with U.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 under U.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




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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
under U.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 under U.S. GAAP. We adjusted MFFO for the amortization of
acquisition fees in the period when such amortization was recognized under U.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. Effective January 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,
the Institute 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 the U.S.
Securities and Exchange Commission, or SEC, nor any other regulatory body has
approved the acceptability of the adjustments that we use to calculate MFFO. In
the future, the SEC 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 under U.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
under U.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 SEC;

•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 with U.S. GAAP and should not be
construed to be more relevant or accurate than the U.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.




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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 March 31,

                                                                          2022                   2021

Funds from operations: Net income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders

                                   $       (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 NorthStar Healthcare Income, Inc. common stockholders

                                   $         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 NorthStar Healthcare Income, Inc. common stockholders

                        $        

5,848 $ 16,151

_______________________________________

(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, on April 20, 2022, our board of directors
declared the Special Distribution of $0.50 per share for each stockholder of
record on May 2, 2022. The Special Distribution paid in cash on or around May 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 of May 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




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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 ended March 31, 2022. During the three months
ended March 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 of May 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 of March 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 of March 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 ended March 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 ended March 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 of March 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 of March 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 of March 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."




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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. In May
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,
effective August 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. In October 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. On April 7,
2020, our board of directors suspended all repurchases under our existing Share
Repurchase Program effective April 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 on February 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
ended March 31, 2022, as compared to $6.7 million net cash used in operating
activities for the three months ended March 31, 2021. The change in cash flow
from operating




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activities was a result of portfolio sales during the year ended December 31,
2021, which resulted in lower rent and resident fees collected during the three
months ended March 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 ended March 31, 2022 as
compared to $44.7 million for the three months ended March 31, 2021. Cash flows
provided by investing activities for the three months ended March 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 ended March 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 of March 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 in Unconsolidated 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, through March 31, 2022, we declared
$433.8 million in distributions and generated cumulative FFO of $133.6 million.
From the date of our first investment on April 5, 2013 through December 31,
2017, we declared an annualized distribution amount of $0.675 per share of our
common stock. From January 1, 2018 through January 31, 2019, we declared an
annualized distribution amount of $0.3375 per share of our common stock.
Effective February 1, 2019, our board of directors suspended recurring
distributions in order to preserve capital and liquidity. On April 20, 2022, our
board of directors declared a Special Distribution of $0.50 per share, for each
stockholder of record on May 2, 2022. The Special Distribution paid in cash on
or around May 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.




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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 of the 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 on February 28, 2022, upon terms
identical to those in effect through February 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

Effective January 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. Effective July 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
effective January 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 through March 31, 2022, our Advisor has not received any incentive
fees.

Acquisition Fee

Effective January 1, 2018, our Advisor no longer receives an acquisition fee in connection with our acquisitions of real estate properties or debt investments.

Disposition Fee


Effective June 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




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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 of March 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 $ 2,647 $ (2,729) $ 855 Reimbursements to Advisor Entities

  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
ended March 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 Unconsolidated Ventures" of Part I, Item 1. "Financial Statements" for further discussion of these investments:

     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 - Related Party


In October 2017, we obtained our Sponsor Line, which was approved by our board
of directors, including all of our independent directors. In April 2020, we
borrowed $35.0 million under the Sponsor Line to improve our liquidity position
in response to the COVID-19 pandemic. In July 2021, we repaid, in full, the
$35.0 million outstanding borrowing and as of March 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 of February 2024.

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