NORTHSTAR HEALTHCARE INCOME, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part I, Item 1. "Financial Statements" and the risk factors in Part II, Item 1A. "Risk Factors." References to "we," "us," "our," or "NorthStar Healthcare " refer toNorthStar Healthcare Income, Inc. and its subsidiaries unless the context specifically requires otherwise.
Overview
We manage a diversified portfolio of investments in healthcare real estate, owned directly or through joint ventures, with a focus on the seniors housing sector, which we define as assisted living, or ALF, memory care, or MCF, skilled nursing, or SNF, and independent living facilities, or ILF, and continuing care retirement communities, or CCRC, which have ILF, ALF, SNF, and MCF available on one campus. We are also invested in other healthcare property types, including medical office buildings, or MOB, hospitals, rehabilitation facilities and ancillary healthcare services businesses. Our investments are predominantly inthe United States , but we have international investments through a joint venture. We were formed inOctober 2010 as aMaryland corporation and commenced operations inFebruary 2013 . We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with the taxable year endedDecember 31, 2013 . We conduct our operations so as to continue to qualify as a REIT forU.S. federal income tax purposes. Since inception throughOctober 21, 2022 , we were externally managed byCNI NSHC Advisors, LLC or its predecessor, or the Advisor, an affiliate ofNRF Holdco, LLC , or the Sponsor. The Advisor was responsible for managing our operations, subject to the supervision of our board of directors, pursuant to an advisory agreement. OnOctober 21, 2022 , we completed the internalization of our management function, or the Internalization. In connection with the Internalization, we agreed with the Advisor to terminate the advisory agreement and arranged for the Advisor to continue to provide certain services for a transition period. Going forward, we will be self-managed under the leadership ofKendall Young , who was appointed by the board of directors as Chief Executive Officer and President concurrent with the Internalization. Refer to "-Recent Developments" for further discussion. From inception throughSeptember 30, 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 endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 . Our healthcare real estate business and investments have been challenged by suboptimal occupancy levels, lower labor force participation rates, which have driven increased labor costs, and inflationary pressures on other operating expenses. We continue to monitor the progression of the economic recovery from the coronavirus 2019, or COVID-19, pandemic 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 endedSeptember 30, 2022 , our direct operating investments continued to attract new residents and improve occupancy. While the pace of resident move-ins at our direct operating investments slowed by 13.4%, resident move-outs declined by 4.6% as compared to the three months endedJune 30, 2022 . A summary of average occupancy of our direct operating investments by property manager is as follows: Average Monthly Occupancy Average Quarterly Occupancy Operator / Manager September 2022 June 2022 Variance Q3 2022 Q2 2022 Variance Solstice Senior Living 84.6 % 82.4 % 2.2 % 84.0 % 81.4 % 2.6 % Watermark Retirement Communities 78.0 % 77.0 % 1.0 % 77.7 % 76.9 % 0.8 % Avamere Health Services 91.4 % 88.5 % 2.9 % 90.4 % 87.7 % 2.7 % Integral Senior Living 97.5 % 97.5 % - % 95.8 % 99.2 % (3.4) % Direct Investments - Operating 83.3 % 81.4 % 1.9 % 82.8 % 80.7 % 2.1 % 35
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Rental and resident fee income of our direct operating investments increased to$46.7 million for the three months endedSeptember 30, 2022 as compared to$45.0 million for the three months endedJune 30, 2022 as a result of improved occupancy. Property operating expenses of our direct operating investments increased to$34.9 million for the three months endedSeptember 30, 2022 as compared to$33.1 million for the three months endedJune 30, 2022 . The increase was attributable to inflationary pressures on operating costs, higher utility costs due to seasonality, 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, rental and resident fee income, net of property operating expenses, of our direct operating investments decreased to$11.8 million for the three months endedSeptember 30, 2022 as compared to$11.9 million for the three months endedJune 30, 2022 .
Direct Investments -
The operator of our Arbors portfolio continues to make partial contractual
rental payments based on availability of cash and liquidity and has not
satisfied full contractual rent obligations. We have recorded rental income to
the extent rental payments were received during the three months ended
Unconsolidated Investments
Equity in earnings recognized from our unconsolidated investments, totaled$2.9 million for the three months endedSeptember 30, 2022 as compared to$34.1 million for the three months endedJune 30, 2022 . The decrease was primarily a result of net gains recognized from sub-portfolio sales within the Espresso joint venture during the three months endedJune 30, 2022 , of which our proportionate share totaled$31.2 million . During the three months endedSeptember 30, 2022 , we received distributions from our unconsolidated investments, which totaled$4.0 million as compared to$31.1 million for the three months endedJune 30, 2022 . Higher distributions during the three months endedJune 30, 2022 were a result of proceeds from sales transactions in the Espresso joint venture. Distributions continued to be limited by reinvestment and development in the Trilogy joint venture and operational challenges in the Diversified US/UK and Eclipse joint ventures.
The following is a summary of operations and performance for the Trilogy,
Diversified US/
•Trilogy: The joint venture's facilities experienced improvements to resident occupancy and revenues, however, its operating margin continues to be impacted by the effects of labor shortages and inflationary pressures. Additionally, the joint venture recognized federal and state COVID-19 provider relief grants as income. •Diversified US/UK : The joint venture classified the 106 properties within the MOB portfolio and two hospitals as held for sale during the three months endedSeptember 30, 2022 . The operators of the joint venture's net lease portfolios, including its portfolio in theUnited Kingdom , continue to face occupancy and expense pressures, which impacted certain operator's ability to pay contractual rent during the quarter and may require lease restructurings. CCRC, SNF and ALF operating portfolios continue to sustain suboptimal occupancy levels, and experienced staffing challenges. These factors, along with rising interest rates have reduced the joint venture's net cash flows and subjected it to cash flow sweeps. •Espresso: The joint venture received full contractual rent from its net lease operators. During the three months endedSeptember 30, 2022 , the joint venture distributed excess cash flows from operations, of which our proportionate share totaled$1.4 million . Rental income collected has declined as a result of the sub-portfolio sales and the joint venture continues to pursue dispositions of its remaining properties as ofSeptember 30, 2022 . Refer to "-Recent Developments" for additional information on distributions from portfolio sales.
Investments, Financings and Disposition Activities
•During the nine months endedSeptember 30, 2022 , the Espresso joint venture distributed proceeds from sub-portfolio sales, of which our proportionate share totaled$27.4 million .
•In
•InJuly 2022 , we exercised our option to extend the maturity date of a mortgage note payable collateralized by a property within the Rochester portfolio fromAugust 2022 toAugust 2023 , which required a$0.2 million principal repayment toward the outstanding principal balance. 36
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•We recorded impairment losses totaling
Special Distribution
•OnApril 20, 2022 , our board of directors declared a special distribution, or the Special Distribution, of$0.50 per share for each stockholder of record onMay 2, 2022 totaling$97.1 million . On or aroundMay 5, 2022 ,$97.0 million of the Special Distribution was paid in cash.
Recent Developments
The following is a discussion of material events which have occurred subsequent
to
Internalization
OnOctober 21, 2022 , we completed the Internalization. In connection with the Internalization, onOctober 21, 2022 , we entered into a Termination Agreement with the Advisor, the Sponsor and theOperating Partnership , which provides for the immediate termination of the advisory agreement, as well as the final settlement of any amounts owing under the advisory agreement and the transition of certain employees from the Advisor to us (including our assumption of certain related employment liabilities). In addition, the Advisor agreed to vote its shares of our common stock in favor of the director nominees recommended by our board of directors and say-on-pay at the first annual meeting following the Internalization, provided the Advisor retains a minimum share ownership. No termination fee will be paid by us to the Advisor in connection with the Internalization.
Sponsor Line of Credit
In connection with the termination of the advisory agreement, our revolving line of credit from an affiliate of the Sponsor, or the Sponsor Line, was terminated onOctober 21, 2022 . No amounts were outstanding under the Sponsor Line at the time of termination. Transition Service Agreement In connection with the Internalization, onOctober 21, 2022 , we, theOperating Partnership and the Advisor entered into a Transition Services Agreement, orTSA , to facilitate an orderly transition of the management of our operations. TheTSA provides for, among other things, the Advisor to provide certain services for a transition period of up to six months following the Internalization, with theOperating Partnership having the option to extend the initial term once for up to three months.Treasury and accounts payable services will be provided for 12 months and will continue until either party provides at least six months' notice of termination. The services primarily include technology, insurance, legal, treasury and accounts payable services. We will reimburse the Advisor for costs to provide the services, including the allocated cost of employee wages and compensation and actually incurred out-of-pocket expenses.
Resignation and Appointment of Officers
Effective upon on the Internalization, onOctober 21, 2022 ,Ann B. Harrington ,Paul V. Varisano andDouglas W. Bath provided notice of their respective resignations as Interim Chief Executive Officer, President, General Counsel and Secretary, Chief Financial Officer and Treasurer and Chief Investment Officer. Their resignations are a result of the termination of the advisory agreement, and not due to any disagreement with us on any matter relating to our operations, policies or practices. OnOctober 21, 2022 , our board of directors appointedKendall K. Young as our Chief Executive Officer and President and as a member of our board of directors to fill an existing vacancy. In addition, our board of directors appointedNicholas R. Balzo as our Chief Financial Officer, Treasurer and Secretary.
Distribution from Unconsolidated Venture
In
Estimated Net Asset Value
OnNovember 10, 2022 , upon the recommendation of the audit committee, or the Audit Committee, of the Board, the Board, including all of its independent directors, approved and established an estimated value per share of our common stock of$2.93 . Refer to Part II, Item 5. "Other Items" for additional information. 37
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Table of Contents Our Investments
Our investments are categorized as follows:
•Direct Investments - Operating - Healthcare properties operated pursuant to management agreements with healthcare managers.
•Direct Investments -
•Unconsolidated Investments - Healthcare joint ventures, including properties operated under net leases with an operator or pursuant to management agreements with healthcare managers, in which we own a minority interest. We generate revenues from resident fees and rental income. Resident fee income is recorded by our ALFs and MCFs when services are rendered and includes resident room and care charges and other resident charges. Rental income is generated from net leases to healthcare operators and tenants as well by our ILFs. 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."
The following table presents a summary of investments as of
Properties(1)(2)
Ownership
Investment Type / Portfolio Amount(2)(3) Seniors Housing MOB SNF Hospitals Total Primary Locations Interest
Direct Investments -
Operating
Winterfell $ 904,985 32 - - - 32 Various 100.0%
Rochester 219,518 10 - - - 10 Northeast 97.0%
Watermark Aqua 77,521 4 - - - 4 Southwest/Midwest 97.0%
Avamere 99,438 5 - - - 5 Northwest 100.0%
Oak Cottage 19,427 1 - - - 1 West 100.0%
Other(4) 2,030 - - - - - West 97.0%
Subtotal $ 1,322,919 52 - - - 52
Direct Investments -
Net Lease
Arbors $ 126,825 4 - - - 4 Northeast 100.0%
Unconsolidated Investments
Trilogy(5) $ 440,942 23 - 75 - 98 Southwest/Midwest 23.2%
Diversified US/UK(6) 261,186 92 - 39 7 138 Various 14.3%
Eclipse 37,291 42 - 9 - 51 Various 5.6%
Espresso(7) - - - - - - Midwest 36.7%
Solstice(8) - - - - - - 20.0%
Subtotal $ 739,419 157 - 123 7 287
Total Investments $ 2,189,163 213 - 123 7 343
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(1)Classification based on predominant services provided, but may include other services. (2)Excludes properties held for sale. (3)Based on cost for real estate equity investments, which includes purchase price allocations related to net intangibles, deferred costs, other assets, if any, and adjusted for subsequent capital expenditures. For real estate equity investments, includes cost associated with purchased land parcels that are not included in the count. (4)Represents seven condominium units for which we hold future interests. (5)Includes institutional pharmacy, therapy businesses and lease purchase buy-out options in connection with the Trilogy investment, which are not subject to property count. (6)The joint venture classified the 106 properties within the MOB portfolio and two hospitals as held for sale as ofSeptember 30, 2022 . (7)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 62 properties are excluded from the table as ofSeptember 30, 2022 . Refer to "-Recent Developments" for additional information on portfolio sales. (8)Represents our investment inSolstice Senior Living, LLC , or Solstice, the manager of the Winterfell portfolio. Solstice is a joint venture between affiliates ofIntegral Senior Living, LLC , or ISL, a management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and us, who owns 20.0%. 38
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The following presents our real estate equity portfolio diversity across property type and geographic location based on cost as ofSeptember 30, 2022 : Real Estate Equity by Property Type(1) Real Estate Equity by Geographic Location [[Image Removed: nshi-20220930_g1.jpg]] [[Image Removed: nshi-20220930_g2.jpg]]
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(1)Classification based on predominant services provided, but may include other services.
Our investments include the following types of healthcare facilities as of
•Seniors Housing Facilities. We define seniors housing facilities to include
ILFs, ALFs, MCFs and CCRCs, as described in further detail below. Revenues
generated by seniors housing facilities typically come from private pay sources,
including private insurance, and to a much lesser extent government
reimbursement programs, such as Medicare and Medicaid.
•Independent living facilities. ILFs are 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.
•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.
•Memory care facilities. MCFs offer specialized options for seniors with
Alzheimer's disease and other forms of dementia. These facilities offer
dedicated care and specialized programming for various conditions relating to
memory loss in a secured environment. 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.
•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.
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•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.
Direct Investments -
For our net lease properties, we enter into net leases that generally provide for fixed rental payments, subject to periodic increases based on certain percentages or the consumer price index, and obligate the operator to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. Our remaining four net lease properties are leased and operated byArcadia Management with a lease term that expires inAugust 2029 . However, the operator has failed to remit contractual rent and comply with other contractual terms of its lease agreements, which resulted in defaults under the operator's leases as ofSeptember 30, 2022 . Operators and Managers
The following table presents the operators and managers of our direct investments (dollars in thousands):
As of September 30, 2022 Nine Months Ended September 30, 2022
Property and Other % of Total Property
Operator / Manager Properties Under Management Units Under Management(1) Revenues(2) and Other Revenues
Solstice Senior Living(3) 32 4,000 $ 82,607 60.5 %
Watermark Retirement
Communities 14 1,753 33,770 24.8 %
Avamere Health Services 5 453 14,764 10.8 %
Integral Senior Living 1 44 3,628 2.7 %
Arcadia Management(4) 4 572 1,220 0.9 %
Other(5) - - 456 0.3 %
Total 56 6,822 $ 136,445 100.0 %
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(1)Represents rooms for ALFs and ILFs and beds for MCFs and SNFs, based on predominant type. (2)Includes rental income received from our net lease properties as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from our ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges. (3)Solstice is a joint venture of which affiliates of ISL own 80%. (4)During the nine months endedSeptember 30, 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):
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Properties as of September 30, 2022 (1)
Equity
Portfolio Partner Acquisition Date Ownership AUM(2) Investment(3) Seniors Housing Facilities MOB SNF Hospitals Total
American Healthcare
REIT / Management
Team of Trilogy
Trilogy Investors, LLC Dec-2015 23.2 % $ 440,942 189,032 23 - 75 - 98
Diversified US/UK (4) NRF and Partner Dec-2014 14.3 % 261,186 $ 243,544 92 - 39 7 138
NRF and Partner/
Formation Capital,
Eclipse LLC May-2014 5.6 % 37,291 23,400 42 - 9 - 51
Formation Capital,
LLC/Safanad
Espresso(5) Management Limited Jul-2015 36.7 % - 55,146 - - - - -
Subtotal $ 739,419 $ 511,122 157 - 123 7 287
Solstice Jul-2017 20.0 % - 402 - - - - -
Total $ 739,419 $ 511,524 157 - 123 7 287
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(1)Excludes properties classified as held for sale. (2)Represents our proportionate share of 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 throughSeptember 30, 2022 . (4)The joint venture classified the 106 properties within the MOB portfolio and two hospitals as held for sale as ofSeptember 30, 2022 . (5)As a result of the joint venture pursuing dispositions of its various sub-portfolios, the remaining 62 properties are excluded from the table as ofSeptember 30, 2022 . Refer to "-Recent Developments" for additional information on distributions from portfolio sales.
•Diversified US/
•Trilogy. Portfolio of predominantly SNFs located in the Midwest and operated pursuant to management agreements withTrilogy Health Services , as well as ancillary services businesses, including a therapy business and a pharmacy business.American Healthcare REIT, Inc. , or AHR, and management of Trilogy own the remaining 76.8% of this portfolio. •Eclipse. Portfolio of SNFs and ALFs leased to, or managed by, a variety of different operators/managers acrossthe United States . The Sponsor and other minority partners andFormation Capital, LLC , or Formation, own 86.4% and 8.0% of this portfolio, respectively. •Espresso. Portfolio of predominantly SNFs located in the Midwest 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
inflation, rising interest rates and other economic industry conditions, 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
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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
Since our inception throughOctober 21, 2022 , we were externally managed by the Advisor, with the Advisor responsible for managing our operations, subject to the supervision of our board of directors, pursuant to an advisory agreement. OnOctober 21, 2022 , we completed the Internalization and became a self-managed REIT, with an internal asset management team. The portfolio management process for our investments includes oversight by our asset management team, regular management meetings and an operating results review process. These processes are designed to evaluate and proactively identify asset-specific issues and trends on a portfolio-wide, sub-portfolio or asset type basis. Our asset management team are experienced and use many methods to actively manage our investments to enhance or preserve our income, value and capital and mitigate risk. Our asset management team seeks 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 asset management team engages in frequent review and dialogue with operators/managers/borrowers/third party advisors and periodic inspections of our owned properties and collateral. In addition, our asset management team considers the impact of regulatory changes on the performance of our portfolio.
Our asset management team 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.
Outlook and Recent Trends
The healthcare industry, which includes ILFs, ALFs, MCFs, CCRCs, SNFs, MOBs and hospitals, continues to be impacted by inflation, rising interest rates and other economic market conditions. While the healthcare industry continues to experience occupancy recovery, 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 will depend on a variety of factors, which may differ considerably across regions, fluctuate over time and are highly uncertain. 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 82.2% during the third quarter of 2022 from 81.4% in the second quarter of 2022. In addition, annual inventory growth decreased to 1.4% during the third quarter of 2022, while construction versus inventory ratio of 5.0% remained elevated in the third quarter of 2022 (source:The National Investment Centers for Seniors Housing & Care , or NIC).
Supply growth, which has outpaced demand over the past several years, has challenged the seniors housing industry. 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 5.0% in the third quarter of 2022 (source: NIC). It is expected that, as demographics and demand continue to increase long-term, supply growth will follow. While increased supply has resulted in competitive pressures that have limited rent growth over the past several years for the senior housing industry, during the third quarter of 2022, market rent growth averaged 4.4% (source: NIC) as a result of increased demand. However, a tight labor market and competition to attract quality staff has 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 and wage and benefits increases may continue to impact the industry's margins in the future, as labor represents approximately 60% of the seniors housing industry's operating expenses (source:Green Street ).
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.
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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. Regulatory initiatives announced in 2022 and aimed at improving safety and quality of nursing home care could further increase the cost burdens for our SNF operators and expose them to financial penalties.The Biden Administration announced its focus on establishing a minimum nursing home staffing requirement, reducing resident room crowding and reinforcing safeguards against unnecessary medications and treatments. These reforms might result in increased government inspections, financial penalties and other enforcement sanctions against facilities not meeting the set standards.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's subjective and complex judgments, and for which the impact of changes in estimates and assumptions could have a material effect on our financial statements. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time.
For a summary of our accounting policies, refer to Note 2, "Summary of Significant Accounting Policies" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."
We believe impairment to be a critical accounting estimate based on the nature of our operations and/or require significant management judgment and assumptions. 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 nine months endedSeptember 30, 2022 , we recorded impairment losses on our operating real estate totaling$31.5 million . We recorded impairment losses of$18.5 million ,$8.5 million and$3.9 million for facilities in our Arbors, Winterfell and Rochester portfolios, respectively, as a result of declining operating margins and lower projected future cash flows. In addition, we recorded impairment losses totaling$0.6 million for property damage sustained by facilities in our Winterfell portfolio. Accumulated impairment losses for operating real estate that we continue to hold as ofSeptember 30, 2022 totaled$181.2 million . Refer to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for additional information regarding impairment recorded in prior years. During the nine months endedSeptember 30, 2022 , we did not impair any of our investments in unconsolidated ventures, however, our unconsolidated ventures have recorded impairments and reserves on properties in their respective portfolios, which have been recognized through our equity in earnings (losses), of which our proportionate share was de minimis. At this time, it is difficult to assess and estimate the continuing impact of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions with any meaningful precision. As the future impact will depend on many factors beyond our control and knowledge, the resulting effect on impairment of our operating real estate and investments in unconsolidated ventures may materially differ from our current expectations and further impairment charges may be recorded in the future. 43
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Table of Contents Results of Operations Comparison of the Three Months EndedSeptember 30, 2022 toSeptember 30, 2021 (dollars in thousands) Three Months Ended September 30, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 11,274 $ 27,370 $ (16,096) (58.8) % Rental income 36,165 37,006 (841) (2.3) % Other revenue 300 38 262 689.5 % Total property and other revenues 47,739 64,414 (16,675) (25.9) % Interest income Interest income on debt investments - 1,067 (1,067) (100.0) % Expenses Property operating expenses 35,134 45,784 (10,650) (23.3) % Interest expense 11,014 15,780 (4,766) (30.2) % Transaction costs 857 - 857 NA Asset management fees - related party 2,428 2,769 (341) (12.3) % General and administrative expenses 2,859 2,432 427 17.6 % Depreciation and amortization 9,642 13,828 (4,186) (30.3) % Impairment loss 18,500 4,600 13,900 302.2 % Total expenses 80,434 85,193 (4,759) (5.6) % Other income, net - - - NA Realized gain (loss) on investments and other 325 75 250 333.3 % Equity in earnings (losses) of unconsolidated ventures 2,872 7,943 (5,071) (63.8) % Income tax expense (15) (59) 44 (74.6) % Net income (loss)$ (29,513) $ (11,753) $ (17,760) 151.1 %
Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 11,274 $ 10,302 $ 972 9.4 %
Properties sold - 17,068 (17,068) (100.0) %
Total resident fee income $ 11,274 $ 27,370 $ (16,096) (59) %
Resident fee income decreased $16.1 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
Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 35,441 $ 30,994 $ 4,447 14.3 %
Same store net lease properties (excludes
properties sold)
Rental payments 724 1,122 (398) (35.5) %
Properties sold - 4,890 (4,890) (100.0) %
Total rental income $ 36,165 $ 37,006 $ (841) (2.3) %
Rental income decreased by
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On a same store basis, rental income at our ILFs increased by
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the three months endedSeptember 30, 2022 as a result of receiving the full repayment of outstanding principal on our mezzanine loan debt investment inAugust 2021 .
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 9,459 $ 7,718 $ 1,741 22.6 %
ILF properties 25,360 23,528 1,832 7.8 %
COVID-19 related expenses 107 359 (252) (70.2) %
Properties sold 208 14,179 (13,971) (98.5) %
Total property operating expenses $ 35,134 $ 45,784 $ (10,650) (23.3) %
Overall, total operating expenses decreased
Excluding properties sold, operating expenses increased$3.3 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, higher occupancy and inflationary pressures drove an increase in overall operating costs, specifically utilities and food and beverage costs.
Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,526 $ 1,400 $ 126 9.0 %
ILF properties 8,581 8,279 302 3.6 %
Net lease properties 907 930 (23) (2.5) %
Properties sold - 5,066 (5,066) (100.0) %
Corporate - 105 (105) (100.0) %
Total interest expense $ 11,014 $ 15,780 $ (4,766) (30.2) %
Interest expense decreased $4.8 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 and the repayment of the Sponsor Line, in July
2021 .
On a same store basis, while average mortgage notes principal balances have
decreased as compared to
Transaction Costs
Transaction costs for the three months endedSeptember 30, 2022 consisted of legal and professional fees incurred to complete the Internalization. Refer to "-Recent Developments" for additional information on the Internalization.
Asset Management Fees -
Prior to the termination of the advisory agreement, the Advisor received a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value, adjusted for any special distribution declared by our board of directors and adjusted for corporate cash balances in excess of$75.0 million . Asset management fees decreased by$0.3 million due to the Special Distribution paid inMay 2022 and adjustments for excess corporate cash balances. 45
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General and Administrative Expenses
General and administrative expenses increased$0.4 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to the Advisor over the term of the policy, beginning inDecember 2021 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 1,770 $ 1,749 $ 21 1.2 %
ILF properties 7,002 7,356 (354) (4.8) %
Net lease properties 870 861 9 1.0 %
Properties sold - 3,862 (3,862) (100.0) %
Total depreciation and amortization $ 9,642 $ 13,828 $ (4,186) (30.3) %
Depreciation and amortization expense decreased
Impairment Loss
During the three months endedSeptember 30, 2022 , impairment losses on operating real estate totaled$18.5 million for facilities within the Arbors net lease portfolio. During the three months endedSeptember 30, 2021 , impairment losses on operating real estate totaled$4.6 million for one independent living facility within the Winterfell portfolio.
Realized Gain (Loss) on Investments and Other
During the three months ended
During the three months ended
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Three Months Ended September
Three Months Ended September 30, 30,
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 $ (344) $ (194) $ 309 $ 273 $ (35) $ 79 $ (114) (144.3) % $ - $ 2,898
Envoy - - - - - - - - % - 78
Diversified US/UK (2,611) (330) 3,125 3,724 514 3,394 (2,880) (84.9) % 358 966
Espresso (242) 7,693 1,617 (5,370) 1,375 2,323 (948) (40.8) % 1,375 -
Trilogy 6,052 763 (753) 3,663 5,299 4,426 873 19.7 % 2,300 -
Subtotal $ 2,855 $ 7,932 $ 4,298 $ 2,290 $ 7,153 $ 10,222 $ (3,069) (30.0) % $ 4,033 $ 3,942
Solstice 17 11 - 1 17 12 5 41.7 % - -
Total $ 2,872 $ 7,943 $ 4,298 $ 2,291 $ 7,170 $ 10,234 $ (3,064) (29.9) % $ 4,033 $ 3,942 _______________________________________
(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 decreased by$5.1 million primarily due to gains recognized on property sales in the Espresso joint venture during the three months endedSeptember 30, 2021 . The decrease was partially offset by the Trilogy joint venture recognizing a gain upon acquiring the remaining ownership interest of an investment portfolio during the three months endedSeptember 30, 2022 . 46
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Equity in earnings, after FFO and MFFO adjustments, decreased by$3.1 million as a result of lower rental income recognized by the Diversified US/UK and Espresso joint ventures during the three months endedSeptember 30, 2022 . Comparison of the Nine Months EndedSeptember 30, 2022 toSeptember 30, 2021 (dollars in thousands) Nine Months Ended September 30, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 32,987 $ 83,906 $ (50,919) (60.7) % Rental income 103,001 101,669 1,332 1.3 % Other revenue 457 80 377 471.3 % Total property and other revenues 136,445 185,655 (49,210) (26.5) % Interest income Interest income on debt investments - 4,667 (4,667) (100.0) % Expenses Property operating expenses 101,258 136,503 (35,245) (25.8) % Interest expense 31,877 47,767 (15,890) (33.3) % Transaction costs 857 54 803 1,487.0 % Asset management fees - related party 7,532 8,307 (775) (9.3) % General and administrative expenses 10,300 8,544 1,756 20.6 % Depreciation and amortization 29,105 44,772 (15,667) (35.0) % Impairment loss 31,502 5,386 26,116 484.9 % Total expenses 212,431 251,333 (38,902) (15.5) % Other income, net 77 6,892 (6,815) (98.9) % Realized gain (loss) on investments and other 660 7,479 (6,819) (91.2) % Equity in earnings (losses) of unconsolidated ventures 39,427 17,819 21,608 121.3 % Income tax expense (45) (85) 40 (47.1) % Net income (loss)$ (35,867) $ (28,906) $ (6,961) 24.1 %
Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 32,987 $ 30,212 $ 2,775 9.2 %
Properties sold - 53,694 (53,694) (100.0) %
Total resident fee income $ 32,987 $ 83,906 $ (50,919) (61) %
Resident fee income decreased $50.9 million as a result of property sales during
2021. The Watermark Fountains portfolio sold in December 2021 , the Kansas City
portfolio in June 2021 and a property within the Aqua portfolio sold in March
2021 .
Excluding properties sold, resident fee income increased by
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Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 101,781 $ 90,727 $ 11,054 12.2 %
Same store net lease properties (excludes
properties sold)
Rental payments 1,220 2,951 (1,731) (58.7) %
Straight-line rental income (loss) - (7,350) 7,350 (100.0) %
Properties sold - 15,341 (15,341) (100.0) %
Total rental income $ 103,001 $ 101,669 $ 1,332 1.3 %
Overall, rental income increased by
Excluding properties sold, rental income increased by$16.7 million primarily as a result of improved occupancy at our ILFs during the nine months endedSeptember 30, 2022 and the write-off of straight-line rent receivables at our Arbors portfolio during 2021.
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the nine
months ended
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 26,525 $ 22,121 $ 4,404 19.9 %
ILF properties 74,036 66,763 7,273 10.9 %
Net lease properties 35 25 10 40.0 %
COVID-19 related expenses 366 1,920 (1,554) (80.9) %
Properties sold 296 45,674 (45,378) (99.4) %
Total Property operating expenses $ 101,258 $ 136,503 $ (35,245) (25.8) %
Overall, total operating expenses decreased
Excluding properties sold, operating expenses increased$10.1 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, higher occupancy and inflationary pressures drove an increase in overall operating costs, specifically utilities and food and beverage costs. 48
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Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 4,339 $ 4,169 $ 170 4.1 %
ILF properties 24,830 24,809 21 0.1 %
Net lease properties 2,708 2,775 (67) (2.4) %
Properties sold - 15,273 (15,273) (100.0) %
Corporate - 741 (741) (100.0) %
Total interest expense $ 31,877 $ 47,767 $ (15,890) (33.3) %
Interest expense decreased $15.9 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 . Corporate interest expense represents interest
resulting from the borrowings under the Sponsor Line, which was repaid in full
in July 2021 .
On a same store basis, while average mortgage notes principal balances have
decreased as compared to
Transaction Costs
Transaction costs for the nine months ended
Asset Management Fees -
Prior to the termination of the advisory agreement, the Advisor received a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value, adjusted for any special distribution declared by our board of directors and adjusted for corporate cash balances in excess of$75.0 million . Asset management fees decreased by$0.8 million due to the Special Distribution paid inMay 2022 and adjustments for excess corporate cash balances.
General and Administrative Expenses
General and administrative expenses increased$1.8 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to the Advisor over the term of the policy, beginning inDecember 2021 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 5,397 $ 5,207 $ 190 3.6 %
ILF properties 21,107 21,891 (784) (3.6) %
Net lease properties 2,601 2,583 18 0.7 %
Properties sold - 15,091 (15,091) (100.0) %
Total depreciation and amortization $ 29,105 $ 44,772 $ (15,667) (35.0) %
Depreciation and amortization expense decreased
Impairment Loss
During the nine months ended
During the nine months endedSeptember 30, 2021 , impairment losses on operating real estate totaled$5.4 million , consisting of$4.6 million recognized for one independent living facility within our Winterfell portfolio and$0.8 million for our Smyrna net lease property, which was sold inMay 2021 . 49
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Table of Contents Other Income, Net Other income, net for the nine months endedSeptember 30, 2022 consisted of$0.1 million in COVID-19 testing reimbursements received and recognized at our Avamere portfolio. For the nine months endedSeptember 30, 2021 , other income, net consisted of$7.4 million in federal COVID-19 provider relief grants from DHHS, partially offset by a$0.5 million non-operating loss recognized at a property within the Watermark Fountains.
Realized Gain (Loss) on Investments and Other
During the nine months ended
During the nine months endedSeptember 30, 2021 , we recognized gains on the sale of four properties totaling$7.4 million . In addition, we recognized gains on distributions that exceeded our carrying value for our investment in the Envoy joint venture.
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Nine Months Ended September
Nine Months Ended September 30 , 30,
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 DistributionsEclipse $ (940)$ 3,739 $ 876$ (3,319) $ (64) $ 420 $ (484) (115.2) %$ 620 $ 2,898 Envoy - 740 - (744) - (4) 4 (100.0) % - 817 Diversified US/UK (4,060) (2,387) 8,503 13,713 4,443 11,326 (6,883) (60.8) % 2,290 3,256 Espresso 33,711 18,636 (28,121) (11,087) 5,590 7,549 (1,959) (26.0) % 32,363 - Trilogy 10,757 (2,839) 7,415 11,265 18,172 8,426 9,746 115.7 % 6,900 - Subtotal$ 39,468 $ 17,889 $ (11,327) $ 9,828 $ 28,141 $ 27,717 $ 424 1.5 %$ 42,173 $ 6,971 Solstice (41) (70) - 2 (41) (68) 27 (39.7) % - - Total$ 39,427 $ 17,819 $ (11,327) $ 9,830 $ 28,100 $ 27,649 $ 451 1.6 %$ 42,173 $ 6,971
_______________________________________
(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$21.6 million primarily due to gains recognized on property sales in the Espresso joint venture and gains recognized by the Trilogy joint venture upon acquiring the remaining ownership interest of an investment portfolio. Gains recognized during the nine months endedSeptember 30, 2022 exceeded the gains recognized on property sales in the Espresso and Eclipse joint ventures during the nine months endedSeptember 30, 2021 . Equity in earnings, after FFO and MFFO adjustments, increased by$0.5 million as a result of improvements in the Trilogy joint venture, partially offset by lower rental income recognized in the Diversified US/UK and Espresso joint ventures during the nine months endedSeptember 30, 2022 .
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or NAREIT, as net income (loss) (computed in accordance withU.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures. Changes in the accounting and reporting rules underU.S. GAAP that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from being capitalized to being 50
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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 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 the 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 the Advisor in connection with the acquisition of equity investments were generally expensed underU.S. GAAP. In both situations, the fees were included in the computation of net income (loss) and income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense), both of which are performance measures underU.S. GAAP. We adjusted MFFO for the amortization of acquisition fees in the period when such amortization was recognized underU.S. GAAP or in the period in which the acquisition fees were expensed. Acquisition fees were paid in cash that would otherwise have been available to distribute to our stockholders. Such fees and expenses will not be reimbursed by the 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 the Advisor. EffectiveJanuary 1, 2018 , the Advisor no longer receives an acquisition fee in connection with our acquisition of real estate properties or debt investments. Due to certain of the unique features of publicly-registered, non-traded REITs, theInstitute for Portfolio Alternatives , or IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. MFFO adjustments for items such as acquisition fees would only be comparable to non-traded REITs that have completed the majority of their acquisition activity and have other similar operating characteristics as us. Neither theU.S. Securities and Exchange Commission , orSEC , nor any other regulatory body has approved the acceptability of the adjustments that we use to calculate MFFO. In the future, theSEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO. MFFO is a metric used by management to evaluate our future operating performance once our organization and offering and acquisition and development stages are complete and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined underU.S. GAAP. In addition, MFFO is not a useful measure in evaluating net asset value, since impairment is taken into account in determining net asset value but not in determining MFFO. We define MFFO in accordance with the concepts established by the IPA, and adjust for certain items, such as accretion of a discount and amortization of a premium on borrowings and related deferred financing costs, as such adjustments are comparable to adjustments for debt investments and will be helpful in assessing our operating performance. Similarly, we adjust for the non-cash effect of unrealized gains or losses on unconsolidated ventures. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's operating performance. The IPA's definition of MFFO excludes from FFO the following items:
•acquisition fees and expenses;
•non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting underU.S. GAAP to a cash basis of accounting);
•amortization of a premium and accretion of a discount on debt investments;
•non-recurring impairment of real estate-related investments that meet the
specified criteria identified in the rules and regulations of the
•realized gains (losses) from the early extinguishment of debt;
•realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
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•unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•adjustments related to contingent purchase price obligations; and
•adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments. MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves/impairment on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. With respect to debt investments, we consider the estimated net recoverable value of the loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based on discounting expected future cash flow of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the consolidated balance sheet date. If the estimated fair value of the underlying collateral for the debt investment is less than its net carrying value, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. With respect to a real estate investment, a property's value is considered impaired if a triggering event is identified and our estimate of the aggregate future undiscounted cash flow to be generated by the property is less than the carrying value of the property. The value of our investments may be impaired and their carrying values may not be recoverable due to our limited life. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT's anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event. We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance once our organization and offering, and acquisition and development stages are complete. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we were to extend our acquisition and development stage or if we determined not to pursue an exit strategy. However, MFFO does have certain limitations. For instance, the effect of any amortization or accretion on debt investments originated or acquired at a premium or discount, respectively, is not reported in MFFO. In addition, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions. Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance withU.S. GAAP and should not be construed to be more relevant or accurate than theU.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance. 52
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The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):
Three Months Ended
2022 2021 2022 2021
Funds from operations:
Net income (loss) attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (29,440) $ (11,653) $ (35,569) $ (28,979)
Adjustments:
Depreciation and amortization 9,642 13,828 29,105 44,772
Depreciation and amortization related to
non-controlling interests (71) (120) (215) (409)
Depreciation and amortization related to
unconsolidated ventures 7,290 7,609 21,386 23,009
Realized (gain) loss from sales of property - - 425 (7,417)
Realized gain (loss) from sales of property
related to non-controlling interests - - (6) 226
Realized (gain) loss from sales of property
related to unconsolidated ventures (505) (9,898) (44,407) (31,277)
Impairment losses of depreciable real estate 18,500 4,600 31,502 5,386
Impairment loss on real estate related to
non-controlling interests - - (117) -
Impairment losses of depreciable real estate
held by unconsolidated ventures 38 - 58 (327)
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ 5,454 $ 4,366 $ 2,162 $ 4,984
Modified funds from operations:
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ 5,454 $ 4,366 $ 2,162 $ 4,984
Adjustments:
Transaction costs 857 - 857 54
Straight-line rental (income) loss - 347 - 7,432
Amortization of premiums, discounts and fees on
investments and borrowings 983 778 2,927 3,081
Realized (gain) loss on investments and other (325) (75) (1,085) (62)
Adjustments related to unconsolidated
ventures(1) (2,525) 4,580 11,636 18,425
Adjustments related to non-controlling
interests 7 (10) 11 (50)
Modified funds from operations attributable to
NorthStar Healthcare Income, Inc. common
stockholders $ 4,451 $
9,986
_______________________________________
(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.
We generated significant liquidity in 2021 from proceeds from asset sales and other realization events. As a result, onApril 20, 2022 , our board of directors declared the Special Distribution of$0.50 per share for each stockholder of record onMay 2, 2022 . The Special Distribution paid in cash on or aroundMay 5, 2022 totaled$97.0 million . While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our management and 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
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Table of Contents Cash From Operations 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$13.6 million for the nine months endedSeptember 30, 2022 . During the nine months endedSeptember 30, 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 the operating margins 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, cash flow has continued to be negatively impacted by suboptimal occupancy levels, rate pressures, cost inflation, rising interest rates and other economic market conditions. 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 factors discussed above, which has and will continue to affect its ability and willingness to pay rent. The operator continues to make partial contractual 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. We have significant joint ventures and will not be able to control the timing of distributions, if any, from these investments. As ofSeptember 30, 2022 , our unconsolidated joint ventures and consolidated joint ventures represented 33.8% and 13.7%, respectively, of our total real estate equity investments, based on cost. Our unconsolidated joint ventures, which have been similarly impacted as our direct investments by the COVID-19 pandemic, inflation, rising interest rates and other economic market conditions, 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. We are required to make recurring principal and interest payments on our borrowings. As ofSeptember 30, 2022 , we had$927.1 million of consolidated asset-level borrowings outstanding and paid$41.5 million in recurring principal and interest payments on borrowings during the nine months endedSeptember 30, 2022 . Our unconsolidated joint ventures also have significant asset level borrowings, which may restrict cash distributions from the joint ventures if certain lender requirements are not met and may require capital to be funded if favorable refinancing is not obtained. The operator for the Arbors portfolio has 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 ofSeptember 30, 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 the inflation, rising interest rates, risk of recession and other economic market conditions continue to influence our investments' performance, which may have a negative impact on our ability to service or refinance our borrowings and we may experience defaults in the future.
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 ofSeptember 30, 2022 , our leverage was 55.6% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofSeptember 30, 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 57.9%. 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." 54
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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 joint venture 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. As the impact of inflation, rising interest rates, risk of recession and other economic market conditions continue to influence the properties' performance, it may have a negative impact on our ability to generate desired returns on dispositions. We have made significant investments through both consolidated and unconsolidated joint ventures with third parties. Decision-making authorities for these joint ventures could prevent us from selling properties or our interest in the joint venture. During the nine months endedSeptember 30, 2022 , our Espresso joint venture distributed the net proceeds generated from sub-portfolios sales, of which our proportionate share totaled$27.4 million . Refer to "-Recent Developments" for additional information on distributions from portfolio sales. Distributions To continue to qualify as a REIT, we are required to distribute annually dividends equal to at least 90% of our taxable income, subject to certain adjustments, to stockholders. We have generated net operating losses for tax purposes and, accordingly, are currently not required to make distributions to our stockholders to qualify as a REIT. Refer to "-Distributions Declared and Paid" for further information regarding our distributions.
Repurchases
We adopted a share repurchase program, or the Share Repurchase Program, effectiveAugust 7, 2012 , which enabled stockholders to sell their shares to us in limited circumstances. Our board of directors may amend, suspend or terminate our Share Repurchase Program at any time, subject to certain notice requirements. InOctober 2018 , our board of directors approved an amended and restated Share Repurchase Program, under which we only repurchased shares in connection with the death or qualifying disability of a stockholder. OnApril 7, 2020 , our board of directors suspended all repurchases under our existing Share Repurchase Program effectiveApril 30, 2020 in order to preserve capital and liquidity. Other Commitments
On
In connection with the Internalization, we entered into theTSA , to facilitate an orderly transition of the management of our operations. TheTSA provides for, among other things, the Advisor to provide certain services, which primarily include technology, insurance, legal, treasury and accounts payable services. We will reimburse the Advisor for costs to provide such services. Refer to "-Recent Developments" for further information. 55
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Cash Flows
The following presents a summary of our consolidated statements of cash flows
(dollars in thousands):
Nine Months Ended September 30,
2022 vs. 2021
Cash flows provided by (used in): 2022 2021 Change
Operating activities $ (13,604) $ (4,355) $ (9,249)
Investing activities 24,249 92,367 (68,118)
Financing activities (113,901) (71,058) (42,843)
Net increase (decrease) in cash, cash
equivalents and restricted cash $ (103,256) $ 16,954 $ (120,210)
Operating Activities
Net cash used in operating activities totaled $13.6 million for the nine months
ended September 30, 2022 , as compared to $4.4 million for the nine months ended
September 30, 2021 . The change in cash flow from operating activities was a
result of receiving $7.4 million in federal COVID-19 provider relief grants from
HHS during the nine months ended September 30, 2021 as well as generating lower
rental and resident fee income, net of property operating expenses during the
nine months ended September 30, 2022 as a result of portfolio sales during the
year ended December 31, 2021 .
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$24.2 million for the nine months endedSeptember 30, 2022 as compared to$92.4 million for the nine months endedSeptember 30, 2021 . Cash flows provided by investing activities for the nine months endedSeptember 30, 2022 were from distributions received from our unconsolidated investments. Cash inflows were used to fund recurring capital expenditures and operating shortfalls for existing investments and to pay corporate general and administrative expenses. Cash flows provided by investing activities for the nine months endedSeptember 30, 2021 were from collections of outstanding principal on our real estate debt investment and proceeds from property sales. On a same store basis, capital expenditures increased during the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . The resumption of normalized business operations has allowed our managers to commence additional improvement projects as we continue to invest capital into our operating portfolios in order to maintain market position and enhance overall asset value.
The following table presents cash used for capital expenditures, excluding our unconsolidated ventures (dollars in thousands):
Nine Months Ended
2022 2021 2022 vs. 2021 Change
Same store (excludes properties sold)
ALF/MCF properties $ 1,993 $ 1,552 $ 441
ILF properties 15,609 9,700 5,909
Net lease properties 322 - 322
Properties sold - 6,092 (6,092)
Total capital expenditures $ 17,924 $ 17,344 $ 580
Financing Activities
Cash flows used in financing activities were $113.9 million for the nine months
ended September 30, 2022 compared to $71.1 million for the nine months ended
September 30, 2021 . For the nine months ended September 30, 2022 , net cash flows
used in financing activities were primarily attributable to the payment of the
Special Distribution to stockholders, repayment of the financing on the Oak
Cottage portfolio and continued principal amortization on our mortgage notes.
Cash flows used in financing activities during the nine months ended
September 30, 2021 were primarily the repayment of the $35.0 million borrowed
under the Sponsor Line and principal amortization and repayments on our mortgage
notes payable. Cash outflows were partially offset by the refinancing of a
mortgage note for a property within our Aqua portfolio, which generated
$6.5 million in net proceeds.
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Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in unconsolidated ventures. Refer to Note 4, "Investments inUnconsolidated Ventures " in Part I. Item 1. "Financial Statements" for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.
Inflation
Macroeconomic trends such as increases in inflation and rising interest rates can have a substantial impact on our business and financial results. Many of our costs are subject to inflationary pressures. These include labor, repairs and maintenance, food costs, utilities, insurance and other operating costs. Our managers' ability to offset increased costs by increasing the rates charged to residents may be limited, therefore, cost inflation may substantially affect the net operating income of our operating properties as well as the ability of our net lease operator to make payments to us.
Distributions Declared and Paid
Since inception of our first investment, throughSeptember 30, 2022 , we declared$530.9 million in distributions, inclusive of the recent Special Distribution, and generated cumulative FFO of$134.0 million . From the date of our first investment onApril 5, 2013 throughDecember 31, 2017 , we declared an annualized distribution amount of$0.675 per share of our common stock. FromJanuary 1, 2018 throughJanuary 31, 2019 , we declared an annualized distribution amount of$0.3375 per share of our common stock. EffectiveFebruary 1, 2019 , our board of directors suspended recurring distributions in order to preserve capital and liquidity. OnApril 20, 2022 , our board of directors declared the Special Distribution of$0.50 per share for each stockholder of record onMay 2, 2022 totaling$97.1 million . On or aroundMay 5, 2022 ,$97.0 million of the Special Distribution was paid in cash from sources other than our cash flow provided by operations, including cash proceeds generated from asset sales and realizations during the year endedDecember 31, 2021 . 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 management and 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 may 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.
Related Party Arrangements
Advisor
Prior to the Internalization, the Advisor was responsible for managing our affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on our behalf. For such services, to the extent permitted by law and regulations, the Advisor received fees and reimbursements from us. Pursuant to the advisory agreement, the Advisor could defer or waive fees in its discretion.
In connection with the Internalization, the advisory agreement was terminated on
Fees to Advisor
Asset Management Fee
Prior to the termination of the advisory agreement, the Advisor received 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. FromJanuary 1, 2022 through theOctober 21, 2022 termination of the advisory agreement, the fee was reduced if our corporate cash balances exceeded$75.0 million , subject to the terms and conditions set forth in the advisory agreement. EffectiveJuly 1, 2021 , the asset management fee was paid entirely in shares of our common stock at a price per share equal to the most recently published net asset value per share. 57
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Acquisition Fee
Effective
Disposition Fee
EffectiveJune 30, 2020 , the Advisor no longer had the potential to receive a disposition fee in connection with the sale of real estate properties or debt investments. Reimbursements to Advisor Operating Costs Prior to the termination of the advisory agreement, the Advisor was entitled to receive reimbursement for direct and indirect operating costs incurred by the Advisor in connection with administrative services provided to us. The Advisor allocated, in good faith, indirect costs to us related to the 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 the Advisor. The indirect costs included our allocable share of the Advisor's compensation and benefit costs associated with dedicated or partially dedicated personnel who spent 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 included rental and occupancy, technology, office supplies and other general and administrative costs and expenses. However, there was no reimbursement for personnel costs related to our executive officers (although reimbursement for certain executive officers of the Advisor was permissible) and other personnel involved in activities for which the Advisor received an acquisition fee or a disposition fee. The Advisor allocated these costs to us relative to its and its affiliates' other managed companies in good faith and reviewed the allocation with our board of directors, including our independent directors. The Advisor updated our board of directors on a quarterly basis of any material changes to the expense allocation and provided a detailed review to the board of directors, at least annually, and as otherwise requested by the board of directors. We reimbursed the 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 non-cash reserves and excluding any gain from the sale of assets for that period. Notwithstanding the above, we could reimburse the Advisor for expenses in excess of this limitation if a majority of our independent directors determined that such excess expenses are justified based on unusual and non-recurring factors. We have calculated the expense reimbursement quarterly based upon the trailing twelve-month period. As ofSeptember 30, 2022 , the Advisor did not have any unreimbursed operating costs which remained eligible to be allocated to us. As ofSeptember 30, 2022 , the outstanding operating costs reimbursable to the Advisor totaled$2.5 million and were reimbursed during the fourth quarter of 2022. The Advisor continued to incur direct and indirect operating costs on our behalf through the termination of the advisory agreement onOctober 21, 2022 . In addition, we will pay the Advisor's costs for certain services for a transition period. Refer to "-Recent Developments" for further discussion.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred and paid to the Advisor (dollars in thousands):
Nine Months Ended September 30, Due to Related
Due to Related 2022 Party as of
Party as of September 30,
Type of Fee or Reimbursement Financial Statement Location December 31, 2021 Incurred Paid 2022 (Unaudited)
Fees to Advisor Entities
Asset management Asset management fees-related
party $ 937 $ 7,532 $ (7,657) $ 812Reimbursements to Advisor Entities
Operating costs General and administrative
expenses 6,401 8,789 (12,655) 2,535
Total $ 7,338 $ 16,321 $ (20,312) $ 3,347
Pursuant to the advisory agreement, for the nine months ended September 30,
2022 , we issued 2.0 million shares totaling $7.7 million based on the estimated
value per share on the date of each issuance, to an affiliate of the Advisor as
part of its asset management fee. We will issue shares to satisfy outstanding
asset management fees incurred and payable through the termination of the
advisory agreement on October 21, 2022 . As of September 30, 2022 , the Advisor,
the Sponsor and their affiliates owned a total of 9.4 million shares, or $36.6
million of our common stock based on our most recent estimated value per
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share. As of
Incentive Fee
NorthStar Healthcare Income OP Holdings, LLC , an affiliate of the Advisor, or the Special Unit Holder, 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 throughSeptember 30, 2022 , the Special Unit Holder has not received any incentive fees.
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 nine months endedSeptember 30, 2022 , we recognized property management fee expense of$4.1 million paid to Solstice related to the Winterfell portfolio.
The below table indicates our investments for which the Sponsor is also an
equity partner in the joint venture. Each investment was approved by our board
of directors, including all of its independent directors. Refer to Note 4,
"Investments in
Portfolio Partner(s) Acquisition Date Ownership
NRF and Partner/
Eclipse Formation Capital, LLC May 2014 5.6%
Diversified US/UK NRF and Partner December 2014 14.3%
Line of Credit -
InOctober 2017 , we obtained the Sponsor Line, which was approved by our board of directors, including all of our independent directors. InApril 2020 , we borrowed$35.0 million under the Sponsor Line to improve our liquidity position in response to the COVID-19 pandemic. InJuly 2021 , we repaid, in full, the$35.0 million outstanding borrowing and as ofSeptember 30, 2022 , we had no outstanding borrowings under the Sponsor Line. The Sponsor Line had a borrowing capacity of$35.0 million at an interest rate of 3.5% plus LIBOR and had a maturity date ofFebruary 2024 . OnOctober 21, 2022 , the Sponsor Line was terminated in connection with the termination of the advisory agreement. No amounts were outstanding under the Sponsor Line at the time of termination. Refer to "-Recent Developments" for additional information on the internalization.
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