NORTHSTAR HEALTHCARE INCOME, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part II, Item 8. "Financial Statements and Supplementary Data" and the risk factors in Part I, 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.
Business Summary
Our investments are categorized as follows:
•Direct Investments - Operating - Properties operated pursuant to management agreements with managers, in which we own a controlling interest.
•Direct Investments -
•Unconsolidated Investments - Joint ventures, which include properties operated under net leases with operators or pursuant to management agreements with managers, in which we own a minority, non-controlling interest.
Through our direct investments, we own a diversified portfolio of seniors housing properties, including independent living facilities, or ILFs, assisted living facilities, or ALFs, and memory care facilities, or MCFs, located throughoutthe United States . In addition, through our unconsolidated investments we have invested in a broader spectrum of healthcare real estate, including seniors housing properties, as well as continuing care retirement communities, or CCRCs, skilled nursing facilities, or SNFs, medical office buildings, or MOBs, specialty hospitals and ancillary services businesses, acrossthe United States andUnited Kingdom . For information regarding our investments as ofDecember 31, 2022 , refer to "Our Investments" included in Part I, Item 1. "Business." Business Update
The following is a summary of business activities and events occurring during
the year ended
Investments, Financings and Disposition Activities
•We invested capital totaling
•The Espresso joint venture completed the sale of 74 properties, which generated
our proportionate share of distributions totaling
•In July, 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.
•In June, we repaid the outstanding financing on the Oak Cottage portfolio at a
discounted payoff of
Special Distribution
•On
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Factors Impacting Our Operating Results
The seniors housing industry, including our business, continues to be adversely impacted by the effects of COVID-19 and broader macroeconomic trends. Our revenue depends on occupancy levels at our properties, which declined significantly as a result of COVID-19 and still have not returned to pre-pandemic levels. At the same time, our costs have increased as a result of macroeconomic trends, including increases in labor costs and historically low unemployment, inflation and rising interest rates, as well as increased health and safety measures, increased governmental regulation and compliance, vaccine mandates and other operational changes necessitated in response to the COVID-19 pandemic. Increased labor costs and a shortage of available skilled and unskilled workers has, and may continue to, increase the cost of staffing at our facilities. We have been required to enhance pay and benefits packages to compete effectively for personnel, pay additional overtime and use costly contract labor. Our operating and administrative costs, including repairs and maintenance, food costs, utilities, insurance and other operating costs, have been, and may continue to be adversely affected by inflation. We may be able to offset increased labor and other costs by increasing rates charged to residents, but we may not be able to do so in a timely manner and it may ultimately result in a decline in occupancy and revenues. Increases in interest rates may help ease inflation and our operating costs, but also increase our debt service obligations on our variable rate debt and create the possibility of slowing economic growth, which may affect the ability of seniors to pay resident fees at our properties, and lower asset values.
Operating Performance
The following is a summary of the performance of our investment segments for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . For additional information on financial results, refer to "-Results of Operations."
Direct Investments - Operating
The seniors housing industry average occupancy improved 2.8% from 2021 to 83.0% during the fourth quarter of 2022, as a result of increasing resident demand, improving consumer sentiment and easing restrictions on visitations and admissions, but was still 4.2% below its pre-pandemic level of 87.1% in the first quarter of 2020 (source:The National Investment Centers for Seniors Housing & Care ).
Our direct operating investments experienced occupancy growth as resident move-ins increased by 4.0% and resident move-outs declined by 2.1% as compared to the prior year. A summary of average occupancy of our direct operating investments by property manager is as follows:
Average Monthly Occupancy Average Annual Occupancy
Manager December 2022 December 2021 Variance 2022 2021 Variance
Solstice Senior Living 85.9 % 77.2 % 8.7 % 82.2 % 73.9 % 8.3 %
Watermark Retirement
Communities (1) 78.9 % 77.2 % 1.7 % 77.7 % 75.4 % 2.3 %
Avamere Health Services 90.5 % 85.0 % 5.5 % 88.5 % 81.9 % 6.6 %
Integral Senior Living
(1) 97.5 % 97.5 % - % 97.3 % 98.1 % (0.8) %
Direct Investments -
Operating 84.3 % 77.9 % 6.4 % 81.5 % 75.1 % 6.4 %
_______________________________________
(1)Average monthly occupancy for
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The following table is a summary of the operating performance at our direct
operating investments, excluding properties sold, for the years ended
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Property revenues
Resident fee income $ 44,274 $ 40,668 $ 3,606 8.9 %
Rental income 138,245 122,614 15,631 12.7 %
Total property revenues 182,519 163,282 19,237 11.8 %
Property operating expenses
Salaries and wages 62,113 55,603 6,510 11.7 %
Utilities 12,144 10,332 1,812 17.5 %
Food and beverage 10,427 8,990 1,437 16.0 %
Repairs and maintenance 13,835 12,276 1,559 12.7 %
Property taxes 11,603 12,192 (589) (4.8) %
Property management fee 9,123 8,174 949 11.6 %
All other expenses 17,934 15,315 2,619 17.1 %
Total property operating expenses 137,179 122,882 14,297 11.6 %
Total property revenues, net of property
operating expenses $ 45,340 $ 40,400 $ 4,940 12.2 %
Overall, property revenues, net of property operating expenses, increased by
$4.9 million for the year ended December 31, 2022 as compared to the prior year.
The increase was primarily attributable to rental and resident fee income
increasing by $19.2 million as a result of improved occupancy and rates at our
ILFs, ALFs, and MCFs. The increase was partially offset by a $14.3 million
increase in property operating expenses primarily a result of staffing
challenges, which resulted in additional overtime hours and the use of agency
and contract labor to fill open positions. Higher occupancy and inflationary
pressures significantly impacted all variable operating costs, most notably
utilities and food and beverage costs. Additionally, the resumption of
normalized business operations has allowed our operators to complete deferred
repairs and maintenance projects.
Direct Investments -
Beginning inFebruary 2021 , the operator of the four net lease properties in our Arbors portfolio has been unable to satisfy its obligations under its leases and remits rent and pays property-level expenses based on its available cash. As a result, during the year endedDecember 31, 2022 , we recorded rental income to the extent rental payments were received, which totaled$1.6 million for the year endedDecember 31, 2022 , as compared to$3.4 million for the year endedDecember 31, 2021 . The properties experienced similar operating cost pressures and staffing challenges as our direct operating investments, as well as sustaining suboptimal occupancy levels due to competitive pressures, which contributed to lower rent collected during the year endedDecember 31, 2022 .
Unconsolidated Investments
We own minority, non-controlling interests in joint ventures, which own investments in real estate properties. The following table presents the distributions received from our unconsolidated investments (dollars in thousands):
Cash
Distributions for the Year Ended
2022 2021 Total Increase (Decrease)
Portfolio Sales Operating Total Sales Operating Total $ %
Eclipse $ 846 $ - $ 846 $ 2,898 $ - $ 2,898 $ (2,052) (70.8) %
Envoy(1) 66 - 66 817 - 817 (751) (91.9) %
Diversified US/UK - 2,433 2,433 - 4,257 4,257 (1,824) (42.8) %
Espresso 49,704 4,950 54,654 1,173 4,327 5,500 49,154 893.7 %
Trilogy - 9,134 9,134 - 4,638 4,638 4,496 96.9 %
Total $ 50,616 $ 16,517 $ 67,133 $ 4,888 $ 13,222 $ 18,110 $ 49,023 270.7 %
_______________________________________
(1)The joint venture completed the sale of its remaining operating assets in 2019 and is currently in the process of liquidating the remaining cash, which resulted in non-recurring residual earnings recognized during the years endDecember 31, 2022 and 2021.
During the year ended
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limited by reinvestment and development in the Trilogy joint venture and
operational challenges in the Diversified US/
The following table is a summary of operations and performance for the Trilogy
and Diversified US/
Trilogy Diversified US/UK
Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease)
2022 2021 Amount % 2022 2021 Amount %
Property and other revenues
Total property and other
revenues $ 1,252,175 $ 1,009,256 $ 242,919 24.1 % $ 225,222 $ 255,680 $ (30,458) (11.9) %
Expenses
Property operating expenses 1,107,757 913,443 194,314 21.3 % 128,363 119,731 8,632 7.2 % Interest expense 51,648 39,123 12,525 32.0 % 102,593 77,484 25,109 32.4 % Administrative, transaction & other 429 9,449 (9,020) (95.5) % 10,317 3,692 6,625 179.4 % Depreciation and amortization 65,393 55,729 9,664 17.3 % 77,628 84,416 (6,788) (8.0) % Impairment loss - - - NA 160,189 (2,288) 162,477 (7,101.3) % Total expenses 1,225,227 1,017,744 207,483 20.4 % 479,090 283,035 196,055 69.3 % Other income (loss), net 1,407 (1,355)
2,762 (203.8) % (3,854) (1,005) (2,849) 283.5 %
Other gains (losses) 21,903 (2,593) 24,496 (944.7) % 22,050 (18) 22,068 (122,600.0) % Income tax benefit (expense) - - - NA 3,115 2,690 425 15.8 % Net income (loss) $ 50,258$ (12,436) $ 62,694 (504.1) %$ (232,557) (25,688)$ (206,869) 805.3 % Ownership 23.2 % 23.2 % 14.3 % 14.3 % Equity in earnings (losses) $ 11,652$ (2,891)
$ 14,543 (503.0) %$ (33,280) $ (3,676) $ (29,604) 805.3 % Trilogy The joint venture's facilities experienced continued occupancy recovery and revenue growth throughout 2022. Although operating margins were impacted by the effects of labor shortages and inflationary pressures, occupancy growth, coupled with higher rates, resulted in improved operating income in 2022. Additionally, federal COVID-19 provider relief grant income recognized during 2022, which totaled$24.8 million , exceeded grant income of$13.9 million recognized in 2021. Improvements to operating cash flows in 2022 were partially offset by higher interest expense, driven by rising LIBOR and outstanding debt.
Diversified US/
The Diversified US/UK Portfolio continued to face challenges during 2022. In theUnited Kingdom , the tenant of theU.K. Sub-Portfolio was unable to improve performance, pay its rent obligations under the lease and resolve its overall liquidity position. As a result, the joint venture completed a lease restructuring inNovember 2022 , which included a reduction in rent based on the performance of the properties, the draw down of the rent deposit and the acquisition of the tenant by an affiliate of our Former Sponsor. In connection with the lease restructuring, the joint venture also restructured its existing debt, including incurring a new mezzanine tranche, and agreed to remain in cash trap until certain performance levels are achieved. Withinthe United States , although the performance of the MOBs within the MOB Sub-Portfolio and MixedU.S. Sub-Portfolio were both relatively stable, the seniors housing assets operated under management agreements continued to struggle with macroeconomic trends and slow recovery from the pandemic, including suboptimal occupancy, increased labor expenses and other inflationary pressures, and various tenants operating SNFs or specialty hospitals under net leases defaulted on their rent obligations within the MixedU.S. Sub-Portfolio. The MixedU.S. Sub-Portfolio has approximately$1.0 billion and$0.5 billion of mortgage and mezzanine floating-rate financing, respectively, or the MixedU.S. Sub-Portfolio Debt, which is secured by all of the assets within the MixedU.S. Sub-Portfolio. Rising interest rates under the MixedU.S. Sub-Portfolio Debt, together with the operating challenges, created significant cash flow and liquidity issues within the MixedU.S. Sub-Portfolio, resulting in a cash flow sweep beginning inJuly 2022 and ultimately a payment default on the mezzanine tranche of the MixedU.S. Sub-Portfolio Debt inMarch 2023 . InAugust 2022 , subsidiaries of the Diversified US/UK Portfolio entered into a purchase and sale agreement to sell the MOB Sub-Portfolio and all of the MOBs and two specialty hospitals within the MixedU.S. Sub-Portfolio. However, due to a variety of factors, this purchase and sale agreement was terminated inFebruary 2023 , and the transaction proceeded with the sale of only the MOB Sub-Portfolio for a purchase price of$121.5 million , substantially all of which was used to repay debt on the MOB Sub-Portfolio and pay transaction expenses. 42
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As a result of all of the above, the financial statements for the Diversified US/UK Portfolio for the year endedDecember 31, 2022 raised doubt regarding the joint venture's ability to continue as a going concern.
The following is a summary of operations and performance for the Espresso and
Eclipse joint ventures for the year ended
•Espresso: During the year, the joint venture received full contractual rent from its net lease operators and distributed excess cash flows from operations and proceeds from sub-portfolio sales, of which our proportionate share totaled$5.0 million and$49.7 million , respectively. Rental income has declined as a result of the sub-portfolio sales. The joint venture continues to pursue dispositions of its remaining properties. •Eclipse: The joint venture continued to struggle with cash flow and liquidity issues. During 2022, two sub-portfolios did not generate sufficient cash flow to cover expenses, capital needs and debt service, resulting in the disposition of one sub-portfolio consisting of seven properties for an amount equal to the debt and another sub-portfolio consisting of eight properties being placed into receivership by the lenders. In addition, the tenant of a net leased sub-portfolio of 10 SNFs stopped paying rent in its entirety, ultimately resulting in the sale of this portfolio for an amount equal to its debt inFebruary 2023 . The remaining three sub-portfolios also face operating challenges, to varying degrees, as a result of the macroeconomic environment and slow recovery from the pandemic, among other factors.
Recent Developments
The following is a discussion of material events which have occurred subsequent
to
Diversified US/
InFebruary 2023 , due to a variety of factors, subsidiaries of the Diversified US/UK Portfolio terminated the purchase and sale agreement to sell the MOB Sub-Portfolio and all of the MOBs and two specialty hospitals within the MixedU.S. Sub-Portfolio and the transaction proceeded with the sale of only the MOB Sub-Portfolio for a purchase price of$121.5 million , substantially all of which was used to repay debt on the MOB Sub-Portfolio and pay transaction expenses. As a result of the reduced sale price and terminated purchase and sale agreement, the joint venture recorded additional impairment for the year endedDecember 31, 2022 which we recognized through equity in earnings (losses) on our consolidated statements of operations.
In addition, the Mixed
TSA
On
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 II, Item 8. "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
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sales comparison approach, using what other purchasers and sellers in the market have agreed to as price for comparable properties.
Impairment
During the year endedDecember 31, 2022 , we recorded impairment losses on our operating real estate totaling$31.9 million . Impairment losses of$18.5 million ,$8.5 million and$3.9 million for facilities in our Arbors, Winterfell and Rochester portfolios, respectively, were a result of declining operating margins and lower projected future cash flows. In addition, impairment losses totaling$0.8 million and$0.2 million were recorded for property damage sustained by facilities in our Winterfell portfolio and a facility in our Avamere portfolio, respectively.
Prior years' accumulated impairment losses totaled
Our unconsolidated ventures recorded impairment losses and reserves on properties in their respective portfolios, which have been recognized through our equity in earnings (losses), of which our proportionate share totaled$25.1 million for the year endedDecember 31, 2022 . The Diversified US/UK and Eclipse joint ventures recorded impairment losses for facilities with lower projected future cash flows and shortened hold periods, of which our proportionate share was$22.9 million and$2.2 million , respectively. In addition, we recorded impairment on our investment in the Diversified US/UK joint venture, which totaled$13.4 million and reduced the carrying value of our investment in the Diversified US/UK joint venture to$28.4 million as ofDecember 31, 2022 . Our assessment for the recoverability of our investment took into consideration the joint venture's post-COVID-19 underperformance, rising interest rates and the joint venture's ability to continue to service debt collateralized by substantially all of its domestically-located healthcare real estate. At this time, it is difficult to assess and estimate the continuing impact of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions. As the future impact will depend on many factors beyond our control and knowledge, the resulting effect on impairment of our operating real estate and investments in unconsolidated ventures may materially differ from our current expectations and further impairment charges may be recorded in the future. 44
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Table of Contents Results of Operations Comparison of the Year EndedDecember 31, 2022 toDecember 31, 2021 (dollars in thousands) Year Ended December 31, Increase (Decrease) 2022 2021 Amount % Property and other revenues Resident fee income$ 44,274 105,955 (61,681) (58.2) % Rental income 139,841 137,322 2,519 1.8 % Other revenue 1,021 - 1,021 NA Total property and other revenues 185,136 243,277 (58,141) (23.9) % Interest income Interest income on debt investments - 4,667 (4,667) (100.0) %
Expenses
Property operating expenses 137,578 177,936 (40,358) (22.7) % Interest expense 43,278 61,620 (18,342) (29.8) % Transaction costs 1,569 54 1,515 2,805.6 % Asset management fees - related party 8,058 11,105 (3,047) (27.4) % General and administrative expenses 13,938 12,691 1,247 9.8 % Depreciation and amortization 38,587 54,836 (16,249) (29.6) % Impairment loss 45,299 5,386 39,913 741.1 % Total expenses 288,307 323,628 (35,321) (10.9) % Other income, net 77 7,278 (7,201) (98.9) % Realized gain (loss) on investments and other 1,029 79,477 (78,448) (98.7) % Equity in earnings (losses) of unconsolidated ventures 47,625 15,843 31,782 200.6 % Income tax expense (61) (99) 38 (38.4) % Net income (loss)$ (54,501) $ 26,815 $ (81,316) (303.2) % Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 44,274 $ 40,668 $ 3,606 8.9 %
Properties sold - 65,287 (65,287) (100.0) %
Total resident fee income $ 44,274 $ 105,955 $ (61,681) (58) %
Resident fee income decreased $61.7 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):
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Same store ILF properties (excludes
properties sold) $ 138,245 $ 122,614 $ 15,631 12.7 %
Same store net lease properties (excludes
properties sold)
Rental payments 1,596 3,449 (1,853) (53.7) %
Straight-line rental income (loss) - (7,350) 7,350 (100.0) %
Total same store net lease properties
(excludes properties sold) 1,596 (3,901) 5,497 (140.9) %
Properties sold - 18,609 (18,609) (100.0) %
Total rental income $ 139,841 $ 137,322 $ 2,519 1.8 %
Overall, rental income increased by
Excluding properties sold, rental income increased by$21.1 million primarily as a result of improved occupancy at our ILFs during the year endedDecember 31, 2022 and the write-off of straight-line rent receivables at our Arbors portfolio during 2021. Other Revenue
Other revenue consists of interest earned on uninvested cash balances during the
year ended
Interest Income on Debt Investments
There was no interest income on debt investments recognized during the year
ended
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 36,469 $ 30,384 $ 6,085 20.0 %
ILF properties 100,303 89,970 10,333 11.5 %
Net lease properties 39 29 10 34.5 %
COVID-19 related expenses 407 2,528 (2,121) (83.9) %
Properties sold 360 55,025 (54,665) (99.3) %
Total Property operating expenses $ 137,578 $ 177,936 $ (40,358) (22.7) %
Overall, total operating expenses decreased
Excluding properties sold, operating expenses increased$14.3 million , primarily a result of labor costs. Higher occupancy and inflationary pressures impacted significantly all variable operating costs, most notably utilities and food and beverage costs. Additionally, the resumption of normalized business operations has allowed our operators to complete deferred repairs and maintenance projects. 46
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Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 5,954 $ 5,562 $ 392 7.0 %
ILF properties 33,715 33,000 715 2.2 %
Net lease properties 3,609 3,699 (90) (2.4) %
Properties sold - 18,618 (18,618) (100.0) %
Corporate - 741 (741) (100.0) %
Total interest expense $ 43,278 $ 61,620 $ (18,342) (29.8) %
Interest expense decreased $18.3 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 year endedDecember 31, 2022 included$1.5 million for legal and professional fees incurred to complete the Internalization, as well as$0.1 million for costs associated with transition services provided by the Former Advisor to facilitate an orderly transition of the management of our operations.
Asset Management Fees -
In connection with the Internalization, the advisory agreement was terminated onOctober 21, 2022 , as a result asset management fees decreased by$3.0 million for the year endedDecember 31, 2022 as compared toDecember 31, 2021 . Under our new internalized structure, we directly incur and pay all operating costs. General and administrative expenses increased$1.2 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to the Former 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):
Year Ended December 31, Increase (Decrease)
2022 2021 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 7,171 $ 6,995 $ 176 2.5 %
ILF properties 28,087 29,306 (1,219) (4.2) %
Net lease properties 3,329 3,444 (115) (3.3) %
Properties sold - 15,091 (15,091) (100.0) %
Total depreciation and amortization $ 38,587 $ 54,836 $ (16,249) (29.6) %
Depreciation and amortization expense decreased $16.2 million , primarily as a
result of properties sold during the year ended December 31, 2021 , as well as
impairments recognized during the years ended December 31, 2022 and 2021, which
reduced building depreciation expense in 2022.
Impairment Loss
During the year endedDecember 31, 2022 , impairment losses on operating real estate totaled$31.9 million and impairment losses recorded on unconsolidated ventures investments totaled$13.4 million . Refer to "-Impairment" for additional discussion. During the year endedDecember 31, 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 . 47
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Table of Contents Other Income, Net Other income, net for the year endedDecember 31, 2022 consisted of$0.1 million in COVID-19 testing reimbursements received and recognized at our Avamere portfolio. For the year endedDecember 31, 2021 , other income, net consisted of$7.7 million in federal COVID-19 provider relief grants from theU.S. Department of Health and Human Services , or HHS, 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 year ended
During the year endedDecember 31, 2021 , we recognized net gains on real estate property sales, which totaled$84.0 million and were partially offset by$8.7 million of debt extinguishment losses. In addition, we recognized gains on distributions that exceeded our carrying value for our investments in the Espresso and Envoy joint ventures, which totaled$4.4 million .
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Year Ended December 31,
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)
Eclipse $ (3,176) $ 2,130 $ 2,851 $ (1,563) $ (325) $ 567 $ (892) (157.3) %
Envoy - 740 - (744) - (4) 4 (100.0) %
Diversified US/UK (33,280) (3,676) 36,030 17,441 2,750 13,765 (11,015) (80.0) %
Espresso 72,427 19,619 (66,393) (9,690) 6,034 9,929 (3,895) (39.2) %
Trilogy 11,652 (2,891) 11,966 15,033 23,618 12,142 11,476 94.5 %
Subtotal $ 47,623 $ 15,922 $ (15,546) $ 20,477 $ 32,077 $ 36,399 $ (4,322) (11.9) %
Solstice 2 (79) - 2 2 (77) 79 (102.6) %
Total $ 47,625 $ 15,843 $ (15,546) $ 20,479 $ 32,079 $ 36,322 $ (4,243) (11.7) %
_______________________________________
(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$31.8 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 year endedDecember 31, 2022 exceeded the gains recognized on property sales in the Espresso and Eclipse joint ventures during the year endedDecember 31, 2021 . The increase was offset by real estate impairments recorded by the Diversified US/UK and Eclipse joint ventures. Equity in earnings, after FFO and MFFO adjustments, decreased by$4.2 million as a result of lower rental income recognized in the Diversified US/UK and Espresso joint ventures, partially offset by improvements in the Trilogy joint venture during the year endedDecember 31, 2022 . 48
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Comparison of the Year EndedDecember 31, 2021 toDecember 31, 2020 (dollars in thousands): Year Ended December 31, Increase (Decrease) 2021 2020 Amount % Property and other revenues Resident fee income$ 105,955 $ 118,126 $ (12,171) (10.3) % Rental income 137,322 157,024 (19,702) (12.5) % Other revenue - 198 (198) (100.0) % Total property and other revenues 243,277 275,348 (32,071) (11.6) % Interest income Interest income on debt investments 4,667 7,674 (3,007) (39.2) %
Expenses
Property operating expenses 177,936 184,178 (6,242) (3.4) % Interest expense 61,620 65,991 (4,371) (6.6) % Transaction costs 54 65 (11) (16.9) % Asset management fees - related party 11,105 17,170 (6,065) (35.3) % General and administrative expenses 12,691 16,505 (3,814) (23.1) % Depreciation and amortization 54,836 65,006 (10,170) (15.6) % Impairment loss 5,386 165,968 (160,582) (96.8) % Total expenses 323,628 514,883 (191,255) (37.1) % Other income, net 7,278 1,840 5,438 295.5 % Realized gain (loss) on investments and other 79,477 302 79,175 26,216.9 % Equity in earnings (losses) of unconsolidated ventures 15,843 (34,466) 50,309 (146.0) % Income tax expense (99) (53) (46) 86.8 % Net income (loss)$ 26,815 $ (264,238) $ 291,053 (110.1) % Resident Fee Income
The following table presents resident fee income generated by our direct investments (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2021 2020 Amount %
Same store ALF/MCF properties (excludes
properties sold) $ 40,668 $ 39,800 $ 868 2.2 %
Properties sold 65,287 78,326 (13,039) (16.6) %
Total resident fee income $ 105,955 $ 118,126 $ (12,171) (10) %
Resident fee income decreased $12.2 million as a result of property sales in the
year ended December 31, 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
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Rental Income
The following table presents rental income generated by our direct investments
(dollars in thousands):
Year Ended December 31, Increase (Decrease)
2021 2020 Amount %
Same store ILF properties (excludes
properties sold) $ 122,614 $ 124,125 $ (1,511) (1.2) %
Same store net lease properties (excludes
properties sold)
Rental payments 3,449 10,139 (6,690) (66.0) %
Straight-line rental income (loss) (7,350) 476 (7,826) (1,644.1) %
Total same store net lease properties
(excludes properties sold) (3,901) 10,615 (14,516) (136.7) %
Properties sold 18,609 22,284 (3,675) (16.5) %
Total rental income $ 137,322 $ 157,024 $ (19,702) (12.5) %
Rental income decreased $19.7 million primarily due to the operator of our
Arbors net lease portfolio not remitting full contractual rent during the year
ended December 31, 2021 , which also resulted in the write-off of straight-line
rent receivables. Limited move-ins and elevated move-outs throughout the first
half of 2021 resulted in lower average occupancy and rental income recognized by
our ILFs. Additionally, the Watermark Fountains net lease portfolio was sold in
December 2021 and recognized lower contractual rent in 2021 under the amended
terms of the lease.
Other Revenue
Other revenue is primarily interest earned on uninvested cash, which was impacted by a decline in market interest rates.
Interest Income on Debt Investments
During the year endedDecember 31, 2021 , interest income generated by our mezzanine loan debt investment decreased as a result of receiving the full repayment of outstanding principal inAugust 2021 . The borrower funded principal repayments through net proceeds generated from the sale of underlying collateral and available operating cash flow.
Property Operating Expenses
The following table presents property operating expenses incurred by our direct investments (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2021 2020 Amount %
Same store (excludes properties sold and
COVID-19 related expenses)
ALF/MCF properties $ 30,384 $ 27,866 $ 2,518 9.0 %
ILF properties 89,970 83,172 6,798 8.2 %
Net lease properties 29 13 16 123.1 %
COVID-19 related expenses 2,528 5,725 (3,197) (55.8) %
Properties sold 55,025 67,402 (12,377) (18.4) %
Total Property operating expenses $ 177,936 $ 184,178 $ (6,242) (3.4) %
Overall, total operating expenses decreased $6.2 million primarily as a result
of property sales in the year ended December 31, 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 . Additionally, COVID-19
related expenses were lower during the year ended December 31, 2021 as compared
to 2020.
Excluding properties sold and COVID-19 related expenses, operating expenses
increased $9.3 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, the resumption of normalized business operations has allowed our
operators to complete deferred repairs and maintenance projects.
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Interest Expense
The following table presents interest expense incurred on our borrowings
(dollars in thousands):
Year Ended December 31, Increase (Decrease)
2021 2020 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 5,562 $ 5,688 $ (126) (2.2) %
ILF properties 33,000 34,151 (1,151) (3.4) %
Net lease properties 3,699 3,797 (98) (2.6) %
Properties sold 18,618 21,406 (2,788) (13.0) %
Corporate 741 949 (208) (21.9) %
Total interest expense $ 61,620 $ 65,991 $ (4,371) (6.6) %
Interest expense decreased $4.4 million primarily as a result of the repayment
of mortgage notes payable which were collateralized by properties sold during
the year ended December 31, 2021 . In addition, average mortgage notes principal
balances decreased during the year ended December 31, 2021 due to continued
principal amortization, while lower LIBOR reduced interest expense on our
floating-rate debt. Corporate interest expense represents interest resulting
from the borrowings under our Sponsor Line, which was repaid in full in July
2021 .
Asset Management Fees -
Prior to the termination of the advisory agreement, the Former Advisor received a monthly asset management fee equal to one-twelfth of 1.5% of our most recently published aggregate estimated net asset value. Asset management fees decreased$6.1 million as a result of the estimated net asset value effectiveDecember 2020 decreasing from the previous estimated net asset value effectiveDecember 2019 .
General and Administrative Expenses
General and administrative expenses decreased$3.8 million primarily as a result of amortizing our directors' and officers' insurance premium incurred and reimbursed to the Former Advisor over the term of the policy, beginning inDecember 2021 . The policy premium was expensed as incurred by the Former Advisor during the year endedDecember 31, 2020 . In addition, we incurred non-operating costs at a property within the Watermark Fountains net lease portfolio during the year endedDecember 31, 2020 .
Depreciation and Amortization
The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2021 2020 Amount %
Same store (excludes properties sold)
ALF/MCF properties $ 6,995 $ 7,443 $ (448) (6.0) %
ILF properties 29,306 30,167 (861) (2.9) %
Net lease properties 3,444 3,444 - - %
Properties sold 15,091 23,952 (8,861) (37.0) %
Total depreciation and amortization $ 54,836 $ 65,006 $ (10,170) (15.6) %
Depreciation and amortization expense decreased $10.2 million , primarily as a
result of properties sold during the year ended December 31, 2021 , as well as
impairments recognized during the year ended December 31, 2020 , which reduced
building depreciation expense in 2021.
Impairment Loss
During the year endedDecember 31, 2021 , impairment losses on operating real estate totaled$5.4 million , consisting of$4.6 million recognized for one facility within our Winterfell portfolio and$0.8 million for our Smyrna net lease property, which was sold inMay 2021 . During the year endedDecember 31, 2020 , impairment losses totaling$166.0 million were recorded, consisting of$84.9 million recognized for nine facilities within our Winterfell portfolio,$4.2 million for a facility within the Avamere portfolio,$12.5 million for two facilities within the Rochester portfolio and$64.4 million for properties that were sold in 2021. 51
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Table of Contents Other Income, Net Other income, net for the year endedDecember 31, 2021 consisted of$7.7 million in federal COVID-19 provider relief grants from HHS, partially offset by a$0.5 million non-operating loss recognized at a property within the Watermark Fountains portfolio. During the year endedDecember 31, 2020 ,$1.8 million in federal COVID-19 provider relief grants from HHS were received and recognized.
Realized Gain (Loss) on Investments and Other
Real estate property sales during the year endedDecember 31, 2021 resulted in net realized gains, which totaled$84.0 million and were partially offset by debt extinguishment losses, which totaled$8.7 million . In addition, we recognized gains on distributions that exceeded our carrying value for our investments in the Espresso and Envoy joint ventures, which totaled$4.4 million .
During the year ended
Equity in Earnings (Losses) of
The following table presents the results of our unconsolidated ventures (dollars
in thousands):
Year Ended December 31 , Year Ended December 31,
2021 2020 2021 2020 2021 2020 2021 2020
Equity in Earnings, after FFO
Portfolio Equity in Earnings (Losses) FFO and MFFO adjustments(1) and MFFO adjustments Increase (Decrease) Cash DistributionsEclipse$ 2,130 $ (3,774) $ (1,563) $ 4,769 $ 567 $ 995 $ (428) (43.0) %$ 2,898 $ 86 Envoy 740 (7) (744) - (4) (7) 3 (42.9) % 817 390 Diversified US/UK (3,676) (35,396) 17,441 47,177 13,765 11,781 1,984 16.8 % 4,257 1,487 Espresso 19,619 270 (9,690) 9,415 9,929 9,685 244 2.5 % 5,500 - Trilogy (2,891) 4,495 15,033 13,617 12,142 18,112 (5,970) (33.0) % 4,638 3,960 Subtotal$ 15,922 $ (34,412) $ 20,477 $ 74,978 $ 36,399 $ 40,566 $ (4,167) (10.3) %$ 18,110 $ 5,923 Solstice (79) (54) 2 - (77) (54) (23) 42.6 % - - Total$ 15,843 $ (34,466) $ 20,479 $ 74,978 $ 36,322 $ 40,512 $ (4,190) (10.3) %$ 18,110 $ 5,923
_______________________________________
(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. We recognized equity in earnings from our investments in unconsolidated investments during the year endedDecember 31, 2021 , primarily due to realized gains on property sales in the Eclipse and Espresso joint ventures, as compared to losses recognized during the year endedDecember 31, 2020 primarily due to real estate impairments recorded by the Diversified US/UK , Trilogy and Eclipse joint ventures. Equity in earnings, after FFO and MFFO adjustments, decreased by$4.2 million as a result of lower COVID-19 provider relief grants received and recognized by the Trilogy joint venture, partially offset by lower tax expense recognized in the Diversified US/UK portfolio for the year endedDecember 31, 2021 .
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or NAREIT, as net income (loss) (computed in accordance withU.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures. 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 52
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disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. 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. We define MFFO in accordance with the concepts established by the IPA. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's operating performance. The IPA's definition of MFFO excludes from FFO the following items:
•acquisition fees and expenses;
•non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting underU.S. GAAP to a cash basis of accounting);
•amortization of a premium and accretion of a discount on debt investments;
•non-recurring impairment of real estate-related investments that meet the
specified criteria identified in the rules and regulations of the
•realized gains (losses) from the early extinguishment of debt;
•realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;
•unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;
•unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;
•adjustments related to contingent purchase price obligations; and
•adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.
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 upon completion of our organization and offering, and acquisition and development stages. 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 determined not to pursue an exit strategy. MFFO does have certain limitations. For instance, 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. 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. 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. 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. 53
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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):
Year Ended December 31,
2022 2021 2020
Funds from operations:
Net income (loss) attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (54,100) $ 25,067 $ (261,458)
Adjustments:
Depreciation and amortization 38,587 54,836 65,006
Depreciation and amortization related to
non-controlling interests (286) (480) (647)
Depreciation and amortization related to
unconsolidated ventures 28,855 30,054 31,999
Realized (gain) loss from sales of property 92 (83,873) -
Realized gain (loss) from sales of property
related to non-controlling interests (5) 2,092 -
Realized (gain) loss from sales of property
related to unconsolidated ventures (92,578) (31,314) (320)
Impairment losses of depreciable real estate 31,880 5,386 165,968
Impairment loss on real estate related to
non-controlling interests (117) - (2,253)
Impairment losses of depreciable real estate held
by unconsolidated ventures 25,109 1,494 37,893
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (22,563) $ 3,262 $ 36,188
Modified funds from operations:
Funds from operations attributable to NorthStar
Healthcare Income, Inc. common stockholders $ (22,563) $ 3,262 $ 36,188
Adjustments:
Transaction costs 1,569 54 65
Straight-line rental (income) loss - 7,803 441
Amortization of premiums, discounts and fees on
investments and borrowings 3,859 4,177 4,975
Realized (gain) loss on investments and other (1,121) 4,396 (302)
Adjustments related to unconsolidated ventures(1) 23,068 20,245 5,406
Adjustments related to non-controlling interests 3 (212) (48)
Impairment of real estate related investment 13,419 - -
Modified funds from operations attributable to
NorthStar Healthcare Income, Inc. common
stockholders $ 18,234 _______________________________________
(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. 54
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As of
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 receive distributions from our investments in unconsolidated ventures. Net cash provided by operating activities was$7.8 million for the year endedDecember 31, 2022 . We have utilized cash reserves generated from asset realizations to fund debt service payments, including principal amortization, 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,Arcadia , has been impacted by the same factors discussed above, which has affected its ability to pay rent.Arcadia has been unable to satisfy its obligations under its leases sinceFebruary 2021 , and instead remits rent and pays property-level expenses based on its available cash. We are in discussions withArcadia regarding the rent shortfalls and resulting defaults under the leases. However, we expect rent shortfalls to continue in the near-term, in varying amounts based on the property's performance, and may also directly incur operating expenses to the extentArcadia is unable to generate sufficient cash flow. We have significant joint ventures and will not be able to control the timing of distributions, if any, from these investments. As ofDecember 31, 2022 , our unconsolidated joint ventures and consolidated joint ventures represented 12.9% and 19.6%, respectively, of our total investments, based on carrying value. 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 ofDecember 31, 2022 , we had$922.4 million of consolidated asset-level borrowings outstanding. Fixed-rate borrowings totaled$792.0 million with interest rates ranging from 3.0% to 4.6%. Floating-rate borrowings totaled$130.3 million and are subject to fluctuating LIBOR or the SOFR. As ofDecember 31, 2022 , effective interest rates on floating rate debt ranged from 6.48% to 7.22%. During the year endedDecember 31, 2022 , we paid$56.4 million in recurring principal and interest payments on borrowings. As ofDecember 31, 2022 , our Winterfell portfolio had$596.4 million of borrowings outstanding, which matures inJune 2025 . As the impact of inflation, rising interest rates, risk of recession and other economic market conditions continue to influence our investments' performance, our ability to service or refinance our borrowings may be negatively impacted and we may experience defaults in the future. As mentioned above, the operator of the Arbors net lease portfolio has defaulted under its lease obligations, which resulted in a non-monetary default under the mortgage notes collateralized by the properties as ofDecember 31, 2022 . To the extent that we do not receive sufficient rent fromArcadia to cover the contractual debt service on this portfolio, we are funding any shortfalls and are otherwise in compliance with the contractual terms under the mortgage notes collateralized by the properties. 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. 55
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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 ofDecember 31, 2022 , our leverage was 55.3% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As ofDecember 31, 2022 , indirect leverage on assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation, held through our unconsolidated joint ventures was 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 II, Item 8. "Financial Statements."
Capital Expenditures Activities
We are responsible for capital expenditures for our operating properties and may also fund capital expenditures for our net lease properties. We continue to invest capital into our direct investments 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.
The following table presents cash used for capital expenditures at our direct investments (dollars in thousands):
Year Ended December 31,
2022 vs. 2021 2021 vs. 2020
2022 2021 2020 Change Change
Same store (excludes
properties sold)
ALF/MCF properties $ 3,310 $ 2,696 $ 1,604 $ 614 $ 1,092
ILF properties 25,622 16,427 10,032 9,195 6,395
Net lease properties 372 - - 372 -
Properties sold - 8,650 3,578 (8,650) 5,072
Total capital expenditures
15,214
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 our properties' performance, there may be a negative impact on our ability to generate desired returns on dispositions. The current state of the public and private capital markets, which have been affected by a general tightening of availability of credit (including the price, terms and conditions under which it can be obtained), and decreased liquidity in certain financial markets, has resulted in limited transaction activity and may limit our ability to execute on our strategy of disposing of investments. We have made significant investments through both consolidated and unconsolidated joint ventures with third parties. We have limited ability to influence material decisions at our unconsolidated joint ventures, including the disposition of assets. During the year endedDecember 31, 2022 , our Espresso joint venture distributed the net proceeds generated from sub-portfolios sales, of which our proportionate share totaled$49.7 million .
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.
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Table of Contents 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
Cash Flows
The following presents a summary of our consolidated statements of cash flows
(dollars in thousands):
Year Ended December 31,
2022 vs. 2021 2021 vs. 2020
Cash flows provided by (used in): 2022 2021 2020 Change Change
Operating activities $ 7,824 $ (6,438)
15,538 661,826 (8,415) (646,288) 670,241
Financing activities (118,640) (538,020) 12,147 419,380 (550,167)
Net increase (decrease) in cash,
cash equivalents and restricted
cash $ (95,278) $ 117,368
Year Ended
Operating Activities
Net cash provided by operating activities totaled$7.8 million for the year endedDecember 31, 2022 , as compared to$6.4 million net cash used in operating activities for the year endedDecember 31, 2021 . The change in cash flow from operating activities was a result of distributions received from our unconsolidated investment in the Espresso joint venture, which have been classified as operating cash flows to the extent positive earnings were recognized by the joint venture. For the year endedDecember 31, 2022 , we classified$22.3 million of distributions from our Espresso joint venture as operating cash flows. Excluding these distributions, cash flow from operations has declined during the year endedDecember 31, 2022 as a result of portfolio sales during the year endedDecember 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$15.5 million for the year endedDecember 31, 2022 as compared to$661.8 million for the year endedDecember 31, 2021 . Cash flows provided by investing activities for the year endedDecember 31, 2022 were from distributions received from our unconsolidated investments, other than those distributions classified as operating cash flows, which totaled$44.8 million and$18.1 million for the years endedDecember 31, 2022 and 2021, respectively. 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 year endedDecember 31, 2021 were from property sales and collection of outstanding principal on our real estate debt investment.
On a same store basis, capital expenditures increased during the year ended
Financing Activities
Cash flows used in financing activities were$118.6 million for the year endedDecember 31, 2022 compared to$538.0 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 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 year 57
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endedDecember 31, 2021 were primarily the repayment of mortgage notes payable collateralized by properties sold during the year, the repayment of the borrowings under the Sponsor Line and continued principal amortization on our mortgage notes. 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.
Year Ended
Operating Activities
Net cash used in operating activities totaled$6.4 million for the year endedDecember 31, 2021 , as compared to$31.0 million net cash provided by operating activities for the year endedDecember 31, 2020 . The change in cash flow from operating activities was a result of the following:
•declines in average occupancy, which resulted in lower rent and resident fees collected;
•less contractual rent collected from direct net lease investment operators; and
•higher payments for property operating expenses, general and administrative expenses and mortgage payable interest, as a result of debt service that was deferred during the year endedDecember 31, 2020 .
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$661.8 million for the year endedDecember 31, 2021 as compared to$8.4 million net cash used for the year endedDecember 31, 2020 . Cash flows provided by investing activities for the year endedDecember 31, 2021 were from property sales and principal repayments on our real estate debt investment. Cash inflows were used to fund recurring capital expenditures for existing investments and for general operations. Cash flows used in investing activities for the year endedDecember 31, 2020 were primarily recurring capital expenditures for existing investments. Recurring capital expenditures have increased during the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 as a result of the resumption of normalized business operations allowing our operators to complete deferred capital improvements.
Financing Activities
For the year endedDecember 31, 2021 , net cash flows used in financing activities were primarily the repayment of mortgage notes payable collateralized by properties sold during the year, the repayment of the borrowings under the Sponsor Line and continued principal amortization on our mortgage notes. Cash outflows were partially offset by the refinancing of a mortgage note payable for a property within our Aqua portfolio, which generated$6.5 million in net proceeds. Cash flows used in financing activities was$538.0 million for the year endedDecember 31, 2021 compared to$12.1 million cash flows provided by financing activities for the year endedDecember 31, 2020 . Cash flows provided by financing activities during the year endedDecember 31, 2020 , were primarily the$35.0 million borrowed under the Sponsor Line, partially offset by principal amortization payments on mortgage notes and repurchases of shares under our Share Repurchase Program.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in unconsolidated ventures. Refer to Note 4, "Investments inUnconsolidated Ventures " in Part II. Item 8. "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.
Distributions Declared and Paid
From inception throughDecember 31, 2022 , we declared$530.9 million in distributions, inclusive of the recent Special Distribution, and generated cumulative FFO of$109.3 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 approximately$97.1 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. 58
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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
Former Advisor
Prior to the Internalization, the Former 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 Former Advisor received fees and reimbursements from us. Pursuant to the advisory agreement, the Former Advisor could defer or waive fees in its discretion.
In connection with the Internalization, the advisory agreement was terminated on
Fees to Former Advisor Asset ManagementFee Prior to the termination of the advisory agreement, the Former 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 subject to adjustments for any special distribution declared by our board of directors in connection with a sale, transfer or other disposition of a substantial portion of our assets. EffectiveJuly 1, 2021 , the asset management fee 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. 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. As ofDecember 31, 2022 , there was no outstanding asset management fee due to the Former Advisor as a result of the termination of the advisory agreement. Acquisition Fee
Effective
Disposition Fee
Effective
Reimbursements to Former Advisor
Operating Costs
Under our new internalized structure, we directly incur and pay all operating
costs. Prior to the termination of the advisory agreement, the Former Advisor
was entitled to receive reimbursement for direct and indirect operating costs
incurred by the Former Advisor in connection with administrative services
provided to us. The Former Advisor allocated, in good faith, indirect costs to
us related to the Former 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
Former Advisor. The indirect costs included our allocable share of the Former
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 Former
Advisor was permissible) and other personnel involved in activities for which
the Former Advisor received an acquisition fee or a disposition fee. The Former
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 Former 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.
Total operating costs (including the asset management fee) reimbursable to our
Former Advisor were limited 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
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above, we were able to incur expenses in excess of this limitation if a majority of our independent directors determined that such excess expenses were justified based on unusual and non-recurring factors. For the year endedDecember 31, 2022 , total operating expenses included in the 2%/25% Guidelines represented 0.9% of average invested assets and 65.6% of net income, as defined above. As ofDecember 31, 2022 , the Former Advisor did not have any unreimbursed operating costs which remained eligible to be allocated to us.
Transition Services
In connection with the Internalization, onOctober 21, 2022 , we, theOperating Partnership and the Former Advisor entered into a Transition Services Agreement, orTSA , to facilitate an orderly transition of the management of our operations. TheTSA , as amended from time to time, provides for, among other things, the Former Advisor to provide certain services, including primarily technology and insurance, for a transition period of up to six months following the Internalization, with legal, treasury and accounts payable services to continue until either party terminates these services in accordance with theTSA . We will reimburse the Former Advisor for costs to provide the services, including the allocated cost of employee wages and compensation and actually incurred out-of-pocket expenses.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred and paid to the Former Advisor (dollars in thousands):
Due to Related
Due to Related Year Ended December 31, 2022 Party as of
Party as of December 31,
Type of Fee or Reimbursement Financial Statement Location December 31, 2021 Incurred Paid 2022Fees to Former Advisor Entities
Asset management(1) Asset management fees-related party
$ 937
-
Reimbursements to Former Advisor Entities(2)
General and administrative
Operating costs expenses/Transaction costs 6,401 9,258 (3) (15,190) 469
Total $ 7,338 $ 17,316 $ (24,185) $ 469
_______________________________________
(1)As a result of the termination of the advisory agreement onOctober 21, 2022 , there were no outstanding asset management fees due to the Former Advisor as ofDecember 31, 2022 . Asset management fees paid through the year endedDecember 31, 2022 include a$0.1 million gain recognized on the settlement of the share-based payment. (2)For the year endedDecember 31, 2022 , we did not incur any offering costs. (3)Includes$0.1 million for costs incurred under theTSA during the year endedDecember 31, 2022 . Due to Related Year Ended December 31, 2021 Due to Related Party as of Party as of Type of Fee or Reimbursement Financial Statement Location December 31, 2020 Incurred Paid December 31, 2021 Fees to Former Advisor Entities Asset management(1) Asset management fees-related party
$ 923
937
Reimbursements to Former Advisor Entities(2)
Operating costs General and administrative
expenses 7,395 14,035 (15,029) 6,401
Total $ 8,318 $ 25,140 $ (26,120) $ 7,338 _______________________________________
(1)Includes
During the year endedDecember 31, 2022 , we issued 2.3 million shares totaling$8.9 million based on the estimated value per share on the date of each issuance, to an affiliate of the Former Advisor as part of its asset management fee, prior to the termination of the advisory agreement. As ofDecember 31, 2022 , the Former Advisor, the Former Sponsor and their affiliates owned a total of 9.7 million shares, or$28.4 million of our common stock based on our most recent estimated value per share. As ofDecember 31, 2022 , the Former Advisor, the Former Sponsor and their affiliates owned 4.97% of the total outstanding shares of our common stock.
Incentive Fee
NorthStar Healthcare Income OP Holdings, LLC , an affiliate of the Former 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 60
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capital plus a 6.75% cumulative, non-compounded annual pre-tax return on such invested capital. From inception throughDecember 31, 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 own 80.0%, and us, who owns 20.0%. For the year endedDecember 31, 2022 , we recognized property management fee expense of$5.6 million paid to Solstice related to the Winterfell portfolio. The below table indicates our investments for which the Former 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 "-Business Update" and Note 4, "Investments inUnconsolidated Ventures " of Part II, Item 8. "Financial Statements" for further discussion of these investments: Portfolio Partner(s) Acquisition Date Ownership NRF and Partner/ Eclipse Formation Capital, LLC May 2014 5.6% Diversified US/UK NRF and Partner December 2014 14.3%
Line of Credit -
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 ofDecember 31, 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.
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