UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Smaller reporting company | ||
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of August 7, 2023, we had
FORM 10-Q
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, | December 31, | |||||
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ASSETS |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Real estate properties, net |
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Intangible lease assets, net |
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Tenant and other receivables, net |
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Other assets, net |
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Equity-method investments |
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Total assets | $ | | $ | | ||
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LIABILITIES AND EQUITY |
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Accounts payable and accrued liabilities | $ | | $ | | ||
Security deposits |
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Loans payable, net of debt issuance costs |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity | $ | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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June 30, |
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Revenues: |
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Total rental revenues | $ | | $ | | $ | | $ | | ||||
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Total operating revenue |
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Expenses: |
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Property operating costs |
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General and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Operating income |
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Income (loss) from equity-method investees |
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Other income |
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Interest expense |
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Net loss |
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Noncontrolling interests’ share in net (income) loss |
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Net loss applicable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||
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Basic and diluted loss per common share: |
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Net loss applicable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average shares used to calculate basic and diluted earnings per common share |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
Common Stock | ||||||||||||||||||||
Common | ||||||||||||||||||||
Number | Stock | Additional | Total | |||||||||||||||||
of | Par | Paid-In | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||
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| Deficit |
| Equity |
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Balance — January 1, 2023 |
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Stock-based compensation |
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Distributions paid to noncontrolling interests |
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Net (loss) income |
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Balance — March 31, 2023 | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Stock-based compensation | | | | |||||||||||||||||
Distributions paid to noncontrolling interests | | | ( | ( | ||||||||||||||||
Net (loss) income | ( | ( | | ( | ||||||||||||||||
Balance — June 30, 2023 | | $ | | $ | | $ | ( | $ | | $ | | $ | |
Common Stock | ||||||||||||||||||||
Common | ||||||||||||||||||||
Number | Stock | Additional | Total | |||||||||||||||||
of | Par | Paid-In | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||
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| Deficit |
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Balance — January 1, 2022 |
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Stock-based compensation |
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Distributions paid to noncontrolling interests |
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Net (loss) income |
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Balance — March 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Stock-based compensation | | | | | | |||||||||||||||
Distributions paid to noncontrolling interests | | | | ( | ( | |||||||||||||||
Net (loss) income | | | | ( | ( | | ( | |||||||||||||
Balance — June 30, 2022 | | $ | | $ | | $ | ( | $ | | $ | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, | ||||||
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Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Amortization of debt issuance costs |
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Depreciation and amortization |
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Amortization of above-market lease intangible | | | ||||
Straight-line rents |
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Stock-based compensation expense |
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(Income) loss from equity-method investees |
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Change in operating assets and liabilities: |
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Tenant and other receivables, net |
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Other assets, net |
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Accounts payable and accrued liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Additions to real estate and other assets |
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Investment in equity-method investees |
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Distributions received from equity-method investees |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Payments of loans payable |
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Distributions paid to noncontrolling interests |
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Deferred financing costs | ( | — | ||||
Net cash used in financing activities |
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Net (decrease) increase in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash – beginning of period |
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Cash, cash equivalents and restricted cash – end of period | $ | | $ | | ||
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Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
1. Organization
Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns
We conduct substantially all of our operations through the Operating Partnership, which is a Delaware limited partnership. We own a
Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
Cornerstone Healthcare Partners LLC – Consolidated Joint Venture
We own
Summit Union Life Holdings, LLC – Equity-Method Investment
In April 2015, through our Operating Partnership, we entered into a limited liability company agreement with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2023 and December 31, 2022, we have a
Summit Fantasia Holdings, LLC – Equity-Method Investment
In September 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia I JV”). The Fantasia I JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2023 and December 31, 2022, we have a
Summit Fantasia Holdings II, LLC – Equity-Method Investment
In December 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2023 and December 31, 2022, we have a
7
Summit Fantasia Holdings III, LLC– Equity-Method Investment
In July 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2023 and December 31, 2022, we have a
Summit Fantasy Pearl Holdings, LLC– Equity-Method Investment
In October 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2023 and December 31, 2022, we have a
Taxable REIT Subsidiaries
Summit Healthcare Asset Management, LLC
Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia I JV, Fantasia II JV, Fantasia III JV, and FPH JV (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.
SHOP TRS LLC
SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary that is the sole member for two of our
Coronavirus (COVID-19)
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. In 2022, two of our tenants experienced a material adverse effect on their operations related to COVID-19, which affected their ability to make rent payments in 2022 and resulted in the termination of the leases and becoming Operated Properties (see Note 3 for further information). Additionally, see Note 5 for further discussion related to our Equity-Method Investments.
The extent to which COVID-19 could continue to impact our business, cash flow and results of operations is highly uncertain and cannot be predicted with confidence. The fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses in future periods.
2. Summary of Significant Accounting Policies
For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023.
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The accompanying condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2022 consolidated financial statements and contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2022 have been omitted in this report.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows | $ | | $ | |
3. Investments in Real Estate Properties
As of June 30, 2023 and December 31, 2022, our investments in real estate properties, including those held by our consolidated subsidiaries (excluding the 35 properties owned by our unconsolidated Equity-Method Investments), are set forth below:
June 30, | December 31, | |||||
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| 2022 | |||
Land | $ | | $ | | ||
Buildings and improvements |
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Less: accumulated depreciation |
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Buildings and improvements, net |
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Furniture and fixtures |
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Less: accumulated depreciation |
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Furniture and fixtures, net |
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Real estate properties, net | $ | | $ | |
For the three months ended June 30, 2023 and 2022, depreciation expense (excluding lease intangibles amortization and leasing commission amortization) was approximately $
As of June 30, 2023, our portfolio consisted of
9
During 2022, our tenants for the Pennington Gardens and Sundial Assisted Living facilities experienced a material adverse effect on their operations related to COVID-19 and other operator issues that affected their ability to make their rent payments in 2022. As a result, we experienced the following impacts:
Pennington Gardens Operations LLC
In February 2022, our former tenant’s lease was terminated and we received approximately $
Sundial Operations LLC
In June 2022, our former tenant’s lease was terminated and we entered into a management agreement with a new operator that began operating the facility, Sundial Assisted Living. Concurrently, we entered into a new lease agreement with Sundial Operations LLC, the newly formed operating company for Sundial Assisted Living, which is a wholly owned subsidiary of SHOP TRS. As such, for the three and six months ended June 30, 2023 and for the period from June 7, 2022 through June 30, 2022, the operations of Sundial Assisted Living are consolidated in our financial statements and revenues from Sundial Assisted Living are recorded under resident fees and services and costs are recorded under resident costs in the condensed consolidated statements of operations.
The following table provides summary information regarding our portfolio (excluding the
Loans | ||||||||||||
Payable, | ||||||||||||
Excluding | ||||||||||||
Debt | ||||||||||||
Purchase | Issuance | |||||||||||
Property |
| Location |
| Date Purchased |
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| Price |
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Sheridan Care Center |
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Fernhill Care Center |
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Friendship Haven Healthcare and Rehabilitation Center |
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Pacific Health and Rehabilitation Center |
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Brookstone of Aledo |
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Sundial Assisted Living |
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Pennington Gardens |
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Yucaipa Hill Post Acute | | | ||||||||||
Creekside Post Acute | | | ||||||||||
University Post Acute | | | ||||||||||
Calhoun Health Center | | | ||||||||||
Maple Ridge Health Care Center | | | ||||||||||
Chatsworth Health Care Center | | | ||||||||||
East Lake Arbor | | | ||||||||||
Fairburn Health Care Center | | | ||||||||||
Grandview Health Care Center | | | ||||||||||
Rosemont at Stone Mountain | | | ||||||||||
Willowwood Nursing Center & Rehab | | | ||||||||||
Total: |
| $ | | $ | |
(1) | SNF is an abbreviation for skilled nursing facility. |
AL is an abbreviation for assisted living facility.
MC is an abbreviation for memory care facility.
10
Future Minimum Lease Payments
The future minimum lease payments to be received under our existing tenant operating leases (excluding the 35 properties owned by our unconsolidated Equity-Method Investments and the intercompany lease between our wholly-owned subsidiaries: Summit Chandler LLC and Pennington Gardens, and HP Redding LLC and Sundial) as of June 30, 2023, for the period from July 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
Years ending |
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2024 |
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2025 |
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2026 |
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2027 |
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Thereafter |
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2023 Acquisitions
None.
2022 Acquisitions
None.
Impairment of Real Estate Properties
As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances.
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4. Loans Payable
As of June 30, 2023 and December 31, 2022, our loans payable consisted of the following:
| June 30, 2023 |
| December 31, 2022 | |||
Loans payable to Lument (formerly ORIX Real Estate Capital, LLC) (insured by HUD) in monthly installments of approximately $ | $ | | $ | | ||
Loan payable to Capital One Multifamily Finance, LLC (insured by HUD) in monthly installments of approximately $ | | | ||||
Loan payable to CIBC Bank, USA in monthly installments of approximately of $ | | | ||||
Loan payable to CIBC Bank, USA in monthly installments of approximately $ | | | ||||
Loan payable to Oxford Finance, LLC in monthly installments of approximately $ | | | ||||
Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $ | | | ||||
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Less debt issuance costs |
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Total loans payable | $ | | $ | |
As of June 30, 2023, we have total debt obligations of approximately $
During the three months ended June 30, 2023 and 2022, we incurred approximately $
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In connection with our loans payable, we incurred debt issuance costs. As of June 30, 2023 and December 31, 2022, the unamortized balance of the debt issuance costs was approximately $
During the three months ended June 30, 2023 and 2022, we incurred approximately $
The principal payments due on the loans payable (excluding debt issuance costs) for the period from July 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
Principal | |||
Years Ending |
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July 1, 2023 to December 31, 2023 | $ | | |
2024 |
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2025 |
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2026 |
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2027 |
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Thereafter |
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The following information notes our loan activity:
CA3 Properties
In 2021, we entered into a first priority $
GA8 Properties
In 2021, we acquired our interest in the GA8 Properties subject to a $
HUD-insured loans
We have six properties with HUD-insured loans from Lument Capital (formerly ORIX Real Estate Capital, LLC) and one property with a HUD-insured loan from Capital One Multifamily Finance, LLC. See table above listing loans payable for further information.
All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our condensed consolidated balance sheets.
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5. Equity-Method Investments
As of June 30, 2023 and December 31, 2022, the balances of our Equity-Method Investments were approximately $
Summit Union Life Holdings, LLC
The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”).
Under the SUL LLC Agreement, net operating cash flow of the SUL JV is distributed monthly, first to the Operating Partnership and Best Years pari passu up to a
For the six months ended June 30, 2023 and 2022, we invested approximately $
As of June 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the SUL JV was approximately $
Summit Fantasia Holdings, LLC
The Fantasia I JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia I LLC Agreement”).
Under the Fantasia I LLC Agreement, net operating cash flow of the Fantasia I JV is distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
For the six months ended June 30, 2023 and 2022, we invested approximately $
As of June 30, 2023 and December 31, 2022, our equity-method investment related to the Fantasia I JV was $
Summit Fantasia Holdings II, LLC
The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”).
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Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia II JV is distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
In June 2023, the tenant for the two properties in the Fantasia II JV filed for receivership. The two properties are currently being operated by the receivership estate in conjunction with a third party manager under a one-year management agreement. As of June 30, 2023, there has been no change in the tenant leases and the Fantasia II JV is currently negotiating with the receiver and manager regarding ongoing lease terms.
As of June 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the Fantasia II JV was approximately $
Summit Fantasia Holdings III, LLC
The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”).
Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV is distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid
As of June 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the Fantasia III JV was approximately $
Summit Fantasy Pearl Holdings, LLC
The FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).
Under the FPH LLC Agreement, net operating cash flow of the FPH JV is distributed quarterly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid
In December 2022, Summit recorded an impairment of approximately $
15
As of June 30, 2023 and December 31, 2022, the balance of our equity-method investment related to the FPH JV was $
Distributions from Equity-Method Investments
As of June 30, 2023 and December 31, 2022, we have distributions receivable, which are included in tenant and other receivables in our condensed consolidated balance sheets, as follows:
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
SUL JV | $ | | $ | | ||
Fantasia I JV |
|
| — | |||
Fantasia II JV |
| |
| | ||
Fantasia III JV |
| |
| | ||
FPH JV |
| |
| | ||
Total | $ | | $ | |
For the six months ended June 30, 2023 and 2022, we have received cash distributions, which are included in our cash flows from operating activities in tenant and other receivables, and cash flows from investing activities, as follows:
Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||||||||||||
Cash Flow | Cash Flow | Cash Flow | Cash Flow | |||||||||||||||
Total Cash | from | from | Total Cash | from | from | |||||||||||||
Distributions | Operating | Investing | Distributions | Operating | Investing | |||||||||||||
| Received |
| Activities |
| Activities |
| Received |
| Activities |
| Activities | |||||||
SUL JV | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Fantasia I JV |
| |
| |
| |
| |
| |
| | ||||||
Fantasia II JV |
| |
| |
| |
| |
| |
| | ||||||
Fantasia III JV |
| |
| |
| |
| |
| |
| | ||||||
FPH JV |
| |
| |
| |
| |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | |
Asset Management Fees
We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in those agreements. For the three months ended June 30, 2023 and 2022, we recorded approximately $
6. Receivables
Tenant and Other Receivables, Net
Tenant and other receivables, net consists of:
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Straight-line rent receivables | $ | | $ | | ||
Distribution receivables from Equity-Method Investments |
| |
| | ||
Asset management fees |
| |
| | ||
Other receivables |
| |
| | ||
Total | $ | | $ | |
16
7. Related Party Transactions
Equity-Method Investments
See Notes 5 and 6 for further discussion of distributions and asset management fees related to our Equity-Method Investments.
8. Intangible Lease Assets
Intangible lease assets are as follows:
| June 30, |
| December 31, | |||
2023 | 2022 | |||||
In-place leases | $ | | $ | | ||
Less: accumulated amortization |
| ( |
| ( | ||
In-place leases, net |
| |
| | ||
Above-market leases |
| |
| | ||
Less: accumulated amortization |
| ( |
| ( | ||
Above-market leases, net |
| |
| | ||
Total intangible lease assets, net | $ | | $ | |
For each of the three months ended June 30, 2023 and 2022, amortization expense for intangible lease assets was approximately $
Expected future amortization of the intangible lease assets as of June 30, 2023, for the period from July 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
Years ending December 31, |
|
| |
July 1, 2023 to December 31, 2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
$ | |
9. Right of Use (ROU) Asset - Operating
In November 2022, we entered into an operating lease for office space (“Office Lease”) for a period of
The Office Lease is classified as an operating lease. A “right to use” or “ROU asset” represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Office Lease did not provide an explicit rate of interest; therefore we used an estimated incremental borrowing rate of
17
Supplemental balance sheet information related to the Office Lease are as follows:
Component |
| Consolidated Balance Sheet Caption |
| June 30, 2023 |
| December 31, 2022 | ||
Right of use asset - operating |
| $ | | $ | | |||
Lease liability - operating |
| $ | | $ | |
Lease expense is presented as part of continuing operations within general and administrative expenses in the condensed consolidated statements of operations. For the three months ended June 30, 2023, we recognized approximately $
Lease payments on the Office Lease for the period from July 1, 2023 to December 31, 2023 and for each of the four following years and thereafter ending December 31 are as follows:
Year |
| Lease payments | |
July 1, 2023 to December 31, 2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total lease payments | $ | | |
Less imputed interest |
| ( | |
Total lease liability | $ | |
10. Concentration of Risk
Our cash is generally invested in short-term money market instruments. As of June 30, 2023, we had cash accounts in excess of FDIC-insured limits. During March 2023, in response to the banking crisis, we transferred cash balances in excess of FDIC-insured limits from a smaller regional bank to a multi-national bank. To date, we have not experienced losses or lack of access to cash in our cash and cash equivalent accounts.
As of June 30, 2023, we owned
Additionally, for the three months ended June 30, 2023, we leased our
For the six months ended June 30, 2023,
As of June 30, 2023, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than
18
11. Fair Value Measurements of Financial Instruments
Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment.
As of June 30, 2023 and December 31, 2022, the fair value of our HUD-insured loans payable was $
As of June 30, 2023 and December 31, 2022, we believe the carrying amounts of our variable rate debt are reasonably estimated at their notional amounts as there have been minimal changes to the fixed spread portion of interest rates for similar loans observed in the market, and as the variable portion of our interest rates fluctuate with the associated market indices. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy.
As of June 30, 2023 and December 31, 2022, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.
12. Commitments and Contingencies
We inspect our properties under a Phase I assessment for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.
19
Legal Proceedings
HCRE
In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $
Eikanas Dispute
On May 15, 2023, the Board of Directors of the Company sent Kent Eikanas, the then-Chief Executive Officer, written notice of various deficiencies in his performance , thereby initiating the
20
Indemnification and Employment Agreements
We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, effective October 19, 2021, we entered into new employment agreements with our executive officers, Kent Eikanas (Chief Executive Officer) and Elizabeth Pagliarini (Chief Financial Officer), for a term of three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements. On July 14, 2023, the employment agreement with Mr. Eikanas was terminated (see Note 14 for further information).
Management of our Equity-Method Investments
As the manager of our Equity-Method Investments, we are responsible for the day-to-day management. Additionally, we could be subject to a capital call from our Equity-Method Investments (see Note 5 for capital call activity).
13. Equity
Share-Based Compensation Plans
Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the book value of our liabilities, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a lack of a control premium, and divided by the total by the number of our common shares outstanding at the time the options were granted.
The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on the simplified method as we do not have sufficient historical exercise data. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant with maturity dates approximating the expected term of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option.
On April 1, 2023, we granted
The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:
| 2023 |
| ||
Stock options granted |
| | ||
Expected volatility |
| | % | |
Expected term |
| years | ||
Risk-free interest rate |
| | % | |
Dividend yield |
| — | % | |
Fair value per share | $ | |
21
The following table summarizes our stock options as of June 30, 2023:
Weighted | ||||||||||
Weighted | Average | |||||||||
Average | Remaining | Aggregate | ||||||||
Exercise | Contractual | Intrinsic | ||||||||
| Options |
| Price |
| Term |
| Value | |||
Options outstanding at January 1, 2023 |
| | $ | |
|
|
|
| ||
Granted |
| | $ | |
|
|
|
| ||
Exercised |
|
|
|
|
|
|
| |||
Cancelled/forfeited |
| — |
|
|
|
|
| |||
Options outstanding at June 30, 2023 |
| | $ | |
| $ | | |||
|
|
|
|
| ||||||
Options exercisable at June 30, 2023 |
| | $ | |
| $ | |
For our outstanding non-vested options as of June 30, 2023, the weighted average grant date fair value per share was $
Years Ending December 31, |
| ||
2023 | $ | | |
2024 |
| | |
2025 | | ||
2026 |
| | |
$ | |
The stock-based compensation expense reported for the three months ended June 30, 2023 and 2022 was approximately $
14. Subsequent Events
Fantasia I JV
On July 3, 2023, the majority member in the Fantasia I JV assigned its
Executive Management Changes
On July 14, 2023 (the “Termination Date”), the Board of Directors (the “Board”) of the Company terminated, for cause, Kent Eikanas from his position as Chief Executive Officer and Secretary of the Company, after Mr. Eikanas was given written notice of and failed to cure various deficiencies in his performance following the expiration of a
Effective July 15, 2023, the Board of Directors of the Company appointed Elizabeth Pagliarini as Chief Executive Officer and Secretary. Additionally, effective July 15, 2023, the Board of Directors of the Company also appointed Sharyn Grant Chief Financial Officer and Treasurer of the Company.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Overview
As of June 30, 2023, our ownership interests in our 18 real estate properties of senior housing facilities was as follows: 100% ownership of 14 properties and a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds one property, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, and a 10% equity interest in an unconsolidated equity-method investment that holds six properties (collectively, our “Equity-Method Investments”). As used in this report, the “Company,” “we,” “us” and “our” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.
Our revenues are comprised largely of tenant rental income from our real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, resident fees and services and asset management fees resulting from our Equity-Method Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our condensed consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture equity or other equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with sustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.
We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities focuses on different segments of the senior population.Our current properties are SNF, AL, and MC facilities.
Current Market and Economic Conditions
The world was, and continues to be, impacted by the COVID-19 pandemic. The healthcare industry was among those most adversely affected by the COVID-19 pandemic. During 2023 and 2022, we experienced a material adverse effect on the operations of two properties related to COVID-19 (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information on its impact to us and see below for the impact on our Equity-Method Investments). We expect the COVID-19 pandemic will continue to adversely affect our tenants’ and our Company’s financial condition and results of operations, including but not limited to, occupancy, resident leases and related resident fees and service revenues, and additional labor and operating expenses. The fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses in future periods.
23
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies. The Federal Reserve has increased its targeted range for the federal funds rate, leading to increased interest rates and it foresees further interest rate increases. We currently have fixed and variable interest rates for our loans. The rise in overall interest rates has caused an increase in our variable rate borrowing costs and our overall cost of capital, resulting in an increase in interest expense. The higher interest rates imposed by the Federal Reserve to address inflation may also adversely impact real estate asset values. In addition, a prolonged period of high and persistent inflation could cause an increase in our expenses. The current market and economic conditions could have a material impact on our business, cash flow and results of operations. It could also impact our ability to find suitable acquisitions, sell properties, and raise equity and debt capital.
Summit Portfolio Properties
At June 30, 2023, our portfolio consisted of 18 real estate properties as noted above in the Overview section of this Item 2, 16 of which were 100% triple-net leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (see Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements under Pennington Gardens Operations LLC (“Pennington Gardens”) and Sundial Operations LLC (“Sundial”), collectively, the “Operated Properties”) for which we operate directly and earn resident fees and services revenue.
The following table provides summary information (excluding the 35 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of June 30, 2023:
|
|
| Square |
| Purchase | ||||
Properties | Beds | Footage | Price | ||||||
SNF |
| 15 |
| 1,354 |
| 406,135 | $ | 181,795,000 | |
AL or AL/MC |
| 3 |
| 221 |
| 136,765 |
| 25,525,000 | |
Total Real Estate Properties |
| 18 |
| 1,575 |
| 542,900 | $ | 207,320,000 |
24
|
|
|
| 2023 | |||||||
Lease | |||||||||||
Property |
| Location |
| Date Purchased |
| Type |
| Beds |
| Revenue (1) | |
Sheridan Care Center |
| Sheridan, OR | August 3, 2012 |
| SNF |
| 51 | $ | 246,000 | ||
Fernhill Care Center |
| Portland, OR | August 3, 2012 |
| SNF |
| 63 |
| 262,000 | ||
Friendship Haven Healthcare and Rehabilitation Center |
| Galveston County TX | September 14, 2012 |
| SNF |
| 150 |
| 706,000 | ||
Pacific Health and Rehabilitation Center |
| Tigard, OR | December 24, 2012 |
| SNF |
| 73 |
| 484,000 | ||
Brookstone of Aledo |
| Aledo, IL | July 2, 2013 |
| AL |
| 66 |
| 382,000 | ||
Sundial Assisted Living (2) |
| Redding, CA | December 18, 2013 |
| AL |
| 65 |
| — | ||
Pennington Gardens (2) |
| Chandler, AZ | July 17, 2017 |
| AL/MC |
| 90 |
| — | ||
Yucaipa Hill Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 82 | 532,000 | ||||||
Creekside Post Acute | Yucaipa, CA | July 2, 2021 | SNF | 59 | 238,000 | ||||||
University Post Acute | Mentone, CA | July 2, 2021 | SNF | 50 | 227,000 | ||||||
Calhoun Health Center | Calhoun, GA | December 30, 2021 | SNF | 100 | 239,000 | ||||||
Maple Ridge Health Care Center | Cartersville, GA | December 30, 2021 | SNF | 74 | 947,000 | ||||||
Chatsworth Health Care Center | Chatsworth, GA | December 30, 2021 | SNF | 120 | 1,729,000 | ||||||
East Lake Arbor | Decatur, GA | December 30, 2021 | SNF | 103 | 451,000 | ||||||
Fairburn Health Care Center | Fairburn, GA | December 30, 2021 | SNF | 120 | 724,000 | ||||||
Grandview Health Care Center | Jasper, GA | December 30, 2021 | SNF | 60 | 532,000 | ||||||
Rosemont at Stone Mountain | Stone Mountain, GA | December 30, 2021 | SNF | 149 | 1,367,000 | ||||||
Willowwood Nursing Center & Rehab | Flowery Branch, GA | December 30, 2021 | SNF | 100 | 515,000 | ||||||
Total |
|
|
|
|
|
| 1,575 |
|
(1) | Represents year-to-date rental revenue based on in-place leases, including straight-line rent, through June 30, 2023 and excluding $1.2 million in tenant reimbursement revenue and $0.03 million in above-market lease amortization. |
(2) | See Note 3 to the accompanying Notes to Condensed Consolidated Financial Statements for further information on these two properties. Lease revenue due under the Pennington Gardens and Sundial intercompany leases are eliminated in consolidation and revenue is reflected in resident fees and services in the accompanying condensed consolidated statements of operations for the Operated Properties. |
Summit Equity-Method Investment Portfolio Properties
We continue to believe that raising institutional capital to make acquisitions will be accretive to shareholder value. Our primary source of capital since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is a prudent strategy for growth; however, in the future, we may raise additional equity capital through alternative methods if warranted by market conditions.
25
Summit Union Life Holdings, LLC
In April 2015, through our operating partnership (“Operating Partnership”), we formed Summit Union Life Holdings, LLC (“SUL JV”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and entered into a limited liability company with Best Years with respect to the SUL JV (the “SUL LLC Agreement”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements.
Equity-Method Partner – Fantasia Investment III LLC
In 2016 and 2017, through our Operating Partnership, we entered into three separate limited liability company agreements (collectively, the “Fantasia Agreements”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed three separate companies, Summit Fantasia Holdings, LLC (“Fantasia I JV”), Summit Fantasia Holdings II, LLC (“Fantasia II JV”) and Summit Fantasia Holdings III, LLC (“Fantasia III JV”) (collectively, the “Fantasia JVs”). The Fantasia JVs are not consolidated in our condensed consolidated financial statements and are accounted for under the equity-method in our condensed consolidated financial statements. Through the Fantasia JVs: we own a 35% interest in one senior housing facility located in California; a 20% interest in two skilled nursing facilities located in Rhode Island; and a 10% interest in nine skilled nursing facilities located in Connecticut.
Summit Fantasy Pearl Holdings, LLC
In October 2017, through our Operating Partnership, we entered into a limited liability company agreement (the “FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements.
The following reconciles our equity investments in our Equity-Method Investments from inception through June 30, 2023 in our condensed consolidated financials statements:
| SUL JV |
| Fantasia JVs |
| FPH JV |
| Total | |||||
Total investment | $ | 6,345,000 | $ | 6,379,000 | $ | 929,000 | $ | 13,653,000 | ||||
Income (loss) from equity-method investees | $ | 1,016,000 | $ | (83,000) | $ | (112,000) | $ | 821,000 | ||||
Distributions | $ | (4,961,000) | $ | (3,544,000) | $ | (817,000) | $ | (9,322,000) | ||||
Total investment at June 30, 2023 | $ | 2,400,000 | $ | 2,752,000 | $ | — | $ | 5,152,000 | ||||
Number of properties | 17 | 12 | 6 | 35 | ||||||||
Number of beds | 1,408 | 1,650 | 507 | 3,565 |
26
A summary of the condensed combined financial data for the balance sheets and statements of income (operations) for all unconsolidated Equity-Method Investments are as follows:
June 30, | December 31, | |||||
Condensed Combined Balance Sheets: |
| 2023 |
| 2022 | ||
Total Assets | $ | 245,563,000 | $ | 249,540,000 | ||
Total Liabilities | $ | 181,846,000 | $ | 185,857,000 | ||
Members Equity: |
|
|
| |||
Summit |
| $ | 5,499,000 | (1) | $ | 5,676,000 |
JV Partners |
| $ | 58,218,000 |
| $ | 58,007,000 |
Total Members Equity |
| $ | 63,717,000 |
| $ | 63,683,000 |
(1)At June 30, 2023 and December 31, 2022, the aggregate balance of our equity method investments in our condensed consolidated financials statements for each period presented of approximately $5.2 million is lower by approximately $0.3 million and $0.5 million, respectively, than the equity recognized in the underlying Equity-Method Investments financial statements due to unrecorded losses and impairments.
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
Condensed Combined Statements of Operations: |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Total Revenue | $ | 9,186,000 | $ | 9,536,000 | $ | 18,006,000 | $ | 19,136,000 | ||||
Income (loss) from Operations | $ | 3,524,000 | $ | (93,000) | $ | 6,154,000 | $ | 4,558,000 | ||||
Net income (loss) | $ | 1,420,000 | $ | (2,062,000) | $ | 1,347,000 | $ | 1,408,000 | ||||
|
|
|
| |||||||||
Summit equity interest in Equity-Method Investments net income (loss) | $ | 229,000 | $ | (1,066,000) | $ | 171,000 | $ | (424,000) | ||||
JV Partners interest in Equity-Method Investments net income (loss) | $ | 1,191,000 | $ | (996,000) | $ | 1,176,000 | $ | 1,832,000 |
Distributions from Equity-Method Investments
For the six months ended June 30, 2023 and 2022, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:
| Six Months Ended June 30, | |||||
2023 |
| 2022 | ||||
Distributions | $ | 427,000 | $ | 610,000 | ||
| ||||||
Cash received for distributions | $ | 413,000 | $ | 546,000 |
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 31, 2023.
27
Results of Operations
Our results of operations are described below:
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
| Three Months Ended |
|
| ||||||
June 30, | |||||||||
2023 |
| 2022 |
| $ Change | |||||
Total rental revenues | $ | 5,380,000 | $ | 5,435,000 | $ | (55,000) | |||
Property operating costs | (746,000) | (766,000) | 20,000 | ||||||
Resident fees and services revenue |
| 1,633,000 |
| 863,000 |
| 770,000 | |||
Resident costs |
| (1,056,000) |
| (818,000) |
| (238,000) | |||
Net operating income (1) |
| 5,211,000 |
| 4,714,000 |
| 497,000 | |||
Asset management fees |
| 147,000 |
| 165,000 |
| (18,000) | |||
General and administrative |
| (1,091,000) |
| (1,132,000) |
| 41,000 | |||
Depreciation and amortization |
| (1,810,000) |
| (1,848,000) |
| 38,000 | |||
Income (loss) from equity-method investees | 117,000 | (1,131,000) | 1,248,000 | ||||||
Other income | 100,000 | 161,000 | (61,000) | ||||||
Interest expense |
| (4,336,000) |
| (3,105,000) |
| (1,231,000) | |||
Net loss |
| (1,662,000) |
| (2,176,000) |
| 514,000 | |||
Noncontrolling interests’ share in (income) |
| (19,000) |
| (18,000) |
| (1,000) | |||
Net loss applicable to common stockholders |
| $ | (1,681,000) |
| $ | (2,194,000) |
| $ | 513,000 |
(1) | Net operating income (“NOI”) is a non-GAAP supplemental measure used to evaluate the operating performance of real estate properties. We define NOI as total rental revenues, resident fees and services revenue less property operating and resident costs. NOI excludes asset management fees, general and administrative expense, depreciation and amortization, income (loss) from equity-method investees, other income, and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of the REIT’s real estate at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess and compare property-level performance. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect the aforementioned excluded items. Additionally, NOI as we define it may not be comparable to NOI as defined by other REITs or companies, as they may use different methodologies for calculating NOI. |
Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating costs include insurance, and property taxes, and resident costs are related to the Operated Properties. Net operating income increased approximately $0.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 primarily due to Sundial being included in our condensed consolidated financials for one month in the three months ended June 30, 2022 compared to three months in the three months ended June 30, 2023.
The net change from loss to income from equity-method investees of approximately $1.2 million is mainly due to the impairment loss of $1.2 million related to the Fantasia I JV in the three months ended June 30, 2022.
The increase in interest expense of $1.2 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 is due to an increase of approximately 4% in interest rates on approximately $139.0 million of debt for the CA3 and GA8 Properties.
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Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
| Six Months Ended |
|
| ||||||
June 30, | |||||||||
2023 |
| 2022 |
| $Change | |||||
Total rental revenues | $ | 10,747,000 | $ | 10,976,000 | $ | (229,000) | |||
Property operating costs |
| (1,552,000) |
| (1,539,000) |
| (13,000) | |||
Resident fees and services revenue |
| 3,002,000 |
| 1,271,000 |
| 1,731,000 | |||
Resident costs |
| (2,266,000) |
| (1,193,000) |
| (1,073,000) | |||
Net operating income (1) |
| 9,931,000 |
| 9,515,000 |
| 416,000 | |||
Asset management fees |
| 295,000 |
| 330,000 |
| (35,000) | |||
General and administrative |
| (2,200,000) |
| (2,180,000) |
| (20,000) | |||
Depreciation and amortization |
| (3,615,000) |
| (3,685,000) |
| 70,000 | |||
Income (loss) from equity-method investees |
| 242,000 |
| (489,000) |
| 731,000 | |||
Other income |
| 196,000 |
| 163,000 |
| 33,000 | |||
Interest expense |
| (8,470,000) |
| (6,136,000) |
| (2,334,000) | |||
Net loss |
| (3,621,000) |
| (2,482,000) |
| (1,139,000) | |||
Noncontrolling interests’ share in (income) |
| (36,000) |
| (37,000) |
| 1,000 | |||
Net loss applicable to common stockholders | $ | (3,657,000) | $ | (2,519,000) | $ | (1,138,000) |
Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating and resident costs include insurance, property taxes and resident costs are related to the Operated Properties. Net operating income increased approximately $0.4 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to Sundial being included in our condensed consolidated financials for one month in the six months ended June 30, 2022 compared to six months in the six months ended June 30, 2023.
The net change from loss to income from equity-method investees of approximately $0.7 million is mainly due to the impairment loss of $1.2 million related to the Fantasia I JV in the six months ended June 30, 2022.
The increase in interest expense of $2.3 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is due to an increase of approximately 4% in interest rates on approximately $139.0 million of debt for the CA3 and GA8 Properties.
Liquidity and Capital Resources
As of June 30, 2023, we had approximately $11.1 million in cash and cash equivalents on hand. During March 2023, in response to the banking crisis, we transferred cash balances in excess of FDIC-insured limits from a smaller regional bank to a multi-national bank with more liquidity and a significantly larger balance sheet. We will continue to address the banking environment and make appropriate changes as necessary. To date, we have not experienced losses or lack of access to cash in our cash and cash equivalent accounts. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.
Going forward, we expect our primary sources of cash to be rental revenues, equity-method investment distributions and asset management fees. In addition, we may increase cash through the sale of additional properties, which may result in the deconsolidation of properties we already own, or borrowing against currently-owned properties. For the foreseeable future, we expect our primary uses of cash to be for funding future acquisitions, investments in joint ventures, operating expenses, interest expense on outstanding indebtedness and the repayment of principal on loans payable. We may also incur expenditures for renovations of our existing properties, making our facilities more appealing in their market.
Seven of our debt obligations are long-term, fixed rate U.S. Department of Housing and Urban Development (“HUD”)-insured loans that mature between 2039 and 2055. The other debt obligations are short-term loans that mature in July 2024 through December 2026 with variable interest rates (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements). Due to the current environment of increasing interest rates, this may have a negative effect on our results of operations and for that reason, we may refinance these short-term loans with long-term, fixed rate HUD-insured debt, other long-term debt, or a combination of debt and equity in 2023.
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Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties. In regard to our Operated Properties, our intent is to stabilize the operations of the facilities and execute long-term triple-net leases with either a new or the existing manager/operator.
Credit Facilities and Loan Agreements
As of June 30, 2023, we had debt obligations of approximately $183.2 million. The outstanding balance by lender is as follows (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements for further information regarding our refinancing arrangements):
● | Capital One Multifamily Finance, LLC (HUD-insured) – approximately $10.0 million maturing September 2053 |
● | Lument Capital (formerly ORIX Real Estate Capital, LLC) (HUD-insured) – approximately $34.4 million maturing from September 2039 through April 2055 |
● | CIBC Bank, USA - approximately $106.0 million maturing from July 2024 to December 2024 |
● | Oxford Finance LLC – approximately $32.8 million maturing from March 2025 to December 2026 |
Distributions
We made no stockholder distributions during the six months ended June 30, 2023.
Funds from Operations (“FFO”)
FFO is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes real estate depreciation and amortization, gains and losses from property dispositions, impairments and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
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The following is the reconciliation from net income (loss) applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the three and six months ended June 30, 2023 and 2022:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net (loss) income applicable to common stockholders (GAAP) | $ | (1,681,000) | $ | (2,194,000) | $ | (3,657,000) | $ | (2,519,000) | ||||
Adjustments: |
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 1,797,000 |
| 1,843,000 |
| 3,595,000 |
| 3,674,000 | ||||
Depreciation and amortization related to non-controlling interests |
| (10,000) |
| (11,000) |
| (20,000) |
| (22,000) | ||||
Depreciation related to Equity-Method Investments |
| 183,000 |
| 226,000 |
| 366,000 |
| 456,000 | ||||
Impairment on real estate property in Fantasia I (included in loss from Equity-Method Investments) | — | 1,200,000 | — | 1,200,000 | ||||||||
Gain on sale of property in Fantasia I JV (included in income from Equity-Method Investments) | — | — | — | (437,000) | ||||||||
Funds provided by (used in) operations (FFO) applicable to common stockholders | $ | 289,000 | $ | 1,064,000 | 284,000 | $ | 2,352,000 | |||||
Weighted-average number of common shares outstanding - basic | 23,027,978 | 23,027,978 | 23,027,978 | 23,027,978 | ||||||||
FFO per weighted average common shares - basic | $ | 0.01 | $ | 0.05 | $ | 0.01 | $ | 0.10 | ||||
Weighted-average number of common shares outstanding – diluted |
| 23,496,475 |
| 23,553,606 |
| 23,496,475 |
| 23,553,606 | ||||
FFO per weighted average common shares - diluted | $ | 0.01 | $ | 0.05 | $ | 0.01 | $ | 0.10 |
Subsequent Events
See Note 14 to the accompanying Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) evaluated the effectiveness of our disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings.
See Note 12 to the accompanying Notes to Condensed Consolidated Financial Statements for a summary of our material legal proceedings.
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Item 1A.Risk Factors.
There have been no material changes to the Risk Factors described in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
(a) | We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the periods covered by this Form 10-Q. |
(b) | Not applicable. |
(c) | During the six months ended June 30, 2023, we redeemed no shares pursuant to our stock repurchase program. |
Item 3.Defaults Upon Senior Securities.
None.
Item 4.Mine Safety Disclosures.
None.
Item 5.Other Information.
None.
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Item 6.Exhibits.
Ex. |
| Description |
3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1 |
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4.2 |
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4.3 |
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4.4 |
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31.1 |
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31.2 |
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101.1 |
| The following information from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows. |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUMMIT HEALTHCARE REIT, INC. | |
| /s/ Elizabeth A. Pagliarini |
Date: August 11, 2023 | Elizabeth A. Pagliarini |
| Chief Executive Officer |
(Principal Executive Officer) | |
|
|
| /s/ Sharyn I. Grant |
Date: August 11, 2023 | Sharyn I. Grant |
| Chief Financial Officer |
(Principal Financial Officer) |
34