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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 000-54685
CNL Healthcare Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland27-2876363
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida
32801
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. Yes ☒ No ☐
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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
Non-accelerated filer
Smaller reporting company
Emerging growth company
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 
There is currently no established public market for the registrant’s shares of common stock. Based on the Company’s $7.37 net asset value (“NAV”) per share as of June 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the stock held by non-affiliates of the registrant on such date was approximately $1.3 billion.
The number of shares of common stock of the registrant outstanding as of March 8, 2023 was 173,960,540.
DOCUMENTS INCORPORATED BY REFERENCE
None


Table of Contents
Contents
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Table of Contents
PART I
STATEMENT REGARDING FORWARD LOOKING INFORMATION
Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Annual Report”) that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should,” “could,” the negative of such terms and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimates of per share NAV of the Company’s common stock, macroeconomic conditions including inflation and rising interest rates, the ongoing impact of the COVID-19 pandemic and the related recovery, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.
For further information regarding risks and uncertainties associated with the Company’s business and important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission (“SEC” or “the Commission”), including, but not limited to, this Annual Report and the Company’s quarterly reports on Form 10-Q, copies of which may be obtained from the Company’s website at www.cnlhealthcareproperties.com.
All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.
Item 1. BUSINESS
General
CNL Healthcare Properties, Inc. is a Maryland corporation that elected to be taxed as a REIT for U.S. federal income tax purposes. We have been and intend to continue to be organized and operate in a manner that allows us to remain qualified as a REIT for U.S. federal income tax purposes. The terms “us,” “we,” “our,” “Company” and “CNL Healthcare Properties” include CNL Healthcare Properties, Inc. and each of its subsidiaries.
Substantially all of our assets are held by, and all operations are conducted, either directly or indirectly, through: (1) CHP Partners LP (“Operating Partnership”) in which we are the sole limited partner and our wholly owned subsidiary, CHP GP, LLC, is the sole general partner; (2) a wholly owned taxable REIT subsidiary (“TRS”), CHP TRS Holding, Inc.; (3) property owner subsidiaries and lender subsidiaries, which are single purpose entities; and (4) investments in joint ventures.
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We completed our public offerings (“Offerings”) and in October 2015, we deregistered the unsold shares of our common stock under our previous registration statement on Form S-11, except for 20 million shares that we registered on Form S-3 under the Securities Exchange Act of 1933 with the SEC for the sale of additional shares of common stock through our distribution reinvestment plan (“Reinvestment Plan”). As part of moving forward with the consideration of Possible Strategic Alternatives, as described below under “Possible Strategic Alternatives,” effective July 11, 2018, we suspended our Reinvestment Plan and, effective with the suspension of our Reinvestment Plan, stockholders who were participants in our Reinvestment Plan now receive cash distributions instead of additional shares of our common stock.
Our offices are located at 450 South Orange Avenue within the CNL Center at City Commons in Orlando, Florida, 32801, and our telephone number is (407) 650-1000.
Advisor and Property Manager
We are externally managed and advised by CNL Healthcare Corp. (“Advisor”), an affiliate of CNL Financial Group, LLC (“Sponsor”). The Sponsor is an affiliate of CNL Financial Group, Inc. (“CNL”). Our Advisor has responsibility for our day-to-day operations, serving as our consultant in connection with policy decisions to be made by our board of directors, and for identifying, recommending and executing on Possible Strategic Alternatives and dispositions on our behalf pursuant to an advisory agreement. In May 2022, we extended the advisory agreement with our Advisor through June 2023. For additional information on our Advisor, its affiliates or other related parties, as well as the fees and reimbursements we pay, see Item 8. “Financial Statements and Supplementary Data – Note 12. Related Party Arrangements.”
Seniors Housing Investment Focus and Strategy
As of December 31, 2022, our investment portfolio consisted of interests in 70 properties, comprised of 69 seniors housing communities and one vacant land parcel. The types of seniors housing properties that we own include independent and assisted living facilities, continuing care retirement communities and Alzheimer’s/memory care facilities. Our strategy is to manage our seniors housing portfolio in a way that will allow us to provide stockholders with cash distributions; preserve, protect and return stockholders’ invested capital; and explore liquidity opportunities. We had previously invested in 70 properties consisting of 63 medical office buildings, acute care and post-acute care properties and seven skilled nursing facilities. As part of executing under Possible Strategic Alternatives, we sold 69 of these properties between April 2019 and January 2021, and completed the sale of the last property in 2022. The exploration of liquidity opportunities, such as the sale of either the Company or our assets, a potential merger, or the listing of our common shares on a national securities exchange, as further described below under “Possible Strategic Alternatives.”
We have primarily leased our seniors housing properties to wholly owned TRS entities and engaged independent third-party managers under management agreements to operate the properties as permitted under the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). We have also leased certain of our seniors housing properties to third-party tenants under triple-net or similar lease structures, where the tenant bears all or substantially all of the costs (including cost increases, for real estate taxes, utilities, insurance and ordinary repairs). In addition, most of our investments are wholly owned, although, to a lesser extent, we invested through partnerships with other entities where we believed it was appropriate and beneficial.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a pandemic around the globe and we operated our communities through the disruptions and uncertainties of the pandemic, including disruptions from new variants of the virus during 2021. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – COVID-19” for further discussions on the impact of the COVID-19 pandemic on our financial position and results of operations.
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Possible Strategic Alternatives
In 2017, we began evaluating possible strategic alternatives to provide liquidity to our stockholders. In April 2018, our board of directors formed a special committee consisting solely of our independent directors (“Special Committee”) to consider possible strategic alternatives, including, but not limited to (i) the listing of our or one of our subsidiaries’ common stock on a national securities exchange; (ii) an orderly disposition of our assets or one or more of our asset classes and the distribution of the net sale proceeds thereof to our stockholders; and (iii) a potential business combination or other transaction with a third-party or parties that provides our stockholders with cash and/or securities of a publicly traded company (collectively, among other options, “Possible Strategic Alternatives”). Since 2018, the Special Committee has engaged KeyBanc Capital Markets Inc. to act as its financial advisor in connection with exploring our Possible Strategic Alternatives.
In connection with our consideration of the Possible Strategic Alternatives, our board of directors suspended both our Reinvestment Plan and our Redemption Plan effective July 11, 2018. In addition, as part of executing on Possible Strategic Alternatives, our board of directors committed to a plan to sell 70 properties which included medical office buildings, post-acute care facilities and acute care hospitals across the US, collectively (the “MOB/Healthcare Portfolio”) plus several skilled nursing facilities. Through December 31, 2021, we sold 69 properties, received net sales proceeds of approximately $1.4497 billion and used the net sales proceeds to: (1) repay indebtedness secured by the properties; (2) strategically rebalance other corporate borrowings; (3) make a special cash distribution in May 2019 of approximately $347.9 million (or $2.00 per share) to our stockholders and (4) retained net sales proceeds for other corporate purposes, because we were focused on maintaining balance sheet strength and liquidity during COVID-19 to enhance financial flexibility. In April 2022, we sold the last property, the Hurst Specialty Hospital, to an unrelated third party, received net sales proceeds of approximately $8.3 million and retained these net sales proceeds to continue our focus to maintain a strong balance sheet and liquidity.
During the COVID-19 pandemic, we shifted our focus away from the pursuit of larger strategic alternatives to provide further liquidity to our stockholders due to the market and industry disruptions in the seniors housing sector from COVID-19. However, our Special Committee continued working and continues to work with our financial advisor to carefully study market data. We remain fully committed to our readiness, active study and pursuit of additional strategic opportunities to provide incremental liquidity to our stockholders as the economic and transactional environments permit.
Portfolio Overview
We believe demographic trends and compelling supply and demand indicators present a strong case for an investment focus on seniors housing real estate assets and real estate-related assets. Our seniors housing investment portfolio is geographically diversified with properties in 26 states. The map below shows our seniors housing investment portfolio across geographic regions as of March 8, 2023:
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The following table summarizes our remaining healthcare portfolio by asset class and investment structure as of March 8, 2023:
Type of InvestmentNumber of
Investments
Amount of
Investments
(in millions)
Percentage
of Total
Investments
Consolidated investments:
Seniors housing leased (1)
15$311.0 17.8 %
Seniors housing managed (2)
541,427.6 82.1 %
Vacant land11.1 0.1 %
70$1,739.7 100.0 %
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FOOTNOTES:
(1)Properties that are leased to third-party tenants for which we report rental income and related revenues.
(2)Properties that are leased to TRS entities and managed pursuant to third-party management contracts (i.e. RIDEA structure) where we report resident fees and services, and the corresponding property operating expenses.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on how we evaluate our seniors housing portfolio, our significant tenants and operators as well as our lease expirations.
Dispositions
The determination of when a particular investment should be sold or otherwise disposed of may be made after considering all relevant factors, including overall strategic alternatives, tax considerations as well as prevailing and projected economic and market conditions (including whether the value of the property or other investment is anticipated to decline substantially). The net proceeds, after payment of debt, received from any disposition may be retained for corporate purposes or distributed to stockholders. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on dispositions.
Share Price Valuation
We have adopted a valuation policy designed to follow recommendations of the Investment Program Association (“IPA”), an industry trade group, in the IPA Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, which was adopted by the IPA effective May 1, 2013 (“IPA Valuation Guideline”). The purpose of our valuation policy is to establish guidelines to be followed in determining the NAV per share of our common stock for regulatory and investor reporting and on-going evaluation of investment performance. NAV means the fair value of real estate, real estate-related investments and all other assets less the fair value of total liabilities. Our NAV will be determined based on the fair value of our assets less liabilities under market conditions existing as of the time of valuation and assuming the allocation of the resulting net value among our stockholders after any adjustments for incentive, preferred or special interests, if applicable.
In accordance with our valuation policy and as recommended by the IPA Valuation Guideline, we expect to produce an estimated NAV per share at least annually as of December 31 and disclose such amount as soon as possible after year-end. The audit committee of our board of directors, comprised of our independent directors (“Valuation Committee”), oversees our valuation process and engages one or more third-party valuation advisors to assist in the process of determining the estimated NAV per share of our common stock.
To assist our board of directors in its determination of the estimated NAV per share of our common stock, our board of directors engaged an independent third-party valuation firm, Robert A. Stanger & Co., Inc. (“Stanger”), to provide property-level and aggregate valuation analyses of the Company and a range for the NAV per share of our common stock and to consider other information provided by our Advisor.
For a detailed discussion of the determination of the estimated NAV per share of our common stock, including our valuation process and methodology, see Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities–Market Information.”
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Distributions
In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income. We may make distributions in the form of cash or other property, including distributions of our own securities. While we generally expect to pay distributions from cash flows provided by operating activities, we have covered, and may in the future cover, periodic shortfalls between distributions paid and cash flows provided by operating activities from other sources; such as from cash flows provided by financing activities (“Other Sources”), a component of which could include borrowings, whether collateralized by our properties or unsecured, or net sales proceeds from the sale of real estate. We have not established any limit on the extent to which we may use borrowings to pay distributions, and there is no assurance we will be able to sustain distributions at any level. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a table that presents total regular and special cash distributions declared and issued, and cash flows provided by operating activities for each quarter in the years ended December 31, 2022 and 2021.
Borrowings
We have borrowed funds to acquire properties, to make loans and other permitted investments and to pay certain related fees. We may borrow money, whether collateralized by our assets or unsecured, to pay distributions to stockholders, for working capital and/or for other corporate purposes. We are subject to certain customary covenants and limitations in connection with our borrowings. The aggregate amount of long-term financing is not expected to exceed 60% of the carrying value of our total assets on an annual basis.
There is no limitation on the amount we can borrow. Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets, unless substantial justification exists that borrowing a greater amount is in our best interests. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Sources of Liquidity and Capital Resources–Borrowings” for further discussions of our borrowings, repayments and aggregate debt leverage ratios.
Competition
Our tenants and operators compete with other properties that provide comparable services in their local markets. Tenants and operators compete for residents based on a variety of factors including, but not limited to: quality of care, reputation, location, service offerings, staff and price. Throughout the COVID-19 pandemic, seniors housing operators have experienced broad-based occupancy declines and as a result, we expect competition to continue in 2023 and beyond as operators attempt to fill unoccupied units.
Human Capital
We are externally managed and as such we do not have any employees. All of our executive officers are employees of the Advisor or one of its affiliates. We do not directly compensate our executive officers for services rendered to us.
Government Regulations
Our business is subject to various federal, state and local laws, ordinances and regulations, including, among other things, the Americans with Disabilities Act of 1990, healthcare regulatory matters, environmental regulations, and zoning regulations and land use controls. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently. We did not make any material capital expenditures in connection with these regulations during the year ended December 31, 2022 and we do not expect that we will be required to make any such material capital expenditures during 2023.
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Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the ADA requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we own properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state, and local laws may require us to modify any properties we own, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.
Healthcare Regulatory Matters
Ownership and operation of certain senior housing properties are subject, directly and indirectly, to substantial federal, state and local government healthcare laws and regulations. The failure by our tenants or operators to comply with these laws and regulations could adversely affect the successful operation of our properties. For example, most senior housing facilities are subject to state licensing and registration laws. In granting and renewing these licenses, the state regulatory agencies consider numerous factors relating to a property’s physical plant and operations, including, but not limited to, admission and discharge standards, staffing, and training. A decision to grant or renew a license is also affected by a property owner’s record with respect to patient and consumer rights, medication guidelines, and rules. In addition, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires the use of uniform electronic data transmission standards for certain healthcare claims and payment transactions submitted or received electronically. Compliance with these regulations is mandatory for healthcare providers, such as, in some cases, our tenants and operators. The cost of compliance with these regulations may have a material adverse effect on the business, financial condition or results of operations of our tenants or operators and, therefore, may adversely affect us. We intend for all of our business activities and operations, as well as the business activities and operations of our tenants and operators, to conform in all material respects with all applicable laws and regulations, including healthcare laws, regulations and licensing requirements.
Environmental Regulations
As an owner of real property, we are subject to various federal, state and local laws and regulations regarding environmental, health and safety matters. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel, oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes, and in certain cases, the costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. Even with respect to properties that we do not operate or manage, we may be held liable, primarily or jointly and severally, for costs relating to the investigation and clean-up of any property from which there is or has been an actual or threatened release of a regulated material and any other affected properties, regardless of whether we knew of or caused the release. Such costs typically are not limited by law or regulation and could exceed the property’s value. In addition, we may be liable for certain other costs, such as governmental fines and injuries to persons, property or natural resources, as a result of any such actual or threatened release.
Under the terms of our lease and management agreements, we generally have a right to indemnification by the tenants or operators of our properties for any contamination caused by them. However, we cannot assure you that our tenants or operators will have the financial capability or willingness to satisfy their respective indemnification obligations to us, and any such inability or unwillingness to do so may require us to satisfy the underlying environmental claims.
Financial Information about Industry Segments
We have determined that we operate in one business segment, real estate ownership, which consists of owning, managing, leasing, acquiring, developing, investing in, and as conditions warrant, disposing of real estate assets. We internally evaluate all of our real estate assets as one operating segment and, accordingly, we do not report segment information.
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Taxation
The following summary of the U.S. federal income taxation of the Company and the material U.S. federal income tax consequences to the holders of our equity securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may be relevant to certain types of holders of securities (including, but not limited to, insurance companies, tax-exempt entities, financial institutions or broker-dealers, persons holding our securities as part of a hedging, integrated conversion, or constructive sale transaction or a straddle, persons subject to special tax accounting rules under Section 451(b) of the Code (as hereinafter defined), persons subject to alternative minimum tax, traders in securities that use a mark-to-market method of accounting for their securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the U.S.).
This summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant in light of a particular investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of purchasing, owning and disposing of our securities as set forth in this summary.
General. We elected to be taxed as a REIT under the U.S. Internal Revenue Code of 1986, as amended (“Code”) beginning with our taxable year ended December 31, 2012. We believe that, commencing with such taxable year, we have been organized and have operated in a manner so as to qualify as a REIT for U.S. federal income tax purposes.
Qualification and taxation as a REIT has depended upon, and will continue to depend upon, our ability to meet on a continuing basis, through actual operating results, distribution levels, diversity of share ownership and various qualification requirements imposed upon REITs by the Code. Our ability to qualify as a REIT also requires that we satisfy certain asset tests (discussed below), some of which depend upon the fair market values of assets directly or indirectly owned by us. Such values may not be susceptible to a precise determination. While we intend to continue to operate in a manner that will allow us to qualify as a REIT, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.
As a REIT, we generally will not be subject to U.S. federal corporate income taxes on that portion of our ordinary income or capital gain we distribute currently to our stockholders, because the REIT provisions of the Code generally allow a REIT to deduct distributions, which are taxable dividends, paid to its stockholders. This substantially eliminates the U.S. federal double taxation on earnings (taxation at both the corporate level and stockholder level) that usually results from an investment in a corporation. With limited exceptions, dividends from us or from other entities that are taxed as REITs are generally not eligible for the capital gain rate and will continue to be taxed at rates applicable to ordinary income. Commencing with taxable years beginning on or after January 1, 2018 and continuing through 2025, the effective tax rate on ordinary REIT dividends (i.e., dividends other than capital gain dividends and dividends attributable to certain qualified dividend income received by us) is reduced for U.S. stockholders (as hereinafter defined) of our common stock that are individuals, estates or trusts by permitting such stockholders to claim a deduction in determining their taxable income equal to 20% of any such dividends they receive. Such deduction results in a maximum effective rate of regular U.S. federal income tax on ordinary REIT dividends of 29.6% through 2025 (as compared to the 20% maximum U.S. federal income tax rate applicable to qualified dividend income received from a non-REIT corporation).
Any net operating losses (“NOLs”), foreign tax credits and other tax attributes generally do not pass through to our stockholders, subject to special rules for certain items such as the capital gains that we recognize.
Effective for taxable years beginning on or after January 1, 2018, our domestic TRSs are subject to U.S. federal income tax on their taxable income at a rate of 21% (as well as applicable state and local income tax), but NOL carryforwards of a TRS arising in taxable years beginning after December 31, 2020 may be deducted only to the extent of 80% of TRS taxable income in the carryforward year (computed without regard to the NOL deduction).
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Commencing in taxable years beginning after December 31, 2017, section 163(j) of the Code limits the deductibility of net interest expense paid or accrued on debt properly allocable to a trade or business to 30% of “adjusted taxable income,” subject to certain exceptions. Any deduction in excess of the limitation is carried forward and may be used in a subsequent year, subject to the 30% limitation in such subsequent year. “Adjusted taxable income” is determined without regard to certain deductions, including those for net interest expense, NOL carryforwards and, for taxable years beginning before January 1, 2022, depreciation, amortization and depletion. Provided the taxpayer makes a timely election (which is irrevocable), the limitation based on adjusted taxable income does not apply to a “real property trade or business” within the meaning of section 469(c)(7)(C) of the Code, which generally includes real property development, redevelopment, construction, reconstruction, rental, operation, acquisition, conversion, disposition, management, leasing or brokerage trade or business. If this election is made, depreciable real property (including certain improvements) held by the relevant trade or business must be depreciated under the alternative depreciation system (“ADS”) under the Code, which is generally less favorable than the generally applicable system of depreciation under the Code. Under guidance issued by the U.S. Department of the Treasury, our leasing, management and operation of our healthcare facilities and buildings should constitute a real property trade or business, and as of the taxable year beginning on January 1, 2018, we elected not to have the interest deduction limitation apply to our trade or business. Thus, we currently are not subject to the foregoing limitation on deductibility of net interest expense. However, we must depreciate depreciable real property (and certain improvements) under ADS. If, however, the election is determined not to be available with respect to all or certain of our business activities, the new interest deduction limitation could result in us having more REIT taxable income and thus increasing the amount of distributions we must make to comply with the REIT requirements and avoid incurring corporate level tax.
Even if we qualify for taxation as a REIT, however, we will be subject to U.S. federal income taxation as follows:
We will be taxed at the regular corporate rate on our undistributed taxable income, including undistributed net capital gains.
If we have net gain for tax purposes from prohibited transactions (which are, in general, sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business), such gain will be subject to a 100% tax.
If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may avoid the 100% tax on gain from a sale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate.
If we should fail to satisfy the asset test other than certain de minimis violations or other requirements applicable to REITs, as described below, yet nonetheless maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax. In that case, the amount of the tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate if that amount exceeds $50,000 per failure.
If we fail to satisfy either of the 75% or the 95% income tests (discussed below) but have nonetheless maintained our qualification as a REIT because certain conditions have been met, we will be subject to a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.
If we fail to distribute during each year at least the sum of (i) 85% of our REIT ordinary income for the year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the sum of (A) the amounts actually distributed, plus (B) retained amounts on which corporate level tax is paid by us.
We may elect to retain and pay tax on our net long-term capital gains. In that case, a U.S. stockholder would be taxed on its proportionate share of our undistributed long-term capital gains and would receive a credit or refund for its proportionate share of the tax we paid.
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If we acquire an appreciated asset from a C corporation that is not a REIT (i.e., a corporation generally subject to corporate level tax) in a transaction in which the C corporation would not normally be required to recognize any gain or loss on disposition of the asset and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then a portion of the gain may be subject to tax at the regular corporate rate, unless the C corporation made an election to treat the asset as if it were sold for its fair market value at the time of our acquisition of such asset. We will also be required to distribute prior non-REIT earnings and profits (“E&P”).
We may be required to pay monetary penalties to the U.S. Internal Revenue Service (“IRS”) in certain circumstances, including if we fail to meet record keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders.
The earnings of our TRSs are subject to U.S. federal corporate income tax. In addition, a 100% excise tax will be imposed on the REIT and a corporate level tax on the TRS for transactions between a TRS and the REIT that are deemed not to be conducted on an arm’s length basis.
In addition, we and our subsidiaries may be subject to a variety of taxes, including state and local property and other taxes, on our assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as a REIT. Our qualification as a REIT has depended upon and will continue to depend upon our meeting and continuing to meet the requirements discussed below relating to our organization, sources of income, nature of assets and distributions of income to our stockholders.
Organizational Requirements. In order to qualify for taxation as a REIT under the Code we must meet tests regarding our income and assets described below and we must (i) be a corporation, trust or association that would be taxable as a domestic corporation but for the REIT provisions of the Code; (ii) be managed by one or more trustees or directors; (iii) have our beneficial ownership evidenced by transferable shares; (iv) not be a financial institution or an insurance company subject to special provisions of the U.S. federal income tax laws; (v) use a calendar year for U.S. federal income tax purposes; (vi) have at least 100 stockholders for at least 335 days of each taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months; and (vii) not be closely held, as defined for purposes of the REIT provisions of the Code.
We would be treated as closely held if, during the last half of any taxable year, more than 50% in value of our outstanding capital shares is owned, directly or indirectly through the application of certain attribution rules, by five or fewer individuals, as defined in the Code to include certain entities. Items (vi) and (vii) above do not apply until after the first taxable year for which we elect to be taxed as a REIT. If we comply with the U.S. Department of the Treasury regulations (“Treasury Regulations”) that provide procedures for ascertaining the actual ownership of our common stock for each taxable year and we did not know, and with the exercise of reasonable diligence could not have known, that we failed to meet item (vii) above for a taxable year, we will be treated as having met item (vii) for that year.
We have elected to be taxed as a REIT commencing with our taxable year ended December 31, 2012, and we intend to satisfy the other requirements described in items (i) through (v) above at all times during each of our taxable years. In addition, our charter contains restrictions regarding ownership and transfer of shares of our common stock that are intended to assist us in continuing to satisfy the share ownership requirements in items (vi) and (vii) above.
For purposes of the requirements described herein, any corporation that is a qualified REIT subsidiary of ours will not be treated as a corporation separate from us for U.S. federal income tax purposes and all assets, liabilities and items of income, deduction and credit of our qualified REIT subsidiaries will be treated as our assets, liabilities and items of income, deduction and credit for such purposes. A qualified REIT subsidiary is a corporation, other than a TRS (described below under “— Operational Requirements — Asset Tests”), of which all of its capital shares are owned by a REIT.
In the case of a REIT that is a partner in an entity treated as a partnership for U.S. federal income tax purposes, the REIT is treated as owning its proportionate share, based on its capital interest, of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the requirements described herein. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of the REIT requirements, including the asset and income tests described below. As a result, our proportionate share, based on our capital interest, of the assets, liabilities and items of income any partnership and of any other partnership, joint venture, limited liability company or other entity treated as a partnership for U.S. federal income tax purposes in which we or the operating partnership have an interest, will be treated as our assets, liabilities and items of income.
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The operating partnership since its formation has been treated as an entity disregarded as separate from us for U.S. federal income tax purposes. Thus, all of the operating partnership’s assets, liabilities and activities are treated as our assets, liabilities and activities for U.S. federal income tax purposes. It is not anticipated that additional interests in the operating partnership will be issued to a third party in a manner that would cause the operating partnership to cease being treated as an entity disregarded as separate from us for U.S. federal income tax purposes.
The Code provides relief from violations of the REIT gross income requirements, as described below under “— Operational Requirements — Gross Income Tests,” in cases where a violation is due to reasonable cause and not willful neglect, and other requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, the Code includes provisions that extend similar relief in the case of certain violations of the REIT asset requirements (see “— Operational Requirements — Asset Tests” below) and other REIT requirements, again provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax. If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT. If relief provisions are available, the amount of any resultant penalty tax could be substantial.
Operational Requirements — Gross Income Tests. To maintain our qualification as a REIT, we must satisfy annually two gross income requirements:
At least 75% of our gross income, excluding gross income from prohibited transactions, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property and from other specified sources, including qualified temporary investment income, as described below. Gross income includes “rents from real property” (as defined in the Code) and, in some circumstances, interest, but excludes gross income from dispositions of property held primarily for sale to customers in the ordinary course of a trade or business. These dispositions are referred to as “prohibited transactions.” This is the “75% Income Test.”
At least 95% of our gross income, excluding gross income from prohibited transactions, for each taxable year must be derived from the real property investments described above and generally from dividends and interest and gains from the sale or disposition of shares of common stock or securities or from any combination of the foregoing. This is the “95% Income Test.”
The rents we will receive or be deemed to receive will qualify as “rents from real property” for purposes of satisfying the gross income requirements for a REIT only if the following conditions are met:
The amount of rent received from a tenant must not be based in whole or in part on the income or profits of any Person; however, an amount received or accrued generally will not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of gross receipts or sales.
In general, neither we nor an owner of 10% or more of our common stock may directly or constructively own 10% or more of a tenant, which we refer to as a “Related Party Tenant,” or a subtenant of the tenant (in which case only rent attributable to the subtenant is disqualified).
Rent attributable to personal property leased in connection with a lease of real property cannot be greater than 15% of the total rent received under the lease, as determined based on the average of the fair market values as of the beginning and end of the taxable year.
We normally must not operate or manage the property or furnish or render services to tenants, other than through an “independent contractor” (as defined in the Code) who is adequately compensated and from whom we do not derive any income or through a TRS (discussed below). However, a REIT may provide services with respect to its properties, and the income derived therefrom will qualify as “rents from real property” if the services are “usually or customarily rendered” in connection with the rental of space only and are not otherwise considered “rendered to the occupant”. Even if the services provided by us with respect to a property are impermissible customer services, the income derived therefrom will qualify as “rents from real property” if such income does not exceed 1% of all amounts received or accrued with respect to that property.
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Interest income constitutes qualifying mortgage interest for purposes of the 75% Income Test to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired or originated the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% Income Test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property, or is under-secured, the income that it generates may nonetheless qualify for purposes of the 95% Income Test.
To the extent the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan, income attributable to the participation feature will be treated as gain from sale of the underlying real property, which generally will be qualifying income for purposes of both the 75% Income Test and 95% Income Test, provided that such property is not held as inventory or dealer property or primarily for sale to customers in the ordinary course of business. Similar to the treatment of contingent rents from real property (discussed above), to the extent that we derive interest income from a mortgage loan where all or a portion of the amount of interest or rental income payable is contingent, such income generally will qualify for purposes of the 75% Income Test and 95% Income Test only if it is based upon the gross receipts or sales and not on the net income or profits of the borrower.
We may, from time to time, enter into hedging transactions with respect to interest rate exposure. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. To the extent that we or a pass-through subsidiary enters into a hedging transaction (i) to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets, or (ii) for taxable years beginning after December 31, 2015, new hedging transactions entered into to hedge the income or loss from prior hedging transactions, where the property or indebtedness which was the subject of the prior hedging transaction was extinguished or disposed of, and the instrument is properly identified as a hedge along with the risk it hedges within prescribed time periods, any periodic income from the instrument, or gain from the disposition of such instrument, would be excluded altogether from the 95% Income Test or the 75% Income Test.
To the extent that we hedge in certain other situations, the resultant income will be treated as income that does not qualify under the 75% Income Test or the 95% Income Test, provided that certain requirements are met. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. We may conduct some or all of our hedging activities through a TRS or other corporate entity, the income from which may be subject to federal, state, and/or local income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries. No assurance can be given, however, that our hedging activities will not give rise to income that does not qualify for purposes of either or both of the REIT income tests, or that our hedging activities will not adversely affect our ability to satisfy the REIT qualification requirements.
With regard to rental income, our leases generally are, and we expect them generally to continue to be, for fixed rentals with annual CPI or similar adjustments and that none of the rentals under our leases will be based on the income or profits of any Person. Rental leases may provide for payments based on gross receipts, which are generally permissible under the REIT income tests. In addition, none of our tenants are expected to be “Related Party Tenants” and the portion of the rent attributable to personal property is not expected to exceed 15% of the total rent to be received under any lease. The services to be performed with respect to our real properties generally are, and we expect them generally to continue to be, performed by our property manager, and such services are expected to be those usually or customarily rendered in connection with the rental of real property and not rendered to the occupant of such real property. Finally, we anticipate any non-customary services will be provided by a TRS or, alternatively, by an independent contractor that is adequately compensated and from whom we derive no income. However, we can give no assurance that the actual sources of our gross income will allow us to satisfy the 75% Income Test and the 95% Income Test described above.
Notwithstanding our failure to satisfy one or both of the 75% Income and the 95% Income Tests for any taxable year, we may still qualify as a REIT for that year if we are eligible for relief under specific provisions of the Code. These relief provisions generally will be available if:
our failure to meet these tests was due to reasonable cause and not due to willful neglect; and
following our identification of the failure, we file a schedule with a description of each item of gross income that caused the failure in accordance with Treasury Regulations.
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It is not possible, however, to state whether, in all circumstances, we would be entitled to the benefit of these relief provisions. In addition, as discussed above, even if these relief provisions apply, a tax would be imposed with respect to the excess net income.
Operational Requirements — Prohibited Transactions. A “prohibited transaction” is a sale by a REIT of real property or other assets held primarily for sale in the ordinary course of the REIT’s trade or business (i.e., real property or other assets that are not held for investment but are held as inventory for sale by the REIT). A 100% penalty tax is imposed on any gain realized by a REIT from a prohibited transaction (including our distributive share of any such gain realized by our operating partnership). Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. We do not presently intend to acquire or hold or allow the operating partnership to acquire or hold any property that represents inventory or other property held primarily for sale to customers in the ordinary course of our or the operating partnership’s trade or business.
A safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction and the 100% prohibited transaction tax is available if the following requirements are met:
the REIT has held the property for not less than two years;
the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of the sale that are includable in the basis of the property do not exceed 30% of the net selling price of the property;
either (i) during the year in question, the REIT did not make more than seven sales of property other than foreclosure property or like-kind exchanges under section 1031 of the Code, or (ii) the aggregate adjusted bases of the non-foreclosure property sold by the REIT during the year did not exceed 20% of the aggregate bases of all of the assets of the REIT at the beginning of such year, or (iii) the fair market value of the non-foreclosure property sold by the REIT during the year did not exceed 20% of the fair market value of all the assets of the REIT at the beginning of such year (10% for both aggregate basis and fair market value determinations beginning with taxable years beginning before December 18, 2015);
the REIT has held the property for at least two years for the production of rental income; and
if the REIT has made more than seven sales of non-foreclosure property during the year, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor from whom the REIT derives no income.
For purposes of the limitation on the number of sales that a REIT may complete in any given year, the sale of more than one property to one buyer will be treated as one sale.
The failure of a sale to fall within the safe harbor does not alone cause such sale to be a prohibited transaction and subject to the 100% prohibited transaction tax. In that event, the particular facts and circumstances of the transaction must be analyzed to determine whether it is a prohibited transaction.
Operational Requirements — Asset Tests. At the close of each quarter of our taxable year, starting with the taxable year ending December 31, 2012 (i.e., starting with the quarter ending March 31, 2012), we also must satisfy four tests, which we refer to as “Asset Tests,” relating to the nature and diversification of our assets.
First, at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items and government securities. The term “real estate assets” includes real property, mortgages on real property, shares of common stock in other qualified U.S. REITs, property attributable to the temporary investment of new capital as described above and a proportionate share of any real estate assets owned by a partnership in which we are a partner or of any qualified REIT subsidiary of ours. For taxable years beginning after December 31, 2015, the term “real estate assets” also includes debt instruments of publicly offered REITs, personal property securing a mortgage secured by both real property and personal property if the fair market value of such personal property does not exceed 15% of the total fair market value of all such property, and personal property leased in connection with a lease of real property for which the rent attributable to personal property is not greater than 15% of the total rent received under the lease.
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Second, no more than 25% of our total assets may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one issuer’s securities that we own may not exceed 5% of the value of our total assets. Additionally, we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities. Such asset tests do not apply to securities of a TRS. The term “securities” also does not include the equity or debt securities of a qualified REIT subsidiary of ours or an equity interest in any entity treated as a partnership for U.S. federal income tax purposes.
Fourth, no more than 20% (25% for our taxable years beginning before December 31, 2017) of the value of our total assets may consist of the securities of one or more TRSs.
Fifth, for taxable years beginning after December 31, 2015, not more than 25% of the value of our total assets may be represented by debt instruments of publicly offered REITs to the extent those debt instruments would not be real estate assets but for the inclusion of debt instruments of publicly offered REITs in the meaning of real estate assets effective for taxable years beginning after December 31, 2015, as described above.
Independent appraisals are not necessarily obtained by us to support our conclusions as to the value of our total assets or the value of any particular security or securities for purposes of these operational requirements. Moreover, values of some assets may not be susceptible to a precise determination, and values are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. Accordingly, there can be no assurance that the IRS will not contend that our interests in our subsidiaries or in the securities of other issuers will not cause a violation of the REIT asset tests.
The Asset Tests must generally be met for each quarter. Upon full investment of the Net Offering Proceeds, most of our assets have consisted of “real estate assets” and we therefore expect to satisfy the Asset Tests.
If we meet the Asset Tests at the close of any quarter, we maintain our qualification as a REIT despite a failure to satisfy the Asset Tests at the end of a later quarter in which we have not acquired any securities or other property if such failure occurs solely because of changes in asset values. If our failure to satisfy the Asset Tests results from an acquisition of securities or other property during a quarter, we can cure the failure by disposing of a sufficient amount of non-qualifying assets within 30 days after the close of that quarter. We intend to maintain adequate records of the value of our assets to ensure compliance with the Asset Tests and to take other action within 30 days after the close of any quarter as may be required to cure any noncompliance. If that does not occur, we may nonetheless qualify for one of the relief provisions described below.
The Code contains a number of provisions applicable to REITs, including relief provisions that allow REITs to satisfy the asset requirements, or to maintain REIT qualification notwithstanding certain violations of the asset and other requirements.
One such provision allows a REIT which fails one or more of the asset requirements to nevertheless maintain its REIT qualification if (i) it provides the IRS with a description of each asset causing the failure; (ii) the failure is due to reasonable cause and not willful neglect; (iii) the REIT pays a tax equal to the greater of (A) $50,000 per failure; or (B) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate; and (iv) the REIT either disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure, or otherwise satisfies the relevant asset tests within that time frame.
A second relief provision applies to de minimis violations of the 10% and 5% asset tests. A REIT may maintain its qualification despite a violation of such requirements if (i) the value of the assets causing the violation do not exceed the lesser of 1% of the REIT’s total assets and $10,000,000, or (ii) the REIT either disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure, or the relevant tests are otherwise satisfied within that time frame.
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The Code also provides that certain securities will not cause a violation of the 10% value test described above. Such securities include instruments that constitute “straight debt,” which includes securities having certain contingency features. A security cannot qualify as “straight debt” if a REIT (or a controlled TRS) owns other securities in the issuer of that security which do not qualify as straight debt, unless the value of those other securities constitutes, in the aggregate, 1% or less of the total value of that issuer’s outstanding securities. In addition to straight debt, the Code provides that certain other securities will not violate the 10% value test. Such securities include:
any loan made to an individual or an estate;
certain rental agreements in which one or more payments are to be made in subsequent years (other than agreements between a REIT and certain Persons related to the REIT);
any obligation to pay rents from real property;
securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity;
any security issued by another REIT; and
any debt instrument issued by a partnership if the partnership’s income is of a nature that it would satisfy the 75% Income Test described above under “— Operational Requirements — Gross Income Tests.”
In addition, when applying the 10% value test, a debt security issued by a partnership is not taken into account to the extent, if any, of the REIT’s proportionate equity interest in that partnership.
Operational Requirements — Annual Distribution Requirement. In order to be taxed as a REIT, we are required to make cash or taxable property distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income (computed without regard to the dividends paid deduction and our net capital gain and subject to certain other potential adjustments) for all tax years. While we must generally make distributions in the taxable year to which they relate, we may also make distributions in the following taxable year if (i) they are declared before we timely file our U.S. federal income tax return for the taxable year in question and (ii) they are paid on or before the first regular distribution payment date after the declaration.
Even if we satisfy the foregoing distribution requirement and, accordingly, continue to qualify as a REIT for tax purposes, we will still be subject to U.S. federal income tax on the excess of our net capital gain and our REIT taxable income, as adjusted, over the amount of distributions to stockholders.
In addition, if we fail to distribute during each calendar year at least the sum of:
85% of our ordinary income for that year;
95% of our capital gain net income other than the capital gain net income which we elect to retain and pay tax on for that year; and
any undistributed taxable income from prior periods,
then we will be subject to a 4% non-deductible excise tax on the excess of the amount of the required distributions over the sum of (i) the amounts actually distributed plus (ii) retained amounts on which corporate level tax is paid by us.
We intend to make timely distributions sufficient to satisfy this requirement; however, it is possible we may experience timing differences between (i) the actual receipt of income and payment of deductible expenses, and (ii) the inclusion of that income and deduction of those expenses for purposes of computing our taxable income. Further, income generally must be accrued for U.S. federal income tax purposes no later than the taxable year in which such income is take into account as revenue in our financial statements, which could create a mismatch between our taxable income and the actual receipt of cash attributable to such income. It is also possible we may be allocated a share of net capital gain attributable to the sale of depreciated property by any partnership in which we own an interest, that exceeds our allocable share of cash attributable to that sale. In those circumstances, we may have less cash than is necessary to meet our annual distribution requirement or to avoid income or excise taxation on undistributed income.
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We may find it necessary in those circumstances to arrange for financing, raise funds through the issuance of additional shares of our common stock or to make a taxable stock distribution in order to meet our distribution requirements. If we fail to satisfy the distribution requirement for any taxable year by reason of a later adjustment to our taxable income made by the IRS, we may be able to pay “deficiency dividends” (as defined in the Code) in a later year and include such distributions in our deductions for dividends paid for the earlier year. In that event, we may be able to avoid the disqualification of our REIT status or being taxed on amounts distributed as deficiency dividends, but we would be required to pay interest and a penalty to the IRS based upon the amount of any deduction taken for deficiency dividends for the earlier year.
As noted above, we may also elect to retain, rather than distribute, some or all of our net long-term capital gains. The effect of such an election would be as follows:
We would be required to pay the U.S. federal income tax on the undistributed gains;
Taxable U.S. stockholders, while required to include their proportionate share of the undistributed long-term capital gains in income, would receive a credit or refund for their share of the tax paid by the REIT; and
The basis of the stockholder’s shares of our common stock would be increased by the difference between the designated amount included in the stockholder’s long-term capital gains and the tax deemed paid with respect to such shares of common stock.
In computing our taxable income, we use the accrual method of accounting and depreciate depreciable property under the ADS. We are required to file an annual U.S. federal income tax return, which, like other corporate returns, is subject to examination by the IRS. Because the tax law requires us to make many judgments regarding the proper treatment of a transaction or an item of income or deduction, it is possible that the IRS will challenge positions we take in computing our taxable income and our distributions.
Challenges could arise, for example, with respect to the allocation of the purchase price of real properties between depreciable or amortizable assets and non-depreciable or non-amortizable assets such as land and the current deductibility of fees paid to our Advisor or its affiliates. If the IRS were to successfully challenge our characterization of a transaction or determination of our taxable income, we could be found to have failed to satisfy a requirement for qualification as a REIT. If we are determined to have failed to satisfy the distribution requirements for a taxable year, we would be disqualified as a REIT, unless we were permitted to pay a deficiency dividend to our stockholders and pay interest thereon to the IRS, as provided by the Code.
Operational Requirement — Recordkeeping. We must maintain certain records as set forth in Treasury Regulations in order to avoid the payment of monetary penalties to the IRS. Such Treasury Regulations require that we request, on an annual basis, certain information designed to disclose the ownership of shares of our outstanding common stock. We intend to comply with these requirements. See “— Statement of Share Ownership” below.
Taxable REIT Subsidiaries. A TRS is any corporation in which a REIT directly or indirectly owns stock, provided that the REIT and that corporation make a joint election to treat the corporation as a TRS. The election can be revoked at any time as long as the REIT and the TRS revoke such election jointly. In addition, if a TRS holds, directly or indirectly, more than 35% of the securities of any other corporation (by vote or by value), then that other corporation also is treated as a TRS. A corporation can be a TRS with respect to more than one REIT. We may form one or more TRSs for the purpose of owning and selling properties that do not meet the requirements of the “prohibited transactions” safe harbor. See “— Requirements for Qualification as a REIT — Operational Requirements — Prohibited Transactions” above.
To the extent of its taxable income, a TRS is subject to U.S. federal income tax at the regular corporate rate and also may be subject to state and local taxation. Any distributions paid or deemed paid by any one of our TRSs also will be subject to tax, either (i) to us if we do not pay the distributions received to our stockholders as distributions, or (ii) to our stockholders if we do pay out the distributions received to our stockholders. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or to the REIT’s tenants that are not conducted on an arm’s-length basis. We may hold more than 10% of the stock of a TRS without jeopardizing our qualification as a REIT notwithstanding the rule described above under “— Requirements for Qualification as a REIT — Operational Requirements — Asset Tests” that generally precludes ownership of more than 10% (by vote or value) of any issuer’s securities.
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However, as noted below, in order for us to qualify as a REIT, the non-mortgage securities (both debt and equity) of all of the TRSs in which we have invested either directly or indirectly may not represent more than 20% (25% for our taxable years beginning before December 31, 2017) of the total value of our assets. We expect that the aggregate value of all of our interests in TRSs will continue to represent less than 20% of the total value of our assets. We cannot, however, assure you that we will always satisfy the 20% value limit or that the IRS will agree with the value we assign to our TRSs.
We may engage in activities indirectly through a TRS as necessary or convenient to avoid receiving the benefit of income or services that would jeopardize our REIT status if we engaged in the activities directly. In particular, in addition to the ownership of certain of our properties as noted above, we would likely use TRSs for providing services that are non-customary or that might produce income that does not qualify under the gross income tests described above. We may also use TRSs to satisfy various lending requirements with respect to special-purpose bankruptcy-remote entities.
Finally, while a REIT is generally limited in its ability to earn rents that qualify as “rents from real property” from a related party as defined by the Code, a REIT can earn “rents from real property” from the lease of a qualified healthcare property to a TRS (even a wholly owned TRS) if an eligible independent contractor operates the facility. Generally, a qualified healthcare property means a property which is a healthcare facility or is necessary or incidental to the use of a healthcare facility. A qualified healthcare facility is defined as a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility or other licensed facility which extends medical or nursing or ancillary services to patients operated by a provider of such services which was eligible for participation in the Medicare program under title XVIII of the Social Security Act with respect to such facility. For these purposes, a contractor qualifies as an “eligible independent contractor” if it is less than 35% affiliated with the REIT and, at the time the contractor enters into the agreement with the TRS to operate the qualified healthcare property, that contractor or any Person related to that contractor is actively engaged in the trade or business of operating qualified healthcare properties for Persons unrelated to the TRS or its affiliated REIT. For these purposes, an otherwise eligible independent contractor is not disqualified from that status on account of the TRS bearing the expenses for the operation of the qualified healthcare property, the TRS receiving the revenues from the operation of the qualified healthcare property, net of expenses for that operation and fees payable to the eligible independent contractor, or the REIT receiving income from the eligible independent contractor pursuant to a preexisting or otherwise grandfathered lease of another property.
Failure to Qualify as a REIT. If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, then we will be subject to tax on our taxable income at the regular corporate rate. We will not be able to deduct dividends paid to our stockholders in any year in which we fail to qualify as a REIT. In addition, if we fail to qualify as a REIT, all distributions to stockholders will be taxable as regular corporate dividends to the extent of current or accumulated E&P. In this event, stockholders taxed as individuals will be taxed on these dividends at the preferential income tax rates currently in effect for qualified dividends received from taxable C corporations and corporate distributees may be eligible for the dividends received deduction. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. It is not possible to state whether we would be entitled to this statutory relief.
Sale-Leaseback Transactions. We normally intend to treat our property leases as true leases for U.S. federal income tax purposes. However, depending on the terms of any specific transaction, the IRS might take the position that the transaction is not a true lease but is more properly treated in some other manner. If such re-characterization were successful, we would not be entitled to claim the depreciation deductions available to an owner of the property. In addition, the re-characterization of one or more of these transactions might cause us to fail to satisfy the Asset Tests or the REIT income tests described above based upon the asset we would be treated as holding or the income we would be treated as having earned and such failure could result in our failing to qualify as a REIT.
Alternatively, the amount or timing of income inclusion or the loss of depreciation deductions resulting from the re-characterization might cause us to fail to meet the distribution requirement described above for one or more taxable years absent the availability of the deficiency dividend procedure or might result in a larger portion of our dividends being treated as ordinary income to our stockholders.
Taxation of Taxable U.S. Stockholders
Definition. In this section, the phrase “U.S. stockholder” means a holder of our common stock that for U.S. federal income tax purposes is:
a citizen or resident of the U.S.;
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the U.S. or of any political subdivision thereof;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. Persons have the authority to control all substantial decisions of the trust.
If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the acquisition, ownership and disposition of our common stock.
For any taxable year for which we qualify for taxation as a REIT, amounts distributed to, and gains realized by, taxable U.S. stockholders with respect to our common stock generally will be taxed for U.S. federal income tax purposes as described below.
Distributions Generally. Distributions paid to U.S. stockholders, other than capital gain distributions discussed below, made out of our current or accumulated E&P will be taxable to the stockholders as ordinary income for U.S. federal income tax purposes. These distributions are not eligible for the dividends received deduction generally available to corporations. In addition, with limited exceptions, these distributions are not eligible for taxation at the preferential income tax rates currently in effect for qualified dividends received by U.S. stockholders that are individuals, trusts and estates from taxable C corporations. However, non-corporate stockholders may generally deduct 20% of the aggregate amount of ordinary REIT dividends distributed by us (other than “capital gain dividends” or “qualified dividend income”) for taxable years beginning after December 31, 2017 and before January 1, 2026, thereby reducing the maximum effective tax rate applicable to REIT ordinary dividends to 29.6% (assuming the current maximum individual income tax rate of 37% applies). Stockholders that are individuals, trusts or estates however, may be taxed at the preferential rates currently in effect (assuming the relevant holding periods have been met) on dividends designated by and received from us to the extent that the dividends are attributable to (i) income retained by us in the prior taxable year on which we were subject to corporate level income tax (less the amount of tax), (ii) dividends received by us from taxable C corporations, including any dividends we may receive from a TRS, or (iii) income in the prior taxable year from the sales of “built-in gain” property acquired by us from C corporations in carryover basis transactions (less the amount of corporate tax on such income).
To the extent we make a distribution in excess of our current and accumulated E&P, the distribution will be treated first as a tax-free return of capital, reducing the tax basis in a U.S. stockholder’s shares of common stock, and the amount of each distribution in excess of a U.S. stockholder’s tax basis in its shares of common stock will be taxable as gain realized from the sale of its shares of common stock. Dividends we declare in October, November or December of any year payable to a stockholder of record on a specified date in any of these months will be treated as both paid by us and received by the stockholder on December 31 of the year, provided that we actually pay the dividends during January of the following calendar year.
To the extent we have available NOLs (after application of the 80% limitation described above) and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions we must make in order to comply with the REIT distribution requirements. See “— Requirements for Qualification as a REIT — Operational Requirements — Annual Distribution Requirement.” Such losses, however, are not passed through to stockholders and do not offset income of stockholders from other sources, nor would such losses affect the character of any distributions that we make, which are generally subject to tax in the hands of stockholders to the extent that we have current or accumulated E&P.
We will be treated as having sufficient E&P to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed above. Moreover, any “deficiency distribution” will be treated as an ordinary or capital gain distribution, as the case may be, regardless of our E&P. As a result, stockholders may be required to treat as taxable some distributions that would otherwise result in a tax-free return of capital.
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Distributions to U.S. stockholders that we properly designate as capital gain distributions normally will be treated as long-term capital gains to the extent they do not exceed our actual net capital gain for the taxable year without regard to the period for which the U.S. stockholder has held his or her shares of common stock and, for taxable years beginning after December 31, 2015, may not exceed our distributions paid for the taxable year, including distributions paid the following year that are treated as paid in the current year. A corporate U.S. stockholder might be required to treat up to 20% of some capital gain distributions as ordinary income. Long-term capital gains are generally taxable at preferential rates in the case of stockholders who are individuals, estates, and trusts. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for taxpayers who are individuals, to the extent of previously claimed depreciation deductions (unrecaptured Section 1250 gains). See “— Requirements for Qualification as a REIT — Operational Requirements — Annual Distribution Requirement” for the treatment by U.S. stockholders of net long-term capital gains that we elect to retain and pay tax on.
Certain Dispositions of Our Common Stock. In general, capital gains recognized by individuals upon the sale or disposition of shares of our common stock will be subject to tax at the U.S. federal capital gains rate if such shares of common stock are held for more than 12 months, and will be taxed at ordinary income rates if such shares of common stock are held for 12 months or less. Gains recognized by stockholders that are corporations are subject to U.S. federal income tax at a current flat rate of 21%, whether or not classified as long-term capital gains. Capital losses recognized by a stockholder upon the disposition of a share of our common stock held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the stockholder but not ordinary income (except in the case of individuals, trusts and estates who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of common stock by a stockholder who has held such shares of common stock for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from us that are required to be treated by the stockholder as long-term capital gain. In addition, under the so-called “wash sale” rules (as defined in the Code), all or a portion of any loss that a stockholder realizes upon a taxable disposition of shares of common stock may be disallowed if the stockholder purchases (including through our Reinvestment Plan) other shares of our stock (or stock substantially similar to our stock) within 30 days before or after the disposition.
If an investor recognizes a loss upon a subsequent disposition of our stock or other securities in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury Regulations involving “reportable transactions” (as defined in the Code) could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These regulations, though directed towards tax shelters, are broadly written and apply to transactions that would not typically be considered tax shelters. The Code imposes significant penalties for failure to comply with these requirements.
You should consult your tax advisor concerning any possible disclosure obligation with respect to the receipt or disposition of our stock or securities or transactions that we might undertake directly or indirectly. Moreover, you should be aware that we and other participants in the transactions in which we are involved (including their advisors) might be subject to disclosure or other requirements pursuant to these regulations, and that the failure to make such disclosures would result in substantial penalties.
Distributions we make and gain arising from the sale or exchange by a U.S. stockholder of our stock will not be treated as passive activity income. As a result, stockholders will not be able to apply any passive losses against income or gain relating to our stock. To the extent distributions we make do not constitute a return of capital or a long-term capital gain (unless you elect otherwise), they will be treated as investment income for purposes of computing the investment interest limitation.
Additional Medicare Contribution Tax. An additional tax of 3.8% generally will be imposed on the “net investment income” of U.S. stockholders who meet certain requirements and are individuals, estates or certain trusts. Among other items, “net investment income” generally includes gross income from dividends and net gain attributable to the disposition of certain property, such as shares of our common stock. In the case of individuals, this tax will only apply to the extent such individual’s modified adjusted gross income exceeds $200,000 ($250,000 for married couples filing a joint return and surviving spouses, and $125,000 for married individuals filing a separate return). U.S. stockholders should consult their tax advisors regarding the possible applicability of this additional tax in their particular circumstances.
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Information Reporting Requirements and Backup Withholding for U.S. Stockholders. As required, we will report to U.S. stockholders of our common stock and to the IRS the amount of distributions made or deemed made during each calendar year and the amount of tax withheld, if any. Under some circumstances, U.S. stockholders may be subject to backup withholding on payments made with respect to, or cash proceeds of a sale or exchange of, our common stock. Backup withholding will apply only if the stockholder:
Fails to furnish its taxpayer identification number (which, for an individual, would typically be his or her Social Security number);
Furnishes an incorrect taxpayer identification number;
Is notified by the IRS that the stockholder has failed to properly report payments of interest or dividends and is subject to backup withholding; or
Under some circumstances, fails to certify, under penalties of perjury, that it has furnished a correct taxpayer identification number and has not been notified by the IRS that the stockholder is subject to backup withholding for failure to report interest and dividend payments or has been notified by the IRS that the stockholder is no longer subject to backup withholding for failure to report those payments.
Backup withholding will not apply with respect to payments made to some stockholders, such as corporations in certain circumstances and tax-exempt organizations. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a U.S. stockholder will be allowed as a credit against the U.S. stockholder’s U.S. federal income tax liability and may entitle the U.S. stockholder to a refund, provided that the required information is furnished to the IRS. U.S. stockholders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
Cost Basis Reporting. Treasury Regulations require us to report the cost basis and gain or loss to a stockholder upon the sale or liquidation of “covered” shares. For purposes of these Treasury Regulations, all shares acquired by non-tax-exempt stockholders through the Reinvestment Plan will be considered “covered” shares and will be subject to the applicable reporting requirements.
Upon the sale or liquidation of “covered” shares, a broker must report both the cost basis of the shares and the gain or loss recognized on the sale of those shares to the stockholder and to the IRS on Form 1099-B. In addition, stockholders that are S-corporations are no longer exempt from Form 1099-B reporting and shares purchased by an S-corporation are “covered” shares under the Treasury Regulations. If we take an organizational action such as a stock split, merger, or acquisition that affects the cost basis of “covered” shares, we will report to each stockholder and to the IRS via our website a description of any such action and the quantitative effect of that action on the cost basis on an information return.
We have elected the first in, first out (FIFO) method as the default for calculating the cost basis and gain or loss upon the sale or liquidation of “covered” shares. A non-tax-exempt stockholder may elect a different method of computation until the settlement date of the sold or liquidated shares. We suggest that you consult with your tax advisor to determine the appropriate method of accounting for your investment.
Treatment of Tax-Exempt Stockholders
Tax-exempt entities, including employee pension benefit trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. These entities are subject to taxation, however, on any UBTI, as defined in the Code. The IRS has issued a published ruling that distributions from a REIT to a tax-exempt pension trust do not constitute UBTI. Although rulings are merely interpretations of law by the IRS and may be revoked or modified, based on this analysis, indebtedness incurred by us or by our operating partnership in connection with the acquisition of a property should not cause any income derived from the property to be treated as UBTI upon the distribution of those amounts as dividends to a tax-exempt U.S. stockholder of our common stock. A tax-exempt entity that incurs indebtedness to finance its purchase of our common stock, however, will be subject to UBTI under the debt-financed income rules.
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In certain circumstances, a pension trust that owns more than 10% of our stock could be required to treat a percentage of the dividends as UBTI if we are a “pension-held REIT.” We will not be a pension-held REIT unless (i) we are required to look through one or more of our pension trust stockholders in order to satisfy the REIT “closely-held” test, and (ii) either (A) one pension trust owns more than 25% of the value of our stock, or (B) one or more pension trusts, each individually holding more than 10% of the value of our stock, collectively owns more than 50% of the value of our stock. Certain restrictions on ownership and transfer of our stock generally should prevent a tax-exempt entity from owning more than 10% of the value of our stock and generally should prevent us from becoming a pension-held REIT. Tax-exempt stockholders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign income and other tax consequences of owning our common stock.
For social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an investment in our shares will generally constitute UBTI unless the stockholder in question is able to deduct amounts set aside or placed in reserve for certain purposes so as to offset the UBTI generated. Any such organization that is a prospective stockholder should consult its own tax advisor concerning these set aside and reserve requirements, and regarding the treatment of distributions to such organization.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. federal income taxation of non-resident alien individuals, foreign corporations and other foreign stockholders, which we refer to collectively as “Non-U.S. stockholders,” are complex. The following discussion is intended only as a summary of these rules. Non-U.S. stockholders should consult with their own tax advisors to determine the impact of U.S. federal, state and local income tax laws on an investment in our common stock, including any reporting requirements as well as the tax treatment of the investment under the tax laws of their home country.
Ordinary Dividends. The portion of distributions received by Non-U.S. stockholders payable out of our E&P which are not attributable to our capital gains and which are not effectively connected with a U.S. trade or business of the Non-U.S. stockholder will be subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty.
In general, Non-U.S. stockholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our common stock. In cases where the distribution income from a Non-U.S. stockholder’s investment in our common stock is, or is treated as, effectively connected with the Non-U.S. stockholder’s conduct of a U.S. trade or business, the Non-U.S. stockholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such distributions, such income must generally be reported on a U.S. federal income tax return filed by or on behalf of the Non-U.S. stockholder, and the income may also be subject to the 30% branch profits tax in the case of a Non-U.S. stockholder that is a corporation.
Non-Dividend Distributions. Unless our common stock constitutes a U.S. real property interest (“USRPI”), distributions by us which are not distributions out of our E&P will not be subject to U.S. federal income tax. If it cannot be determined at the time at which a distribution is made whether or not the distribution will exceed current and accumulated E&P, the distribution will be subject to withholding at the rate applicable to distributions. However, the Non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated E&P. If our common stock constitutes a USRPI, as described below, distributions by us in excess of the sum of our E&P plus the stockholder’s basis in shares of our common stock will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. stockholder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a refundable withholding at a rate of 15% of the amount by which the distribution exceeds the stockholder’s share of our E&P.
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Capital Gain Distributions. Under FIRPTA, subject to the following exception, distributions that are sourced from capital gains from dispositions of USRPIs will be treated as income that is effectively connected with a U.S. trade or business of the Non-U.S. stockholder without regard to whether the distribution is designated as a capital gain distribution and shall be subject to a 21% withholding tax. As an exception, a distribution sourced from capital gains from dispositions of USRPIs will generally not be treated as income that is effectively connected with a U.S. trade or business, and will instead be treated the same as an ordinary distribution from us (see “— Special Tax Considerations for Non-U.S. Stockholders — Ordinary Dividends”), if (i) the capital gain distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the U.S., and (ii) the recipient Non-U.S. stockholder does not own more than 10% of that class of stock at any time during the taxable year in which the capital gain distribution is received. We do not anticipate our common stock satisfying the “regularly traded” requirement, and in such cases distributions that are sourced from capital gains from dispositions in USRPIs generally would be taxable to a Non-U.S. stockholder under FIRPTA. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a Non-U.S. stockholder that is a corporation. A distribution is not a USRPI capital gain if we held the underlying asset solely as a creditor. Capital gain distributions received by a Non-U.S. stockholder from a REIT that are not USRPI capital gains are generally not subject to U.S. federal income tax, but may be subject to U.S. federal withholding tax. Distributions, to “qualified foreign pension funds” or entities all of the interests of which are held by “qualified foreign pension funds” are exempt from U.S. federal income tax under FIRPTA. Non-U.S. stockholders should consult their tax advisors regarding the application of these rules.
Estate Tax. If our stock is owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the U.S. at the time of such individual’s death, the stock will be includable in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and may therefore be subject to U.S. federal estate tax.
Dispositions of Our Common Stock. Unless our common stock constitutes a USRPI, a sale of our common stock by a Non-U.S. stockholder generally will not be subject to U.S. federal income tax under FIRPTA. Our common stock will not be treated as a USRPI if less than 50% of our assets throughout a prescribed testing period consist of interests in real property located within the U.S., excluding, for this purpose, interests in real property solely in a capacity as a creditor.
Even if the foregoing test is not met, our common stock nonetheless will not constitute a USRPI if we are a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares of common stock is held directly or indirectly by Non-U.S. stockholders. If we are a domestically controlled REIT, the sale of our common stock should not be subject to taxation under FIRPTA. We cannot assure you that we are or will continue to be a domestically controlled REIT. Non-U.S. stockholders should consult their tax advisors regarding the application of these rules.
If we were not a domestically controlled REIT, whether a Non-U.S. stockholder’s sale of our common stock would be subject to tax under FIRPTA as a sale of a USRPI would depend on whether our common stock were “regularly traded” on an established securities market and on the size of the selling stockholder’s interest in us.
In addition, even if we are a domestically controlled REIT, upon disposition of our common stock (subject to the exception applicable to “regularly traded” stock described above), a Non-U.S. stockholder may be treated as having gain from the sale or exchange of a USRPI if the Non-U.S. stockholder (i) disposes of our common stock within a 30-day period preceding the ex-dividend date of distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI and (ii) acquires, or enters into a contract or option to acquire, other shares of our common stock within 30 days after such ex-dividend date.
If the gain on the sale of shares of common stock were subject to taxation under FIRPTA, a Non-U.S. stockholder would be subject to the same treatment as a U.S. stockholder with respect to the gain, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals.
Gain from the sale of our common stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the U.S. to a Non-U.S. stockholder in two cases: (i) if the Non-U.S. stockholder’s investment in our common stock is effectively connected with a U.S. trade or business conducted by such Non-U.S. stockholder, the Non-U.S. stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain; or (ii) if the Non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” (as defined in the Code) in the U.S., the nonresident alien individual will be subject to a 30% U.S. federal tax on the individual’s capital gain.
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Information Reporting Requirements and Backup Withholding for Non-U.S. Holders. Non-U.S. stockholders should consult their tax advisors with regard to U.S. information reporting and backup withholding requirements under the Code. We will provide you with an annual Form 1042-S, if required, by March 15 following the end of our fiscal year.
Statement of Share Ownership
We are required to demand annual written statements from the record holders of designated percentages of our common stock disclosing the actual owners of the shares of common stock. Any record stockholder who, upon our request, does not provide us with required information concerning actual ownership of the shares of common stock is required to include specified information relating to his or her shares of common stock in his or her U.S. federal income tax return. We also must maintain, within the Internal Revenue District in which we are required to file our U.S. federal income tax return, permanent records showing the information we have received about the actual ownership of our common stock and a list of those Persons failing or refusing to comply with our demand.
Other Tax Considerations
Payments to Certain Foreign Financial Entities and Other Foreign Entities. U.S. federal withholding tax at a rate of 30% will be imposed on certain payments to you or certain foreign financial institutions (including investment funds) and other non-U.S. entities receiving payments on your behalf, including distributions in respect of shares of our stock, if you or such institutions fail to comply with certain due diligence and other reporting rules as set forth in Treasury Regulations. Accordingly, the entity through which shares of our stock are held will affect the determination of whether such withholding is required. Withholding currently applies to payments of dividends and the IRS has advised that future guidance may provide that certain other payments made to or by certain foreign financial institutions may be subject to a 30% U.S. federal withholding tax. Stockholders that are otherwise eligible for an exemption from, or reduction of, U.S. federal withholding taxes with respect to such dividends will be required to seek a refund from the IRS to obtain the benefit of such exemption or reduction. Additional requirements and conditions may be imposed pursuant to an intergovernmental agreement, if and when entered into, between the U.S. and such institution’s home jurisdiction. We will not pay any additional amounts to any stockholders in respect of any amounts withheld. You are encouraged to consult with your tax advisor regarding U.S. federal withholding taxes and the application of the Treasury Regulations in light of your particular circumstances.
Partnership Audit Rules. Generally effective for partnership tax years beginning after December 31, 2017, for U.S. federal income tax purposes, subject to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s distributive share thereof) generally is determined, and taxes, interest, or penalties attributable thereto are assessed and collected, at the partnership level. It is possible that this rule could result in partnerships in which we directly or indirectly invest being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties even though we, as a REIT, may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment.
Legislative or Other Actions Affecting REITs. Current and prospective holders of our stock should recognize the present U.S. federal income tax treatment of an investment in our stock may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our stock.
U.S. State and Local Taxes. We and our subsidiaries and stockholders may be subject to U.S. state and local taxation in various jurisdictions including those in which we or they transact business, own property or reside. We own properties located in numerous jurisdictions within the U.S., and may be required to file tax returns in some or all of those jurisdictions. Our U.S. state and local tax treatment and that of our stockholders may not conform to the U.S. federal income tax treatment discussed above.
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Available Information
CNL Financial Group, LLC (“Sponsor” or “CNL”) maintains a web site at www.cnlhealthcareproperties.com containing additional information about our business, and a link to the SEC web site (www.sec.gov). We make available free of charge on our web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after we file such material, or furnish it to, the SEC. The SEC also maintains a web site (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.
The contents of our web site are not incorporated by reference in, or otherwise a part of, this report.
Item 1A. RISK FACTORS
The events and consequences discussed in these risk factors could, in circumstances where the Company may not be able to accurately predict, recognize or control, have a material adverse effect on the Company’s business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, and ability to pay distributions.
Risks Related to The Company’s Business
The ongoing COVID-19 pandemic has had an adverse effect on, and likely will continue to adversely affect, the Company’s business, results of operations and financial condition.
The COVID-19 pandemic has resulted in a decline in occupancy, resident fees, and revenues, and coupled with an increase in COVID-19 operating expenses, has had a negative impact on results of operations and cash flow from operations at the Company’s senior communities. The magnitude of impact of COVID-19 on the Company’s business, results from operations, financial condition, liquidity and cash flows will depend on many factors, many of which cannot be foreseen given the ongoing and dynamic nature of the circumstances surrounding the COVID-10 pandemic, including: the ultimate duration of the pandemic; the severity of COVID-19 on seniors generally and those living in seniors housing communities specifically; the continued emergence of additional variants; continued issues with the supply chain and availability and cost of goods; and consumer sentiment regarding the safety of seniors housing communities during and after the pandemic which may impact demand for seniors housing communities.
The COVID-19 pandemic and other actions taken by the governments, businesses and individuals in response to the COVID-19 pandemic has subjected and could further subject the Company’s business, operations, and financial condition to a number of risks, including, but not limited to:
the Company’s ability to collect rents;
occupancy rates in the Company’s facilities;
the Company’s and its operators’ ability to evict residents for non-payment and for other reasons;
the Company’s ability to repay existing debt and to secure new debt financing if needed;
the Company’s ability to collect unpaid rent and to exercise other rights and remedies in bankruptcy proceedings involving tenant, operator, borrow, manager and other obligors;
the Company’s ability to find replacement tenants as needed;
the Company’s ability to control incremental costs associated with COVID-19, including increased costs resulting from higher inflation and insurance costs;
continued staffing shortages resulting from the COVID-19 pandemic and other actions taken by local and national governments;
potential litigation expenses and increased reputational risk; and
the Company’s ability to pay distributions at expected levels or at all.
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Given the ongoing and dynamic nature of the circumstances surrounding the COVID-19 pandemic, it remains challenging to predict the ultimate impact of the COVID-19 pandemic on the global economy, the Company’s residents and operators, or for how long disruptions are likely to continue. The COVID-19 pandemic also may have the effect of heightening many of the other risks described below.
If the Company does not successfully implement a liquidity event, investors may have to hold an investment for an indeterminate period of time.
In April 2018, the Company’s board of directors formed a special committee consisting solely of independent directors (“Special Committee”) to consider possible strategic alternatives to provide liquidity to the Company’s stockholders. In connection with its consideration of Possible Strategic Alternatives, the board of directors suspended both the Company’s Reinvestment Plan and Redemption Plan effective July 11, 2018 and committed to a plan to sell 70 properties consisting of medical office buildings, acute-care properties, post-acute care properties and skilled nursing facilities.
Between April 2019 and December 31, 2021, the Company sold 69 of these properties resulting in net proceeds to the Company of approximately $1.4497 billion. The Company used the net sales proceeds to: (1) repay indebtedness secured by or allocated to the sold properties; (2) strategically rebalance other corporate borrowings; (3) make a special cash distribution of $347.9 million to stockholders and (4) for other corporate purposes. In March 2022, the Company entered into a purchase and sale agreement for the last property in its MOB/Healthcare Portfolio, the remaining specialty hospital (“Hurst Specialty Hospital”), with an unrelated third party and in April 2022, sold it and received net sales proceeds of approximately $8.3 million. As of December 31, 2022, the Company’s investment portfolio consisted of interests in 70 properties, comprising of 69 seniors housing communities and one vacant land parcel.
Our Special Committee continues to actively work with our financial advisor to identify potential strategic options, which may include other transactions to provide stockholders with liquidity for their investment. The COVID-19 pandemic and general macroeconomic conditions have adversely affected the real estate market for properties like those currently owned by the Company. Valuations of properties have declined as a result of changes in operating income, lower estimates of earnings growth, and an expansion of capitalization rates. Additionally, rising interest rates in a high inflation environment may adversely impact the valuation of the Company’s assets as debt capital available to potential buyers becomes more expensive. As a result, the Company may have to own and operate its remaining properties if and until market conditions improve. Even if the Company consummates a liquidity event, the Company cannot guarantee that the Company will be able to liquidate all of the Company’s remaining assets on favorable terms, if at all. The timing of the sale of assets will depend on real estate and financial markets, economic conditions in areas in which its investments are located and federal income tax effects on stockholders that may prevail in the future.
If the Company is unable to consummate a liquidity event or delays such a transaction due to market conditions, the Company’s common stock may continue to be illiquid and investors may, for an indeterminate period of time, be unable to convert investor shares to cash easily, if at all, and could suffer losses on an investment in the Company’s shares.
In determining the Company’s estimated NAV per share, the Company primarily relied upon a valuation of the Company’s portfolio of properties and debt as of December 31, 2022. Valuations and appraisals of the Company’s properties and outstanding debt are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties. Therefore, the Company’s estimated NAV per share may not reflect the amount that would be realized upon a sale of each of the Company’s properties.
For the purposes of calculating the Company’s estimated NAV per share, the Company retained an independent third-party valuation firm as valuation expert to determine the Company’s estimated NAV per share and the value of the Company’s properties and debt as of December 31, 2022. The valuation methodologies used to estimate the NAV of the Company’s shares as well as the value of the Company’s properties and outstanding debt involved certain subjective judgments, including but not limited to, discounted cash flow analyses and the direct capitalization approach for wholly owned and partially owned properties. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond the Company’s control. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of the Company’s properties and the Company’s investments in real estate-related assets may not correspond to the realizable value upon a sale of those assets. In addition, reduced occupancy levels at the Company’s properties, as well as disruptions in the financial markets or deteriorating economic conditions that differ from what the Company anticipated at the time the Company acquired the properties could result in decreased values for such properties. As a result, the value of the Company’s real estate investments could decrease below the amounts the Company paid for the investments and also adversely affect NAV.
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The Company’s valuation procedures and its NAV are not subject to accounting principles generally accepted in the United States, or GAAP, and will not be subject to independent audit. The Company’s NAV may differ from equity (net assets) reflected on the Company’s audited financial statements, even if the Company is required to adopt a fair value basis of accounting for GAAP financial statement purposes.
Seniors housing properties in the Company’s portfolio may not be readily adaptable to other uses.
Seniors housing properties are specific-use properties that have limited alternative uses. Therefore, if the operations of any of the Company’s properties become unprofitable for the Company’s tenant or operator or for the Company due to industry competition, a general deterioration of the applicable industry or otherwise, then the Company may have great difficulty re-leasing the property or developing an alternative use for the property and the liquidation value of the property may be substantially less than would be the case if the property were readily adaptable to other uses. Should any of these events occur, the Company’s income and cash available for distribution and the value of the Company’s property portfolio could be reduced.
The financial condition of our operators and tenants can impact the Company’s operating revenue.
Although the Company’s operating lease agreements provide it with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, borrower, manager, or other obligor in bankruptcy or subject to insolvency proceedings may be able to limit or delay the Company’s ability to collect unpaid rent and to exercise other rights and remedies. In addition, if a lease is rejected in a tenant bankruptcy, the Company’s claim against the tenant may be limited by applicable provisions of the bankruptcy law. The Company may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. If the Company has terminated its lease with a tenant, the Company may not be able to find another tenant under current conditions due to the country’s current economic conditions, including impacts to the industry and other macroeconomic effects of the COVID-19 pandemic. If the Company cannot transition a leased property to a new tenant, the Company may take possession of that property, which may expose it to certain successor liabilities. Publicity about the operator’s financial condition and insolvency proceedings may also negatively impact their and the Company’s reputations, decreasing customer demand and revenues. Should such events occur, the Company’s revenue and operating cash flow may be adversely affected.
Events which adversely affect the ability of seniors to afford the Company’s daily resident fees could cause the occupancy rates, resident fee revenues and results of operations of the Company’s seniors housing properties to decline.
Costs to seniors associated with certain types of the seniors housing properties the Company acquires generally are not reimbursable under government reimbursement programs such as Medicaid and Medicare. A significant majority of the resident fee revenues generated by the Company’s properties are derived from private payment sources consisting of income or assets of residents or their family members. Only seniors with income or assets meeting or exceeding certain standards can typically afford to pay the Company’s daily resident and service fees and, in some cases, entrance fees. Economic downturns such as the one recently experienced in the U.S., reductions, or declining growth of government entitlement programs, such as social security benefits, inflation, or stock market volatility could adversely affect the ability of seniors to afford the fees for the Company’s seniors housing properties. If the Company’s tenants or managers are unable to attract and retain seniors with sufficient income, assets or other resources required to pay the fees associated with assisted and independent living services, the occupancy rates, resident fee revenues and results of operations for these properties could decline, which, in turn, could have a material adverse effect on the Company’s business.
Inflation could adversely impact the operating expenses of our tenants and operators.
Recent increases and continuing increases in the rate of inflation, both real and anticipated, as well as any resulting governmental policies, could adversely affect the economy and the costs of labor, goods and services to our tenants and operators. Increased operating costs could have an adverse impact if operating expenses exceed the pace of increases in revenue at our operating properties. Similarly, if increases in tenants' operating expenses exceed increases in their revenue, this may adversely affect our tenants’ ability to pay rent owed to us. An increase in our tenants’ expenses and a failure of their revenues to increase at least with inflation could adversely impact our tenants’ and our financial condition and our results of operations.
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Inflation could rise at rates that outpace contractual or actual increases in rental income.
Our long-term leases typically contain provisions, such as rent escalators, designed to mitigate the adverse impact of inflation. If the contractual or actual increases in rental income we receive from our operators do not keep pace with a rise in inflation, our financial condition and our results of operations could be adversely impacted. Inflation could erode the value of long-term leases that do not contain indexed escalation provisions, or contain fixed annual rent escalation provisions that are at rates lower than the rate of inflation, and increase expenses including those that cannot be passed through under our leases. Increased inflation could also increase our general and administrative expenses and, as a result of an increase in market interest rate in response to higher than anticipated inflation rate, increase our mortgage and debt interest costs, and these costs could increase at a rate higher than our rent increases.
There can be no assurance that the Company will be able to achieve expected cash flows necessary to pay or maintain distributions at any particular level or that distributions will continue over time.
There are many factors that can affect the availability and timing of distributions to stockholders. Distributions generally will be based upon such factors as the amount of cash available or anticipated to be available from real estate investments, current and projected cash requirements and tax considerations. Distributions may be limited in whole or in part by covenants of the Company’s Revolving Credit Facility or other loans. Because the Company receives income from property operations and interest or rents at various times during the Company’s fiscal year, distributions paid may not reflect the Company’s income earned in that particular distribution period. The amount of cash available for distributions is affected by many factors, such as the income from the Company’s real estate investments, the Company’s operating expense levels and many other variables. Actual cash available for distribution may vary substantially from estimates. The Company’s actual results may differ significantly from the assumptions used by the Company’s board of directors in establishing the distribution rates to be paid on its shares.
The Company cannot assure investors that:
rents or operating income from the Company’s properties will remain stable or increase; or
tenants will not default under or terminate their leases.
Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond the Company’s control, and a change in any one factor could adversely affect the Company’s ability to pay distributions. For instance:
Cash available for distributions may decrease if the Company is required to spend money to correct defects or to make improvements to properties.
Federal income tax laws require REITs to distribute at least 90% of their taxable income to stockholders each year. The Company has elected to be treated as a REIT for tax purposes, and this limits the earnings that the Company may retain for corporate growth, such as asset acquisition, development or expansion, and will make the Company more dependent upon additional debt or equity financing than corporations that are not REITs. If the Company borrows more funds in the future, more of the Company’s operating cash will be needed to make debt payments and cash available for distributions may decrease.
The payment of principal and interest required to service the debt resulting from the Company’s policy to use leverage to acquire assets may leave the Company with insufficient cash to pay distributions.
Because the Company has elected to be taxed as a REIT, the Company may pay distributions to the Company’s stockholders to comply with the distribution requirements of the Code, and to eliminate, or at least minimize, exposure to federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require the Company to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.
In addition, subject to the applicable REIT rules, the Company’s board of directors, in its discretion, may retain any portion of the Company’s cash on hand for capital needs and other corporate purposes. Future distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this Annual Report, as well as other factors that the Company’s board of directors may, from time to time deem relevant to consider when determining an appropriate common stock distribution.
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An investment return may be reduced if the Company is required to register as an investment company under the Investment Company Act.
The Company is not registered and does not intend to register the Company or any of its subsidiaries, as an investment company under the Investment Company Act. If the Company or any of its subsidiaries becomes obligated to register as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change the Company’s operations.
The Company believes it conducts its operations, directly and through the Company’s wholly and majority owned subsidiaries, so that neither the Company nor any of its subsidiaries will be an investment company and, therefore, will not be required to register as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which the Company refers to as the “40% Test.”
Since the Company is primarily engaged in the business of acquiring real estate, the Company believes that the Company and most, if not all, of the Company’s wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If the Company or any of the Company’s wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” the Company intends to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act. Under Section 3(c)(5)(C), a company generally must maintain at least 55% of its assets directly in what are deemed “qualifying” real estate assets and at least 80% of the entity’s assets in such qualifying assets and in a broader category of what are deemed “real estate-related” assets to qualify for this exception.
If the Company were required to register as an investment company but failed to do so, it would be prohibited from engaging in the Company’s business, and criminal and civil actions could be brought against the Company. In addition, the Company’s contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the Company and liquidate its business.
Cyber security risks and cyber incidents could adversely affect the Company’s business and disrupt operations.
Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence.
Damage from catastrophic weather and other natural events and climate change could result in losses to us.
Certain of our properties are located in areas that may experience catastrophic weather and other natural events from time to time, including hurricanes or other severe weather, flooding, fires, snow or ice storms, windstorms or, earthquakes. These adverse weather and natural events could cause substantial damages or losses to our properties which could exceed our insurance coverage. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected property, as well as anticipated future revenue from that property. We could also continue to be obligated to repay any mortgage indebtedness or other obligations related to the property.
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To the extent that significant changes in the climate occur, we may experience extreme weather and changes in precipitation and temperature and rising sea levels, all of which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. The impact of climate change may be material in nature, including destruction of our properties, or occur for lengthy periods of time.
Growing public concern about climate change has resulted in the increased focus of local, state, regional, national and international regulatory bodies on greenhouse gas (“GHG”) emissions and climate change issues. Legislation to regulate GHG emissions has periodically been introduced in the U.S. Congress, and there has been a wide-ranging policy debate, both in the U.S. and internationally, regarding the impact of these gases and possible means for their regulation. Federal, state or foreign legislation or regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties or to protect them from the consequence of climate change and could also result in increased compliance costs or additional operating restrictions that could adversely impact the businesses of our tenants and their ability to pay rent.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or regulated substances on, under, in or about such property. The costs of investigation, removal or remediation of such substances could be substantial. Those laws may impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the substances.
Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and compliance with those restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles govern the presence, maintenance, removal and disposal of certain building materials, including mold, asbestos and lead-based paint.
The cost of defending against such claims of liability, of compliance with environmental requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, the amounts available for distribution to our stockholders.
We cannot assure our stockholders that properties which we acquired will not have any material environmental conditions, liabilities or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we own.
Risks Related to Conflicts of Interest and the Company’s Relationships with Its Advisor and Its Affiliates
The Advisor and its affiliates, including all of the Company’s executive officers and affiliated directors, face conflicts of interest as a result of their compensation arrangements with the Company, which could result in actions that are not in the best interest of the Company’s stockholders.
The Company pays its Advisor and its affiliates substantial fees. These fees could influence their advice to the Company, as well as the judgment of affiliates of the Advisor performing services for the Company. Among other matters, these compensation arrangements could affect their judgment with respect to:
the continuation, renewal, or enforcement of the Company’s agreements with its Advisor and its affiliates;
property sales, which may entitle the Advisor to disposition fees;
property acquisitions from third parties, which entitle the Advisor to an investment services fee;
borrowings to acquire assets, which increase the investment services fees and asset management fees payable to the Advisor and which entitle the Advisor or its affiliates to receive other acquisition fees in connection with assisting in obtaining financing for assets if approved by the Company’s board of directors, including a majority of the Company’s independent directors;
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whether the Company seeks to internalize its management functions, which could result in it retaining some of the Advisor’s and its affiliates’ key officers for compensation that is greater than that which they currently earn or which could require the Company to make additional payments to the Advisor or its affiliates to purchase the assets and operations of the Advisor and its affiliates performing services for the Company;
the listing of, or other liquidity event with respect to, the Company’s shares, which may entitle the Advisor to a subordinated incentive fee.
The fees the Advisor receives in connection with transactions involving the purchase and management of the Company’s assets are not necessarily based on the quality of the investment or the quality of the services rendered to the Company. The basis upon which fees are calculated may influence the Advisor to recommend riskier transactions to the Company.
None of the agreements with the Advisor or any other affiliates were negotiated at arm’s length.
Agreements with the Advisor or any other affiliates may contain terms that would not otherwise apply if the Company entered into agreements negotiated at arm’s length with third parties.
If the Company internalizes the Company’s management functions, an interest in the Company could be diluted, the Company could incur other significant costs associated with being self-managed, and the Company may not be able to retain or replace key personnel and may have increased exposure to litigation.
The Company may internalize management functions provided by the Advisor and its affiliates. The Company’s board of directors may decide in the future to acquire assets and personnel from the Advisor or its affiliates for consideration that would be negotiated at that time. However, as a result of the non-solicitation clause in the advisory agreement, generally the acquisition of Advisor personnel would require the prior written consent of the Advisor. There can be no assurances that the Company will be successful in retaining the Advisor’s key personnel in the event of an internalization transaction. In the event the Company acquires the Advisor, the Company cannot be sure of the form or amount of consideration or other terms relating to any such acquisition, which could take many forms, including cash payments, promissory notes, and shares of the Company’s stock. The payment of such consideration could reduce the percentage of the Company’s shares owned by the Company's current stockholders and could reduce the net income per share and FFO per share attributable to their current stockholdings.
In addition, the Company may issue equity awards to officers and consultants, which would reduce the percentage of the Company's shares owned by the Company's current stockholders, increase operating expenses and decrease net income and FFO. The Company cannot reasonably estimate the amount of fees to the Advisor and other affiliates the Company would save, and the costs it would incur, if the Company acquired these entities. If the expenses the Company assumes as a result of an internalization are higher than the expenses the Company avoids paying to the Advisor and other affiliates, its net income per share and FFO per share would be lower than they otherwise would have been had the Company not internalized management functions.
Additionally, if the Company internalizes its management functions, the Company could have difficulty integrating these functions. Currently, the officers of the Advisor and its affiliates perform asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. The Company may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could result in the Company’s incurring additional costs and divert its management’s attention from effectively managing the Company’s properties and overseeing other real estate-related assets.
Internalization transactions have been the subject of stockholder litigation. Stockholder litigation can be costly and time-consuming, and there can be no assurance that any litigation expenses the Company might incur would not be significant or that the outcome of litigation would be favorable to the Company. Any amounts the Company is required to expend defending any such litigation will reduce the amount of funds available for investment by the Company in properties or other investments.
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The Company is not in privity of contract with service providers that may be engaged by the Advisor to perform advisory services and they may be insulated from liabilities to the Company, and the Advisor has minimal assets with which to remedy any liabilities to the Company.
The Advisor sub-contracts with affiliated or unaffiliated service providers for the performance of substantially all of its advisory services. The Advisor has engaged affiliates of the Sponsor to perform certain services on its behalf pursuant to agreements to which the Company is not a party. As a result, the Company is not in privity of contract with any such service provider and, therefore, such service provider has no direct duties, obligations, or liabilities to the Company. In addition, the Company has no right to any indemnification to which the Advisor may be entitled under any agreement with a service provider. The service providers the Advisor may subcontract with may be insulated from liabilities to the Company for services they perform but may have certain liabilities to the Advisor. The Advisor has minimal assets with which to remedy liabilities to the Company resulting under the advisory agreement.
Financing Related Risks
The Company may enter into agreements with lenders which restrict the Company’s ability to pay distributions to investors.
The Company’s Revolving Credit Facility contains limitations on distributions and the extent of allowable distributions. The Company’s Revolving Credit Facility requires that allowable distributions not exceed 95% of adjusted FFO (as defined in the Revolving Credit Facility agreement) and limits the minimum amount of distributions required to maintain the Company’s REIT status. These and other similar restrictions in loan agreements the Company may enter into impact the Company’s ability to pay distributions to investors.
Mortgage indebtedness and other borrowings will increase the Company’s business risks.
The Company has incurred and may increase the Company’s mortgage debt by obtaining loans collateralized by some or all of the Company’s assets to obtain funds to acquire additional investments or to pay distributions to the Company’s stockholders. If necessary, the Company also may borrow funds to satisfy the requirement that the Company distribute at least 90% of the Company’s annual taxable income, or otherwise as is necessary or advisable to assure that the Company maintain the Company’s qualification as a REIT for federal income tax purposes.
The Company’s charter provides that it may not borrow more than 300% of the value of the Company’s net assets without the approval of a majority of the Company’s independent directors and the borrowing must be disclosed to the Company’s stockholders in the Company’s first quarterly report after such approval. Borrowing may be risky if the cash flow from the Company’s properties and other real estate-related investments is insufficient to meet the Company’s debt obligations. In addition, the Company’s lenders may seek to impose restrictions on future borrowings, distributions and operating policies, including with respect to capital expenditures and asset dispositions. If the Company mortgages assets or pledges equity as collateral and the Company cannot meet the Company’s debt obligations, then the lender could take the collateral, and the Company would lose the asset or equity and the income the Company were deriving from the asset.
The Company uses credit facilities to finance the Company’s investments, which may require the Company to provide additional collateral and significantly impact its liquidity position.
Some of the Company’s credit facilities contain mark-to-market provisions providing that if the market value of the commercial real estate debt or securities pledged by the Company declines in value due to credit quality deterioration, the Company may be required by the Company’s lenders to provide additional collateral or pay down a portion of the Company’s borrowings. In a weak economic environment, the Company would generally expect credit quality and the value of the commercial real estate debt or securities that serve as collateral for the Company’s credit facilities to decline, and in such a scenario it is likely that the terms of the Company’s credit facilities would require partial repayment from the Company, which could be substantial. Posting additional collateral to support the Company’s credit facilities could significantly reduce the Company’s liquidity and limit its ability to leverage its assets. In the event the Company does not have sufficient liquidity to meet such requirements, the Company’s lenders can accelerate the Company’s borrowings, which could have a material adverse effect on its business and operations.
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Financing arrangements involving balloon payment obligations may adversely affect the Company’s ability to make distributions.
The Company sometimes enters into fixed-term financing arrangements which require it to make “balloon” payments at maturity. The Company’s ability to pay or refinance such obligations at maturity is uncertain and may depend upon the Company’s ability to obtain additional financing or sell a particular property. At the time the balloon payment is due, the Company may not be able to raise equity or refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. These refinancing or property sales could negatively impact the rate of return to stockholders and the timing of disposition of the Company’s assets. In addition, payments of principal and interest may leave the Company with insufficient cash to pay the distributions that the Company is required to pay to maintain its qualification as a REIT.
The Company may acquire various financial instruments for purposes of “hedging” or reducing the Company’s risks which may be costly and/or ineffective and will reduce the Company’s cash available for distribution to its stockholders.
The Company may engage in hedging transactions to manage the risk of changes in interest rates, price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the Company. The Company may use derivative financial instruments for this purpose, collateralized by the Company’s assets and investments. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. The Company’s actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time. Hedging activities may be costly or become cost-prohibitive and the Company may have difficulty entering into hedging transactions.
To the extent that the Company uses derivative financial instruments to hedge against exchange rate and interest rate fluctuations, the Company will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. The Company may be unable to manage these risks effectively.
Regulation
The Company’s failure or the failure of the tenants and managers of the Company’s properties to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect the operations of the Company’s seniors housing properties.
The operations of the Company’s seniors housing properties are subject to numerous federal, state, and local laws and regulations that are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing laws. The ultimate timing or effect of any changes in these laws and regulations cannot be predicted. Failure to obtain licensure or loss or suspension of licensure or certification may prevent a facility from operating or result in a suspension of certain revenue sources until all licensure or certification issues have been resolved. Properties may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. State laws may require compliance with extensive standards governing operations and agencies administering those laws regularly inspect such properties and investigate complaints. Failure to comply with all regulatory requirements could result in the loss of the ability to provide or bill and receive payment for healthcare services at the Company’s seniors housing properties. Additionally, transfers of operations of certain facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate. The Company has no direct control over the tenant’s or manager’s ability to meet regulatory requirements and failure to comply with these laws, regulations and requirements may materially adversely affect the operations of these properties.
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In addition, if the Company leases a seniors housing property to the Company’s TRS rather than leasing the property to a third-party tenant, the Company’s TRS will generally be the license holder and become subject to state licensing requirements and certain operating risks that apply to facility operators, including regulatory violations and third-party actions for negligence or misconduct. The TRS will have increased liability resulting from events or conditions that occur at the facility, including, for example, injuries to residents and deaths of residents at the facility. In the event the TRS incurs liability and a successful claim is made that the separate legal status of the TRS should be ignored for equitable or other reasons (i.e. a corporate veil piercing claim), the Company may also become liable for such matters. Insurance may not cover all such liabilities. Any negative publicity resulting from lawsuits related to the Company’s TRS status as a licensee could adversely affect the Company’s business reputation and ability to attract and retain residents in the Company’s leased properties, the Company’s ability to obtain or maintain licenses at the affected facility and other facilities, and the Company’s ability to raise additional capital.
Termination of resident lease agreements could adversely affect the Company’s revenues and earnings for seniors housing properties providing assisted living services.
Applicable regulations governing assisted living properties generally require written resident lease agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident lease agreement for any reason on reasonable notice or upon the death of the resident. The operators of seniors housing properties cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements with terms of up to one year or longer. In addition, the resident turnover rate in the Company’s properties may be difficult to predict. If a large number of resident lease agreements terminate at or around the same time, and if the Company’s units remained unoccupied, then the Company’s tenant’s ability to make scheduled rent payments to the Company or, with respect to certain of the Company’s seniors housing properties lease to TRS entities, the Company’s operating results, the Company’s revenues and the Company’s earnings could be adversely affected.
Legislation and government regulation may adversely affect the operations of the Company’s properties.
Certain of the operations conducted on the Company’s properties require permits, licenses, and approvals from certain federal, state, and local authorities. Material permits, licenses or approvals may be terminated, not renewed, or renewed on terms or interpreted in ways that are materially less favorable to the Company. Furthermore, laws and regulations that the Company or the Company’s operators are subject to may change in ways that are difficult to predict. There can be no assurance that the application of laws, regulations or policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a detrimental effect on any property the Company may acquire, the operations of such property and the amount of rent it receives from the tenant of such property.
Tax Related Risks
Failure to qualify as a REIT would adversely affect the Company’s operations and the Company’s ability to pay distributions to investors.
The Company believes it operates as a REIT under the Code and believes the Company will continue to operate as a REIT in such manner. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company’s control may also affect the Company’s ability to remain qualified as a REIT. If the Company fails to qualify as a REIT for any taxable year, (i) the Company will be subject to federal and state income tax on the Company’s taxable income for that year at regular corporate rates, (ii) for taxable years beginning before December 31, 2017, the Company may be subject to alternative minimum tax on the Company’s taxable income for that year at regular corporate rates, (iii) unless entitled to relief under relevant statutory provisions, the Company would generally be disqualified from taxation as a REIT for the four taxable years following the year of disqualification as a REIT; and (iv) distributions to stockholders would no longer qualify for the dividends paid deduction in computing the Company’s taxable income. If the Company does not qualify as a REIT, the Company would not be required to make distributions to stockholders as a non-REIT is not required to pay dividends to stockholders in order to maintain REIT status or avoid an excise tax. The additional income tax liability the Company would incur as a result of failing to qualify as a REIT would reduce the Company’s net earnings available for distributions to stockholders and also reduce the funds available for satisfying the Company’s obligations in general. If the Company fails to qualify as a REIT, the Company may be required to borrow funds or liquidate some investments in order to pay the applicable tax. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair the Company’s ability to implement its business strategy and would adversely affect the value of its stock.
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The Company’s leases may be re-characterized as financings which would eliminate depreciation deductions with respect to the Company’s properties.
The Company believes that it would be treated as the owner of properties where the Company would own the underlying real estate, except with respect to leases structured as “financing leases,” which would constitute financings for federal income tax purposes. If the lease of a property does not constitute a lease for federal income tax purposes and is re-characterized as a secured financing by the IRS, then the Company believes the lease should be treated as a financing arrangement and the income derived from such a financing arrangement should satisfy the 75% and the 95% gross income tests for REIT qualification as it would be considered to be interest on a loan collateralized by real property. Nevertheless, the re-characterization of a lease in this fashion may have adverse tax consequences for the Company. In particular, the Company would not be entitled to claim depreciation deductions with respect to the property (although the Company should be entitled to treat part of the payments the Company would receive under the arrangement as the repayment of principal and not rent). In such event, in some taxable years the Company’s taxable income, and the corresponding obligation to distribute 90% of such income, would be increased. With respect to leases structured as “financing leases,” the Company will report income received as interest income and will not take depreciation deductions related to the real property. Any increase in the Company’s distribution requirements may limit the Company’s ability to invest in additional properties and to make additional mortgage loans. No assurance can be provided that the IRS would re-characterize such transactions as financings that would qualify under the 95% and 75% gross income tests.
The Company may have to borrow funds or sell assets to meet the Company’s distribution requirements.
Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income to its stockholders. For the purpose of determining taxable income, the Company may be required to accrue interest, rent and other items treated as earned for tax purposes, but that it has not yet received. In addition, the Company may be required not to accrue as expenses for tax purposes some items which actually have been paid, or some of the Company’s deductions might be subject to certain disallowance rules under the Code. As a result, the Company could have taxable income in excess of cash available for distribution. If this occurs, the Company may have to borrow funds or liquidate some of its assets in order to meet the distribution requirements applicable to a REIT.
Even as a REIT, the Company remains subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred.
Even as a REIT, the Company is or could be subject to federal, foreign and state and local taxes on the Company’s income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed taxable income; (ii) for taxable years beginning before December 31, 2017, alternative minimum tax on the Company’s items of tax preference; (iii) certain state income taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions”; (v) tax on net gains from the sale of certain “foreclosure property”; (vi) tax on gains of sale of certain “built-in gain” properties; and (vii) certain taxes and penalties if the Company fails to comply with one or more REIT qualification requirements, but nevertheless qualifies to maintain the Company’s status as a REIT. Foreclosure property includes property with respect to which the Company acquires ownership by reason of a borrower default on a loan or possession by reason of a tenant’s default on a lease. The Company may elect to treat certain qualifying property as “foreclosure property,” in which case, the gross revenue and net gain from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, the Company must satisfy additional requirements, including that the Company operate the property through an independent contractor after a short grace period. The Company will be subject to tax on the Company’s net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income. Any such tax incurred will reduce the amount of cash available for distribution.
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The Company’s investment strategy may cause the Company to incur penalty taxes, fail to maintain the Company’s REIT status or own and sell properties through TRSs, each of which would diminish the return to the Company’s stockholders.
The sale of one or more of the Company’s properties may be considered a prohibited transaction under the Code. Any “inventory-like” sales would almost certainly be considered such a prohibited transaction. If the Company is deemed to have engaged in a “prohibited transaction” (i.e., the Company sells a property held by the Company primarily for sale in the ordinary course of the Company’s trade or business), all net gain that the Company derives from such sale would be subject to a 100% penalty tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The principal requirements of the safe harbor are that: (i) the REIT must hold the applicable property for not less than two years for the production of rental income prior to its sale; (ii) the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of sale which are includible in the basis of the property do not exceed 30% of the net selling price of the property; and (iii) the REIT does not make more than seven sales of property during the taxable year, the aggregate adjusted bases of property sold during the taxable year does not exceed 20% of the aggregate bases of all of the REIT’s assets as of the beginning of the taxable year or the fair market value of property sold during the taxable year does not exceed 20% of the fair market value of all of the REIT’s assets as of the beginning of the taxable year (this percentage threshold was 10% of the aggregate bases or fair market value of all of the REIT’s assets, as the case may be, for taxable years beginning before December 18, 2015). Given the Company’s investment strategy, the sale of one or more of its properties may not fall within the prohibited transaction safe harbor.
If the Company desires to sell a property pursuant to a transaction that does not fall within the safe harbor, the Company may be able to avoid the prohibited transaction tax if the Company acquired the property through a TRS, or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes). The Company may decide to forego the use of a TRS in a transaction that does not meet the safe harbor based on the Company’s own internal analysis, the opinion of counsel or the opinion of other tax advisors that the disposition will not be subject to the prohibited transaction tax. In cases where a property disposition is not effected through a TRS, the IRS could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net gain from the sale of such property will be payable as a tax which will have a negative impact on cash flow and the ability to make cash distributions.
As a REIT, the value of the Company’s ownership interests held in the Company’s TRSs may not exceed 20% of the value of all of the Company’s assets at the end of any calendar quarter (25% for taxable years beginning before December 31, 2017). If the IRS were to determine that the value of the Company’s interests in all of the Company’s TRSs exceeded 20% of the value of the Company’s total assets at the end of any calendar quarter, then the Company would fail to qualify as a REIT. If the Company determines it to be in its best interest to own a substantial number of the Company’s properties through one or more TRSs, then it is possible that the IRS may conclude that the value of the Company’s interests in the Company’s TRSs exceeds 20% of the value of the Company’s total assets at the end of any calendar quarter and therefore cause the Company to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of the Company’s gross income with respect to any year may be from sources other than real estate. Distributions paid to the Company from a TRS are considered to be non-real estate income. Therefore, the Company may fail to qualify as a REIT if distributions from all of the Company’s TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of the Company’s gross income with respect to such year.
The Company’s TRS structure subjects the Company to the risk that the leases with the Company’s TRSs do not qualify for tax purposes as arm’s-length, which would expose the Company to potentially significant tax penalties.
The Company’s TRSs generally will incur taxes or accrue tax benefits consistent with a “C” corporation for federal income tax purposes. If the leases between the Company and the Company’s TRSs were deemed by the IRS to not reflect an arm’s-length transaction as that term is defined by tax law, the Company may be subject to significant tax penalties as the lessor that would adversely impact the Company’s profitability and the Company’s cash flows.
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If the Company’s operating partnership fails to maintain its status as a partnership, the operating partnership’s income may be subject to taxation, which would reduce the cash available to the Company for distribution to its stockholders.
The Company maintains the status of its operating partnership as either a disregarded entity or an entity taxable as a partnership for federal income tax purposes. However, if the IRS were to successfully challenge the status of the operating partnership as a disregarded entity or an entity taxable as a partnership, the Company’s operating partnership would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to the Company. Additionally, this could also result in the Company’s failure to qualify as a REIT and becoming subject to a corporate level tax on the Company’s taxable income. This would substantially reduce the cash available to the Company to pay distributions and the return on an investment. In addition, if any of the partnerships or limited liability companies through which the Company’s operating partnership owns its properties, in whole or in part, loses its characterization as a partnership or disregarded entity for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Company’s operating partnership. Such a re-characterization of an underlying property owner could also threaten the Company’s ability to maintain REIT status.
The lease of qualified health care properties to a TRS is subject to special requirements.
The Company leases certain qualified health care properties to TRSs (or limited liability companies of which the TRSs are members), which lessees then contract with managers (or related parties) to manage the health care operations at these properties. The rents from this TRS lessee structure are treated as qualifying rents from real property if (1) they are paid pursuant to an arm’s-length lease of a qualified health care property with a TRS and (2) the manager qualifies as an eligible independent contractor (as defined in the Code). If any of these conditions are not satisfied, then the rents will not be qualifying rents and the Company might fail to meet the 95% and 75% gross income tests.
If the Company’s assets are deemed “plan assets” for the purposes of the Employee Retirement Income Security Act (“ERISA”), the Company could be subject to excise taxes on certain prohibited transactions.
The Company believes that the Company’s assets will not be deemed to be “plan assets” for purposes of ERISA and/or the Code, but the Company has not requested an opinion of counsel to that effect, and no assurances can be given that the Company’s assets will never constitute “plan assets.” If the Company’s assets were deemed to be “plan assets” for purposes of ERISA and/or the Code, among other things, (a) certain of the Company’s transactions could constitute “prohibited transactions” under ERISA and the Code, and (b) ERISA’s prudence and other fiduciary standards would apply to the Company’s investments (and might not be met). Among other things, ERISA makes plan fiduciaries personally responsible for any losses resulting to the plan from any breach of fiduciary duty, and the Code imposes nondeductible excise taxes on prohibited transactions. If such excise taxes were imposed on the Company, the amount of funds available for the Company to make distributions to stockholders would be reduced.
Risks Related to the Company’s Organizational Structure
The limit on the percentage of shares of the Company’s stock that any person may own may discourage a takeover or business combination that may benefit the Company’s stockholders.
The Company’s charter restricts the direct or indirect ownership by one person or entity to no more than 9.8%, by number or value, of any class or series of the Company’s equity securities (which includes common stock and any preferred stock the Company may issue). This restriction may deter individuals or entities from making tender offers for shares of the Company’s common stock on terms that might be financially attractive to stockholders or which may cause a change in the Company’s management. This ownership restriction may also prohibit business combinations that would have otherwise been approved by the Company’s board of directors and stockholders and may also decrease stockholders' ability to sell their shares of the Company’s common stock.
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The Company’s board of directors can take many actions without stockholder approval which could have a material adverse effect on the distributions investors receive from the Company and/or could reduce the value of the Company’s assets.
The Company’s board of directors has overall authority to conduct the Company’s operations. This authority includes significant flexibility. For example, the Company’s board of directors can: (i) list the Company’s stock on a national securities exchange or include its stock for quotation on the National Market System of the NASDAQ Stock Market without obtaining stockholder approval; (ii) prevent the ownership, transfer and/or accumulation of shares in order to protect the Company’s status as a REIT or for any other reason deemed to be in the best interests of the stockholders; (iii) authorize and issue additional shares of any class or series of stock without obtaining stockholder approval, which could dilute an ownership interest; (iv) change the Company’s Advisor’s compensation, and employ and compensate affiliates; (v) direct the Company’s investments toward those that will not appreciate over time, such as loans and building-only properties, with the land owned by a third-party; and (vi) establish and change minimum creditworthiness standards with respect to tenants. Any of these actions could reduce the value of the Company’s assets without giving investors, as stockholders, the right to vote.
The Company’s use of an operating partnership structure may result in potential conflicts of interest with limited partners other than the Company, if any, whose interests may not be aligned with those of the Company’s stockholders.
Limited partners other than the Company, if any, in the Company’s operating partnership will have the right to vote on certain amendments to the operating partnership agreement, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with the interests of the Company’s stockholders. As general partner of the Company’s operating partnership, the Company is obligated to act in a manner that is in the best interest of all partners of the Company’s operating partnership. Circumstances may arise in the future when the interests of other limited partners in the operating partnership may conflict with the interests of the Company’s stockholders. These conflicts may be resolved in a manner that stockholders do not believe is in their best interest.

Item 1B. UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
As of December 31, 2022, we had investments in 70 real estate investment properties, as described in Item 1. “Business––Seniors Housing Investment Focus and Strategy.” The following tables set forth details on our consolidated healthcare investment portfolio by asset class (in millions):
Name and LocationStructureDate AcquiredEncumbrance at 12/31/2022Investment Amount
Seniors Housing (Leased)
Primrose Retirement Community of Casper
Casper, WY
Triple-net Lease2/16/2012$— $19.0 
Sweetwater Retirement Community
Billings, MT
Triple-net Lease2/16/2012— 16.3 
Primrose Retirement Community of Grand Island
Grand Island, NE
Triple-net Lease2/16/2012— 13.4 
Primrose Retirement Community of Mansfield
Mansfield, OH
Triple-net Lease2/16/2012— 18.3 
Primrose Retirement Community of Marion
Marion, OH
Triple-net Lease2/16/2012— 17.9 
Primrose Retirement Community of Lima
Lima, OH
Triple-net Lease12/19/2012— 18.6 
Primrose Retirement Community of Zanesville
Zanesville, OH (“Columbus”)
Triple-net Lease12/19/2012— 19.1 
Primrose Retirement Community of Decatur
Decatur, IL
Triple-net Lease12/19/2012— 18.2 
Primrose Retirement Community of Council Bluffs
Council Bluffs, IA (“Omaha”)
Triple-net Lease12/19/2012— 12.9 
Primrose Retirement Community Cottages
Aberdeen, SD
Triple-net Lease12/19/2012— 4.3 
Primrose Retirement Community of Anderson
Anderson, IN (“Muncie”)
Triple-net Lease5/29/2015— 21.1 
Primrose Retirement Community of Lancaster
Lancaster, OH (“Columbus”)
Triple-net Lease5/29/2015— 25.7 
Primrose Retirement Community of Wausau
Wausau, WI (“Green Bay”)
Triple-net Lease5/29/2015— 20.3 
Wellmore of Tega Cay
Tega Cay, SC (“Charlotte”)
Triple-net Lease2/7/2014— 32.2 
Wellmore of Lexington
Lexington, SC (“Columbia”)
Triple-net Lease9/14/2015— 53.7 
Senior Housing (Managed)
Brookridge Heights Assisted Living & Memory Care
Marquette, MI
Managed12/21/2012— 18.5 
Curry House Assisted Living & Memory Care
Cadillac, MI
Managed12/21/2012— 13.5 
Symphony Manor
Baltimore, MD
Managed12/21/2012— 24.0 
Woodholme Gardens Assisted Living & Memory Care
Pikesville, MD (“Baltimore”)
Managed12/21/2012— 17.1 
Tranquillity at Fredericktowne
Frederick, MD
Managed12/21/2012— 23.3 
HarborChase of Villages Crossing
   Lady Lake, FL (“The Villages”)
Managed8/29/2012— 19.7 
HarborChase of Jasper
Jasper, AL
Managed8/1/2013— 7.3 
HarborChase of Plainfield
Plainfield, IL
Managed3/28/2014— 26.5 
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Name and LocationStructureDate AcquiredEncumbrance at 12/31/2022Investment Amount
Senior Housing (Managed) - continued
HarborChase of Shorewood
   Shorewood, WI (“Milwaukee”)
Managed7/8/2014$— $23.8 
Raider Ranch
Lubbock, TX
Managed8/29/2013— 72.0 
Town Village
Oklahoma City, OK
Managed8/29/2013— 23.7 
MorningStar of Billings
Billings, MT
Managed12/2/2013— 48.3 
MorningStar of Boise
Boise, ID
Managed12/2/2013— 40.0 
MorningStar of Idaho Falls
Idaho Falls, ID
Managed12/2/2013— 44.4 
MorningStar of Sparks
Sparks, NV (“Reno”)
Managed12/2/2013— 55.2 
Prestige Senior Living Arbor Place
Medford, OR
Managed12/2/2013— 15.8 
Prestige Senior Living Beaverton Hills
Beaverton, OR (“Portland”)
Managed12/2/2013— 12.9 
Prestige Senior Living Five Rivers
Tillamook, OR
Managed12/2/2013— 16.7 
Prestige Senior Living High Desert
Bend, OR
Managed12/2/2013— 13.6 
Prestige Senior Living Huntington Terrace
Gresham, OR (“Portland”)
Managed12/2/2013— 15.0 
Prestige Senior Living Orchard Heights
Salem, OR
Managed12/2/2013— 17.8 
Prestige Senior Living Riverwood
Tualatin, OR (“Portland”)
Managed12/2/2013— 9.7 
Prestige Senior Living Southern Hills
Salem, OR
Managed12/2/2013— 12.9 
Prestige Senior Living Auburn Meadows
Auburn, WA (“Seattle”)
Managed2/3/2014— 21.9 
Prestige Senior Living Bridgewood
Vancouver, WA (“Portland”)
Managed2/3/2014— 22.1 
Prestige Senior Living Monticello Park
Longview, WA
Managed2/3/2014— 27.4 
Prestige Senior Living Rosemont
Yelm, WA
Managed2/3/2014— 16.9 
Prestige Senior Living West Hills
Corvallis, OR
Managed3/3/2014— 15.0 
Isle at Cedar Ridge
Cedar Park, TX (“Austin”)
Managed2/28/2014— 22.0 
Legacy Ranch Alzheimer's Special Care Center
Midland, TX
Managed3/28/2014— 12.0 
The Springs Alzheimer's Special Care Center
San Angelo, TX
Managed3/28/2014— 10.9 
Isle at Watercrest - Bryan
Bryan, TX
Managed4/21/2014— 50.4 
Isle at Watercrest - Mansfield
Mansfield, TX (“Dallas/Fort Worth”)
Managed5/5/2014— 31.3 
Watercrest at Mansfield (1)
Mansfield, TX (“Dallas/Fort Worth”)
Managed6/30/201422.9 49.0 
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Name and LocationStructureDate AcquiredEncumbrance at 12/31/2022Investment Amount
Senior Housing (Managed) - continued
Watercrest at Katy (2)
Lubbock, TX
Managed6/27/2014$21.2 $37.2 
Fairfield Village of Layton
Layton, UT (“Salt Lake City”)
Managed11/20/2014— 68.0 
Superior Residences of Panama City
Panama City Beach, FL
Managed7/15/2015— 20.0 
Parc at Duluth
Duluth, GA (“Atlanta”)
Managed7/31/2015— 52.8 
Parc at Piedmont
Marietta, GA (“Atlanta”)
Managed7/31/2015— 50.8 
The Pavilion at Great Hills
Austin, TX
Managed7/31/2015— 35.0 
The Hampton at Meadows Place
Meadows Place, TX (“Houston”)
Managed7/31/2015— 28.4 
The Beacon at Gulf Breeze
Gulf Breeze, FL (“Pensacola”)
Managed7/31/2015— 28.0 
Waterstone on Augusta
Greenville, SC
Managed8/31/2015— 26.8 
Palmilla Senior Living
Albuquerque, NM
Managed9/30/2015— 47.6 
Cedar Lake Assisted Living and Memory Care
Lake Zurich, IL (“Chicago”)
Managed9/30/2015— 30.0 
The Shores of Lake Phalen
Maplewood, MN (“St. Paul”)
Managed11/10/2015— 29.2 
The Dogwood Forest of Grayson
Grayson, GA
Managed11/24/2015— 25.7 
Park Place Senior Living at WingHaven
O'Fallon, MO (“St Louis”)
Managed12/17/2015— 54.0 
Hearthside Senior Living of Collierville
Collierville, TN (“Memphis”)
Managed12/29/2015— 17.0 
Windsor Manor of Vinton (3)
Vinton, IA
Managed8/31/20122.7 5.0 
Windsor Manor of Webster City (3)
Webster City, IA
Managed8/31/20122.4 5.8 
Windsor Manor of Nevada (3)
Nevada, IA
Managed8/31/20125.4 5.3 
Windsor Manor of Indianola (3)
Indianola, IA
Managed4/2/20132.1 4.9 
Windsor Manor of Grinnell (3)
Grinnell, IA
Managed4/2/20135.2 5.5 
Vacant Land
Albuquerque NM, Land Owner
Albuquerque, NM
Managed9/7/2017— 1.1 
$61.9 $1,739.7 
_______________
FOOTNOTES:
(1)The encumbrance collateralized by this property was repaid in March 2023.
(2)Property owned through a consolidated joint venture in which we hold a 95% controlling interest.
(3)As of December 31, 2021, we owned this real estate property through a 75% interest in Windsor Manor Joint Venture, an unconsolidated joint venture. Effective January 1, 2022, we acquired the remaining 25% interest in the Windsor Manor Joint Venture from our joint venture partner and currently own a 100% interest in the Windsor Manor Joint Venture.
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Item 3. LEGAL PROCEEDINGS
From time to time, we may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including proceedings to enforce our contractual or statutory rights. While we cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, we do not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on our results of operations or financial condition.
Item 4. MINE SAFETY DISCLOSURES
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell shares at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
Our board of directors has adopted a valuation policy substantially consistent with the IPA Valuation Guideline. The valuation process used by the Valuation Committee and the board of directors to determine the estimated NAV per share was designed to follow recommendations in the IPA Valuation Guideline and our valuation policy.
During the year ended December 31, 2022, our board of directors initiated a process to estimate the Company’s NAV per share as of December 31, 2022 (“Valuation Date”) and engaged Stanger to provide a report containing, among other things, a range for the estimated NAV per share of our common stock as of the Valuation Date (“Valuation Report”). The engagement of Stanger was based on a number of factors including Stanger’s experience in the valuation of assets similar to those we own. Upon receipt of the Valuation Report from Stanger, which contained, among other information, a range for the estimated NAV per share for our common stock, our Valuation Committee considered the reasonableness of the range of per share values in order to make a recommendation to our board of directors. On March 8, 2023, our board of directors accepted the recommendation of our Valuation Committee and approved an estimated NAV as of December 31, 2022 of $6.92 per share, which includes deductions for estimated transaction costs (the “2022 NAV”). The Company previously announced an estimated NAV of $7.37 per share as of December 31, 2021 (the “2021 NAV”) and also previously announced an estimated NAV of $7.38 per share as of December 31, 2020 (the “2020” NAV”).
For additional information on the determination of our estimated NAV, please refer to our Current Report on Form 8-K filed with the SEC on March 9, 2023.
Stockholder Information
As of December 31, 2022, we had 46,343 stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., who serves as our transfer agent.
Redemption Plan
Our Redemption Plan, through its suspension in July 2018, as further discussed below, was designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any liquidity event. Proceeds from our Reinvestment Plan were the primary source of available funds for redemption requests under the Redemption Plan on a quarterly basis with additional sources for excess redemption requests determined by our board of directors in accordance with our Redemption Plan.
In July 2018, in light of the Company’s decision to proceed with the exploration of Possible Strategic Alternatives, our board of directors suspended our Reinvestment Plan and our Redemption Plan. Approximately $16.4 million (1.6 million shares) of unsatisfied redemptions requests were placed in a redemption requests queue effective with the suspension of our Redemption Plan. The unsatisfied redemption requests placed in the redemption queue will remain there until such time, if at all, that our board of directors reinstates our Redemption Plan. Unless our Redemption Plan is reinstated by our board of directors, we will not as a general matter accept or otherwise process any additional redemption requests received after July 11, 2018. There can be no guarantee that our Redemption Plan will be reinstated by our board of directors.
No requests for redemptions have been accepted subsequent to the July 2018 suspension of the Redemption Plan.
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Distributions
Distributions to our stockholders are governed by the provisions of our articles of incorporation. We intend to continue paying distributions to our stockholders on a quarterly basis until such provisions are terminated or amended by our board of directors. The amount or basis of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors, including:
sources of cash available for distribution such as current year and inception to date cumulative cash flows from operating activities, FFO and MFFO, as well as expected future long-term cash flows, FFO and MFFO;
the impact of the disruptions from the COVID-19 pandemic on occupancy and our cash flows from operations in determining the level of distributions going forward;
limitations and restrictions contained in the terms of our current and future indebtedness concerning the payment of distributions; and
other factors, including but not limited to, the avoidance of distribution volatility, our objective of continuing to qualify as a REIT, capital requirements, inflation levels, rising interest rates, the general economic environment and other factors.
The table in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources–Uses of Capital Resources–Distributions” presents total regular cash distributions declared and issued, and cash flows provided by operating activities for each quarter in the years ended December 31, 2022 and 2021. On March 21, 2022, our Board approved $0.0256 per share as the first quarter 2022 distribution (the “First Quarter Distribution”). The First Quarter Distribution represents a fifty percent (50%) discount from the previous quarter’s declared cash distribution. The First Quarter Distribution rate is the result of various factors including, without limitation, the continued COVID-19 impact on industry performance, inflation, a rising interest rate environment and volatility in the credit markets. We, along with our Board, will continue to monitor our cash flow and operating proceeds as well as our strategic alternatives process and make no assurances regarding future quarterly cash distributions.
The tax composition of our distributions declared for years ended December 31, 2022 and 2021 were as follows:
Years Ended December 31,
20222021
Ordinary income0.00 %43.82 %
Return of capital100.00 %56.18 %
Due to a variety of factors, the characterization of distributions declared for the year ended December 31, 2022 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2023. In determining the apportionment between taxable income and return of capital, the amounts distributed to stockholders (other than amounts designated as capital gains dividends) in excess of current or accumulated E&P are treated as a return of capital to the stockholders. E&P is a statutory calculation which is derived from net income and determined in accordance with the Code. It is not intended to be a measure of the REIT’s performance, nor do we consider it to be an absolute measure or indicator of our source or ability to pay distributions to stockholders. No amounts distributed to stockholders for the years ended December 31, 2022 and 2021 were required to be or have been treated as return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement.
Unregistered Sales of Equity Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
None.
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Secondary Sales of Registered Shares between Investors
During years ended December 31, 2022, 2021 and 2020, there were approximately 936,000 shares, 743,000 shares and 482,000 shares transferred between investors, respectively, at an average sales price per share of approximately $4.77, $4.13 and $4.73, respectively. We are not aware of any other trades of our shares, other than previous purchases made in our Offerings and/or redemptions of shares by us.

Item 6. RESERVED
The selected financial data previously required by Item 301 of Regulation S-K has been omitted in reliance on SEC Release No. 33-10890.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
CNL Healthcare Properties, Inc. is a Maryland corporation that elected to be taxed as a REIT for U.S. federal income tax purposes. We have and intend to continue to be organized and operate in a manner that allows us to remain qualified as a REIT for federal income tax purposes. The terms “us,” “we,” “our,” “Company” and “CNL Healthcare Properties” include CNL Healthcare Properties, Inc. and each of its subsidiaries. The discussion of our financial condition and results of operations for the year ended December 31, 2020 included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed on March 23, 2022 is incorporated by reference herein.
Substantially all of our assets are held by, and all operations are conducted, either directly or indirectly, through: (1) the Operating Partnership in which we are the sole limited partner and our wholly owned subsidiary, CHP GP, LLC, is the sole general partner; (2) a wholly owned TRS, CHP TRS Holding, Inc.; (3) property owner subsidiaries and lender subsidiaries, which are single purpose entities; and (4) investments in joint ventures.
We are externally managed and advised by CNL Healthcare Corp. (the “Advisor”). Our Advisor has responsibility for our day-to-day operations, serving as our consultant in connection with policy decisions to be made by our board of directors, and for identifying, recommending and executing on Possible Strategic Alternatives (as described below under “Possible Strategic Alternatives”), and dispositions on our behalf pursuant to an advisory agreement. In May 2022, we extended the advisory agreement with the Advisor through June 2023. For additional information on our Advisor, its affiliates or other related parties, as well as the fees and reimbursements we pay, see Item 8. “Financial Statements and Supplementary Data–Note 12. Related Party Arrangements.”
As of December 31, 2022, our seniors housing investment portfolio consisted of interests in 70 properties, consisting of a geographically diversified portfolio of 69 seniors housing communities and one vacant land parcel. The types of seniors housing properties that we own include independent and assisted living facilities, continuing care retirement communities and Alzheimer’s/memory care facilities. Five of our 69 seniors housing properties were previously owned through an unconsolidated joint venture and became wholly-owned effective January 1, 2022.
Market Conditions
During the last half of 2021, we began to experience the operational impacts of a challenging labor market. Labor costs increased at an accelerated rate during the last half of 2021 due to increases throughout all wage classifications within our communities and an increased focus on attracting and retaining staff at our communities. The “great resignation” resulted in an increase in the number of vacant positions at our communities and COVID-19 staff infections contributed to staff absences due to quarantine requirements under CDC guidelines. These factors led to an increase in the usage of temporary agency labor which led to incremental, measurable labor costs beginning in the middle of 2021. Since the beginning of 2022, our intensified focus of hiring and filling some of the vacant staff roles, as well as a decline in absences from lower COVID staff infections and more relaxed CDC quarantine requirements, have resulted in ongoing reductions in our reliance on temporary agency labor. However, historically low unemployment rates, wage pressures, overtime pay and some continued reliance on temporary agency labor resulted in high labor costs that impacted net operating income (“NOI”) margins during 2022 and could continue to impact margins in 2023.
In addition, during the last half of 2021, we began to experience the impact of higher inflation levels in the form of higher food costs and virtually all other operating expenses. This contributed to property NOI margin compressions during 2022 in our managed seniors housing communities. We anticipate that operating expenses will continue to remain at elevated levels which could result in continued operating margin compressions during 2023.
Macro-economic and geopolitical events around the globe have contributed to volatile credit markets. As part of its effort to reduce the rising levels of inflation, the Federal Reserve enacted several interest rate increases during 2022 and additional rate increases are expected to continue into 2023. The interest rate increases to date and any further interest rate increases will contribute to higher interest expense on our unhedged variable rate debt. We have interest rate caps in place for interest rate protection on a portion of our variable rate debt and continue to monitor opportunities to further protect the remaining unhedged variable rate debt.
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COVID-19
Since the onset of the coronavirus (“COVID-19”) pandemic in March 2020 and throughout 2021, we operated our communities through the disruptions and uncertainties of the pandemic, including disruptions from new variants of the virus. Average occupancy declined from the second half of March 2020 through February 2021, and since March 2021, we have experienced marginal occupancy gains, initially attributed to the availability of vaccines and lifted or relaxed regulatory move-in restrictions. The positive marginal occupancy gains continued through 2022 and have resulted in increases in resident fees and revenues. We anticipate continued marginal occupancy improvements in 2023.
As of December 31, 2022, our 69 seniors housing communities were located throughout the United States in 26 states. Of our 69 senior housing communities, we owned 15 properties leased to two separate third party tenants under triple-net leases (“NNN”), and the remaining 54 properties were managed through third party operators. During 2020, we provided assistance to the tenant of two properties under NNN leases with $0.9 million in rent relief and in December 2021, we provided another $1.4 million in rent relief, each in the form of rent deferral agreements. We did not grant any rent concessions as part of any rent deferral provided to this tenant and through February 2022, we had deferred an aggregate of $2.3 million in rents under these rent deferral agreements. We began collecting amounts deferred in January 2023 in accordance with the installment schedule under the rent deferral agreements and as of March 8, 2023, had collected 100% of all amounts due in accordance with the terms of the tenant's lease agreements and deferral agreements. As of March 8, 2023, we had collected 100% of all rental amounts due from our other tenant of 13 properties under NNN leases in accordance with their lease agreements.
Since March 13, 2020, there have been a number of federal, state and local government initiatives to manage the spread of the virus and its impact on the economy, financial markets and continuity of businesses of all sizes and industries. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which provided, among other things, for the establishment of a Provider Relief Fund under the direction of the Department of Health and Human Services (“HHS”). During the years ended December 31, 2022 and 2021, we received or recognized provider relief funds under the CARES Act, which are deemed governmental grants provided that the recipient attests to and complies with certain terms and conditions, and we recorded approximately $4.3 million and $0.5 million, respectively, as other income in the accompanying consolidated statements of operations as all conditions of the grant had been met.
Possible Strategic Alternatives
In 2017, we began evaluating possible strategic alternatives to provide liquidity to our stockholders. In April 2018, our board of directors formed a special committee consisting solely of our independent directors (“Special Committee”) to consider possible strategic alternatives, including, but not limited to (i) the listing of our or one of our subsidiaries’ common stock on a national securities exchange; (ii) an orderly disposition of our assets or one or more of our asset classes and the distribution of the net sale proceeds thereof to our stockholders; and (iii) a potential business combination or other transaction with a third-party or parties that provides our stockholders with cash and/or securities of a publicly traded company (collectively, among other options, “Possible Strategic Alternatives”). Since 2018, the Special Committee has engaged KeyBanc Capital Markets Inc. to act as its financial advisor in connection with exploring our Possible Strategic Alternatives.
In connection with our consideration of the Possible Strategic Alternatives, our board of directors suspended both our Reinvestment Plan and our Redemption Plan effective July 11, 2018. In addition, as part of executing on Possible Strategic Alternatives, our board of directors committed to a plan to sell 70 properties which included medical office buildings, post-acute care facilities and acute care hospitals across the US, collectively (the “MOB/Healthcare Portfolio”) plus several skilled nursing facilities. Through December 31, 2021, we sold 69 properties, received net sales proceeds of approximately $1.4497 billion and used the net sales proceeds to: (1) repay indebtedness secured by the properties; (2) strategically rebalance other corporate borrowings; (3) make a special cash distribution in May 2019 of approximately $347.9 million (or $2.00 per share) to our stockholders and (4) retained net sales proceeds for other corporate purposes, because we were focused on maintaining balance sheet strength and liquidity during COVID-19 to enhance financial flexibility. In April 2022, we sold the last property, the Hurst Specialty Hospital, to an unrelated third party and received net sales proceeds of approximately $8.3 million.
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During the COVID-19 pandemic, we shifted our focus away from the pursuit of larger strategic alternatives to provide further liquidity to our stockholders due to the market and industry disruptions in the seniors housing sector from COVID-19. However, our Special Committee continued working and continues to work with our financial advisor to carefully study market data. We remain fully committed to our readiness, active study and pursuit of additional strategic opportunities to provide incremental liquidity to our stockholders as the economic and transactional environments permit.
Seniors Housing Portfolio
Our remaining investment focus is in seniors housing communities. We have invested in or developed the following types of seniors housing properties:
Independent Living Facilities. Independent living facilities are age-restricted, multi-family rental or ownership (condominium) housing with central dining facilities that provide residents, as part of a monthly fee, meals and other services such as housekeeping, linen service, transportation, social and recreational activities.
Assisted Living Facilities. Assisted living facilities are usually state-regulated rental properties that provide the same services as independent living facilities, but also provide, in a majority of the units, supportive care from trained employees to residents who are unable to live independently and require assistance with activities of daily living. The additional services may include assistance with bathing, dressing, eating, and administering medications.
Memory Care/Alzheimer’s Facilities. Those suffering from the effects of Alzheimer’s disease or other forms of memory loss need specialized care. Memory care/Alzheimer’s centers provide the specialized care for this population including residential housing and assistance with the activities of daily living.
Portfolio Overview
As of December 31, 2022, our healthcare investment portfolio consisted of interests in 70 properties, comprising 69 seniors housing communities and one vacant land parcel.
We believe demographic trends and compelling supply and demand indicators present a strong case for an investment focus on seniors housing real estate and real estate-related assets. Our seniors housing investment portfolio is geographically diversified with properties in 26 states. The map below shows our seniors housing investment portfolio across geographic regions as of March 8, 2023:
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The following table summarizes our seniors housing investment portfolio by investment structure as of March 8, 2023:
Type of InvestmentNumber of
Investments
Amount of
Investments
(in millions)
Percentage
of Total
Investments
Consolidated investments:
Seniors housing leased (1)
15$311.0 17.8 %
Seniors housing managed (2)
541,427.6 82.1 
Vacant land11.1 0.1 
70$1,739.7 100.0 %
_______________
FOOTNOTES:
(1)Properties that are leased to third-party tenants for which we report rental income and related revenues.
(2)Properties that are leased to TRS entities and managed pursuant to third-party management contracts (i.e. RIDEA structure) where we report resident fees and services, and the corresponding property operating expenses.
Portfolio Evaluation
While we are not directly impacted by the performance of the underlying properties leased to third-party tenants, we believe that the financial and operational performance of our tenants provides an indication about the stability of our tenants and their ability to pay rent. To the extent that our tenants, managers or joint venture partners experience operating difficulties and become unable to generate sufficient cash to make rent payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Our tenants and managers are generally contractually required to provide this information to us in accordance with their respective lease, management and/or joint venture agreements. Therefore, in order to mitigate the aforementioned risk, we monitor our investments through a variety of methods determined by the type of property.
We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor credit quality by (1) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (2) direct interaction with onsite property managers, (3) monitoring news and rating agency reports regarding our tenants (or their parent companies) and their underlying businesses, (4) monitoring the timeliness of rent collections and (5) monitoring lease coverage.
When evaluating the performance of our seniors housing portfolio, management reviews property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits. Management also reviews occupancy levels and monthly revenue per occupied unit, which we define as total revenue divided by average number of occupied units. Similarly, when evaluating the performance of our third-party operators, management reviews monthly financial statements, property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits. All of the aforementioned operating and statistical metrics assist us in determining the ability of our properties or operators to achieve market rental rates, to assess the overall performance of our diversified healthcare portfolio, and to review compliance with leases, debt, licensure, real estate taxes, and other collateral.
Significant Tenants and Operators
Our real estate portfolio of 69 seniors housing properties is operated by a mix of national or regional operators and the following represents the significant tenants and operators that lease or manage 10% or more of our rentable space as of March 8, 2023, excluding the vacant land parcel:
TenantsNumber of
Properties
Rentable
Square Feet
(in thousands)
Percentage
of Rentable
Square Feet
Lease
Expiration
Year
TSMM Management, LLC131,261 77.5 %2025
Wellmore, LLC2366 22.5 2031-2032
151,627 100.0 %
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OperatorsNumber of
Properties
Rentable
Square Feet
(in thousands)
Percentage
of Rentable
Square Feet
Operator
Expiration
Year
Integrated Senior Living, LLC71,948 30.8 %2023-2024
Prestige Senior Living, LLC13895 14.2 2023-2024
Morningstar Senior Management, LLC4834 13.2 2023
Other operators (1)
302,645 41.8 2023-2029
546,322 100.0 %
_______________
FOOTNOTE:
(1)Comprised of various operators each of which comprise less than 10% of our consolidated rentable square footage.
Tenant Lease Expirations
As of December 31, 2022, we owned 15 seniors housing properties that were leased to third party tenants under triple-net operating leases. During the year ended December 31, 2022, our rental income from continuing operations represented approximately 8.3% of our total revenues from continuing operations.
Under the terms of our triple-net lease agreements, each tenant is responsible for payment of property taxes, general liability insurance, utilities, repairs and maintenance, including structural and roof expenses. Each tenant is expected to pay real estate taxes directly to the taxing authorities. However, if the tenant does not pay the real estate taxes, we are liable.
We work with our tenants in advance of the lease expirations or renewal period options in order for us to maintain a balanced lease rollover schedule and high occupancy levels, as well as to enhance the value of our properties through extended lease terms. Certain amendments or modifications to the terms of existing leases could require lender approval.
The following table lists, on an aggregate basis, scheduled expirations for the next 10 years and thereafter on our consolidated seniors housing portfolio, assuming that none of the tenants exercise any of their renewal options (in thousands, except for number of properties and percentages):
Year of Expiration (1)
Number of
Properties
Expiring
Leased
Square Feet
Expiring
Annualized
Base Rents (2)
Percentage
of Expiring
Annual
Base Rents
2023$— — %
2024— — 
2025131,26117,941 68.1 
2026— — 
2027— — 
2028— — 
2029— — 
2030— — 
203111373,602 13.7 
203212294,793 18.2 
Thereafter— — 
Total151,627$26,336 100.0 %
Weighted Average Remaining Lease Term: (3)
4.7 years
_______________
FOOTNOTES:
(1)Represents current lease expiration and does not take into consideration lease renewals available under existing leases at the option of the tenants.
(2)Represents the current base rent, excluding tenant reimbursements and the impact of future rent increases included in leases, multiplied by 12 and included in the year of expiration.
(3)Weighted average remaining lease term is the average remaining term weighted by annualized current base rents.
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Operator Expirations
As of December 31, 2022, we had 54 seniors housing properties managed by third-party operators. All of our management agreements have been in place for multiple years and many include auto-renewal clauses ranging from one to five years, which are effective unless a notice of termination is provided by either party. We work with our operators in advance of management agreement expirations or renewal period options in order for us to maintain a balanced operator rollover schedule, which provides us flexibility to execute on possible strategic alternatives, minimize potential early termination fees and align with the broader industry. The management agreements of 38 of our managed seniors housing properties were scheduled to expire within one year or less as of December 31, 2022, all of which are scheduled to be renewed under the renewal provisions of the agreements.
Liquidity and Capital Resources
General
Our ongoing primary source of capital is proceeds from operating cash flows. Our primary uses of capital include the payment of distributions, payment of operating expenses, funding capital improvements to existing properties and payment of debt service. Generally, we expect to meet short-term working capital needs from our cash flows from operations. Our ongoing sources and uses of capital have been and will continue to be impacted by the rate of occupancy recovery from the COVID-19 pandemic, and by rising interest rates and rising inflation levels. As necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures or to cover periodic shortfalls between distributions paid and cash flows from operating activities.
Despite the marginal increases in occupancy beginning in March 2021 as described above in “COVID-19”, we began to experience and during 2022 continued to experience compression in property level NOI margins due to increases in operating expenses. Labor costs increased due to increased wages in a tight labor market. The “great resignation” resulted in an increase in the number of vacant positions at our communities, which led to increased reliance on temporary agency personnel to temporarily fill vacancies. Since the beginning of 2022, our intensified focus of hiring and filling some of the vacant staff roles, as well as a decline in absences from lower COVID staff infections and more relaxed CDC quarantine requirements, resulted in ongoing reductions in our reliance on temporary agency labor. Rising inflation levels surfaced in the form of higher food costs and other operating expenses, which also contributed to margin compressions. We implemented rate increases at our properties as part of ongoing resident lease renewals in 2022 which resulted in an increase in revenues. Rental rate increases during 2022 contributed favorably to operating margins, however, increased labor costs and operating expenses resulted in downward pressure on the rate of operating margin recovery during 2022. We expect that increases in occupancy and some moderate rate increases will increase revenue streams during 2023. However, even though we anticipate less reliance on agency labor and anticipate lower inflation levels, we anticipate that labor costs and operating expenses will continue at elevated levels throughout 2023 and could impact the rate of margin recovery in 2023.
As of December 31, 2022, we had approximately $210.9 million of liquidity (consisting of $69.5 million cash on hand, $24.4 million invested in short term securities and $117.0 million in undrawn availability under the Revolving Credit Facility). We remain focused on maintaining liquidity and financial flexibility and continue to monitor developments as we continue to recover from the disruptions in occupancy from COVID-19, continue to navigate through rising labor costs during a tight labor market, increased operating expenses from current inflation levels and the increase in interest costs from a rising interest rate environment. The extent of the continued impact of COVID-19, a tight labor market, inflation, the volatility in the credit markets and a rising interest rate environment on our financial condition, results of operations and cash flows is uncertain and cannot be predicted at the current time as it depends on the timing and speed of economic recovery.
We have pledged certain of our properties in connection with our borrowings and may continue to strategically leverage our real estate and use debt financing as a means of providing additional funds for the payment of distributions to stockholders, working capital and for other corporate purposes. Our ability to increase our borrowings could be adversely affected by credit market conditions, inflation and rising interest rates, which could result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate. We may also be negatively impacted by rising interest rates on our unhedged variable rate debt or the timing of when we seek to refinance existing debt. As part of our variable debt hedging strategy, we have purchased interest rate caps for interest rate protection. We continue to monitor the credit markets and continue to evaluate the need and the timing for additional interest rate protection in the form of interest rate swaps or caps on unhedged variable rate debt or variable rate debt with interest rate protection scheduled to mature.
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Our cash flows from operating and investing activities as described within “Sources of Liquidity and Capital Resources” and “Uses of Liquidity and Capital Resources” represent cash flows from continuing operations and exclude the results of one property that was classified as discontinued operations, which was sold in January 2021.
Sources of Liquidity and Capital Resources
Proceeds from Sale of Real Estate – Continuing Operations
During the year ended December 31, 2022, we closed on the sale of the Hurst Specialty Hospital, the last of the 70 properties for which we had committed to a plan to sell and received net sales proceeds of approximately $8.3 million. Additionally, our co-venture partner exercised its option to purchase the Fieldstone at Pear Orchard property (a seniors housing property owned through a consolidated joint venture) and also provided an unsolicited offer to purchase the Fieldstone Memory Care property, an adjacent property (collectively, the “Fieldstone Properties”). We completed the sale of the Fieldstone Properties and received net sales proceeds of approximately $28.4 million. We used approximately $2.0 million of the net sales proceeds from the sale of the Fieldstone at Pear Orchard property to pay distributions to our co-venture partner in accordance with the terms of the joint venture agreement, as described below. We retained the remaining net sales proceeds from the Hurst Specialty Hospital and the Fieldstone Properties to maintain a strong balance sheet and liquidity. We did not sell any properties from continuing operations during the year ended December 31, 2021.
Proceeds from Sale of Real Estate – Discontinued Operations
As part of executing under our Possible Strategic Alternatives, during the year ended December 31, 2021, we closed on the sale of one acute care property and received net sales proceeds of approximately $7.4 million. We did not sell any properties from discontinued operations during the year ended December 31, 2022.
Borrowings
During the year ended December 31, 2022, we borrowed $45.0 million from our Revolving Credit Facility to refinance approximately $44.5 million of secured indebtedness in advance of its September 2022 maturity and paid fees of approximately $0.3 million to unrelated third parties. In February 2023, we purchased a short-term interest rate cap with a notional value of $420.0 million and a strike of 3.5%, to hedge the majority of our Credit Facilities. The interest rate cap matures on August 15, 2023.
In September 2021, we entered into a new term loan agreement which provided for an additional $150 million senior unsecured term loan facility (the “2021 Term Loan Facility”) to complement and become part of our existing Credit Facilities. The 2021 Term Loan Facility has an initial term that is co-terminus with the Credit Facilities, maturing May 15, 2024, subject to one 12-month extension, and through September 2022, bore interest based on 30-day LIBOR plus a spread that varies with the Company's leverage ratio. The 2021 Term Loan Facility is pre-payable at any time in whole or part without fees or penalties, has a borrowing availability calculation that is subject to a similar borrowing base calculation as the Credit Facilities and contains similar affirmative, negative and financial covenants as the covenants in the Credit Facilities. We paid fees totaling approximately $0.9 million to unrelated third parties and a refinancing fee to the Advisor of approximately $1.5 million. See Item 8. “Financial Statements and Supplementary Data–Note 12. Related Party Arrangements” for additional information regarding the refinancing fee.
In October 2021, we borrowed $238.0 million, which consisted of $88 million drawn on our unsecured Revolving Credit Facility and $150.0 million available under the unsecured 2021 Term Loan Facility to refinance approximately $238.0 million of secured indebtedness in advance of its January 2022 maturity. See “Liquidity and Capital Resources – Uses of Liquidity and Capital Resources – Debt Repayments” below for additional information regarding debt repayments during the years ended December 31, 2022 and 2021.
We may borrow money to fund enhancements to our portfolio, as well as to cover periodic shortfalls between distributions paid and cash flows from operating activities to the extent impacted by compressed property NOI margins from rising labor costs, inflationary pressures on other operating expenses and an increased interest rate environment.
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Net Cash Provided by Operating Activities – Continuing Operations
Cash flows from operating activities for the years ended December 31, 2022 and 2021 were approximately $43.8 million and $46.4 million, respectively. The change in cash flows from operating activities for the year ended December 31, 2022 as compared to the same period in 2021 was primarily the result of the following:
a decline in NOI, primarily due to reduced rent related to new leases which commenced February 2022 at five seniors housing properties, increased operating expenses at our managed properties primarily driven by inflation and labor shortages, and the sale of three properties during 2022, which was partially offset by the consolidation of the Windsor Manor properties;
higher interest expense due to the rising interest rate environment; and
unfavorable changes in assets and liabilities; partially offset by
$4.3 million received in provider relief funds under the CARES Act.
Lease Renewals and Extensions
We entered into new leases covering five of our properties that expired in February 2022. The new leases with the same tenant commenced in February 2022 and will expire in February 2025. We do not have any leases expiring until 2025.
Tenant Financial Difficulties
The tenant of the Hurst Specialty Hospital had experienced financial difficulties. During the year ended December 31, 2021, we collected approximately $2.2 million in rental amounts from the tenant and we paid approximately $0.2 million in real estate taxes which were not reimbursed by the tenant. We did not collect any rental amounts and we did not pay any real estate taxes during the year ended December 31, 2022. We sold the Hurst Specialty Hospital in April 2022. Refer to “Results of Operations — Impairment Provision” for further discussion on the impairment recorded related to this property during the year ended December 31, 2021.
Distributions from Unconsolidated Entities
As of December 31, 2021, we had an investment in five unconsolidated properties through a 75% interest in an unconsolidated joint venture (the “Windsor Manor Joint Venture”). Pursuant to the joint venture agreement, we were entitled to receive quarterly preferred cash distributions to the extent there was cash available to distribute. These distributions were generally received within 45 days after each quarter end. For the year ended December 31, 2021, we received approximately $0.7 million of operating distributions from our investment in these unconsolidated entities. Effective January 1, 2022, we acquired the remaining 25% interest in the Windsor Manor Joint Venture for approximately $3.3 million and currently own a 100% interest in the Windsor Manor Joint Venture. Effective January 1, 2022 we began consolidating the revenues and expenses of the five properties in the Windsor Manor Joint Venture and ceased recording distributions from unconsolidated joint ventures.
Amended and Restated Expense Support Agreement
We have entered into an amended and restated expense support agreement with our Advisor (the “Amended and Restated Expense Support Agreement”). Pursuant to the Amended and Restated Expense Support Agreement, our Advisor agreed to provide expense support through forgoing the payment of fees in cash and acceptance of restricted forfeitable stock for services in an amount equal to the positive excess, if any, of (a) Aggregate Stockholder Cash Distributions declared for the applicable year, over (b) our aggregate modified funds from operations over the same period (as defined in the Amended and Restated Expense Support Agreement).
Under the terms of the Amended and Restated Expense Support Agreement with our Advisor, for each quarter within a calendar expense support year, we will record a proportional estimate of the cumulative year-to-date period based on an estimate of expense support amounts for the calendar expense support year. Moreover, in exchange for services rendered and in consideration of the expense support provided under the expense support agreement, we will issue, within 90 days following the determination date, a number of shares of forfeitable restricted common stock (“Restricted Stock”) equal to the quotient of the expense support amounts provided by our Advisor for the preceding calendar year divided by our then-current NAV per share of common stock. The terms of the Amended and Restated Expense Support Agreement automatically renew for consecutive one-year periods, subject to the right of our Advisor to terminate upon 30 days’ written notice. We did not recognize any expense support for the years ended December 31, 2022 or 2021. See Item 8. “Financial Statements and Supplementary Data — Note 12. Related Party Arrangements” for additional information.
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Uses of Liquidity and Capital Resources
Acquisition of Joint Venture Interest
As of December 31, 2021, we indirectly owned five properties through a 75% interest in the Windsor Manor Joint Venture, an unconsolidated equity method investment. Effective January 1, 2022, we acquired the remaining 25% interest from our joint venture partner for approximately $3.3 million and we currently own a 100% controlling interest in the Windsor Manor Joint Venture.
Capital Expenditures
We paid approximately $17.8 million and $14.2 million in capital expenditures during the years ended December 31, 2022 and 2021, respectively. We have increased our investment in capital improvements to maintain and improve our properties.
Purchase of Held-to-Maturity Securities
During the year ended December 31, 2022, we used approximately $24.2 million of available cash to purchase held-to-maturity securities to enhance the yield earned on cash on hand. We did not purchase held-to-maturity securities during the year ended December 31, 2021.
Debt Repayments
During the year ended December 31, 2022, we repaid approximately $46.3 million of indebtedness, which included $1.8 million of scheduled repayments on our mortgages and other notes payable and the June 2022 refinance of approximately $44.5 million of secured indebtedness, consisting of debt collateralized by five properties. We refinanced the debt maturity, added the five properties to the borrowing base of our unsecured Credit Facilities and used $45.0 million from amounts available under the unsecured Revolving Credit Facility to repay our secured indebtedness. In September 2022, we amended the agreements of our Credit Facilities to transition the benchmark rate from LIBOR to SOFR.
During the year ended December 31, 2021, we paid approximately $247.8 million, which included $9.8 million of scheduled repayments on our mortgages and other notes payable and the October 2021 refinance of approximately $238.0 million of secured indebtedness, consisting of debt collateralized by 22 properties, in advance of its scheduled maturity of January 2022. We added the 22 properties to the borrowing base of our unsecured Credit Facilities and used $88 million from amounts available under the unsecured Revolving Credit Facility and $150 million available under the new unsecured 2021 Term Loan to repay our secured indebtedness.
On an ongoing basis, we monitor our debt maturities, engage in dialogue with third-party lenders about various financing scenarios and analyze our overall portfolio borrowings in advance of scheduled maturity dates of the debt obligations to determine the optimal borrowing strategy.
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The following table provides details of the Company’s indebtedness as of December 31, 2022 and 2021 (in thousands):
As of December 31,
20222021
Mortgages payable and other notes payable:
Fixed rate debt(1)
$44,082 $89,766 
Variable rate debt(1)(2)(3)
17,859 — 
Premium(4)
17 59 
Loan costs, net(185)(425)
Total mortgages and other notes payable, net61,773 89,400 
Credit facilities:
Revolving Credit Facility(6)(7)
133,000 88,000 
Term Loan Facility(5)(6)(7)
265,000 265,000 
2021 Term Loan Facility(5)(6)(7)
150,000 150,000 
Loan costs, net related to Term Loan Facilities(1,900)(3,272)
Total credit facilities, net546,100 499,728 
Total indebtedness, net$607,873 $589,128 
_______________
FOOTNOTES:
(1)As of December 31, 2022 and 2021, our mortgages and other notes payable were collateralized by seven properties, with a total carrying value of approximately $92.7 million and $135.4 million, respectively.
(2)In connection with the acquisition of the 25% interest in the Windsor Manor Joint Venture, we consolidated the net assets of the joint venture effective January 1, 2022, including the debt associated with the properties, at fair value. The debt collateralized by the five Windsor Manor properties accrues interest at a rate of 2.50% plus 30-day LIBOR and matures in February 2024. The 30-day LIBOR was approximately 4.39% as of December 31, 2022.
(3)As of December 31, 2022, we had interest rate protection through an interest rate cap with a notional amount of $15.0 million. Refer to Item 8. “Financial Statements and Supplementary Data – Note 13. Derivative Financial Instruments” for additional information.
(4)Premium is reflective of recording mortgage note payables assumed at fair value on the respective acquisition dates.
(5)As of December 31, 2021 and during the year ended December 31, 2022, we had interest rate protection through interest rate caps with notional amounts of $355.0 million. The interest rate caps expired on December 31, 2022. Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risks” and Item 8. “Financial Statements and Supplementary Data – Note 13. Derivative Financial Instruments” for additional information.
(6)As of December 31, 2022 and 2021, we had undrawn availability under the applicable revolving credit facility of approximately $117.0 million and $14.1 million, respectively, based on the value of the properties in the unencumbered pool of assets supporting the loan.
(7)Term SOFR (as defined by the agreements governing our Credit Facilities) was approximately 4.46% as of December 31, 2022. The 30-day LIBOR was approximately 0.10% as of December 31, 2021.
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As of December 31, 2022, we had approximately $210.9 million of liquidity (consisting of $69.5 million of cash on hand, $24.4 million invested in short term securities and $117.0 million available under the Revolving Credit Facility) and we believe we are well positioned to manage our near-term debt maturities. We had $133.0 million outstanding under our Revolving Credit Facility that was scheduled to mature in May 2023, with a one-year extension option. In January 2023, we exercised our one-year extension option which extended the maturity date to May 2024.
The following is a schedule of future principal payments for our total indebtedness for the next five years and thereafter, in the aggregate, and reflects the extension of the maturity date of our Revolving Credit Facility (in thousands):
2023$24,054 
2024585,887 
2025— 
2026— 
2027— 
Thereafter— 
$609,941 
As of December 31, 2022, we had $24.1 million of scheduled principal payments coming due during the year ending December 31, 2023, which included a mortgage loan maturing in June 2023 of $22.7 million. We repaid this loan in March 2023 before its scheduled maturity using cash on hand, to reduce interest expense in 2023.
The aggregate amount of long-term financing is not expected to exceed 60% of our gross asset values (as defined in our Credit Facilities) on an annual basis. As of December 31, 2022 and 2021, we had aggregate debt leverage ratios of approximately 31.9% and 31.8%, respectively, of the aggregate carrying value of our assets.
Generally, the loan agreements for our mortgage loans contain customary financial covenants and ratios; including (but not limited to) the following: debt service coverage ratio, minimum occupancy levels, limitations on incurrence of additional indebtedness, etc. The loan agreements also contain customary performance criteria and remedies for the lenders. As of December 31, 2022, we were in compliance with all financial covenants related to our mortgage loans.
The Credit Facilities contain affirmative, negative, and financial covenants which are customary for loans of this type, including (but not limited to): (i) maximum leverage, (ii) minimum fixed charge coverage ratio, (iii) minimum consolidated net worth, (iv) restrictions on payments of cash distributions except if required by REIT requirements, (v) maximum secured indebtedness, (vi) maximum secured recourse debt, (vii) minimum unsecured interest coverage, (viii) maximum unsecured indebtedness ratio and (ix) limitations on certain types of investments and with respect to the pool of properties supporting borrowings under the Credit Facilities, minimum weighted average occupancy, and remaining lease terms, as well as property type, MSA, operator, and asset value concentration limits. The limitations on distributions generally include a limitation on the extent of allowable distributions, which are not to exceed the greater of 95% of adjusted FFO (as defined per the Credit Facilities) and the minimum amount of distributions required to maintain the Company’s REIT status. As of December 31, 2022, we were in compliance with all financial covenants related to our Credit Facilities.
Distributions
In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income. We may make distributions in the form of cash or other property, including distributions of our own securities. While we generally expect to pay distributions from cash flows provided by operating activities, we have and may continue to cover periodic shortfalls between distributions paid and cash flows from operating activities with proceeds from other sources such as from cash flows provided by financing activities, a component of which could include borrowings, whether collateralized by our properties or unsecured, or net sales proceeds from the sale of real estate.
In March 2022, our board of directors reduced our quarterly distributions to $0.0256 per share effective with the first quarter 2022 distribution. The decrease in the quarterly distribution rate was the result of various factors including, without limitation, the continued COVID-19 impact on industry performance, inflation rates and volatility in the credit markets. Our management team and our board of directors will continue to monitor our results of operations and operating cash flows, as well as our strategic alternatives process and make no assurances regarding future quarterly cash distributions.
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The following table presents total cash distributions declared, distributions reinvested and cash distributions per share on a quarterly basis for the years ended December 31, 2022 and 2021 (in thousands, except per share data):
PeriodsCash
Distributions
per Share
Total Cash
Distributions
Declared (1)
Cash Flows
Provided by
Operating
Activities (2)
2022 Quarters
First $0.02560 $4,453 $8,236 
Second0.02560 4,453 15,840 
Third0.02560 4,454 10,318 
Fourth0.02560 4,454 9,452 
Total$0.10240 $17,814 $43,846 
2021 Quarters
First$0.05120 $8,907 $12,633 
Second0.05120 8,906 11,560 
Third0.05120 8,907 8,719 
Fourth0.05120 8,907 13,450 
Total$0.20480 $35,627 $46,362 
_______________
FOOTNOTES:
(1)For the years ended December 31, 2022 and 2021, our net loss attributable to common stockholders was approximately $(1.5) million and $(22.9) million, respectively, while cash distributions declared for each of the periods were approximately $17.8 million and $35.6 million, respectively. For the years ended December 31, 2022 and 2021, 100% of regular cash distributions declared to stockholders were considered to be funded with cash provided by operating activities as calculated on a quarterly basis for GAAP purposes.
(2)Amounts herein include cash flows from discontinued operations. Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions and as such our board of directors uses other measures such as FFO and MFFO in order to evaluate the level of distributions.
Distributions to Noncontrolling Interests
During the year ended December 31, 2022, our consolidated joint ventures paid distributions of approximately $2.2 million to co-venture partners, which included $2.0 million representing the pro rata share of net sales proceeds from the sale of one of the Fieldstone Properties owned by one of the consolidated joint ventures, and the balance represented their pro rata share of operating cash flows. During the year ended December 31, 2021, our consolidated joint ventures paid distributions of approximately $0.2 million to co-venture partners, representing their pro rata share of operating cash flows.
Results of Operations
Except for the impact of elevated labor costs, inflation and a rising interest rate environment, we are not aware of other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the operation of properties, other than those referred to in the risk factors identified in “Part I, Item 1A” of this report.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
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Fiscal year ended December 31, 2022 as compared to the fiscal year ended December 31, 2021
As of December 31, 2022, excluding our vacant land and including the five properties consolidated from the Windsor Manor Joint Venture effective January 1, 2022, we owned 69 consolidated operating investment properties and owned 67 properties as of December 31, 2021.
Investment count as of December 31,
Consolidated operating investment types:20222021
Seniors housing leased15 15 
Seniors housing managed54 51 
Acute care leased— 
69 67 
Rental Income and Related Revenues. Rental income and related revenues were approximately $26.9 million and $30.1 million for the years ended December 31, 2022 and 2021, respectively. The decrease in revenue during the year ended December 31, 2022, was primarily due to reduced rent related to new leases in February 2022 at five seniors housing properties, as well as the sale of the Hurst Specialty Hospital in April 2022.
Resident Fees and Services. Resident fees and services income was approximately $295.8 million and $265.3 million for the years ended December 31, 2022 and 2021, respectively. The increase in revenue during the year ended December 31, 2022, was primarily due to an increase in average occupancy and increases in rates charged to our residents. Average occupancy was lower during the year ended December 31, 2021, due to move-in restrictions, intensified screening and other measures enacted at our communities to address the spread of COVID-19. The increase in resident fees and services was also partially due to the acquisition of the remaining 25% interest in the Windsor Manor Joint Venture and the subsequent consolidation of the Windsor Manor revenues from five properties effective January 1, 2022. Refer to Item 8. “Financial Statements and Supplemental Data – Note 4. Acquisition” for additional information. The increase was partially offset by the sale of the Fieldstone Properties in August 2022.
Property Operating Expenses. Property operating expenses were approximately $226.8 million and $197.6 million for the years ended December 31, 2022 and 2021, respectively. Property operating expenses increased during the year ended December 31, 2022, primarily due to an increase in average occupancy as well as the consolidation of our Windsor Manor expenses, as described above. In addition, property expenses were higher due to increased labor costs driven by higher wages and usage of agency labor in a tight labor market and an increase in operating expenses due to inflation. The increase in property operating expense was partially offset by the sale of the Fieldstone Properties in August 2022.
General and Administrative Expenses. General and administrative expenses were approximately $10.2 million and $9.1 million for the years ended December 31, 2022 and 2021, respectively. General and administrative expenses were comprised primarily of personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, franchise taxes, sales taxes, accounting and legal fees, and board of director fees.
Asset Management Fees. We incurred asset management fees of approximately $14.1 million and $15.7 million for the years ended December 31, 2022 and 2021, respectively. Asset management fees are paid to our Advisor for the management of our real estate assets, including our pro rata share of investments in unconsolidated entities, loans and other permitted investments. Asset management fees decreased during the year ended December 31, 2022, as compared to the year ended December 31, 2021, as a result of a reduction in our asset management fee from 1.0% per annum to 0.80% per annum of average invested assets, which became effective in March 2021, and due to the sale of three properties in 2022.
Property Management Fees. We incurred property management fees payable to our third-party property managers of approximately $14.7 million and $13.0 million for the years ended December 31, 2022 and 2021, respectively. The property management fees are based on a percentage of revenues under the property management agreement and the increase across periods is reflective of the increase in average occupancy and resident fees and service revenues over the same period as described above.
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Impairment Provision. As described above in “Liquidity and Capital Resources – Tenant Financial Difficulties,” in March 2022 we entered into a purchase and sale agreement for the Hurst Specialty Hospital with an unrelated third party for a gross sales price of $8.5 million. In conjunction therewith, we determined that the carrying value of this property was not recoverable and during the year ended December 31, 2021, we recorded an impairment provision of approximately $9.8 million to write-down the value of our Hurst Specialty Hospital to its estimated sales proceeds expected from the sale of the Hurst Specialty Hospital. There was no impairment provision recorded during the year ended December 31, 2022.
Depreciation and Amortization. Depreciation and amortization expenses were approximately $54.2 million and $50.4 million for the years ended December 31, 2022 and 2021, respectively. Depreciation and amortization expenses are comprised of depreciation and amortization of the buildings, equipment, land improvements and in-place leases related to our real estate portfolio. The increase during the year ended December 31, 2022, as compared to the year ended December 31, 2021, is primarily due to investing approximately $17.8 million in capital improvements to maintain and improve our properties subsequent to December 31, 2021, and to a lesser extent, due to the consolidation of the Windsor Manor assets effective January 1, 2022.
Gain on Sale of Real Estate. Gain on the sale of real estate of the Fieldstone Properties was approximately $6.3 million during the year ended December 31, 2022. One of the Fieldstone Properties was indirectly owned through a consolidated joint venture. Of the aggregate gain on the sale of real estate for the year ended December 31, 2022, approximately $5.4 million was allocable to common stockholders and the balance was allocable to noncontrolling interests. We did not sell any properties from continuing operations during the year ended December 31, 2021.
Interest and Other Income. Interest and other income was approximately $4.7 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively. Other income includes approximately $4.3 million and $0.5 million during the years ended December 31, 2022 and 2021, respectively, in CARES Act provider relief funds recorded as conditions of the grant were met. See “COVID-19” above and Item 8. “Financial Statements and Supplemental Data – Note 2. Summary of Significant Accounting Policies – Government Grant Income” for additional information.
Interest Expense and Loan Cost Amortization. Interest expense and loan cost amortization were approximately $21.8 million and $19.7 million for the years ended December 31, 2022 and 2021, respectively. The increase in interest expense and loan cost amortization for the year ended December 31, 2022, as compared to the year ended December 31, 2021, is primarily due to the rising interest rate environment. During the year ended December 31, 2022, we were able to partially mitigate the full impact from the rise in interest rates due to the interest rate caps in place throughout 2022 as part of our overall variable debt hedging strategy.
Gain on Change of Control of a Joint Venture. As described below in Item 8. “Financial Statements and Supplemental Data – Note 4. Acquisition,” during the year ended December 31, 2022, we recognized a gain of approximately $8.4 million as part of acquiring the remaining 25% interest in the Windsor Manor Joint Venture from our joint venture partner, resulting in us owning a 100% controlling interest in the Windsor Manor Joint Venture and derecognizing our equity method investment in the Windsor Manor Joint Venture. We did not record such gains during the year ended December 31, 2021.
Income Tax Expense. We incurred income tax expense of approximately $0.5 million and $4.2 million for the years ended December 31, 2022 and 2021, respectively. The decrease in income tax expense during the year ended December 31, 2022, as compared to the year ended December 31, 2021, is primarily attributable to the tax effect of the valuation allowance on current year results and the increase in our valuation allowance against deferred tax assets in the prior year.
Net income attributable to noncontrolling interests. Net income attributable to non-controlling interests was approximately $1.0 million and $16,000 for the years ended December 31, 2022 and 2021, respectively. The increase in net income attributable to noncontrolling interests during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the sale of one of the Fieldstone Properties by one of our consolidated joint ventures in August 2022, which resulted in a gain on sale of real estate of approximately $0.9 million attributable to noncontrolling interests.
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Net Operating Income
We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from NOI. We define NOI, a non-GAAP measure, as total revenues less the property operating expenses and property management fees from managed properties. We use NOI as a key performance metric for internal monitoring and planning purposes, including the preparation of annual operating budgets and monthly operating reviews, as well as to facilitate analysis of future investment and business decisions. It does not represent cash flows from operating activities in accordance with GAAP and should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as an indication of our operating performance or to be an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity. We believe the presentation of this non-GAAP measure is important to the understanding of our operating results for the periods presented because it is an indicator of the return on property investment and provides a method of comparing property performance over time. In addition, we have aggregated NOI on a “same-store” basis only for comparable properties that we have owned during the entirety of all periods presented. Non-same-store NOI includes NOI from the acquisition of the remaining 25% interest in the Windsor Manor Joint Venture effective January 1, 2022 and the subsequent transition of the Windsor Manor properties from unconsolidated to consolidated, as we did not consolidate those properties during the entirety of all periods presented. Non-same-store NOI also includes NOI from the Hurst Specialty Hospital sold in April 2022 and the two Fieldstone Properties sold in August 2022, as we did not own these properties during the entirety of all periods presented. The chart below presents a reconciliation of our net income to NOI for the years ended December 31, 2022 and 2021 (in thousands) and the amount invested in properties as of December 31, 2022 and 2021 (in millions), excluding one property classified as discontinued operations:
Years Ended December 31,Change
20222021$%
Net loss$(412)$(22,866)
Adjusted to exclude:
General and administrative expenses10,209 9,116 
Asset management fees14,074 15,733 
Impairment provision— 9,790 
Depreciation and amortization54,242 50,417 
Gain on sale of real estate(6,282)— 
Other expenses, net of other income8,742 18,505 
Income tax expense540 4,174 
Loss from discontinued operations— 10 
NOI$81,113 $84,879 $(3,766)(4.4)%
Less: Non-same-store NOI3,198 3,582 
Same-store NOI$77,915 $81,297 $(3,382)(4.2)%
Invested in operating properties, end of period$1,739 $1,768 
Overall, our same-store NOI for the year ended December 31, 2022 decreased by approximately $3.4 million, as compared to the prior year. Same-store NOI was negatively impacted by reduced rents related to new leases which commenced in February 2022 at five seniors housing properties, as well as increased property operating expenses resulting from higher labor costs in a tight labor market and rising inflation levels.
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Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, (“NAREIT”) promulgated a measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, plus depreciation and amortization of real estate related assets, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model) to an expensed-as-incurred model that were put into effect in 2009, and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP and accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA has standardized a measure known as modified funds from operations (“MFFO”) which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
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We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted from a GAAP accrual basis in order to reflect such payments on a cash basis of amounts expected to be received for such lease and rental payments); contingent purchase price consideration adjustments; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income or loss; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.
Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from our subscription proceeds and other financing sources and not from operations.
By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (or loss) or income (or loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
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The following table presents a reconciliation of net income to FFO and MFFO for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data):
Year Ended December 31,
202220212020
Net (loss) income attributable to common stockholders$(1,453)$(22,882)$3,912 
Adjustments:
Depreciation and amortization:
Continuing operations54,242 50,417 51,817 
Impairment provision:
Continuing operations— 9,790 — 
Gain on sale of real estate: (1)
Continuing operations(6,282)— (1,074)
Gain on change of control of a joint venture: (2)
Continuing operations(8,376)— — 
FFO adjustments attributable to noncontrolling interests:
Continuing operations821 (184)(192)
FFO adjustments from unconsolidated entities (3)
— 947 266 
FFO attributable to common stockholders38,952 38,088 54,729 
Straight-line rent adjustments: (4)
Continuing operations1,209 1,231 1,697 
Write-off of lease related costs: (5)
Continuing operations— — 2,468 
Discontinued operations— — 103 
Amortization of premium for debt investments:
Continuing operations(42)(42)(42)
Realized loss on extinguishment of debt: (6)
Continuing operations28 43 35 
Unrealized gain on investment in short term securities: (7)
Continuing operations— — 11 
MFFO adjustments attributable to noncontrolling interests:
Continuing operations12 
MFFO attributable to common stockholders$40,159 $39,321 $59,010 
Weighted average number of shares of common stock outstanding (basic and diluted)173,960173,960173,960
Net (loss) income per share (basic and diluted)$(0.01)$(0.13)$0.02 
FFO per share (basic and diluted)$0.22 $0.22 $0.31 
MFFO per share (basic and diluted)$0.23 $0.23 $0.34 
_______________
FOOTNOTES:
(1)Management believes that adjusting for the gain on sale of real estate is appropriate because the adjustment is not reflective of our ongoing operating performance and, as a result, the adjustment better aligns results with management’s analysis of operating performance.
(2)Management believes that adjusting for the gain on change of control of a joint venture is appropriate because the adjustment is not reflective of our ongoing operating performance and, as a result, the adjustment better aligns results with management’s analysis of operating performance.