S-11 1 forms-11.htm

 

As filed with the Securities and Exchange Commission on August 21, 2023

 

REGISTRATION NO. 333-             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-11

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

STRAWBERRY FIELDS REIT, INC.

(Exact name of registrant as specified in its charter)

 

6101 Nimtz Parkway

South Bend, IN 46628

(574) 807-0800

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

David M. Gross, Esq.

Strawberry Fields REIT, Inc.

5683 North Lincoln Ave.

Chicago IL 60659

(574) 807-0800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With Copies to:

 

Alfred G. Smith, Esq.

J. Thomas Cookson, Esq.

Shutts & Bowen LLP

200 South Biscayne Boulevard

Suite 4100

Miami, Florida 33131

Telephone: (305) 379-9147

Facsimile: (305) 381-9982

 

Curt Creely, Esq.

Carrie Long, Esq.

Foley & Lardner LLP

100 N. Tampa St.

Suite2700

Tampa, Florida 33602

Telephone: (813) 229-2300

Facsimile: (813) 221-4210

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

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 7(a)(2)(B) of the Securities Act. ☐

 

Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
         
      Emerging growth company

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion,

 

Preliminary Prospectus dated August 21, 2023

 

 

STRAWBERRY FIELDS REIT, INC.

 

Common Stock

 

This is the initial public offering of Strawberry Fields REIT, Inc., a Maryland corporation. We are offering shares of our common stock.

 

Our common stock is listed for trading on the NYSE American under the symbol “STRW.” On           , 2023, the last reported sale price of our common stock on the NYSE American was $         .

 

We are organized and operate our business to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.

 

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. You should carefully consider the matters described under the caption “Risk Factors” beginning on page 24 of this prospectus.

 

   Per Share   Total 
Public offering price  $       $            
Underwriting discount(1)  $             $ 
Proceeds to us, before expenses, to us  $   $ 

 

  (1) We refer you to “Underwriting” beginning on page 166 of this prospectus for additional information regarding underwriting compensation.

 

The underwriters may also purchase up to an additional            shares of our common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock sold in this offering on or about             , 2023.

 

Compass Point Ladenburg Thalmann

 

The date of this prospectus is                  , 2023.

 

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
RISK FACTORS 24
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 56
USE OF PROCEEDS 57
DISTRIBUTION POLICY 58
CAPITALIZATION 59
DILUTION 60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 61
BUSINESS AND PROPERTIES 75
MANAGEMENT 100
EXECUTIVE COMPENSATION 105
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 109
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 115
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES AND TRANSACTIONS 116
STRUCTURE AND FORMATION OF OUR COMPANY 121
DETERMINATION OF OFFERING PRICE 123
DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF STRAWBERRY FIELDS REALTY LP 123
DESCRIPTION OF CAPITAL STOCK 128
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS 132
SHARES ELIGIBLE FOR FUTURE SALE 137
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS 139
UNDERWRITING 166
LEGAL MATTERS 174
EXPERTS 174
WHERE YOU CAN FIND MORE INFORMATION 174
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this document or to which we have referred you. None of us or the underwriters have authorized anyone to provide you with information that is different. If anyone provides you with different information, you should not rely on it. None of us or the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current as of the date such information is presented. Our business, financial condition, liquidity, funds from operations, or FFO, adjusted FFO, or AFFO, results of operations and prospects may have changed since those dates.

 

This prospectus contains market data and industry forecasts that were obtained from industry publications. We have not independently verified any of this information.

 

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GLOSSARY OF CERTAIN TERMS

 

The following is a glossary of certain terms used in this prospectus:

 

“ADA” means the Americans with Disabilities Act of 1990, as amended.

 

“ALF” means assisted living facility.

 

“Affordable Care Act” means the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010.

 

“BVI Company” means Strawberry Fields REIT, Ltd., a company organized under the laws of the British Virgin Islands. Upon the consummation of the formation transaction, the BVI Company became a wholly-owned subsidiary of the Operating Partnership.

 

“CAGR” means compound annual growth rate.

 

“CMS” means the Centers for Medicare and Medicaid Services, which administers Medicare, Medicaid and the State Children’s Health Insurance Program.

 

“Company” means Strawberry Fields REIT, Inc., a Maryland corporation.

 

“Dollars” or “$” means United States dollars.

 

“EBITDA” means earnings before interest, taxes, depreciation and amortization.

 

“EBITDAR” means earnings before interest, taxes, depreciation, amortization and rent.

 

“EBITDARM” means earnings before interest, taxes, depreciation, amortization, rent and management fees.

 

“GLA” or “gross leasable area” or means the area in any building that may be leased to tenants.

 

“HHS” means the U.S. Department of Health and Human Services.

 

“HIPAA” means the Health Insurance Portability and Accountability Act of 1996, as amended.

 

“HITECH Act” means the Health Information Technology for Economic and Clinical Health Act.

 

“HUD” means the U.S. Department of Housing and Urban Development, the federal government agency for housing and urban development.

 

“long-term acute care hospital” or “LTACH” means medical institutions in which patients requiring prolonged hospitalization (but who are stable) are given medical care and rehabilitation for several weeks. The operation of these institutions is subject to receipt of a suitable license.

 

“NIS” means New Israeli Shekels.

 

“Operating Partnership” means Strawberry Fields Realty LP, a Delaware limited partnership.

 

“OP units” means the units of limited partnership interests in the Operating Partnership.

 

“Predecessor Company” means Strawberry Fields REIT, LLC, an Indiana limited liability company. Prior to the consummation of the formation transaction, the Predecessor Company was the indirect owner of 73 of our properties.

 

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“SNF” means a skilled nursing facility.

 

“Series A Bonds” means the Series A Bonds issued by the BVI Company, which were first offered to the public in Israel in 2015. The net outstanding principal balance of the Series A Bonds on June 30, 2023, was approximately $20.2 million.

 

“Series B Bonds” means the Series B Bonds issued by the BVI Company, which were first offered to the public in Israel in 2018. The Series B Bonds were repaid in full during the year ended December 31, 2022.

 

“Series C Bonds” means the Series C Bonds issued by the BVI Company, which were first offered to the public in Israel on July 28, 2021. As of June 30, 2023, the Series C Bonds had an outstanding principal balance of approximately $63.7million.

 

“Series D Bonds” means the Series D Bonds issued by the BVI Company, which were first offered to the public in Israel on June 19, 2023. As of June 30, 2023, the Series D Bonds had an outstanding principal balance of approximately $22.4 million. In July 2023, the BVI Company issued an additional NIS 70.0 million ($19.2 million) in Series D Bonds.

 

“TASE” means the Tel Aviv Stock Exchange Ltd.

 

“TRS” means taxable REIT subsidiary.

 

TENANT INFORMATION

 

This prospectus includes information regarding certain of our tenants that lease properties from us and are not subject to SEC reporting requirements.

 

The information related to our tenants contained or referred to in this prospectus was provided to us by such tenants. We have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot provide any assurance of its accuracy. We are providing this data for informational purposes only.

 

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PROSPECTUS SUMMARY

 

The following summary highlights some of the information contained elsewhere in this prospectus. It is not complete and does not contain all of the information you should consider before making an investment decision. You should read carefully the more detailed information set forth under the heading “Risk Factors” and the other information included in this prospectus. References in this prospectus to “we,” “our,” “us” and “the Company” refer to Strawberry Fields REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Strawberry Fields Realty LP, a Delaware limited partnership, which we refer to in this prospectus as our Operating Partnership. We are the sole general partner of our Operating Partnership. Certain historical and current operations described in this prospectus refer to historical and current operations of the businesses and assets of Strawberry Fields REIT, LLC, an Indiana limited liability company and our accounting predecessor (which we refer to in this prospectus as the Predecessor Company). On June 8, 2021, the Predecessor Company contributed all of its assets to the Operating Partnership, and the Operating Partnership assumed all of the liabilities of the Predecessor Company.

 

Business

 

We are a self-managed and self-administered real estate company that specializes in the acquisition, ownership and triple-net leasing of skilled nursing facilities and other post-acute healthcare properties. As of June 30, 2023, our portfolio consisted of 79 healthcare properties with an aggregate of 10,351 licensed beds. We hold fee title to 78 of these properties, and hold one property under a long-term lease. These properties are located across Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas. Our 79 properties comprise 83 healthcare facilities, consisting of 78 skilled nursing facilities, 3 assisted living facilities and 2 long-term acute care hospitals.

 

We generate substantially all of our revenues by leasing our properties to tenants under long-term leases primarily on a triple-net basis, under which the tenant pays the cost of real estate taxes, insurance and other operating costs of the facility and capital expenditures. Our properties are currently leased to 83 tenants under 28 lease agreements. Approximately 77.1% of our properties are held under a master lease which provides for cross default provisions, cross collateralization and diversification of risk. As of June 30, 2023, our average remaining initial lease term is 5.9 years with average annual rent escalators of 2.7%. Most of our leases include two 5-year renewal options to extend the term.

 

We are entitled to monthly rent paid by the tenants and we do not receive any income or bear any expenses from the operation of such facilities. As of June 30, 2023, the aggregate annualized average base rent for the expected life of the leases for our properties was approximately $84.2 million. As of March 31, 2023 the rent coverage ratio for our portfolio was 1.95x, based on EBITDARM of our tenants.

 

Each healthcare facility located at our properties is managed by a qualified operator with an experienced management team. As of the date of this prospectus, 41 properties representing 62.2% of our annualized base rent as of June 30, 2023, are leased to and operated by related parties that are affiliates of Moishe Gubin, who is our Chairman and Chief Executive Officer and Michael Blisko, who is one of our directors. These properties are operated by affiliates of Infinity Healthcare Management (“Infinity Healthcare”), a healthcare consulting business . Infinity Healthcare and these affiliates are one of the largest groups of operators of skilled nursing facilities in the Midwest with over 10,000 beds. Our relationship with Infinity Healthcare provides us with unmatched insight into operating trends and industry developments. Additionally, our relationship with Infinity Healthcare provides us with operating flexibility with regard to evaluating potential new acquisitions or better understanding of operational issues pertaining to underperforming tenants.

 

Since our Predecessor Company was formed, we have grown significantly through acquisitions, having purchased 33 properties since January 2017, with an aggregate purchase price of approximately $236.6 million and weighted average lease yield of 14.3%. The weighted average lease yield is calculated as the annualized average annual base rent for the expected life of the leases divided by total purchase price. Since 2017, our aggregate annualized average base rent for the expected life of the leases for our properties has grown at an approximate 7.6% CAGR from $57.1 million in fiscal year 2017 to $82.5 million in fiscal year 2022. In addition, our Adjusted EBITDA and FFO from 2018 to 2022 grew at an approximate 10.8% and 23.4% CAGR, respectfully. During that period, we expanded our geographic footprint from six states to nine states.

 

We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include new or existing skilled nursing operators. We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets. In addition, we actively monitor the clinical, regulatory, and financial operating results of our tenants, and work to identify opportunities within their operations and markets that could improve their operating results at our facilities. We communicate such observations to our tenants; however, we have no contractual obligation to do so. Moreover, our tenants have sole discretion with respect to the day-to-day operation of the facilities they lease from us, and how and whether to implement any observation we may share with them. We also actively monitor the overall occupancy, skilled mix, and other operating metrics of our tenants monthly.

 

 

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Our management team has extensive experience in acquiring, owning, financing, operating and leasing skilled nursing facilities and other types of healthcare properties. The team is led by Moishe Gubin, our Chief Executive Officer and Chairman of our Board of Directors, Nahman Eingal, our Chief Financial Officer, and Jeffrey Bajtner who serves as our Chief Investment Officer. Combined, this team has over 50 years of experience investing in real estate and particularly in healthcare related real estate and operating companies. Mr. Gubin began his career working at a skilled nursing operator in 1998 and developed in-depth knowledge of the business before purchasing his first skilled nursing facility in 2003. Mr. Gubin has successfully raised equity and debt capital to facilitate over 100 real estate related/healthcare related acquisitions totaling over $1.1 billion in gross investment. In addition, our management team has extensive experience as operators of, and healthcare consultants to, skilled nursing facilities, having managed and operated over 70 skilled nursing facilities, including 41 of our current tenants. We believe our management team’s unique experience across both skilled nursing operations and real estate and its extensive knowledge of the skilled nursing industry position us favorably to take advantage of healthcare investment opportunities. Additionally, our deep and broad relationships with industry operators have allowed us to identify and acquire skilled nursing facilities to which many of our competitors do not have access.

 

COVID-19 presented a significant challenge for the SNF industry as occupancy declined, payroll expenses increased and operators were required to purchase additional personal protective equipment. Although profitability declined at our tenants’ facilities, we experienced rent deferrals equal to less than 1% of rental income during the past 3 years. As of June 30, 2023, none of the Company’s tenants are delinquent on the payment of rent. We believe our strong rent collection performance is attributed to selecting tenants with a demonstrated track record, financial strength and a large presence in local markets as well as close monitoring of our tenants’ operating results. Since reaching a low point in January 2021, the SNF industry has seen a significant increase in overall occupancy of approximately 8%.

 

We have assembled a high quality and diversified portfolio of skilled nursing and other healthcare related facilities and we plan to continue to invest primarily in skilled nursing facilities and other healthcare facilities that primarily provide services to the elderly. We believe these asset classes provide potential for higher risk-adjusted returns compared to other forms of net-leased real estate assets due to the specialized expertise necessary to acquire, own, finance and operate these properties, which are factors that tend to limit competition among investors, owners, operators and finance companies. Additionally, our management team’s strong relationships in the industry have allowed us to acquire healthcare-related properties at valuations that achieve attractive lease yields, with the goal of generating strong returns for our stockholders over the long-term. As we continue to acquire additional properties and expand our portfolio, we expect to continue diversifying our portfolio by geography and by tenant, while also maintaining balance sheet strength and liquidity.

 

We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2022. We believe that we have been organized and have operated, and we intend to continue to operate, in a manner to qualify for taxation as a REIT. We operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets are held through Strawberry Fields Realty, L.P. (the “Operating Partnership”). We are the general partner of the Operating Partnership and own approximately 12.3% of the outstanding OP units.

 

Recent Developments

 

Indiana Facilities Acquisition and Financing

 

On June 8, 2023, the Company entered into a Purchase and Sale Agreement with respect to the purchase of 24 healthcare facilities located in Indiana (the “Indiana Facilities”) for $102.0 million. The Indiana Facilities are comprised of 19 skilled nursing facilities with 1,659 licensed beds and five assisted living facilities with 193 beds, of which 29 beds are licensed. Annualized straight line rent for the facilities is expected to equal $12.7 million representing a weighted average lease yield of 12.4%.

 

The Company made an initial earnest money deposit of $4.0 million in June 2023 and a second deposit of $1.0 million in July 2023 under the Purchase and Sale Agreement, which will be applied to the purchase price at closing. The Company expects to pay the balance of the purchase price from the Company’s current working capital, which includes $19.1 million in proceeds from our sale of additional Series D Bonds, together with funds to be borrowed under a new $66.0 million credit facility from a commercial bank. The credit facility is expected to have a 5-year term and require payments of interest-only payments for 12 months at a floating rate of SOFR plus 3.5%. Under the Purchase and Sale Agreement, the Company has also agreed to make a loan of approximately $6.5 million to the sellers, which will be payable within 60 days of the closing.

 

The Indiana Facilities are currently leased under a master lease agreement dated November 1, 2022, between the sellers and a group of tenants affiliated with two of the Company’s directors, Moishe Gubin and Michael Blisko. Under the master lease, the tenants are required to pay annual rent, on a triple net basis, commencing on November 1, 2022, in the amount of $9.5 million, which amount is subject to annual increases set forth in the master lease. The master lease has an initial term of seven years. The tenants have three options to extend the lease. The first option is for three years, the two remaining options are for five years each. The tenants have an option to buy the properties during the sixth or seventh year of the lease for $127.0 million. The material terms of the master lease will not be modified as a result of the purchase. The tenants operate the Indiana Facilities as skilled nursing and assisted living facilities.

 

Assuming that we successfully close the acquisition of the Indiana Facilities, our portfolio would increase from 79 healthcare properties to 103 properties, and our aggregate annualized average base rent for the expected life of our leases would increase from $84.2 million to $96.9 million, based on aggregate annualized average base rent as of June 30, 2023. Additionally, the number of properties leased to tenants affiliated with Mr. Gubin and Mr. Blisko would increase from 41 properties to 65 properties, and the percentage of annualized base rent received from related party leases would increase from 62.2% to 67.1 %, based on aggregate annualized average base rent over the life of our leases as of June 30, 2023.

 

The Company anticipates closing the acquisition of the Indiana Facilities in August 2023.

 

Our Industry

 

The skilled nursing industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an aging population, increasing life expectancies and the trend toward shifting patient care to lower cost settings. We believe this evolution has led to a number of favorable improvements in the industry, as described below:

 

  Increased Demand Driven by Aging Populations. As seniors account for a higher percentage of the total U.S. population, we believe the overall demand for skilled nursing services will increase. At present, the primary market demographic for skilled nursing services is individuals aged 75 and older. The 2020 U.S. Census reported that there were over 56 million people in the United States in 2020 over the age of 65. The U.S. Census estimates this group to be one of the fastest growing segments of the United States population, projecting that it will increase 30% to 73 million people in 2030. According to the Centers for Medicare & Medicaid Services, skilled nursing facilities and continuing care retirement communities’ expenditures are projected to grow from approximately $196.8 billion in 2020, which includes federal expenditures in response to the COVID-19 pandemic, to approximately $266 billion in 2028. Although skilled nursing and seniors housing occupancy rates have declined during the COVID-19 pandemic, we believe that these trends in population will support an increasing demand for skilled nursing services in the long-term, which in turn will likely support an increasing demand for the services provided within our properties.
     
   Shift of Patient Care to Lower Cost Alternatives. The growth of the senior population in the United States continues to increase healthcare costs. In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as SNFs, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals, inpatient rehabilitation facilities (“IRF”) and other post-acute care settings. SNFs Medicare average cost per day is $547 compared to $2,607, $1,689 and $1,671 for Hospitals, IRF and LTACH’s respectively. As a result, SNFs are generally serving a larger population of higher-acuity patients than in the past.

 

 

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  Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented, characterized predominantly by numerous local and regional providers. Public REITs own approximately 11% of skilled nursing facilities. We believe this fragmentation provides significant acquisition and consolidation opportunities.
     
  Widening Supply and Demand Imbalance. The number of SNFs has declined modestly over the past several years. According to the Valuation & Information Group, which provides appraisal and market reports for the industry, the nursing home industry is currently comprised of approximately 14,800 facilities, as compared with over 16,700 facilities as of December 2000. Supply of new facilities is limited due to certificate of need restrictions. 71% of states have certificate of need restrictions., We expect that the supply/demand imbalance in the skilled nursing industry will increasingly favor skilled nursing providers due to the shift of patient care to lower cost settings and an aging population to meet the growing need for post-acute healthcare.

 

Competitive Strengths

 

We believe that the following competitive strengths provide a solid foundation for the sustained growth of our business and successful execution of our business strategies:

 

Diversified Portfolio. We have a portfolio that is diversified in terms of both geography and tenant composition. As of the date of this prospectus, our portfolio is comprised of 79 healthcare-related properties with a total of 10,351 licensed beds located throughout Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas. We believe that our geographic diversification limits the potential impact of any regulatory, reimbursement, competitive dynamic or other changes in any single market on the overall performance of our portfolio. We lease our properties to 83 tenants, with no single tenant accounting for more than 3.1% of our annualized base rent. 64 of these tenants are held under master leases which provides for cross default provisions, cross collateralization and diversification of risk This diversification limits our exposure for any single tenant that encounters financial or operational difficulties. We expect to continue growing our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of operators in different geographic markets.

 

Protected Markets. In eight of the nine states in which we operate, we benefit from CON laws that require state approval for the construction and expansion of certain types of healthcare facilities. These laws represent significant barriers to entry and limit competition in these markets.

 

Demonstrated Ability to Identify and Structure Accretive Acquisition Opportunities. Our management team has long-standing relationships in the skilled nursing and post-acute industries. Through their experience in acquiring these types of facilities, we have the proven ability to identify and complete complex and accretive transactions. Since 2017 we have acquired 33 properties with an aggregate purchase price of approximately $236.6 million and with a weighted average first-year lease yield of 14.3%. Additionally, because many of our acquisitions are off-market opportunities sourced through our management team’s network of industry relationships, and later financed through HUD guaranteed loans, we believe we do not typically compete with larger healthcare-focused real estate companies for acquisitions as they tend to focus on larger, platform acquisition opportunities. As a result, we have consistently acquired assets at attractive valuations and believe we can continue to identify these types of opportunities to expand our portfolio.

 

 

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Significant Experience Acquiring Underperforming Assets. Although we primarily seek to acquire properties that have had consistent profitability, we may also acquire underperforming properties if we believe that the underlying facilities can become successful through better management. Our management team’s prior experience as operators gives it the ability to evaluate these types of facilities and their potential for improved revenue enhancement and increased operating efficiencies. For example, in 2018 and 2019 we acquired 16 properties for total purchase price of $80.4 through the assumption or payment of the outstanding loan on the facilities or directly from the lender and generated a lease yield of 17%. We will consider the acquisition of underperforming properties if they are available at attractive valuations and provide us with significant upside potential once their new operators have successfully stabilized and optimized their operations. If we acquire underperforming properties, we expect to lease them to tenants and operators that have significant turnaround experience and support from experienced consultants.

 

Experienced and Adept Operators. We have strong and long-standing relationships with operators and their principals who have significant experience in operating successful skilled nursing facilities. These operators and their principals have a strong track record of operating in challenging markets where operators are subject to increased regulatory issues and significant competition. Additionally, these operators and their principals have learned to successfully operate facilities in which most of the revenue is earned from providing services to patients covered by Medicaid which are subject to lower reimbursement rates than other revenue sources.

 

Consulting Firms Provide Additional Resources for the Operators of our Facilities. Most of the operators of our facilities utilize the services of experienced healthcare consulting firms to provide them with expert advice and assistance with their operations. We believe these consulting firms provide the operators with additional expertise and resources that materially enhance their ability to operate efficiently and to meet applicable regulatory requirements.

 

Close Relationships with Tenants, Operators and Consultants Provide Enhanced Oversight, Market Intelligence and Strong Alignment of Interests. The nature of our close relationships with the tenants and operators of our properties and their consulting firms allows us to maintain close communication and obtain early knowledge of potential issues faced by our tenants, enabling us to address those issues that affect us as the lessor. These relationships also provide us with intelligence on the markets in which we own properties and assistance in locating new and replacement tenants. Additionally, the consulting firms assist us without charge in evaluating potential acquisitions and operators. This assistance provides us with insight of local market trends, which is particularly valuable for new markets. These relationships also provide a strong alignment of interests between our interests as a property owner and our tenants’ interests.

 

Well-Structured, Long-Term, Triple-Net Leases Generate Predictable and Growing Rental Income Streams. Most of our owned properties are leased to tenants under long-term, non-cancellable, triple-net leases, pursuant to which the tenants are responsible for all maintenance and repairs, insurance and taxes associated with the leased properties and the business conducted at the properties. As of June 30, 2023, 100% of the gross leasable area of our facilities was leased with an average remaining initial lease term of 5.9 years. Most of our leases include two remaining 5-year renewal options. Our leases generally have terms that range from 10 to 20 years with two five-year extensions, and annual rent escalators of 1% to 3% per year, which provides us with a steady and growing cash rental stream. Additionally, our leases are structured to provide us with key credit support and have credit enhancement provisions that may include non-refundable security deposits of up to 6 months, personal and corporate guarantees and cross-default provisions under our master leases. Approximately 71.1% of our total annualized rental revenue is generated through our 9 master leases that have cross-default and cross-collateralization provisions.

 

 

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Seasoned Management Team with Significant Experience. Moishe Gubin, our Chairman and Chief Executive Officer, has over 25 years of operating and real estate experience in the skilled nursing and long-term care industries. Prior to founding the Predecessor Company, Mr. Gubin worked as an operator of skilled nursing facilities and built a strong operational knowledge base that has been incorporated into the day-to-day management of our current portfolio. Additionally, Mr. Gubin has significant acquisition experience having completed over 100 healthcare real estate related acquisitions with an aggregate investment amount of over $1.1 billion since 2003. Nahman Eingal, our Chief Financial Officer, has an extensive background in real estate finance with over 20 years of experience in the banking industry focusing on commercial lending to healthcare providers. Mr. Gubin and Mr. Eingal also have significant experience accessing the debt capital markets to fund growth, having raised over $310 million of publicly traded bonds that are listed on the Tel Aviv Stock Exchange. We believe that the diverse operational and financial background and expertise of our management team gives us the ability to successfully manage our portfolio and sustain our growth.

 

Our Portfolio

 

As of the date of this prospectus, we own and lease a geographically diverse portfolio of 79 healthcare- related properties in nine states, with an aggregate of 10,351 licensed beds. Of these 79 properties, 76 are skilled nursing facilities, two are dual-purpose facilities used as both skilled nursing facilities and long-term acute care hospitals, and three are assisted living facilities.

 

The following table contains information regarding our owned and leased healthcare facility portfolio by facility type, as of the date of this prospectus, except for Annualized Average Base Rent and % of Total Annualized Base Rent, which are calculated as of June 30, 2023.

 

Summary of Our Facilities
Facility Type   Number of Facilities(1)     Licensed Bed Count     Annualized Average Base Rent(2)(3)     % of Total Annualized Base Rent  
                (Amounts in $000s)  
Skilled Nursing Facilities(i)     78       10,206     $ 82,321       97.7 %
Long-Term Acute Care Hospitals     2       63       1,311       1.6 %
Assisted Living Facilities     3       82       603       07 %
Total     83       10,351     $ 84,235       100.0 %

 

(1) Number of facilities does not equate to the number of properties because, in the case of four properties, the properties include both an SNF and either an LTACH or an ALF.
   
(2) Annualized average base rent does not represent historical rental amounts. Rather, annualized average base rent represents the average annual base rent for the expected life of the lease, except as otherwise noted. Base rent does not include tenant recoveries, additional rents or other related adjustments, but does include contractual annual rent escalation and averages the base rent over the life of the lease. For additional information on the expiration of these leases, see “Business and Properties — Lease Expirations.”
   
(3) There are no material differences between the annualized average base rent for the properties leased to related parties and the properties leased to third parties. In most cases, the base rent is equal to ten percent of the purchase price of the property, subject to adjustments based on changes in the consumer price index.

 

 

5
 

 

 

Property Types

 

Skilled Nursing Facilities. Skilled nursing facilities, or SNFs, provide services for individuals that don’t need to be in a hospital but can’t be cared for at home. Most SNFs have skilled nurses and additional medical staff on duty 24 hours a day. The staff provides daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals and patients requiring certain assistance for daily living activities. A typical SNF includes mostly one or two bed units, each equipped with a private or shared bathroom and community dining halls.

 

The need for SNF’s can be instantaneous, such as after an acute hospitalization, stroke, or heart attack.  SNF’s are not only occupied by the elderly. In past years, a SNF are a place that provided care for residents, of all ages, who were often too frail/sick to be considered candidates for any type of rehabilitative treatment.

 

Assisted Living Facilities. Assisted living facilities, or ALFs, provide services that include minimal nursing assistance, housekeeping, nutrition, laundry and administrative services for individuals and patients requiring minimal assistance for daily living activities. ALFs enable residents to maintain some of their privacy and independence as they do not require constant supervision and assistance. ALFs are typically comprised of one- and two-bedroom suites equipped with private bathrooms and efficiency kitchens. Services bundled within one regular monthly fee usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24- hour availability of assistance with the activities of daily living, such as eating, dressing and bathing. Professional nursing and healthcare services are available at the facility on-call or at scheduled times.

 

Long-Term Acute Care Hospitals. Long term acute care hospitals, or LTACHs, provide a range of services and treatments for acute care domains such as emergency care; urgent care; short- term stabilization; trauma care and acute care surgery; critical care; and prehospital care. The acute service domains mentioned are for individuals and patients with acute life- or limb- threatening medical surgical needs, ambulatory care needs, acute needs before delivery of definitive treatment, community care needs until patient transfer, life- threatening conditions requiring comprehensive care and constant monitoring, and life- threatening injuries requiring acute surgical attention.

 

Geographic Diversification

 

Our portfolio of 79 properties is diversified by geographic location across nine U.S. states, comprising Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas.

 

The following table contains information regarding our healthcare facility portfolio by geography, as of the date of this prospectus, other than Annualized Average Base Rent and % of Total Annualized Base Rent which are calculated as of June 30, 2023:

 

State  Number of Properties  Facility Type  Licensed Bed Count   Annualized Average Base Rent (Amounts in $000s)   % of Total Annualized Average Base Rent 
Illinois(1)  20  20 SNFs   4,226   $25,203    29.9%
Tennessee  12  12 SNFs   1,056    17,129    20.3%
Indiana  15  15 SNFs   1,388    14,258    16.9%
Arkansas  13  12 SNFs 2 ALFs   1,568    11,044    13.1%
Kentucky  10  10 SNFs 1 ALF   1,165    9,783    11.6%
                      
Texas  3  3 SNFs 1 LTACH   473    3,963    4.7%
Oklahoma  1  1 SNFs 1 LTACH   137    1,151    1.4%
Ohio  4  4 SNFs   238    864    1.0%
Michigan  1  1 SNF   100    840    1.0%
                      
Totals  79  78 SNFs 2 LTACHs 3 ALFs   10,351   $84,235    100.0%

 

  (1) In February 2023 one of the SNF we own in Southern Illinois was closed by the tenant for efficiency reasons. This SNF is under a master lease with 2 other facilities and the full amount of the rent payments under the master lease are continuing to be paid. Additionally, the operator continues to be responsible for ensuring the building is secure and paying utilities, real estate taxes and insurance bills.

 

Principal Consulting Firms to Operators

 

The principal consulting firms engaged by our tenants are described below. They provide the tenants with a wide range of advice and assistance that we believe significantly enhances the operators’ ability to operate successfully. As further described below, certain operators and consultants are related to one or more of our affiliates.

 

Infinity Healthcare. Infinity Healthcare is a consulting group that provides healthcare consulting services to the healthcare industry, including facilities that offer skilled and intermediate nursing, short-term rehabilitation, services for residents with dementia and Alzheimer’s disease, behavioral health, ventilator units, in-house dialysis, and home health. Infinity Healthcare was founded in 2008 by Moishe Gubin and Michael Blisko, whom are the CEO and a Director, respectively, of the Company. Infinity Healthcare has an experienced management team with over 25+ years, on average, which has been focused on the SNF industry. With offices in Chicago, Illinois., Fort Lauderdale, Florida., Indianapolis, Indiana. and Gallatin, Tennessee., Infinity Healthcare provides consulting services to 70 facilities (of which 41 are leased from us) in Illinois, Indiana, and Tennessee. As of 2021, Infinity Healthcare was ranked the 16th largest skilled nursing company in America.

 

Benchmark Healthcare (“Benchmark”). Benchmark is a healthcare consulting service provider to the skilled nursing facility industry. Benchmark was founded in 2015 and primarily provides consulting services to A&M Healthcare which, through its subsidiaries, holds the licenses to 18 skilled nursing facilities. A&M Healthcare operates under the trade name Landmark. Benchmark provides consulting services to 18 facilities (of which 17 are leased from us) in Kentucky, Illinois Texas, Michigan and Oklahoma.

 

Oasis Healthcare Group – Oasis is a diverse healthcare consulting firm founded in 2020 by three healthcare experienced individuals, Abraham Schreiber, Zalman Scheinbaum, and Matis Herzka. The Company is based in New York. Oasis provides consulting services to 13 skilled nursing facilities and 2 assisted living facilities (of which all are leased from us) in Arkansas.

 

AOM Healthcare Management (“AOM”). AOM is a diverse and experienced healthcare consulting firm founded in the 2000’s and based in New York. AOM provides consulting services to 22 skilled nursing facilities (of which four are leased from us) in New York and Ohio.

 

Paramount Healthcare Consultants (“Paramount”). Paramount is a diverse and experienced healthcare consulting firm founded in 2008 and based in Louisiana. Paramount provides consulting services to 11 healthcare facilities (of which one is leased from us) in Louisiana and Texas.

 

Bria Health Services (“Bria”). Bria is a healthcare consulting company that provides consulting services to the skilled nursing facility industry. Bria was founded in 2012 by Avrum Weinfeld, Daniel Weiss and Natan Weiss and headquartered in Skokie, Illinois. Bria provides consulting services to 17 operators in Illinois with over 2,800 beds (including five Strawberry facilities located in southern Illinois with 654 licensed beds).

 

 

6
 

 

 

Regulatory

 

Although there is presently no Federal regulation on the lessor itself from Federal government agencies that regulate and inspect the operators and no regulation of the lessor in the States in which we own real property, our tenants (the operators of skilled nursing facilities, long-term acute care hospitals and other healthcare providers) are subject to extensive federal, state and local government healthcare laws and regulations.

 

Our tenants and operators receive payments for patient services from the federal government under the Medicare program, state governments under their respective Medicaid or similar programs, managed care plans, private insurers and directly from patients. As of March 31, 2023, approximately 74% of payments were from Medicaid, 11% from Medicare and 15% from other sources.

 

The amounts of program payments received by our tenants/operators can be changed from time to time by legislative or regulatory actions and by determinations by agents for the programs. The states in which we operate generally set reimbursement rates on a quarterly, bi-annual or annual basis. The majority of our states utilize a prospective, cost and price-based reimbursement system. This allows state regulatory authorities to review historical costs as well as take into account expected pricing and acuity to set appropriate reimbursement rate levels for our operators See “Regulatory – Key Market Overview” for more information.

 

Our Business and Growth Strategies

 

Our objective is to generate attractive returns for our stockholders over the long-term through dividends and capital appreciation. Key elements of our strategy include the following:

 

Acquire Additional Healthcare Properties in Concentrated Geographic Areas. We plan to invest primarily in real estate used as skilled nursing facilities and other healthcare facilities that provide services to the elderly, where our management team has substantial experience and relationships. We believe these facilities have the potential to provide higher risk-adjusted returns compared to other forms of net-leased real estate assets due to the specialized expertise necessary to acquire, own, finance and manage these properties, which are factors that tend to limit competition among investors, owners, operators and finance companies. We will seek to acquire properties in states where we believe we can build regional density in order to create competitive advantages and drive operational and cost efficiencies.

 

Negotiate Well-Structured Net Leases. Our primary ownership structure is a facility purchase with a long-term triple-net lease with the healthcare operator. We seek to structure our leases with lease terms of 10 years with tenant options to extend the lease for an additional period of 5 to 10 years and rent escalators that provide a steadily growing cash rental stream. Our lease structures are designed to provide us with credit support for our rents, including, in certain cases, lease deposits, covenants regarding liquidity, and various provisions for cross-default. We believe these features help insulate us from variability in operator cash flows and enable us to minimize our expenses while we continue to build our portfolio.

 

 

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Leverage Existing and Develop New Operator Relationships. Our management team has long-standing relationships in the healthcare industry through which we have sourced our existing portfolio, and we intend to continue to expand our portfolio by leveraging these existing relationships. Forty-one of our properties are leased to related parties. One of our goals is to reduce our dependence on related party tenants in order to diversify our tenant base. Although we expect to continue to lease properties to related party tenants in markets in which the related party tenants have substantial experience and operations, we intend to lease properties in other markets to unrelated tenants if we are able to identify qualified operators. Additionally, we will consider leasing properties to unrelated parties in markets in which related parties operate if we are able to identify qualified operators that are willing to lease properties on terms that are no less favorable than those available from related parties.

 

Utilize Prudent Investment Underwriting Criteria. We have adopted what we believe to be a thorough investment underwriting process based on careful analysis and due diligence with respect to both the healthcare real estate and the healthcare service operations. We seek to make investments in healthcare properties that have the following attributes: well-located, visible to traffic, in good physical condition with predictable future capital improvement needs and with attractive prospects for future profitability.

 

Monitor the Performance of our Facilities and Industry Trends. We carefully monitor the financial and operational performance of our tenants and of the specific facilities in which we invest through a variety of methods, such as reviews of periodic financial statements, and regular meetings with the facility operators. Pursuant to the terms of our leases, our tenants are required to provide us with certain periodic financial statements and operating data.

 

Utilize Targeted Leverage in Our Investing Activities. We seek to utilize a targeted level of leverage that is appropriate in light of market conditions, future cash flows, the creditworthiness of tenants and future rental rates. We will seek to achieve a ratio of debt to asset fair market value in the range of 45% to 55%. However, our charter and bylaws do not limit the amount of debt that we may incur and our board of directors has not adopted a policy limiting the total amount of our borrowings.

 

Tenants and Operators

 

Our properties are currently leased to 83 tenants under 28 lease agreements. Our leases include 9 master lease agreements that cover 64 facilities leased to 64 tenants, with the remaining 19 leases each covering a single facility leased to one tenant. 41 of our tenants are related parties.

 

Each property is operated as a healthcare facility by a licensed operator, which may be the tenant or a separate operator. Each operator holds a license granted by state regulators to operate a specific type of facility. All the operators have experienced management teams and senior healthcare staff with substantial knowledge of their respective local markets. We target healthcare operators that are owned by principals with a history of quality care, and the demonstrated ability to successfully navigate in a changing healthcare operating environment. Certain operators are related parties.

 

We believe that each of the operators of our properties is primarily focused on serving the needs of the local community. Unlike operators that are part of a large national healthcare conglomerate, we believe the operators at our properties can manage their facilities more efficiently because they are not burdened by costly infrastructure and have the flexibility to rapidly adjust their cost structure to respond to changes in the reimbursement environment.

 

In order to operate efficiently and improve profitability, most of the operators at our facilities have engaged large consulting firms that specialize in healthcare and skilled nursing operations. These consulting firms provide advice and assistance on marketing, operating policies and procedures, billing, collections and regulatory compliance. The operators and consultants work together to develop and standardize best practices in the facilities, while operating in a cost-efficient manner. The operators at our properties primarily use one of nine principal consulting firms, including three firms that are part of Infinity Healthcare, a healthcare consulting business that is owned by Moishe Gubin, who is our Chairman and Chief Executive Officer and Michael Blisko, who is one of our directors.

 

The tenants and operators of our properties have demonstrated the ability to generate consistent profitability despite the challenging markets in which they operate. In many cases, these tenants and operators have successfully optimized and stabilized underperforming skilled nursing facilities. While these tenants and operators have been successful, we expect to seek opportunities to diversify our tenant/operator mix through future acquisitions that will be leased to new operators.

 

 

8
 

 

 

The following table contains information regarding our healthcare facility portfolio by tenant, as of June 30, 2023.

 

Lessor/

Company Subsidiary

 

Manager/Tenant/

Operator (1)

  State  Property type  Number of licensed beds   Tenant Lease Expiration Year (2)   Rentable square feet   Percent leased  

Annualized Lease Income

(in $)

   % of total Annualized Lease Income   Annualized lease income per SQF (in $) 
Master Lease Indiana                                            
1020 West Vine Street Realty LLC  The Waters of Princeton II LLC  IN  SNF   95    2025    32,571    100%   1,045,506    1.24%   32.10 
12803 Lenover Street Realty LLC  The Waters of Dillsboro – Ross Manor II LLC  IN  SNF   123    2025    67,851    100%   1,353,655    1.61%   19.95 
1350 North Todd Drive Realty, LLC  The Waters of Scottsburg II LLC  IN  SNF   99    2025    28,050    100%   1,089,527    1.29%   38.84 
1600 East Liberty Street Realty LLC  The Waters of Covington II, LLC  IN  SNF   119    2025    40,821    100%   1,309,634    1.55%   32.08 
1601 Hospital Drive Realty LLC  The Waters of Greencastle II LLC  IN  SNF   100    2025    31,245    100%   1,100,532    1.31%   35.22 
1712 Leland Drive Realty, LLC  The Waters of Huntingburg II LLC  IN  SNF   95    2025    45,156    100%   1,045,506    1.24%   23.15 
2055 Heritage Drive Realty LLC  The Waters of Martinsville II LLC  IN  SNF   103    2025    30,060    100%   1,133,548    1.35%   37.71 
3895 South Keystone Avenue Realty LLC  The Waters of Indianapolis II LLC  IN  SNF   81    2025    25,469    100%   891,431    1.06%   35.00 
405 Rio Vista Lane Realty LLC  The Waters of Rising Sun II LLC  IN  SNF   58    2025    16,140    100%   638,309    0.76%   39.55 
950 Cross Avenue Realty LLC  The Waters of Clifty Falls II LLC  IN  SNF   138    2025    39,438    100%   1,518,735    1.80%   38.51 
958 East Highway 46 Realty LLC  The Water of Batesville II LLC  IN  SNF   86    2025    59,582    100%   946,458    1.12%   15.88 
2400 Chateau Drive Realty, LLC  The Waters of Muncie II LLC  IN  SNF   72    2025    22,350    100%   792,383    0.94%   35.45 
The Big H2O LLC  The Waters of New Castle II LLC  IN  SNF   66    2025    24,860    100%   726,351    0.86%   29.22 
Master Lease Central Illinois 1                                            
253 Bradington Drive, LLC  Bria of Columbia LLC  IL  SNF   119    2032    43,189    100%   410,821    0.49%   9.51 
3523 Wickenhauser, LLC  Bria of Alton LLC  IL  SNF   181    2032    44,840    100%   624,862    0.74%   13.94 
727 North 17TH Street, LLC  Belleville Healthcare Center LLC  IL  SNF   180    2032    50,650    100%   621,410    0.74%   12.27 

Master Lease Central Illinois 2

                                            
107 South Lincoln Street LLC (3)  Bria of Smithton, LLC  IL  SNF   0    0    0    0%   -    0.00%   - 
1623 West Delmar Avenue, LLC  Bria of Godfrey LLC  IL  SNF   68    2032    15,740    100%   234,755    0.28%   14.91 
393 Edwardsville Road, LLC  Bria of WoodRiver LLC  IL  SNF   106    2032    29,491    100%   365,941    0.43%   12.41 
Master Lease Landmark                                            
1621 Coit Road Realty, LLC  Landmark of Plano Rehabilitation and Nursing Center, LLC  TX  SNF   160    2032    74,718    100%   1,343,689    1.60%   17.98 
8200 National Avenue Realty, LLC  Landmark of Midwest City Rehabilitation and Nursing Center, LLC  OK  SNF   106    2032    39,789    100%   890,194    1.06%   22.37 
8200 National Avenue Realty, LLC  Landmark of Midwest City Hospital, LLC  OK  LTACH   31    2032    49,319    100%   260,340    0.31%   5.28 
5601 Plum Creek Drive Realty, LLC  Landmark of Amarillo Rehabilitation and Nursing Center, LLC  TX  SNF   99    2032    90,046    100%   831,408    0.99%   9.23

 

 

9
 

 

 

Lessor/

Company Subsidiary

 

Manager/Tenant/

Operator (1)

  State  Property type  Number of licensed beds   Tenant Lease Expiration Year (2)   Rentable square feet   Percent leased  

Annualized Lease Income

(in $)

   % of total Annualized Lease Income   Annualized lease income per SQF (in $) 
9300 Ballard Road Realty, LLC  Landmark of Des Plaines Rehabilitation and Nursing Center, LLC  IL  SNF   231    2032    70,556    100%   1,939,952    2.30%   27.50 
911 South 3rd Street, LLC  Chalet Of Niles, LLC  MI  SNF   100    2032    31,895    100%   839,806    1.00%   26.33 
1015 Magazine Street, LLC  Landmark of River City Rehabilitation and Nursing Center, LLC  KY  SNF   92    2032    36,050    100%   772,621    0.92%   21.43 
900 Gagel Avenue, LLC  Landmark of Iroquois Park Rehabilitation and Nursing Center, LLC  KY  SNF   120    2032    36,374    100%   1,007,767    1.20%   27.71 
308 West Maple Avenue, LLC  Landmark of Lancaster Rehabilitation and Nursing Center, LLC  KY  SNF   96    2032    42,438    100%   806,214    0.96%   19.00 
1155 Eastern Parkway, LLC  Landmark of Louisville Rehabilitation and Nursing Center, LLC  KY  SNF   252    2032    106,250    100%   2,116,311    2.51%   19.92 
203 Bruce Court, LLC  Landmark of Danville Rehabilitation and Nursing Center, LLC, Goldenrod Village Assisted Living Center, LLC  KY  SNF/
ALF
   108    2032    46,500    100%   906,990    1.08%   19.51 
120 Life Care Way, LLC  Landmark of Bardstown Rehabilitation and Nursing Center, LLC  KY  SNF   100    2032    36,295    100%   839,806    1.00%   23.14 
1033 North Highway 11, LLC  Landmark of Laurel Creek Rehabilitation and Nursing Center, LLC  KY  SNF   106    2032    32,793    100%   890,194    1.06%   27.15 
945 West Russell Street, LLC  Landmark of Elkhorn City Rehabilitation and Nursing Center, LLC  KY  SNF   106    2032    31,637    100%   890,194    1.06%   28.14 
1253 Lake Barkley Drive, LLC  Landmark of Kuttawa, A Rehabilitation & Nursing Center, LLC  KY  SNF   65    2032    37,892    100%   545,874    0.65%   14.41 
420 Jett Drive, LLC  Landmark of Breathitt County Rehabilitation and Nursing Center, LLC  KY  SNF   120    2031    32,581    100%   1,007,767    1.20%   30.93 
Master Lease Ohio                                            
3090 Five Points Hartford Realty, LLC  Continent Health Company of Hartford, LLC  OH  SNF   54    2025    15,504    100%   196,012    0.23%   12.64 
3121 Glanzman Road Realty, LLC  Continent Health Company of Toledo, LLC  OH  SNF   84    2025    24,087    100%   304,908    0.36%   12.66 
620 West Strub Road Realty, LLC  Continent Health Company of Sandusky, LLC  OH  SNF   50    2025    18,984    100%   181,493    0.22%   9.56 
4250 Sodom Hutchings Road Realty, LLC  Continent Health Company of Cortland, LLC  OH  SNF   50    2025    14,736    100%   181,493    0.22%   12.32 

 

 

10
 

 

 

Lessor/

Company Subsidiary

 

Manager/Tenant/

Operator (1)

  State  Property type  Number of licensed beds   Tenant Lease Expiration Year (2)   Rentable square feet   Percent leased  

Annualized Lease Income

(in $)

   % of total Annualized Lease Income   Annualized lease income per SQF (in $) 
Master Lease Tennessee 1                                            
115 Woodlawn Drive, LLC  Lakebridge A Waters Community, LLC  TN  SNF   109    2031    37,734    100%   1,511,463    1.79%   40.06 
146 Buck Creek Road, LLC  The Waters of Roan Highlands, LLC  TN  SNF   80    2031    30,139    100%   1,109,331    1.32%   36.81 
704 5TH Avenue East, LLC  The Waters of Springfield, LLC  TN  SNF   66    2031    19,900    100%   915,198    1.09%   45.99 
2501 River Road, LLC  The Waters of Cheatham, LLC  TN  SNF   80    2031    37,953    100%   1,109,331    1.32%   29.23 
202 Enon Springs Road East, LLC  The Waters of Smyrna, LLC  TN  SNF   91    2031    34,070    100%   1,261,864    1.50%   37.04 
140 Technology Lane, LLC  The Waters of Johnson City, LLC  TN  SNF   84    2031    34,814    100%   1,164,797    1.38%   33.46 
835 Union Street, LLC  The Waters of Shelbyville, LLC  TN  SNF   96    2031    44,327    100%   1,331,197    1.58%   30.03 
Master Lease Tennessee 2                                            
505 North Roan Street, LLC  Agape Rehabilitation & Nursing Center, A Water’s Community, LLC  TN  SNF   84    2031    27,100    100%   1,628,910    1.93%   60.11 
14510 Highway 79, LLC  Waters of McKenzie, A Rehabilitation & Nursing Center, A Water’s Community, LLC  TN  SNF   66    2031    22,454    100%   1,279,858    1.52%   57.00 
6500 Kirby Gate Boulevard, LLC  Waters of Memphis, A Rehabilitation & Nursing Center, LLC  TN  SNF   90    2031    51,565    100%   1,745,261    2.07%   33.85 
978 Highway 11 South, LLC  Waters of Sweetwater, A Rehabilitation & Nursing Center, LLC  TN  SNF   90    2031    30,312    100%   1,745,261    2.07%   57.58 
2830 Highway 394, LLC  Waters of Bristol, A Rehabilitation & Nursing Center, LLC  TN  SNF   120    2031    53,913    100%   2,327,014    2.76%   43.16 
Master Lease Arkansas 1                                            
5301 Wheeler Avenue, LLC  Wheeler Avenue Operating LLC  AR  SNF   117    2028    41,490    100%   821,950    0.98%   19.81 
414 Massey Avenue, LLC  Massey Avenue ALF Operating LLC  AR  ALF   32    2028    12,548    100%   224,807    0.27%   17.92 
706 Oak Grove Street, LLC  Oak Grove Street Operating LLC  AR  SNF   97    2028    31,586    100%   681,445    0.81%   21.57 
8701 Riley Drive, LLC  Riley Drive Operating LLC  AR  SNF   140    2028    61,543    100%   983,530    1.17%   15.98 
1516 Cumberland Street, LLC  Cumberland Street Operating LLC  AR  SNF   120    2028    82,328    100%   843,025    1.00%   10.24 
5720 West Markham Street, LLC  West Markham Street Operating LLC  AR  SNF   154    2028    56,176    100%   1,081,883    1.28%   19.26 
2501 John Ashley Drive, LLC  John Ashley Drive Operating LLC  AR  SNF   140    2028    65,149    100%   983,530    1.17%   15.10 
1513 South Dixieland Road, LLC  South Dixieland Road Operating LLC  AR  SNF   110    2028    32,962    100%   772,773    0.92%   23.44 
826 North Street, LLC  North Street Operating LLC  AR  SNF   94    2028    30,924    100%   660,370    0.78%   21.35 

 

 

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Lessor/

Company Subsidiary

 

Manager/Tenant/

Operator (1)

  State  Property type  Number of licensed beds   Tenant Lease Expiration Year (2)   Rentable square feet   Percent leased  

Annualized Lease Income

(in $)

   % of total Annualized Lease Income   Annualized lease income per SQF (in $) 
Individual Leases                                            
Ambassador Nursing Realty, LLC  Ambassador Nursing and Rehabilitation Center II, LLC  IL  SNF   190    2026    37,100    100%   1,005,313    1.19%   27.10 
Momence Meadows Realty, LLC  Momence Meadows Nursing and Rehabilitation Center, LLC  IL  SNF   140    2026    37,139    100%   1,038,000    1.23%   27.95 
Oak Lawn Nursing Realty, LLC(4)  Oak Lawn Respiratory and Rehabilitation Center, LLC  IL  SNF   143    2031    37,854    100%   637,092    0.76%   16.83 
Forest View Nursing Realty, LLC  Forest View Rehabilitation and Nursing Center, LLC  IL  SNF   144    2024    34,152    100%   1,215,483    1.44%   35.59 
Lincoln Park Holdings, LLC  Lakeview Rehabilitation and Nursing Center, LLC  IL  SNF   178    2031    34,362    100%   1,260,000    1.50%   36.67 
Continental Nursing Realty, LLC  Continental Nursing and Rehabilitation Center, LLC  IL  SNF   208    2028    53,653    100%   1,575,348    1.87%   29.36 
Westshire Nursing Realty, LLC  City View Multicare Center, LLC  IL  SNF   485    2025    124,020    100%   1,788,365    2.12%   14.42 
Belhaven Realty, LLC  Belhaven Nursing and Rehabilitation Center, LLC  IL  SNF   221    2026    60,000    100%   2,134,570    2.53%   35.58 
West Suburban Nursing Realty, LLC  West Suburban Nursing and Rehabilitation Center, LLC  IL  SNF   259    2027    70,314    100%   1,961,604    2.33%   27.90 
Niles Nursing Realty, LLC  Niles Nursing & Rehabilitation Center, LLC  IL  SNF   304    2026    46,480    100%   2,409,998    2.86%   51.85 
Parkshore Estates Nursing Realty, LLC  Parkshore Estates Rehabilitation and Nursing Center, LLC  IL  SNF   318    2024    94,018    100%   2,454,187    2.91%   26.10 
Midway Neurological and Rehabilitation Realty, LLC  Midway Neurological and Rehabilitation Center, LLC  IL  SNF   404    2026    120,000    100%   2,547,712    3.02%   21.23 
516 West Frech Street LLC  Parker Rehab & Nursing Center, LLC  IL  SNF   102    2030    24,979    100%   498,350    0.59%   19.95 
4343 Kennedy Drive, LLC  Hope Creek Nursing and Rehabilitation Center, LLC  IL  SNF   245    2030    104,000    100%   478,958    0.57%   4.61 
1316 North Tibbs Avenue Realty, LLC  Westpark A Waters Community, LLC  IN  SNF   89    2024    26,572    100%   549,884    0.65%   20.69 
1585 Perry Worth Road, LLC  The Waters of Lebanon, LLC  IN  SNF   64    2027    32,650    100%   116,677    0.14%   3.57 
                                             
2301 North Oregon Realty, LLC  MPD Operators Mesa Hills, LLC  TX  SNF   182    2027    19,895    100%   737,455    0.88%   37.07 
2301 North Oregon Realty, LLC  Mesa Hills Specialty Hospital Operator, LLC  TX  LTACH   32    2029    24,660    100%   1,050,852    1.25%   42.61 
9209 Dollarway Road, LLC  Dollarway Road Operating LLC  AR  SNF   120    2029    45,771    100%   843,026    1.00%   18.42 
Master Lease Arkansas 2                                            
326 Lindley Lane, LLC  Lindley Lane Operating LLC  AR  SNF   120    2029    49,675    100%   850,639    1.01%   17.12 
2821 West Dixon Road, LLC  West Dixon Road Operating LLC & West Dixon Road ALF Operating LLC  AR  SNF/ALF   172    2029    50,382    100%   1,219,250    1.45%   24.20 
552 Golf Links Road, LLC  Golf Links Road Operating LLC  AR  SNF   152    2029    30,372    100%   1,077,476    1.28%   35.48 
Total/Average            10,351         3,512,982    100%   84,235,434    100.00%   23.98 

 

 

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(1) The tenant and the operator are the same for each facility other than the 13 SNFs leased under the Indiana master lease agreement and one SNF in Amarillo, Texas. In the case of these other facilities, the tenants are county hospitals which have entered into management agreements with the operators listed in the table. These arrangements permit the facilities to participate in a CMS program that pays higher Medicaid reimbursement rates for facilities associated with hospitals in underserved areas.

 

(2) The expiration dates do not reflect the exercise of any renewable options.

 

(3) In February 2023 the facility was closed. The closure was a result of the tenant request and mainly for efficiency reasons. This SNF is under a master lease with 2 other facilities and the full amount of the rent payments under the master lease are continuing to be paid. Additionally, the operator continues to be responsible for ensuring the building is secure and paying utilities, real estate taxes and insurance bills.

 

(4) We expect to execute a new lease for this property with a non-affiliated tenant. The new lease is expected to be a triple net lease, which will remove the property tax and property insurance exposure from the Company to the tenant. We expect there will be no material change in the net rent payment the Company will receive. However, there is no assurance that we will execute a new lease for this property on the foregoing terms or at all.

 

Related Party Transactions

 

As further described in “Certain Relationships and Related Transactions,” and throughout this prospectus, we have engaged in certain related party transactions.

 

Related Party Consulting Firms

 

Most of the operators at our facilities have engaged large consulting firms that specialize in healthcare and skilled nursing operations. The operators at our properties primarily use one of nine principal consulting firms, including three firms that are part of Infinity Healthcare, a healthcare consulting group that is owned by Moishe Gubin, our chairman and Chief Executive Officer and Michael Blisko, one of our directors. See “—Principal Consulting Firms to Operators”.

 

Related Party Tenants

 

As of the date of this prospectus, we lease 41 of our facilities to tenants that are affiliates of Moishe Gubin, who serves as Chairman of the Board and our Chief Executive Officer, and Michael Blisko, who serves as one of our directors. As of June 30, 2023, approximately 62.2% of our annualized base rent is received from such related-party tenants. The failure of these tenants to fulfill their obligations under their leases or renew their leases upon expiration could have a material adverse effect on our business, financial condition and results of operations.

 

Rental income from leases with these related party tenants represented 62.2% of all rental income for the quarter ended June 30, 2023. We believe these affiliated relationships provide a strong alignment of interests between us and our tenants and offers us increased operating flexibility with regards to potentially replacing underperforming tenants or evaluating acquisitions in new states. As we continue to grow and expand our portfolio, we intend to develop new relationships with unrelated party tenants and operators in order to diversify our tenant base and reduce our dependence on related party and operators.

 

 

13
 

 

 

We monitor the creditworthiness of our tenants by evaluating the ability of the tenants to meet their lease obligations to us based on the tenants’ financial performance, including the evaluation of any guarantees of tenant lease obligations. The primary basis for our evaluation of the credit quality of our tenants (and more specifically the tenants’ ability to pay their rent obligations to us) is the tenants’ lease coverage ratios. These coverage ratios compare (i) EBITDAR and (ii) EBITDARM to rent coverage. We utilize a standardized 5% management fee when we calculate lease coverage ratios. We obtain various financial and operational information from our tenants each month. We regularly review this information to calculate the above-described coverage metrics, to identify operational trends, to assess the operational and financial impact of the changes in the broader industry environment (including the potential impact of government reimbursement and regulatory changes), and to evaluate the management and performance of the tenants’ operations. These metrics help us identify potential areas of concern relative to our tenants’ credit quality and ultimately the tenants’ ability to generate sufficient liquidity to meet their ongoing obligations, including their obligations to continue paying contractual rents due to us and satisfying other financial obligations to third parties, as prescribed by our triple-net leases.

 

Other Related Party Transactions

 

On June 8, 2021, in connection with the contribution by the Predecessor Company of all of its assets to the Operating Partnership, we entered into a tax protection agreement with the Predecessor Company pursuant to which we agreed to indemnify the protected parties against certain potential adverse tax consequences to them, including future “built-in” gains relating to assets that the protected parties are deemed to contribute to the Company.

 

The total amount of protected built-in gain on the properties and other assets contributed to the Company in connection with the formation transaction was approximately $423.4 million. Such indemnification obligations could result in aggregate payments, based on current tax laws, of up to 177.0 million. The amount of tax is calculated without regard to any deductions, losses or credits that may be available. Therefore, although it may be otherwise in our stockholders’ best interests that we sell one of these properties, it may be economically prohibitive for us to do so because of these indemnification obligations to the protected parties incurred by our Operating Partnership.

 

For a complete list of the related party transactions, see “Certain Relationships and Related Transactions.”

 

 

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Our Acquisition Pipeline

 

As of the date of this prospectus, we have executed two non-binding LOI’s to acquire three properties with an aggregate of 331 licensed skilled nursing beds and 28 assisted living beds in Tennessee, representing total expected purchase consideration of approximately $11.2 million. The expected first year rental yield is 10% based on total in-place contracted lease revenue divided by total estimated purchase price. The acquisitions of the properties are subject to ongoing diligence, final approval of our board of directors and the satisfaction of customary closing conditions, and there can be no assurance that we will consummate the acquisitions of the properties on the terms anticipated, or at all.

 

As of the date of this prospectus, our senior management team has identified and is in various stages of reviewing approximately $350.0 million of additional potential properties for acquisition, which amount is estimated based on the sellers’ asking prices for the properties, preliminary discussions with sellers or our internal assessment of the values of such properties after taking into account the current and expected annualized lease revenue, operating history, age and condition of the property and other relevant factors. There can be no assurance that we will consummate the acquisition of any of the properties in our current acquisition pipeline on the terms anticipated, or at all, including the properties for which we have executed a definitive purchase agreement or a non-binding letter of intent.

 

Potential Dispositions

 

In December 2022, the Company, through one of its subsidiaries, acquired title to a property located in Massachusetts through a foreclosure of the Company’s lien on the property. The property is carried at estimated fair value of $1.2 million. The Company is actively seeking a qualified buyer for the property.

 

In February 2023, the operator of one of the SNF’s owned by the Company in Southern Illinois closed a SNF with the consent of the Company. The SNF was leased to the operator under a master lease with 2 other facilities. The Company agreed to the closure subject to the operators’ agreement to continue to pay the full amount of the rental payment under the master lease. Additionally, the operator continues to be responsible for ensuring the building is secure and paying utilities, real estate taxes and insurance bills. The Company is attempting to sell the property and will receive the proceeds from the sale.

 

For additional information regarding our recently completed and pending acquisitions and dispositions, see “Business and Properties.”

 

Indebtedness

 

As of June 30, 2023, we had outstanding indebtedness of approximately $482.1 million, consisting of $275.2 million in HUD guaranteed mortgage loans, $100.6 million in borrowings under our principal credit facility and $106.3 million under the Series A Bonds, Series C Bonds and Series D Bonds. Our HUD guaranteed loans have staggered maturities with a weighted average debt maturity of approximately 25.0 years, with a weighted average interest rate of 3.88% per annum (including mortgage insurance premium). Approximately 79.1% of our debt is fixed rate debt. Our principal credit facility has a term of 3.8 years, with loans bearing interest at the rate of SOFR plus 3.5% per annum (but no less than 4.0% per annum).

 

In July 2023, we issued an additional NIS 70.0 million ($19.2 million) in Series D Bonds. We expect to utilize the proceeds from the sale of these Bonds, together with a $66.0 million commercial bank mortgage loan, to finance a portion of the purchase price of our planned acquisition of the Indiana Facilities.

 

In the future, our overall leverage will depend on how we choose to finance our portfolio, including future acquisitions, and the cost of leverage. Neither our charter nor our investment policies restrict the amount of leverage that we may incur.

 

Structure and Formation of Our Company

 

Our Operating Entities

 

Our Company

 

We were formed as a Maryland corporation in July 2019 and commenced operations on June 8, 2021 following the completion of our formation transaction. We conduct our business through a traditional UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries, as described below under “—Our Operating Partnership.” We are the sole general partner of our Operating Partnership and currently own approximately 12.3% of the outstanding OP units. Our board of directors oversees our business and affairs.

 

 

15
 

 

 

Our Operating Partnership

 

Our Operating Partnership was formed as a Delaware limited partnership in July 2019 and commenced operations on June 8, 2021 upon completion of the formation transaction. Our operations are conducted through our Operating Partnership. As the sole general partner of our Operating Partnership, we generally have the exclusive power under the partnership agreement to manage and conduct its business and affairs, subject to certain limited approval and voting rights of the limited partners, which are described more fully below in “Description of the Partnership Agreement of Strawberry Fields Realty LP.” In the future, we may issue additional OP units or preferred OP units of limited partnership interest in our Operating Partnership, or preferred OP units, from time to time in connection with property acquisitions, compensation or otherwise.

 

Formation Transaction

 

On June 8, 2021, the Predecessor Company contributed all of its assets to the Operating Partnership, and the Operating Partnership assumed all of the liabilities of the Predecessor Company. In exchange, the Predecessor Company and its current members received 45,861,434 OP units in the Operating Partnership and 5,824,846 shares of our common stock.

 

The assets contributed to the Operating Partnership by the Predecessor Company included all of the shares of the BVI Company and all of the membership interests in three property-owning limited liability companies owned directly by the Predecessor Company. At the date of the Formation Transaction closed, the BVI Company continues to own, through wholly owned subsidiaries, 71 of our 76 properties and to hold, through wholly-owned subsidiaries, leases for two additional properties.

 

Our Ownership Structure

 

The following diagram depicts our ownership structure.

 

 

 

16
 

 

 

Restrictions on Transfer

 

Under the partnership agreement for our Operating Partnership, holders of OP units may not transfer their units without our prior consent, as general partner of the Operating Partnership. Each of our executive officers, directors and director nominees and their respective affiliates have agreed not to sell or otherwise transfer or encumber any shares of our common stock or securities convertible or exchangeable into shares of our common stock (including OP units) owned by them at the completion of this offering or thereafter acquired by them for a period of 180 days without the written consent of the underwriters. The current holders of OP units may tender their units for redemption by the Operating Partnership in exchange for cash equal to the market price of our common stock at the time of redemption or, at our option, for shares of common stock on a one-for-one basis as described under “Description of the Partnership Agreement of Strawberry Fields Realty LP—Redemption Rights.”

 

In the event that the Predecessor Company or its affiliates tender their OP units for cash redemption or exchange for shares of our common stock, we will treat this request as a related party transaction. The determination will be made by our audit committee, comprised of independent directors, pursuant to our related party transaction policy. In making this determination, the audit committee would consider the impact of the redemption or exchange on the Company and its shareholders, including any impact on the Company’s status as a REIT. See “Policies With Respect To Certain Activities and Transactions —Policies Applicable to All Directors and Officers.”

 

Restrictions on Ownership of our Capital Stock

 

Due to limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue Code of 1986, as amended, or the Code, effective upon the completion of this offering and subject to certain exceptions, our charter provides that, subject to certain exceptions, no person may beneficially or constructively own more than 9.8% in value of the aggregate outstanding shares of our common stock or more than 9.8% in value of the outstanding shares of any class or series of our preferred stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Our charter also prohibits any person from, among other things:

 

● beneficially or constructively owning or transferring shares of our capital stock if such ownership or transfer would result in our being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a year);

 

● transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code).

 

● beneficially or constructively owning shares of our capital stock to the extent such beneficial or constructive ownership would cause us to constructively own 9.9% or more of stocks or interest (determined in accordance with Section 856(d)(2)(B) of the Code) of a tenant, other than a TRS, of our real property; or

 

● beneficially or constructively owning or transferring shares of our capital stock if such beneficial or constructive ownership or transfer would otherwise cause us to fail to qualify as a REIT under the Code.

 

Our board of directors, in its sole discretion, may prospectively or retroactively exempt a person from certain of the limits described above and may establish or increase an excepted holder percentage limit for such person if our board of directors obtains such representations, covenants and undertakings as it deems appropriate in order to conclude that granting the exemption and/or establishing or increasing the excepted holder percentage limit will not result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable years) or otherwise failing to qualify as a REIT.

 

Our charter also provides that any ownership or purported transfer of our stock in violation of the foregoing restrictions will result in the shares owned or transferred in such violation being automatically transferred to one or more charitable trusts for the benefit of a charitable beneficiary and the purported owner or transferee acquiring no rights in such shares, except that any transfer that results in the violation of the restriction relating to shares of our capital stock being beneficially owned by fewer than 100 persons will be void ab initio. If the transfer to the trust is ineffective for any reason to prevent a violation of the restriction, the transfer that would have resulted in such violation will be void ab initio.

 

Conflicts of Interest

 

We have previously entered into a contribution agreement with the Predecessor Company and the Operating Partnership, pursuant to which the Predecessor Company contributed all of its assets to the Operating Partnership, and the Operating Partnership assumed all of its liabilities. In exchange, the Predecessor Company and certain of its current members received shares of our common stock and OP units in the Operating Partnership. See “Structure and Formation of Our Company”. The contribution agreement was not negotiated on an arms’ length basis and may not be as favorable to us as an agreement negotiated on an arms’ length basis. We have not obtained third-party property appraisals of the properties contributed to us in the formation transaction or fairness opinions in connection with our formation transaction. As a result, the consideration received by the Predecessor Company and its members for the contributed properties and other assets in our formation transaction may have exceeded their fair market value. See “Certain Relationships and Related Party Transactions—Formation Transaction.”

 

We have also entered into a tax protection agreement with the Predecessor Company pursuant to which we agreed to indemnify the Predecessor Company and certain of its affiliates, including affiliates of Moishe Gubin, who is our Chairman and Chief Executive Officer and Michael Blisko, who is one of our directors, against certain potential adverse tax consequences to such parties, which may affect the way in which we conduct our business, including with respect to when and under what circumstances we sell properties in our initial portfolio or interests therein or repay debt during the restriction period. The amount of indemnified tax is calculated without regard to any deductions, losses or credits that may be available. Because of our obligations under the tax protection agreement, we may pursue growth and acquisition opportunities less vigorously than if we did not have these obligations. See “Structure and Formation of Our Company—Tax Protection Agreement.”

 

 

17
 

 

 

To the extent that any breach, dispute or ambiguity arises with respect to any of the contribution agreement or the tax protection agreement, we may choose not to enforce, or to enforce less vigorously, our rights under these agreements due to our ongoing relationships with the members of our executive management team and directors.

 

Conflicts of interest may arise between the holders of OP units, on the one hand (including the Predecessor Company), and our stockholders, on the other hand, with respect to certain transactions, such as the sale of properties or a reduction of indebtedness, which could have adverse tax consequences to holders of OP units, thereby making those transactions less desirable to such holders. See “Policies with respect to Certain Activities and Transactions—Conflict of Interest Policies” and “Description of the Partnership Agreement of Strawberry Fields Realty LP”.

 

As of the date of this prospectus, we lease 41 of our properties to related parties. These lease agreements may give rise to conflicts of interest between the Company and such related parties. See “Risk Factors—Risks Related to Business - The leases with affiliates of Moishe Gubin, Michael Blisko and the other Controlling Members of the Predecessor Company have not been negotiated on an arm’s-length basis, and the terms of those agreements may be less favorable to us than they might otherwise have been in an arm’s-length transaction.”

 

For additional information about these relationships, see “Certain Relationships and Related Transactions.”

 

Our Tax Status

 

We have elected to be taxed as a REIT for federal income tax purposes commencing with the taxable year ending December 31, 2022. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we were organized in conformity with the requirements for qualification as a REIT under the Code and that our manner of operation enabled us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes commencing with the taxable year ending December 31, 2022.

 

As a REIT, we generally will not be subject to federal income tax on our net taxable income that we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. For as long as we are an emerging growth company, among other things:

 

● we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.

 

● we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

 

● we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We may take advantage of these provisions until December 31, 2025 or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of shares of common stock held by non-affiliates, or issue more than $1 billion of non-convertible debt securities over a three-year period.

 

 

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Corporate Information

 

Our principal executive offices are located at 6101 Nimtz Parkway, South Bend, In 46628. Our telephone number at our executive offices is (574) 807-0800 and our corporate website is www.strawberryfieldsreit.com. The information contained on, or accessible through, our website is not incorporated by reference into, and does not form a part of, this prospectus.

 

Summary Risk Factors

 

An investment in our shares involves various risks, and prospective investors are urged to carefully consider the matters discussed under “Risk Factors” prior to making an investment in our shares. The following is a list of some of these risks:

 

● We lease 41 of our properties to tenants that are affiliates, including entities controlled by Moishe Gubin who serves as our Chairman of the Board and our Chief Executive Officer, and Michael Blisko, who serves as one of our directors.

 

● We have entered into 9 master lease agreements with respect to 64 of our facilities. As of June 30, 2023, these leases represented approximately 71.1% of the annualized base rent under all of our leases. The failure of these tenants/operators to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

● Our real estate investments are, and are expected to continue to be, concentrated in skilled nursing facilities, which could adversely affect our operations relative to a more diversified portfolio of assets.

 

● Our growth depends on our ability to obtain additional debt and equity financing from third-party sources. Such financing is outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability, among other things, to meet our capital and operating needs or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.

 

● We expect to have approximately $             million of indebtedness outstanding following completion of this offering, which may expose us to the risk of default under our debt obligations and our debt agreements may include covenants that restrict our ability to pay distributions to our stockholders.

 

● Certain of our debt agreements include restrictive covenants which could limit our ability to make distributions and require us to repay the indebtedness prior to its maturity.

 

● Our current debt arrangements include balloon payment obligations, and our future debt arrangements may contain such obligations. These types of obligations may materially adversely affect us, including our cash flows, financial condition and ability to make distributions.

 

● Properties in Illinois, Indiana Tennessee and Arkansas account for approximately 80.3% of the annualized base rent from our portfolio as of June 30, 2023.

 

● We may incur additional costs in acquiring or re-leasing properties, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

● We may have difficulty finding suitable replacement tenants in the event of a tenant default or non-renewal of our leases.

 

 

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● Our use of OP units as consideration to acquire properties could result in stockholder dilution or limit our ability to sell such properties, which could have a material adverse effect on our business, results of operations and cash flows.

 

● We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make common stock less attractive to investors.

 

● We have elected to avail ourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies under the JOBS Act and will, therefore, not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, which could make our common stock less attractive to investors.

 

●A pandemic, epidemic or outbreak of an infectious disease in the United States, such as the recent outbreak of the coronavirus known as COVID-19, could adversely affect the operating results and financial condition of the operators of our facilities, which in turn could undermine their ability to meet their lease obligations to us.

 

● Adverse trends in healthcare provider operations may negatively affect the operations at our properties, which in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

● We and our tenants and operators may be adversely affected by healthcare regulation and enforcement.

 

● Our business is subject to risks associated with real estate assets and the real estate industry, which could materially adversely affect our financial condition, results of operations, cash flow, cash available for distribution and our ability to service our debt obligations.

 

● As an owner of real estate, we could incur significant costs and liabilities related to environmental matters.

 

● Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs of remediation.

 

● Our charter contains certain provisions restricting the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.

 

● We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval.

 

● Certain provisions of Maryland General Corporation Law, or MGCL, could inhibit changes of control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.

 

● Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

● The tax protection agreement with the Predecessor Company and its affiliates could limit our ability to sell or otherwise dispose of certain properties.

 

● We may pursue less vigorous enforcement of terms of the contribution and other agreements with the Predecessor Company and its affiliates because of their relationship with member of our management and board of directors.

 

● Our rights and the rights of our stockholders to take action against our directors and officers are limited.

 

● If we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face substantial tax liability, which would substantially reduce funds available for distribution to our stockholders.

 

● Our ownership of and relationship with any current or future taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

 

● REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

 

● The share ownership limit imposed by the Code for REITs, and our certificate of incorporation, may inhibit market activity in our shares and restrict our business combination opportunities.

 

● If you invest in this offering, you will experience immediate dilution in the book value of your shares.

 

● The number of shares of our common stock available for future issuance or sale could materially adversely affect the per share trading price of our common stock.

 

 

20
 

 

 

THE OFFERING

 

Common stock offered by us             shares (or         shares if the underwriters’ option to purchase additional shares is exercised in full).
     
Shares of common stock to be outstanding upon completion of this offering            shares(1)
     
Common stock and OP units to be outstanding upon completion of this offering (excluding OP units held by us)            shares(1)          and OP units
     
Use of proceeds  

We estimate that the net proceeds from this offering will be approximately $      million (or approximately $          million if the underwriters’ option to purchase additional shares is exercised in full) based on an assumed public offering price of $           per share, the last reported sale price of our common stock on the NYSE American on         , 2023, after deducting underwriting discounts of approximately $         million (or approximately $         million if the underwriters’ option to purchase additional shares is exercised in full) and estimated offering expenses of approximately $ payable by us.

 

We intend to contribute the net proceeds of the offering received by us in the offering to our Operating Partnership in exchange for OP units. The Operating Partnership intends to use these net proceeds for general working capital purposes, including acquisitions of additional properties.

 

See “Use of Proceeds.”

     
Ownership and transfer restrictions   The ownership and transfer of our common stock are subject to restrictions set forth in our charter. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”
     
Risk factors   Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 24 and other information included in this prospectus before investing in our common stock.
     
NYSE American symbol   “STRW”

 

(1) Based on                 shares outstanding as of             , 2023. Excludes (i) up to         shares of common stock that may be issued by us upon exercise of the underwriters’ option to purchase additional shares, (ii) 225,100 shares of our common stock available for future issuance under the equity incentive plan, and (iii)        shares of common stock that may be issued, at our option, upon redemption of outstanding OP units not held by us.

 

 

21
 

 

 

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

 

The following summary historical and pro forma financial data should be read in conjunction with the audited and unaudited financial statements and the related notes, and our unaudited pro forma financial information and the related notes, included elsewhere in this prospectus.

 

The following table sets forth summary financial and operating data on a consolidated pro forma and historical basis for the Company.

 

The historical consolidated balance sheet information of the Company and its Predecessor as of June 30, 2023 and 2022, and as of December 31, 2022 and December 31, 2021, and the statements of operations information of the Company and its Predecessor for the six months ended June 30, 2023 and 2022, and for the years ended December 31, 2022 and December 31, 2021 have been derived from the historical consolidated financial statements of the Company and its Predecessor included elsewhere in this prospectus.

 

The unaudited pro forma consolidated balance sheet data is presented to reflect the historical consolidated balance sheet of the Company at June 30, 2023 and the planned acquisition of the Indiana Facilities as if the acquisition had all been completed on June 30, 2023.

 

The unaudited pro forma consolidated statements of operations for the six months ended June 30, 2023, reflect the historical operations of the Indiana Facilities for the period from January 1, 2023 through June 30, 2023, and the historical results of operations of the Company for the six months ended June 30, 2023, as if the acquisition of the Indiana Facilities had been completed on November 1, 2022.

 

The unaudited pro forma consolidated statements of operations for the year ended December 31, 2022, reflect the historical operations of the Indiana Facilities for the period from November 1, 2022 through December 31, 2022, and the historical results of operations of the Company for the year ended December 31, 2022, as if the acquisition of the Indiana Facilities had been completed on November 1, 2022. The operating results of the Indiana Facilities for the period from January 1, 2022 to October 31, 2022, were excluded because the Indiana Facilities were leased to unaffiliated tenants on substantially different terms during this period, including significantly higher rent for the first six months of 2022 and no rent for the period from July 1, 2022 through October 31, 2022.

 

Our pro forma financial information is not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

 

The information presented below should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business – Recent Developments – Indiana Facilities Acquisition and Financing” and our audited and unaudited financial statements and related notes, which are included elsewhere in this prospectus.

 

 

22
 

 

 

STRAWBERRY FIELDS REIT, INC. and Subsidiaries and Predecessor

 

UNAUDITED PRO FORMA AND HISTORICAL

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

 

(Amounts in $000’s, except share data)

 

   Six Months Ended June 30,   Year Ended December 31, 
   Consolidated          
   2023   2023   2022   2022   2022   2021 
  

Pro Forma

  

Historical

  

Historical

  

Pro Forma

  

Historical

  

Historical

 
                         
Revenues                              
Rental revenues  $55,338    48,554    44,737    94,804    92,543    87,032 
                               
Expenses:                              
Depreciation   15,615    12,461    13,051    26,581    25,530    24,460 
Amortization   1,514    1,514    1,514    3,028    3,028    3,028 
Loss on real estate investment impairment   2,451    2,451    -    -    -    - 
General and administrative expenses   2,413    2,413    3,421    6,012    6,012    6,297 
Property taxes   7,885    7,435    5,620    13,281    13,131    10,623 
Facility rent expenses   272    272    259    532    532    735 
Provision for credit losses   -    -    663    (5,636)   (5,636)   5,128 
Total expenses   30,150    26,546    24,528    43,798    42,597    50,271 
Income from operations   25,188    22,008    20,209    51,006    49,946    36,761 
                               
Interest expense, net   (13,796)   (10,118)   (9,039)   (21,733)   (20,507)   (21,261)
Amortization of deferred financing costs   (399)   (253)   (187)   (553)   (504)   (379)
Mortgage insurance premium   (833)   (833)   (861)   (1,704)   (1,704)   (1,769)
Total interest expense   (15,028)   (11,204)   (10,087)   (23,990)   (22,715)   (23,409)
Other (loss) income:                              
Gain from sale of real estate investments       -    -         -    3,842 
Foreign currency transaction loss       -    (10,100)   (10,932)   (10,932)   (8,775)
Other (expense) income   (983)   (983)   -    120    120    - 
Total other loss   (983)   (983)   (10,100)   (10,812)   (10,812)   (4,933)
Net income   9,177    9,821    22    16,204    16,419    8,419 
Less:                              
Net income attributable to non-controlling interest        (8,628)   (20)        (14,567)   (3,083)
Net income attributable to predecessor                     -    (4,943)
Net income attributable to common stockholders        1,193    2         1,852    393 
Other comprehensive income (loss):        -             -     
Gain (loss) due to foreign currency translation        4,284    14,010         14,256    (6,751)
Reclassification of foreign currency transaction losses        -    10,100         10,932    8,775 
Comprehensive income attributable to predecessor                            (9,681)
Comprehensive (income) loss attributable to non-controlling interest        (3,765)   (21,458)        (22,347)   6,795 
Comprehensive income (loss)        1,712    2,654         4,693    (469)
Net income attributable to common stockholders  $     1,193    2         1,852    393 
Basic and diluted income per common share  $     0.19    -         0.31    0.07 
                               
Weighted average number of common shares outstanding        6,365,856    5,864,789         6,008,953    5,846,195 
Number of shares and OP Units Outstanding      51,867,424    53,256,276         53,256,276    53,256,276 
                               
Statement of Cash Flow Data:                              
Net cash provided by (used in):                              
Operating activities      $25,553    18,009         50,926    44,786 
Investing activities        (4,421)   (7,613)        (10,101)   (58,288)
Financing activities        264    (19,514)        (47,249)   (23,571)
                               
Other Data:                              
FFO(1)      $23,796    14,587         44,977    32,065 
AFFO(1)      $26,460    24,845         51,076    43,936 

 

(1) FFO & AFFO are non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for definitions of these measures and a reconciliation to net income, the most comparable GAAP measure.

 

Balance Sheet Data:                    
Real estate held for investment, net   532,030    430,030    449,677    438,911    462,728 
Cash, cash equivalents and restricted cash   42,714    67,100    43,010    45,704    52,128 
Total assets   642,843    557,653    554,683    547,000    569,964 
Total liabilities   590,751    505,561    500,377    497,616    534,914 
Total stockholders’ equity   8,098    8,098    4,919    7,786    2,265 
Noncontrolling interests   

43,994

    43,994    49,387    41,598    32,785 
Total equity   52,092    52,092    54,306    49,384    35,050 

 

 

23
 

 

RISK FACTORS

 

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in our common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus were to occur, our business, prospects, financial condition, liquidity, FFO, AFFO and results of operations and our ability make distributions to our stockholders and achieve our goals could be materially and adversely affected, the value of our common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

 

Risks Related to Business and Operations

 

We lease 41 of our facilities to tenants that are affiliates of Moishe Gubin, who serves as Chairman of the Board and our Chief Executive Officer, and Michael Blisko, who serves as one of our directors. As of June 30, 2023, approximately 62.2% of our annualized base rent was attributable to these related-party tenants. Assuming that we successfully close the acquisition of the Indiana Facilities, we would lease 65 of our facilities to affiliates of Mr. Gubin and Mr. Blisko, and 67.1% of our annualized base rent would be attributable to these related-party tenants. The failure of these tenants to perform their obligations under their leases or renew their leases upon expiration could have a material adverse effect on our business, financial condition and results of operations.

 

As of the date of this prospectus, 41 of our facilities are leased to tenants that are affiliates of Moishe Gubin, who serves as Chairman of the Board and our Chief Executive Officer and Michael Blisko, who serves as one of our directors. As of June 30, 2023, approximately 62.2% of our annualized base rent was attributable to these related party tenants. Assuming that we successfully close the acquisition of the Indiana Facilities, we would lease 65 of our facilities to affiliates of Mr. Gubin and Mr. Blisko, and 67.1% of our annualized base rent would be attributable to these related-party tenants. We expect that leases to related party tenants will continue to be the primary source of our revenues for the foreseeable future. Due to such concentration, any failure by these entities to perform their obligations under their leases or a failure to renew their leases upon expiration, could cause interruptions in the receipt of lease revenue or result in vacancies, or both, which would reduce our revenue until the affected properties are leased, and could decrease the ultimate value of the affected property upon sale and have a material adverse effect on our business, financial condition and results of operations.

 

The leases with related parties have not been negotiated on an arm’s-length basis, and the terms of those agreements may be less or more favorable to us than they might otherwise have been in arm’s-length transactions.

 

While we endeavor to have our leases with related parties reflect customary, arm’s-length commercial terms and conditions, these agreements were not the result of arm’s-length negotiations, and consequently there can be no assurance that the terms of these agreements were as favorable to us as if they had been negotiated with unaffiliated third parties. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under these leases because of our desire to maintain our ongoing relationship with these affiliates. As of the date of this prospectus, Moishe Gubin, our Chairman and Chief Executive Officer, and Michael Blisko, one of our directors, are the controlling members of 41 of our tenants and related operators. Messrs. Gubin and Blisko are subject to potential conflicts of interest due to their ownership of these tenants and their duties as directors of the Company. As a result of these conflicts, transactions between the Company and these related party tenants would require approval of the audit committee of our board of directors, comprised of independent directors, under our conflicts of interest policies. See “Business. Policies With respect to Certain Activities and Transactions—Conflict of Interest Policies.” For a description of these agreements and the other agreements that we have entered into with the Predecessor Company, see “Certain Relationships and Related Party Transactions.”

 

We have entered into nine master lease agreements with respect to 64 of our facilities, including three master lease agreements with tenants that are affiliates of Moishe Gubin, who serves as Chairman of the Board and our Chief Executive Officer, and Michael Blisko, who serves as one of our directors. As of June 30, 2023, these nine master leases represent approximately 71.1% of the annualized base rent under all of our leases. The failure of these tenant/operators to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Each master lease agreement provides that the tenants under the master lease are jointly and severally liable for the obligations of all of the other tenants under such master lease. The tenants under each master lease agreement are affiliates of each other.

 

24
 

 

Rental income under the master leases represents approximately 71.1% of our annualized base rent. Four of these master lease agreements account for more than 5% of our annualized base rent and range from 8.0% to 16.3% of our annualized base rent.

 

Because our tenants under each master lease agreement are affiliates of each other, the failure of one tenant, or operator under a master lease, may cause the decline in the performance of all of the tenants or operators under the master lease, leading to a lease payment default by multiple tenants.

 

In addition, the affiliation of the tenants under each master lease increases the potential financial impact to us of an adverse event that affects one of these tenant/operators, such as legal proceedings that seek to suspend or exclude an operator or its principals or employees from Medicaid, Medicare or similar government programs, or otherwise make the tenant/operator ineligible for reimbursement. This type of event could affect all of the tenants under a particular master lease, which could lead to defaults by all of the tenants under that master lease.

 

Lease payment defaults under any lease including the master lease agreements or declines in the operating performance of groups of tenants could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

If a substantial number of our tenants default, we could lose a significant portion of our revenue. In the event of such a default, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment and re-leasing these properties. Further, we cannot assure you that we will be able to re-lease these properties for the rent previously received, or at all, or that lease terminations will not cause us to sell the properties at a loss. The result of any of the foregoing risks could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Our growth strategy will depend upon future acquisitions of healthcare properties, and we may be unsuccessful in identifying and consummating attractive acquisitions or taking advantage of other investment opportunities, which would impede our growth.

 

Our ability to expand through acquisitions is integral to our business strategy and requires that we identify and consummate suitable acquisition or investment opportunities that meet our investment criteria and are compatible with our growth strategy. We may not be successful in identifying and consummating acquisitions or investments in healthcare properties that meet our investment criteria, which would impede our growth. In addition, general fluctuations in the market prices of securities and interest rates may affect our investment opportunities and the value of our investments. Our ability to acquire healthcare properties on favorable terms, or at all, may be adversely affected by the following significant factors:

 

● competition from other real estate investors, including public and private REITs, private equity investors and institutional investment funds, many of whom may have greater financial and operational resources and lower costs of capital than we have and may be able to accept more risk than we can prudently manage;

 

● competition from other potential acquirers, which could significantly increase the purchase prices for properties we seek to acquire;

 

● we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete;

 

● increases in interest rates, inflationary pressures on the margins of our portfolio assets may impact our investment activities.

 

Our failure to identify and consummate attractive acquisitions or take advantage of other investment opportunities without substantial expense, delay or other operational or financial problems, would impede our growth and negatively affect our results of operations and cash available for distribution to our stockholders.

 

25
 

 

Our real estate investments are, and are expected to continue to be, concentrated in skilled nursing facilities, which could adversely affect our operations relative to a more diversified portfolio of assets.

 

We primarily invest in properties operated as skilled nursing facilities. As of June 30, 2023, approximately 97.7% of our total annualized base rent is derived from skilled nursing facilities. We are subject to risks inherent in concentrating investments in real estate, and the risks resulting from a lack of diversification may become even greater as a result of our business strategy to concentrate our investments in these types of healthcare properties. Any adverse effects that result from these risks could be more pronounced than if we diversified our investments outside of these types of healthcare properties. Given our focus on skilled nursing facilities , our tenant base is limited to operators of this type of facility and dependent upon the healthcare industry generally, and in particular, that the Federal and State governments, through their administration of the Medicare and Medicaid programs, have significant control over the amount and conditions of payment for services rendered and increasingly on conditions for operation, which impact our tenants’ revenues. Any changes in reimbursement or conditions of payment or operation which adversely impact our tenants’ revenues, as well as, any industry downturn or negative regulatory or governmental development could adversely affect the ability of our tenants to make lease payments and our ability to maintain current rental and occupancy rates. Accordingly, a downturn in the healthcare industry generally, or in the healthcare-related facility specifically, could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

A pandemic, epidemic or outbreak of an infectious disease in the United States, such as the outbreak of the coronavirus known as COVID-19, could adversely affect the operating results and financial condition of the operators of our facilities, which in turn could undermine their ability to meet their lease obligations to us.

 

Our operating results and financial condition are dependent on the ability of our tenants to meet their lease obligations to us. A pandemic, epidemic or outbreak of an infectious disease, such as the recent outbreak of respiratory illness caused by the novel coronavirus known as COVID-19, could adversely affect the ability of our tenants to meet their lease obligation by increasing their operating costs and reducing their income. Tenants may be required to make significant expenditures to prevent or contain such illnesses. Tenants’ revenues could be affected if public trust in skilled nursing facilities and long-term acute care hospitals were undermined because of such illnesses. Tenants’ revenues could also be adversely affected if a pandemic caused a temporary shutdown or diversion of patients, disrupted the delivery of medical supplies or caused staffing shortages or substantially increased the costs of supplies or staffing or resulted in increased costs as a result of new conditions of operation. The risk to our tenants is enhanced because their facilities primarily serve the elderly, who are particularly at risk for respiratory illnesses such as COVID-19.

 

Although the amount of rent we receive from our tenants is not dependent on our tenants’ operating results, our tenants’ ability to fulfill their lease obligations, including the payment of rent, could be adversely affected if our tenants encountered significant financial difficulties due to a pandemic.

 

As of the date of this prospectus, the pandemic caused by the coronavirus known as COVID-19 has not had a material adverse effect on our financial performance, results of operations, liquidity or access to financing. However, our operations and financial performance are dependent on the ability of our tenants to meet their lease obligations to us.

 

To our knowledge and based on information provided to us by our tenants, the principal financial effects of the COVID-19 pandemic on our tenants have been to increase their payroll expenses, to require additional purchases of personal protective equipment, and to decrease occupancy at their facilities. We believe that the decline in occupancy was primarily due to declining referrals as a result of hospitals postponing elective surgeries as well as patients’ concerns regarding the risk of infection from COVID-19.

 

As a result of the COVID-19 pandemic, our tenants have received financial support under several government programs. These programs consisted of forgivable loans under the Paycheck Protection Program, grants to operators under the Coronavirus Aid, Relief and Economic Security (CARES) Act in an amount equal to 2% of their historical annual revenues, the waiver of the three day hospital stay required by Medicare (which ended on May 11th, 2023), accelerated payments under Medicare, and increased funding for Medicaid patients by some state governments.

 

Our management does not expect that the discontinuation of these government programs will have a material adverse effect on our tenants’ ability to pay rent for three reasons. First, our management believes that most nursing home residents in the United States have received vaccines for COVID-19, which have been highly effective in preventing cases of COVID-19. Second, occupancy significantly increased between April 2021 and May 2023. Third, most of our tenants have the ability to maintain profitability notwithstanding the decrease in revenues because approximately 85% to 90% of their operating costs are variable items (such as labor costs, food, drugs and supplies, including personal protection equipment and cleaning supplies) that can be reduced when occupancy decreases.

 

26
 

 

To our knowledge, our tenants are complying with all applicable governmental requirements and guidelines for addressing the risks posed by COVID-19. Although there have been a limited number of confirmed cases of COVID-19 at the facilities operated by our tenants, to our knowledge, these cases have not had a material impact on any of the operators or resulted in any claims against any of the operators.

 

As a landlord, we do not control the operations of our tenants, including related party tenants, and are not able to cause our tenants to take any specific actions to address trends in occupancy at the facilities operated by our tenants, other than to monitor occupancy and income of our tenants, discuss trends in occupancy with tenants and possible responses, and, in the event of a default, to exercise our rights as a landlord. However, Moishe Gubin, our Chairman and Chief Executive Officer, and Michael Blisko, one of our directors, as the controlling members of 41 of our tenants and related operators, have the ability to obtain information regarding these tenants and related operators and cause the tenants and operators to take actions, including with respect to occupancy. Messrs. Gubin and Blisko are subject to potential conflicts of interest due to their ownership of these tenants and their duties as our directors. As a result of these conflicts, actions by us with respect to these related party tenants would be directed by the audit committee of our board of directors, comprised of independent directors, under our conflicts of interest policies. See “Business. Policies With respect to Certain Activities and Transactions—Conflict of Interest Policies.”

 

Except as described below, COVID-19 has not caused any of our tenants to be unable to meet their lease obligations to us, including their obligation to pay rent in a timely manner.

 

On April 4, 2022, we were notified that the tenants under the master leases for 6 facilities located in central Illinois intended to default with respect to their lease agreements due to operating losses. The tenants indicated that their operating losses were partially due to decreased occupancy caused by COVID-19. The tenants are affiliates of Steven Blisko, who is the brother of Michael Blisko, one of our directors. These leases provided for a combined rent of $225,000 per month, or $2.7 million per year. All payments due under these leases were paid through mid-June 2022. On July 1, 2022, we entered into 2 new master lease agreements with an unaffiliated third-party operator to lease these properties. The new leases have terms of 10 years each and provide first year base rent of $180,000 per month, or $2.3 million per year over the life of the leases. The Company recognized a loss of approximately $1.1 million in the second quarter of 2022 due to the write-off of straight-line rent receivable related to the former leases.

 

As of the date of this prospectus, none of our tenants are delinquent on the payment of rent, and none of them have requested us to amend the terms of their leases to reduce current or future lease payments. We accordingly believe that our current tenants have the ability to meet their lease obligations based on their current levels of occupancy. However, if tenants were to experience additional decreases in occupancy due to the emergence of new variants of COVID-19, and such decreases adversely affected our tenants’ operating income, tenants might be unable to meet their lease obligations. The Company is unable to determine what level of decreased occupancy would result in lease defaults because decreases in occupancy also allow tenants to reduce operating costs due to reduced staffing requirements.

 

In the event that tenants were to default due to decreased occupancy, the Company would seek to obtain new operators to take over the leases and the facilities. This could result in decreases in the Company’s rental income if the new tenants required lower rental payments. This could have a material adverse effect on our financial condition and results of operation.

 

The COVID-19 pandemic has also caused and is likely to continue to cause regulatory changes and, as a result, healthcare operators may face increased regulatory scrutiny and new requirements for operations and/or payment, especially from government payors including Medicare and Medicaid. Any changes in the regulatory framework or the intensity or extent of government or private enforcement actions could materially increase operating costs incurred by us or our tenants, operators and managers for monitoring and reporting compliance, which could have a material effect on us.

 

27
 

 

Inflation could adversely impact our operators and our results of operations.

 

Inflation, both real or anticipated, as well as any resulting governmental policies, could adversely affect the economy and the costs of labor, goods and services to our operators or borrowers. Our long-term leases and loans typically contain provisions such as rent and interest escalators that are designed to mitigate the adverse impact of inflation on our results of operations. However, these provisions may have limited effectiveness at mitigating the risk of high levels of inflation due to contractual limits on escalation that exist in substantially all of our escalation provisions. Our leases are triple-net and typically require the operator to pay all property operating expenses, and therefore, increases in property-level expenses at our leased properties generally do not directly affect us. However, increased operating costs resulting from inflation have had, and may continue to have, an adverse impact on our operators and borrowers if increases in their operating expenses exceed increases in their reimbursements, which has affected, and may continue to adversely affect, our operators’ or borrowers’ ability to pay rent or other obligations owed to us.

 

Increased labor costs and historically low unemployment may adversely affect our business, results of operations, cash flows and financial condition.

 

The market for qualified personnel is highly competitive and our tenants, borrowers and Senior Housing – Managed communities have experienced and may continue to experience difficulties in attracting and retaining such personnel, in particular due to a reduction in the supply of such personnel and wage increases relating to the COVID-19 pandemic and inflation. An inability to attract and retain trained personnel has negatively impacted, and may continue to negatively impact, our occupancy rates, operating income and the ability of our tenants and borrowers to meet their obligations to us. A shortage of caregivers or other trained personnel, minimum staffing requirements or general inflationary pressures on wages may continue to force tenants, borrowers and Senior Housing – Managed communities to enhance pay and benefits packages to compete effectively for skilled personnel, or to use more expensive contract personnel, and they may be unable to offset these added costs by increasing the rates charged to residents and patients. Any further increase in labor costs or any failure by our tenants, borrowers and Senior Housing – Managed communities to attract and retain qualified personnel could adversely affect our cash flow and have a materially adverse effect on our results of operations.

 

An increase in market Interest rates could increase our interest costs on borrowings on our outstanding indebtedness and future debt and could adversely affect our stock price.

 

Interest rates rose substantially since March 2022 and may continue to rise. Increases in interest rates could increase our interest costs for borrowings on our outstanding debt and any new debt we may incur. This increased cost could make the financing of any new investments more costly. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. In addition, an increase in interest rates could negatively impact the access to and cost of financing available to third parties interested in purchasing assets we may make available for sale, thereby decreasing the amount they are willing to pay for those assets, and consequently limit our ability to reposition our portfolio promptly in response to changes in economic or other conditions.

 

We depend on key personnel whose continued service is not guaranteed and each of whom would be difficult to replace.

 

We depend on the efforts and expertise of Mr. Gubin, our Chief Executive Officer and Chairman of our board of directors, Mr. Eingal, our Chief Financial Officer, and Mr. Jeffrey Bajtner, our Chief Investment Officer, to execute our business strategy. If we were to lose the services of one or more of our executive officers and were unable to find suitable replacements, our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially and adversely affected.

 

We have substantial indebtedness, which could adversely affect our financial condition, results of operations and cash flows.

 

As of June 30, 2023, we had total indebtedness of approximately $482.1 million, consisting of $275.2 million in HUD guaranteed debt, $106.3 million in Series A, Series C Bonds and Series D Bonds outstanding and $100.6 million in commercial mortgage loans from third party lenders that were not guaranteed by HUD. In July 2023, we issued an additional NIS 70.0 million ($19.2 million) in Series D Bonds. We expect to utilize the proceeds from the sale of these Bonds, together with a $66.0 million commercial bank mortgage loan, to finance a portion of the purchase price of our planned acquisition of the Indiana properties. We also expect to incur additional debt to finance future acquisitions.

 

We currently anticipate that we will have sufficient liquidity to meet our working capital obligations, including our debt service obligations.

 

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Nevertheless, payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties or to pay the dividends currently contemplated or necessary to qualify and maintain our qualification as a REIT.

 

Our substantial level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

● our cash flows may be insufficient to meet our required principal and interest payments;

 

● we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;

 

● we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

● we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

● we may default on our obligations, in which case the lenders or mortgagees may have the right to foreclose on any properties that secure the loans and/or directly collect rents and other income from our properties;

 

● increased inflation may have a pronounced negative impact on the variable portion of the interest expense we pay in connection with our outstanding indebtedness, as these costs could increase at a rate higher than our rents; and

 

● we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations or reduce our ability to pay, or prohibit us from paying, distributions to our stockholders.

 

If any one of these events were to occur, our financial condition, results of operations and cash flows could be materially adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness.”

 

Certain of our debt agreements include restrictive covenants which could limit our ability to make distributions.

 

The indentures for our Series A Bonds, Series C Bonds and Series D Bonds contain restrictions on the payment of dividends by the BVI Company.

 

Under these indentures, the BVI Company may not make any distribution unless certain conditions set forth in the indentures are fulfilled. These conditions include limitations on annual dividends to a percentage of current income after tax, subject to certain adjustments, and restrictions on dividends based on BVI Company’s equity and the ratio of BVI Company’s equity to its balance sheet. See “Management Discussion and Analysis of Results of Operations and Financial Condition – Liquidity and Capital Resources.” At June 30, 2023, the BVI Company would have been permitted to pay dividends of up to $21.8 million under the indentures.

 

Additionally, our subsidiaries that have received HUD guaranteed mortgage loans are parties to customary healthcare regulatory agreements with HUD. These agreements restrict the ability of these subsidiaries to make distributions in the event that the subsidiary does not have surplus funds to make a distribution. Surplus funds are calculated semi-annually and are funds in excess of the amount then required to make the payments under the loan and other obligations related to the mortgaged property.

 

The restrictions under the indentures for the Series A Bonds, Series C Bonds, Series D Bonds and the loan agreements for our other loans could affect the ability of the BVI Company and its subsidiaries to make distributions to the Operating Partnership. This in turn could affect our ability to make distributions to our stockholders, including cash dividends required to meet the annual distribution requirements applicable to the Company as a REIT. In such event, we would seek to obtain additional loans or sell additional OP units in order to fund required distributions or make elective stock dividends.

 

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Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

 

Substantially all of our properties have been financed with mortgage debt. Mortgage and other secured debt obligations increase our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. Foreclosures could also trigger our tax indemnification obligations under the terms of our tax protection agreements with respect to the sales of certain properties.

 

The indenture for the Series C Bonds and Series D Bonds provides for a balloon payment of the entire remaining principal in 2026. The loan agreement for our $105 million term loan provides for a balloon payment in 2027. We may also obtain additional financing that contains balloon payment obligations. Refinancing these indentures and loans with balloon payment obligations may be difficult and have a direct effect on us, including our cash flows, financial condition and ability to make distributions.

 

The indenture for the Series C Bond provides for the principal to be repaid in five annual payments. Payments for each of the first four years covers 6% of the principal total under the Series C Bond and a balloon payment of the entire remaining principal is due in 2026. The indenture for the Series D Bond provides for the principal to be repaid in three annual payments. Payments for each of the first two years covers 6% of the principal total under the Series D Bond and a balloon payment of the entire remaining principal is due in 2026. The loan agreement for our $105 million term loan provides for monthly payments of principal and interest and a final balloon payment of the unpaid principal balance together with accrued interest in 2027.

 

It is also possible that our future debt arrangements may require us to make a similar lump-sum or “balloon” payment at maturity.

 

To the extent we have these types of obligations, our ability to make a balloon payment at maturity will depend on our working capital at the time of repayment, our ability to obtain additional financing or our ability to sell any property securing such indebtedness. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original loan or sell any related property at a price sufficient to make the balloon payment. In addition, balloon payments and other payments of principal and interest on our indebtedness may leave us with insufficient cash to pay the distributions that we are required to pay to qualify and maintain our qualification as a REIT. In such event, we would seek to obtain additional loans or sell additional OP units in order to fund required distributions or make elective stock dividends.

 

The loan agreement for our $105 million commercial bank term loan contains covenants and other terms that impose material operating and financial restrictions. The loan agreement also contains provisions that allow the lender to accelerate the amounts due under the loan agreement if Moishe Gubin, our Chairman and Chief Executive Officer, ceases to be actively involved in the executive management of the Operating Partnership or ceases to be a director of the Company or if any person or group (other than Mr. Gubin) acquires more than 30% of the common stock of the Company. A breach of these covenants and restrictions could result in the acceleration of the amounts due under the loan agreement, which would have a material adverse effect on the Company’s financial conditions and results of operations.

 

On March 18, 2022, the Operating Partnership and 21 of its subsidiaries received a $105 million mortgage loan from a commercial bank. The loan is secured by a lien on all of the assets of the Operating Partnership and the 21 subsidiaries that are borrowers. The collateral primarily consists of 21 properties owned by these subsidiaries. The loan is also secured by guarantees of the Company and the BVI Company. The borrowers must pay down a portion of the loan in the event that the outstanding balance of the loan exceeds 65% of the fair market value of the properties pledged to the lenders as collateral in order to bring that percentage down to 65% or lower.

 

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The loan agreement contains a number of restrictive covenants that impose material operating and financial restrictions and may limit our ability to undertake transactions that we may believe are in our long-term best interest. These restrictions limit the ability of the Operating Partnership and the borrower subsidiaries to, among other things:

 

  incur additional indebtedness, other than indebtedness incurred by the Operating Partnership that would not result in a violation of the financial covenants described below;
     
  pay dividends or make other distributions or repurchase or redeem capital stock, other than dividends or distributions that would not result in an event of default, including a violation of the financial covenants described below and distributions made by the Operating Partnership and subsidiary borrowers that are used by the Company to make distributions that are necessary to maintain our REIT status;
     
  make loans and investments, other than loans and investments by the Operating Partnership that would not result in a violation of the financial covenants described below;
     
  sell assets, other than the sale of assets by the Operating Partnership;
     
  incur liens on any of the collateral for the loan or on the other assets of the borrower subsidiaries other than certain enumerated, permitted liens;
     
  enter into transactions with affiliates except in the ordinary course of business on arm’s length terms; and
     
  enter into any transaction, including any merger or consolidation, that could result in a change of control.

 

The loan agreement defines a change of control as the occurrence of any of the following events:

 

  the BVI Company fails to own all of the equity interests in the borrower subsidiaries;
     
  the Operating Partnership fails to own all of the equity interests in the BVI Company;
     
  the failure of the Company to be the general partner of the Operating Partnership;
     
  the failure of Moishe Gubin to be a voting member of the board of directors of each of the Company and the BVI Company; and
     
  the failure of Moishe Gubin to be actively involved in the executive management of the Operating Partnership; or
     
  any person (other than Moishe Gubin) shall have acquired beneficial ownership, directly or indirectly, of more than 30% of the common stock of the Company.

 

In addition, the loan agreement contains financial covenants that require us to maintain specified financial ratios and maintain a minimum amount of equity in our subsidiaries.

 

The financial covenants consist of (i) a covenant that the ratio of the Company’s indebtedness to its EBITDA cannot exceed 8.0 to 1.0, (ii) a covenant that the ratio of the Company’s net operating income to its debt service before dividend distribution is at least 1.25 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, (iii) a covenant that the ratio of the Company’s net operating income to its debt service after dividend distribution is at least 1.05 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, and (iv) a covenant that the Company’s equity in its subsidiaries equal at least $20.0 million.

 

Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.

 

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As a result of these restrictions, we may be:

 

  limited in how we conduct our business;
     
  unable to raise additional debt or equity financing to operate during general economic or business downturns; or
     
  unable to take advantage of new business opportunities.

 

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results and our substantial indebtedness could adversely affect the availability and terms of additional financing.

 

A breach of the covenants or restrictions under the loan agreement could result in an event of default under the loan agreement. Such a default would allow the lender to accelerate the loan and may result in the acceleration of any debt to which a cross-acceleration or cross-default provision applies.

 

The restrictions related to a change of control include a requirement that Mr. Gubin remain actively involved in the management of our business and serving as a director. Although we expect that Mr. Gubin will continue to be actively involved in the Company’s business because he owns a significant portion of our common stock and the OP units in the Operating Partnership, it is possible that he could become unavailable for reasons outside of his control such as illness or injury. Such an event could result in the breach of the loan agreement.

 

The restrictions related to a change of control also include a requirement that no person or group (other than Mr. Gubin) acquire more than 30% of our common stock. We believe that the risk of a violation of this restriction is limited because the Company’s organizational documents prohibit any person or such person’s affiliates from acquiring more than 9.9% of our common stock.

 

In the event of any breach of the covenants or restrictions under the loan agreement, we would seek to obtain a waiver from the lender. If the lender refused to grant a waiver, we would seek to refinance the loan with a new lender or seek to sell properties in order to obtain funds to repay the loan. If we were unable to refinance the loan or repay the loan utilizing the proceeds from the sale of our properties, the lenders could foreclose their mortgage lien against the properties pledged as collateral for the loan. Such an event would have a material adverse effect on our financial condition and our operating results because it would eliminate a substantial portion of our income generating assets and potentially result in the acceleration of any other debt that is subject to default if the loan agreement is accelerated.

 

For addition information concerning our commercial bank term loan, see “Financial Information-Management’s Discussion and Analysis of Financial Condition and Results of Operations–- Liquidity and Capital Resources- Commercial Bank Term Loan.”

 

We have experienced and expect to continue to experience significant growth and may not be able to adapt our management and operational systems to respond to the integration of the healthcare properties we expect to acquire without unanticipated disruption or expense, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.

 

We have experienced and expect to continue to experience significant growth through the potential acquisition of healthcare properties that we identify. We may not be able to adapt our management, administrative, accounting and operational systems or hire and retain sufficient operational staff to manage such potential acquisitions without operating disruptions or unanticipated costs. Our failure to successfully manage our growth could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

We may be unsuccessful in our efforts to develop relationships with unaffiliated operators.

 

Part of our business strategy is to develop relationships with unaffiliated operators. We believe these efforts will assist us in expanding our portfolio and reducing our dependency on operators that are related parties. As of June 30, 2023, 42 of our facilities, or approximately 50.6% of the total, were leased and operated by unaffiliated third parties. We do not have any commitments from any unaffiliated operators to lease facilities and there can be no assurance that we will be able to establish such relationships or enter into leases with such third parties.

 

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Properties in Illinois, Indiana, Tennessee and Arkansas account for approximately 80.2% of the annualized base rent from our portfolio as of June 30, 2023.

 

As of June 30, 2023, approximately 80.2% of our annualized base rent was derived from properties located in the states of Illinois (29.9%), Indiana (16.9%), Tennessee (20.3%) and Arkansas (13.1%). As a result of this geographic concentration, we are particularly exposed to downturns in the economies of, as well as other changes in the real estate and healthcare industries in, these geographic areas or in increased regulation or new conditions on operations or payment. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in these geographic areas could have a disproportionate effect on our overall business results. In the event of negative economic or other changes in these geographic areas, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be adversely affected.

 

We face potential adverse consequences of bankruptcy or insolvency by our tenants, operators, borrowers, managers and other obligors.

 

We are exposed to the risk that our tenants, operators, borrowers, managers or other obligors could become bankrupt or insolvent. Although our lease agreements will provide us with the right to exercise certain remedies in the event of default on the obligations owing to us or upon the occurrence of certain insolvency events, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. For example, a debtor-lessee may reject its lease with us in a bankruptcy proceeding. In such a case, our claim against the debtor-lessee for unpaid and future rents would be limited by the statutory cap of the U.S. Bankruptcy Code. This statutory cap could be substantially less than the remaining rent actually owed under the lease, and any claim we have for unpaid rent might not be paid in full. In addition, a debtor-lessee may assert in a bankruptcy proceeding that its lease should be re-characterized as a financing agreement. If such a claim is successful, our rights and remedies as a lender, compared to a lessor, are generally more limited. In the event of an obligor bankruptcy, we may also be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of our properties, avoid the imposition of liens on our properties or transition our properties to a new tenant, operator or manager. As a result, our business, financial condition and results of operations and our ability to make distributions to our stockholders could be adversely affected if an obligor becomes bankrupt or insolvent.

 

Long-term leases may result in below market lease rates over time, which could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

We have entered into long-term leases with tenants/operators at most of our properties. Our long-term leases provide for rent to increase over time. However, if we do not accurately judge the potential for increases in market rental rates, we may set the terms of such long-term leases at levels such that even after contractual rental increases, the rent under our long-term leases could be less than then-current market rental rates. Further, we may have no ability to terminate those leases or to adjust the rent to then-prevailing market rates. As a result, our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially and adversely affected.

 

We may incur additional costs in acquiring or re-leasing properties, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

We may invest in properties designed or built primarily for a particular tenant/operator of a specific type of use known as a single-user facility. If the tenant/operator fails to renew its lease or defaults on its lease obligations, we may not be able to readily market a single-user facility to a new tenant/operator without making substantial capital improvements or incurring other significant costs. We also may incur significant litigation costs in enforcing our rights against the defaulting tenant/operator. These consequences could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

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We may have difficulty finding suitable replacement tenants in the event of a tenant default or non-renewal of our leases.

 

We cannot predict whether our tenants will renew existing leases beyond their current terms. If any of our leases are not renewed upon expiration, we would attempt to lease those properties to another tenant. In case of non-renewal, we generally expect to have advance notice before expiration of the lease term to arrange for repositioning of the properties and our tenants are required to continue to perform all of their obligations (including the payment of all rental amounts) for the non-renewed assets until such expiration. However, following expiration of a lease term or if we exercise our right to replace a tenant in default, rental payments on the related properties could decline or cease altogether while we reposition the properties with a suitable replacement tenant. We also might not be successful in identifying suitable replacement tenants or entering into leases with new tenants on a timely basis or on terms as favorable to us as our current leases, or at all, and we may be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. Our ability to reposition our properties with a suitable tenant could be significantly delayed or limited by state licensing, receivership, certificate of need or other laws, relating to debtor-creditor rights and obligations and the ownership and operation of health care facilities, as well as by the Medicare and Medicaid change-of-ownership rules. We could also incur substantial additional expenses in connection with any licensing, receivership or change-of-ownership proceedings, which can be complex and time consuming and can sometimes require that new tenants comply with new or additional requirements for a facility’s physical plant or operations which might not have been imposed on prior tenants because of grandfathering provisions in law or regulation. In addition, our ability to locate suitable replacement tenants could be impaired by the specialized healthcare uses or contractual restrictions on use of the properties which are designed for specific health care purposes, and we may be required to spend substantial amounts to adapt the properties to other uses or obtain governmental approvals to do so. Any such delays, limitations and expenses could adversely impact our ability to collect rent, obtain possession of leased properties or otherwise exercise remedies for tenant default and could have a material adverse effect on us. In addition, if we are unable to re-let the properties to healthcare operators with the expertise necessary to operate the type of properties in which we intend to invest, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by potential purchasers.

 

All of these risks may be greater in smaller markets, where there may be fewer potential replacement tenants, making it more difficult to replace tenants, especially for specialized space, and could have a material adverse effect on us.

 

On April 4, 2022, we were notified that the tenants under the master leases for 6 facilities located in central Illinois intended to default with respect to their lease agreements due to operating losses. The tenants indicated that their operating losses were partially due to decreased occupancy caused by COVID-19. The tenants are affiliates of Steven Blisko, who is the brother of Michael Blisko, one of our directors. These leases provided for a combined rent of $225,000 per month, or $2.7 million per year. All payments due under these leases were paid through mid-June 2022. On July 1, 2022, the Company entered into two new master lease agreements with an unaffiliated third-party operator to lease these properties. The new leases have terms of 10 years each and provide for first year base rent of $180,000 per month, or $2.3 million per year over the life of the leases. The Company recognized a loss of approximately $1.1 million in the second quarter of 2022 due to the write-off of straight-line rent receivable related to the former leases.

 

Our computer systems may be subject to potential cyberattacks by state actors as a result of the conflict between Russia and Ukraine.

 

The invasion of Ukraine by Russia on February 24, 2022 has increased the risk of potential cyberattacks of businesses located in the United States, including our business. In the event that our computer systems or database were subject to such an attack, our ability to operate our business could be significantly impaired until we were able to address the attack by rebuilding the parts of our computer systems and database affected by such an attack. Our computer database primarily consists of financial information relating to our rental properties, including information concerning rental payments from tenants and the payment of property and operating expenses by us and our tenants. We do not have any patient information. To address the risk of a possible cyberattack by state actors, the Company has engaged a third-party consultant to implement additional security protections for our systems, including restrictions on the ability of persons utilizing URLs located outside of the United States to log on to our systems. We also maintain backups of our data on third party servers. Although these steps provide additional protection from cyberattacks, they are not full proof, and it is possible that we may experience a cyberattack that materially disrupts our business.

 

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We and our directors and officers may become subject to litigation and disputes, which could have an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our common stock.

 

We and our directors and officers may become subject to litigation, including claims relating to our operations, properties, offerings, and otherwise in the ordinary course of business.

 

For example, the sellers of certain properties acquired by the Predecessor Company in Arkansas and Kentucky have commenced legal proceedings against two of our directors, Moishe Gubin, Michael Blisko, the Predecessor Company and certain of its subsidiaries, as well as the operators of the facilities located at the acquired properties, asserting claims for fraud, breach of contract and rescission based on defendants’ alleged failure to perform certain post-closing obligations. We have potential direct exposure for these claims because the subsidiaries of the Predecessor Company that were named as defendants are now subsidiaries of the Operating Partnership. Additionally, the Operating Partnership is potentially liable for the claims made against Moishe Gubin, Michael Blisko and the Predecessor Company pursuant to the provisions of the contribution agreement, under which the Operating Partnership assumed all of the liabilities of the Predecessor Company and agreed to indemnify the Predecessor Company and its affiliates for such liabilities. See “Business and Properties-Legal Proceedings.” Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. In addition, we are regularly named as a defendant in claims made against our tenants/operators due to patient injuries. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our common stock.

 

In addition, the COVID-19 pandemic may cause our business and the businesses of our tenants, operators and managers to face increased exposure to union or other disputes, lawsuits or other legal or regulatory proceedings filed at the same time across multiple jurisdictions, such as professional liability litigation alleging wrongful death and negligence claims, some of which may result in large damage awards and not be indemnified or subject to sufficient insurance coverage. Federal, state, local and industry-initiated efforts may limit our tenants’, operators’ and managers’ liabilities from COVID-19 related quality of care litigation but the extent of such limitations are uncertain and, to the extent such limitations of liability may not be applicable or enforced, such liabilities could adversely impact the business and financial conditions of our tenants, operators and managers. If, in turn, such tenants, operators or managers fail to make contractual rent payments to us or, with respect to our senior living operating portfolio, cash flows are adversely affected, it could have a material adverse effect on us.

 

Our use of OP units as consideration to acquire properties could result in stockholder dilution or limit our ability to sell such properties, which could have a material adverse effect on our business, results of operations and cash flows.

 

In the future, we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for OP units in our Operating Partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell properties at a time, or on terms, that would be favorable absent such restrictions, which could have a material adverse effect on our business, results of operations and cash flows.

 

We have limited operating history as a REIT and may not be able to operate our business successfully as a REIT.

 

We elected to be taxed as a REIT for the 2022 calendar year. As a result, we have a limited operating history as a REIT. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate the Company as a REIT. We will be required to develop and implement control systems and procedures in order to qualify and maintain our qualification as a REIT, and this transition could place a significant strain on our management systems, infrastructure and other resources. See “—Risks Related to Our Status as a REIT.”

 

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We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make common stock less attractive to investors.

 

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of shares pursuant to a registration statement filed under the Securities Act, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and benefits under the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile and decline significantly.

 

We have elected to avail ourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies under the JOBS Act and will, therefore, not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, which could make our common stock less attractive to investors.

 

The JOBS Act provides that an emerging growth company can take advantage of exemption from various reporting requirements applicable to other public companies and an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We intend to avail ourselves of these exemptions and the extended transition periods for adopting new or revised accounting standards and therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our consolidated financial statements may not be comparable to companies that comply with public company effective dates. We intend to avail ourselves of these options although, subject to certain restrictions, we may elect to stop availing ourselves of these exemptions in the future even while we remain an “emerging growth company.” We cannot predict whether investors will find our stock less attractive as a result of this election. If some investors find shares of our common stock less attractive as a result of this election, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We will be subject to the requirements of the Sarbanes-Oxley Act.

 

As long as we remain an emerging growth company, as that term is defined in the JOBS Act, we will be permitted to gradually comply with certain of the on-going reporting and disclosure obligations of public companies pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes- Oxley Act”).

 

However, our management will be required to deliver a report that assesses the effectiveness of our internal controls over financial reporting, pursuant to Section 302 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act may require our auditors to deliver an attestation report on the effectiveness of our internal controls over financial reporting in conjunction with their opinion on our audited financial statements as of December 31 subsequent to the year in which this prospectus becomes effective if we are no longer an “emerging growth company”. Substantial work on our part may be required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process may be both costly and challenging. We cannot give any assurances that material weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 302 and 404 of the Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our consolidated financial statements that could require us to restate our consolidated financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the per share trading price of our common stock.

 

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We face possible risks and costs associated with severe weather conditions, natural disasters or the physical effects of climate change.

 

Some of our properties are located in areas particularly susceptible to revenue loss, cost increase or damage caused by severe weather conditions or natural disasters such as hurricanes, earthquakes, tornadoes, fires and floods, as well as the effects of climate change. To the extent that climate change impacts changes in weather patterns, our markets could experience more frequent and severe natural disasters. Operationally, such events could cause a major power outage, leading to a disruption of our operators’ operations or require them to incur additional costs associated with evacuation plans. Over time, any of these conditions could result in increased operator costs, delays in construction, resulting in increased construction costs, or in the inability of our operators to operate our facilities at all. Such events could also have a material adverse impact on our tenants’ operations and ability to meet their obligations to us. 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. Any such loss could materially and adversely affect our business and our financial condition and results of operations.

 

Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable. To the extent that significant changes in the climate occur in areas where our properties are located, we may experience more frequent extreme weather events which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties and could also require us to spend more on our new development properties without a corresponding increase in revenue. Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.

 

Risks Related to Healthcare Industry

 

Adverse trends in healthcare provider operations may negatively affect the operations at our properties, which in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

We believe the healthcare industry is currently experiencing the following trends:

 

● changes in the demand for and methods of delivering healthcare services;

 

● changes in third-party reimbursement policies, including a shift to Medicaid managed care, and changes in Medicare reimbursement for skilled nursing facility services which commenced on October 1, 2019;

 

● significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas;

 

● increased expense for uninsured patients;

 

● increased expense arising from an older and sicker patient mix;

 

● increased competition among healthcare providers;

 

● shortage of qualified health care workers due to competition from other health industry employers and enhancement of credentials required to perform specified services;

 

● substantial increases in costs associated with employing health care workers due to competition and health care industry specific wage mandates, general inflationary pressures on wages and other statutory and regulatory requirements associated with the employment of worker in the health industry and specifically for skilled nursing facilities;

 

● increased liability insurance expense and reductions in the availability of certain coverages resulting in gaps;

 

● increasing shift of the plaintiffs’ bar from medical malpractice to skilled nursing facility industry liability;

 

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● continued pressure by private and governmental payors to reduce payments to providers of services along with the consolidation of payors, which has resulted in a decreased ability to negotiate levels and conditions of payment;

 

● increased scrutiny of billing, referral and other practices by federal and state authorities and private insurers; and

 

● increasing focus by relators and the qui tam bar on the skilled nursing facility industry.

 

These factors may materially adversely affect the economic performance of some or all of our tenants/operators, which in turn could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Both we and the tenants and operators of our properties may be adversely affected by healthcare regulation and enforcement.

 

The regulatory environment of the long-term healthcare industry has generally intensified over time both in the amount, complexity and type of regulations and in the efforts to enforce those regulations. The extensive federal, state and local laws and regulations affecting the healthcare industry include those relating to, among other things, licensure, conduct of operations, ownership of facilities, addition of facilities and equipment, allowable costs, services, prices for services, qualified beneficiaries, quality of care, patient rights, fraudulent or abusive behavior, and financial and other arrangements that may be entered into by healthcare providers. Moreover, changes in enforcement policies by federal and state governments have resulted in an increase in the number of inspections, citations of regulatory deficiencies and other regulatory sanctions, including terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and certain services as well as more aggressive imposition of exclusions from participation in, and receipt of reimbursement from, the Medicare and Medicaid programs, civil monetary penalties and even criminal penalties. See “Business and Properties — Regulation.” We are unable to predict the scope of future federal, state and local regulations and legislation, including the Medicare and Medicaid statutes and regulations, or the intensity of enforcement efforts with respect to such regulations and legislation, and any changes in the regulatory framework could have a material adverse effect on our tenants, operators, guarantors and managers, which, in turn, could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Further, if our tenants and operators fail to comply with the extensive laws, regulations and other requirements applicable to their businesses and the operation of our properties (some of which are discussed below), they could become ineligible to receive reimbursement from governmental and private third-party payor programs, face bans on admissions of new patients or residents, suffer civil or criminal penalties or be required to make significant changes to their operations. We also may become subject directly to healthcare laws and regulations because of the broad nature of some of these restrictions. Our tenants, operators, borrowers, guarantors, managers and we also could be forced to expend considerable resources responding to an investigation or other enforcement action under applicable laws or regulations or in implementing new or additional measures to reduce the possibility of enforcement action. In such event, the results of operations and financial condition of our tenants, operators, borrowers, guarantors and managers and the results of operations of our properties operated or managed by those entities could be adversely affected, which, in turn, could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

All healthcare providers who accept Medicare and Medicaid reimbursement are subject to the federal Anti-Kickback Statute, which establishes civil, criminal and administrative penalties with respect to any person who knowingly and willfully offers, pays, solicits, or receives any remuneration to induce or in return for (1) referring an individual to a person for the furnishing or arranging for the furnishing of any item or service payable in whole or in part under a Federal healthcare program; or (2) purchasing, leasing, ordering or arranging for, or recommending the purchasing, leasing or ordering of any good, facility service, or item payable under a Federal healthcare program, such as Medicare and Medicaid. Remuneration is defined broadly to include the transfer of anything of value, in case or in kind, directly or indirectly, overtly or covertly. Certain healthcare facilities are also subject to the Federal Ethics in Patient Referral Act of 1989, commonly referred to as the Stark Law. The Stark Law prohibits the submission of claims to Medicare for payment if the claim results from a physician referral (including an order or prescription) for certain designated services and the physician has a financial relationship with the health service provider that does not qualify under one of the exceptions for a financial relationship under the Stark Law. Similar prohibitions on kickbacks, physician self-referrals and submission of claims apply to state Medicaid programs and may also apply to private payors under state laws, which in some cases are even broader and contain stricter prohibitions or requirements than Federal prohibitions. Violations of these laws subject persons and entities to termination from participation in Medicare, Medicaid and other federally funded healthcare programs or result in criminal prosecution, the imposition of civil monetary penalties, the imposition of treble damages and fines and/or other penalties as well as potential civil liability under the Federal False Claims Act. In addition, criminal liability under the Federal Travel Act is increasingly used to prosecute healthcare providers for certain business relationships. Healthcare facilities and providers may also experience an increase in audits and medical record reviews from public and private payors and a host of government agencies and contractors, including the HHS Office of the Inspector General, the Department of Justice, Zone Program Integrity Contractors, and Recovery Audit Contractors.

 

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Other laws that impact how the operators conduct their operations include: federal and state laws designed to protect the confidentiality and security of patient health information; state and local licensure laws; laws protecting consumers against deceptive practices; laws generally affecting the operators’ management of property and equipment and how the operators generally conduct their operations, such as fire, health and safety, and environmental laws; federal and state laws affecting assisted living facilities mandating quality of services and care, and quality of food service; resident rights (including abuse and neglect laws); and health standards set by the federal Occupational Safety and Health Administration. For example, HIPAA imposes extensive requirements on the way in which certain healthcare entities use, disclose, and safeguard protected health information (as that term is defined under HIPAA), including requirements to protect the integrity, availability, and confidentiality of electronic medical records. Many of these obligations were expanded under the HITECH Act. In order to comply with HIPAA and the HITECH Act, covered entities often must undertake significant operational and technical implementation efforts. Operators also may face significant financial exposure if they fail to maintain the privacy and security of medical records, personal health information about individuals, or protected health information. HIPAA violations are also potentially subject to criminal penalties. See “Business and Properties—Regulation.”

 

We may also be adversely affected by possible changes to CON laws which serve as a barrier to entry in eight of the nine states in which we own properties. If these laws are repealed in states in which we own properties, we and the tenants and operators of our properties could be subject to increased competition.

 

Our tenants/operators may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us and, thus, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

As is typical in the healthcare industry, our tenants/operators may often become subject to claims that their services have resulted in patient injury or other adverse effects. Many of these tenants/operators may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage maintained by tenants/operators may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to these tenants/operators due to state law prohibitions or limitations of availability. As a result, these types of tenants/operators of our healthcare properties operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. We also believe that there has been, and will continue to be, an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid overbilling and compliance with the conditions of payment and participation and false claims, as well as an increase in debar actions resulting from these investigations. Insurance is generally not available to cover such losses, including the costs of investigation and any penalties in the absence of specialized underwriting. None of our related party tenants, and to our knowledge, none of our other tenants, have such insurance. Additionally, neither the Company nor its subsidiaries have such insurance. The costs of a comprehensive investigation along with any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future or a condition imposed as a result of an investigation such as a monitoring by an independent review organization (“IRO”) under a Corporate Integrity Agreement, could have a material adverse effect on a tenant/operator’s financial condition. Neither our related party tenants nor, to our knowledge, our other tenants, are subject to any pending or threatened legal proceedings or investigations by any governmental authorities, and none of them has entered into any Corporate Integrity Agreements. If a tenant/operator were unable to obtain or maintain insurance coverage, if judgments were obtained in excess of the insurance coverage, if a tenant/operator were required to pay uninsured or uninsurable punitive damages, or if a tenant/operator were subject to an uninsured or uninsurable payor audit or government enforcement action, the tenant/operator could be exposed to substantial additional liabilities, which could affect the tenant/operator’s ability to pay rent to us, which in turn could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. Neither the Company nor its subsidiaries are subject to any pending or threatened legal proceedings or investigations by any governmental authorities, and none of them has entered into any Corporate Integrity Agreements.

 

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Risks Related to Real Estate Industry

 

Our business is subject to risks associated with real estate assets and the real estate industry, which could materially adversely affect our financial condition, results of operations, cash flow, cash available for distribution and our ability to service our debt obligations.

 

Our ability to pay dividends to our stockholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events include many of the risks set forth above under “—Risks Related to Our Business and Operations,” as well as the following:

 

● adverse changes in financial conditions of buyers, sellers and tenants of properties;

 

● vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options, and the need to periodically repair, renovate and re-let space;

 

● increased operating costs, including insurance premiums, utilities, real estate taxes and state and local taxes;

 

● civil unrest, acts of war, terrorist attacks and natural disasters, including hurricanes, which may result in uninsured or underinsured losses;

 

● geopolitical challenges and uncertainties (including wars and other forms of conflict, terrorist acts and security operations), such as the war between Russia and Ukraine and the severe economic sanctions and export controls imposed by the U.S. and other governments against Russia and Russian interests;

 

● decreases in the underlying value of our real estate; and

 

● changing market demographics.

 

In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which could materially adversely affect our financial condition, results of operations, cash flow, cash available for distribution and ability to service our debt obligations.

 

As an owner of real estate, we could incur significant costs and liabilities related to environmental matters.

 

Under various federal, state and local laws and regulations relating to the environment, as a current or former owner of real property, we may be liable for costs and damages resulting from the presence or release of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean up such contamination and liability for any alleged harm to human health, property or natural resources. Such laws often impose strict liability without regard to fault, including whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required investigation, remediation, removal, fines or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. See “Business and Properties —Regulation—Environmental Matters.”

 

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Some of our properties may have been or may be impacted by contamination arising from current or prior uses of the property, or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. In most cases, the Company or the Predecessor Company obtained Phase I Environmental Site Assessments for acquired properties. The Phase I Environmental Site Assessments are of limited scope and may not have conducted comprehensive asbestos, lead-based paint, lead in drinking water, mold or radon assessments. Although these assessments provide some assurance regarding environmental issues at the properties, they are not a guarantee that the properties do not have an environmental issue. As a result, we may not be aware of all potential or existing environmental contamination liabilities at the properties in our portfolio. There also exists the risk that material environmental conditions, liabilities or compliance concerns may arise in the future. If any of our properties are subject to environmental issues, we could potentially incur material liability for these issues. The realization of any or all of these environmental issues may also have an adverse effect on our business, financial condition and results of operations.

 

As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials, such as asbestos or lead, or other adverse conditions, such as poor indoor air quality, in our buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, we could face fines for such noncompliance and could be required to abate, remove or otherwise address the hazardous material to achieve compliance with applicable environmental laws and regulations. Also, we could be liable to third parties, such as occupants or employees of the buildings, for damages related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. If we incur material environmental liabilities in the future, we may find it difficult to sell or lease any affected properties.

 

Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs of remediation.

 

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our sole tenant, employees of our sole tenant or others if property damage or personal injury is alleged to have occurred.

 

Our properties may be subject to impairment charges.

 

On a quarterly basis, we will assess whether there are any indicators that the value of our properties may be impaired. A property’s value is considered to be impaired only if the estimated aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. In our estimate of cash flows, we will consider factors such as expected future operating income, trends and prospects, the effects of demand, competition and other factors. If we are evaluating the potential sale of an asset or development alternatives, the undiscounted future cash flows analysis will consider the most likely course of action at the balance sheet date based on current plans, intended holding periods and available market information. We will be required to make subjective assessments as to whether there are impairments in the value of our properties. These assessments may be influenced by factors beyond our control, such as early vacating by a tenant or damage to properties due to earthquakes, tornadoes, hurricanes and other natural disasters, fire, civil unrest, terrorist acts or acts of war. These assessments may have a direct impact on our earnings because recording an impairment charge results in an immediate negative adjustment to earnings. There can be no assurance that we will not take impairment charges in the future related to the impairment of our properties. Any such impairment could have a material adverse effect on our business, financial condition and results of operations in the period in which the charge is taken.

 

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We may incur significant costs complying with various federal, state and local laws, regulations and covenants, as well as the terms and conditions of any recorded instruments, that are applicable to our properties.

 

Properties are subject to various covenants and federal, state and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers upon each property may restrict our use of our properties and may require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from third parties (such as, but not limited to, adjacent land owners, applicable governmental authorities, and local officials of community standards organizations) at any time with respect to our properties, including prior to developing or acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to construction, permitted uses, fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future development, acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Existing improvements within a property may be in violation of recorded instruments or may otherwise have been constructed in a manner inconsistent with the requirements of such instruments and/or applicable features of the underlying land. Our growth strategy may be affected by our ability to obtain permits, licenses, and zoning, and any other relief that may be applicable in connection with any such applicable covenants and federal, state and local laws and regulatory requirements, including permitting and licensing requirements.

 

In addition, federal and state laws and regulations, including laws such as the ADA and the Fair Housing Amendment Act of 1988, or FHAA, impose further restrictions on our properties and operations. Under the ADA and the FHAA, all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that all our properties are in compliance with the requirements of the ADA and the FHAA, if one or more of the properties in our portfolio were not in compliance with the ADA, the FHAA or any other regulatory requirements, we could incur additional costs to bring such properties into compliance, be subject to governmental fines or the award of damages to private litigants or be unable to refinance such properties. In addition, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations and cash flow.

 

Risks Related to Organizational Structure

 

Moishe Gubin, our Chairman and Chief Executive Officer, and Michael Blisko, one of our directors, are the beneficial owners of approximately 8.4% of our outstanding shares and approximately 83.5% of the OP units in the Operating Partnership. They have the ability to influence decisions by the Company and the Operating Partnership, including the approval of matters involving conflicts of interest and significant corporate transactions.

 

Moishe Gubin, our Chairman and our Chief Executive Officer, and Michael Blisko, one of our directors, control the tenants and operators of 41 of our facilities.

 

As a result of their ownership of our common stock and the OP units, and their board positions, Moishe Gubin and Michael Blisko and their affiliates have the ability to influence the outcome of matters presented to our directors or stockholders, including the election of our board of directors, matters related to the leases of our properties to their affiliates and approval of significant corporate transactions, including business combinations, consolidations and mergers.

 

As a landlord, the Company does not control the operations of its tenants, including related party tenants, and is not able to cause its tenants to take any specific actions to address trends in occupancy at the facilities operated by its tenants, other than to monitor occupancy and income of its tenants, discuss trends in occupancy with tenants and possible responses, and, in the event of a default, to exercise its rights as a landlord. However, Mr. Gubin and Mr. Blisko, as the controlling members of 41 of our tenants and related operators, have the ability to obtain information regarding these tenants and related operators and cause the tenants and operators to take actions, including with respect to occupancy. Mr. Gubin and Mr. Blisko are subject to potential conflicts of interest due to their ownership of these tenants and their duties as directors of the Company.

 

The ability of Mr. Gubin and Mr. Blisko to influence decisions by the Board is limited by our conflicts of interest policy, which requires transactions in which a director has a conflict of interest to be approved by the audit committee of the Board, which consists exclusively of independent directors. The ability of Mr. Gubin, Mr. Blisko and their affiliates to influence decisions by the Company’s stockholders is limited by the terms of our articles of incorporation, which prohibit any stockholder from holding more than 9.8% of the shares of our common stock. Additionally, the ability of Mr. Gubin, Mr. Blisko and their affiliates to influence decisions by the Operating Partnership is limited because the Operating Partnership is controlled by the Company as its sole general partner and the OP units issued to the Predecessor Company have no voting rights.

 

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Nevertheless, Moishe Gubin, Mr. Blisko and their affiliates have significant influence over us and it is possible that they could exercise influence in a manner that is not in the best interests of our other stockholders. Furthermore, as discussed above, certain conflicts of interest may exist between the interests of Mr. Gubin, Mr. Blisko, and their affiliates and the interests of our stockholders. Their voting power might also have the effect of delaying or preventing a change of control that our stockholders may view as beneficial.

 

Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of OP units in the Operating Partnership, which may impede business decisions that could benefit our stockholders.

 

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to the Company under Maryland law in connection with their management of the Company. At the same time, we, as the general partner of the Operating Partnership, have fiduciary duties and obligations to the Operating Partnership and its limited partners under Delaware law and the partnership agreement of the Operating Partnership in connection with the management of the Operating Partnership. Our fiduciary duties and obligations as the general partner of the Operating Partnership may come into conflict with the duties of our directors and officers to the Company. Moishe Gubin, our Chairman and Chief Executive Officer, and Michael Blisko, one of our directors, beneficially own 83.5% of the OP units in the Operating Partnership and may have conflicts of interest in making decisions that affect both our stockholders and the limited partners of the Operating Partnership, particularly since their ownership interests in the Operating Partnership is significantly greater than their 8.4% ownership interest in shares of the common stock of the Company.

 

The partnership agreement provides that we will be under no obligation to consider the separate interests of the limited partners of our Operating Partnership in deciding whether to cause the Operating Partnership to take or decline to take any actions. The partnership agreement also provides that, in the event of a conflict between the interests of the Operating Partnership or any limited partner, on the one hand, and the separate interests of the Company or our stockholders, on the other hand, that cannot be resolved in a manner not adverse to either our stockholders or the limited partners, we, in our capacity as the general partner of the Operating Partnership, shall resolve the conflict in favor of the Company and our stockholders. Additionally, any action or failure to act on our part or on the part of our board of directors that does not violate the contract rights of the limited partners of the Operating Partnership but does give priority to the separate interests of the Company or our stockholders shall not be deemed to violate our duty of loyalty to the Operating Partnership and its limited partners that arises from our role as the general partner of the Operating Partnership.

 

Additionally, the partnership agreement provides that we will not be liable to the Operating Partnership or any partner for monetary damages for losses sustained, liabilities incurred as a result of errors in judgment or mistakes of fact or law or of any act or omission if any such party acted in good faith. Our Operating Partnership must indemnify us, our directors and officers, officers of the Operating Partnership and our designees from and against any and all claims that relate to the operations of the Operating Partnership, unless it is established that: (i) the act or omission of the person was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the person actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the person had reasonable cause to believe that the act or omission was unlawful. Our Operating Partnership must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. The Operating Partnership will not indemnify or advance funds to any person with respect to any action initiated by the person seeking indemnification without our approval (except for any proceeding brought to enforce such person’s right to indemnification under the partnership agreement) or if the person is found to be liable to the Operating Partnership on any portion of any claim in the action.

 

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Our charter contains certain provisions restricting the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.

 

Our charter contains certain ownership limits with respect to our stock. Our charter, among other restrictions, prohibits, subject to certain exceptions, the beneficial or constructive ownership by any person of more than 9.8% in value of the aggregate outstanding shares of our common stock or more than 9.8% in value of the outstanding shares of any class or series of our preferred stock. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from this ownership limit if certain conditions are satisfied. See “Description of Capital Stock—Restrictions on Ownership and Transfer.” This ownership limit as well as other restrictions on ownership and transfer of our stock in our charter may:

 

● discourage a tender offer, proxy contest, or other transactions or a change in management or of control that might result in a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; and

 

● result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of certain of the benefits of owning the additional shares.

 

We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval.

 

Our board of directors, without stockholder approval, has the power under our charter to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue. In addition, under our charter, our board of directors, without stockholder approval, has the power to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the preference, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption for such newly classified or reclassified shares. See “Description of the Registrant’s Securities to be Registered - Description of Capital Stock—Power to Increase or Decrease Authorized Stock and Issue Additional Shares of Common and Preferred Stock.” As a result, we may issue series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. Although our board of directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.

 

Certain provisions of Maryland General Corporation Law, or MGCL, could inhibit changes of control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.

 

Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

● “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes certain fair price and/or supermajority stockholder voting requirements on these combinations; and

 

● “control share” provisions that provide that holders of “control shares” of the Company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

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We have opted out of the business combination provisions of the MGCL, which provides that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL.

 

Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. If implemented, these provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Description of Registrant’s Securities - Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

 

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

Our bylaws generally provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland (or in certain circumstances, the United States District Court for the District of Maryland, Northern Division) shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to the Company, our directors, our officers or our employees. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. We adopted this provision because Maryland judges have more experience in dealing with issues of Maryland corporate law than judges in any other state and we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements. These provisions of our bylaws will not apply to claims that may be asserted under federal securities laws.

 

Certain provisions in the partnership agreement of the Operating Partnership may delay or prevent unsolicited acquisitions of us.

 

Provisions in the partnership agreement of the Operating Partnership may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some of our stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

● redemption rights;

 

● a requirement that we may not be removed as the general partner of the Operating Partnership without our consent;

 

● transfer restrictions on OP units;

 

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● our ability, as general partner, in some cases, to amend the partnership agreement and to cause the Operating Partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of us or the Operating Partnership without the consent of the limited partners; and

 

● the right of the limited partners to consent to direct or indirect transfers of the general partnership interest, including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer requires approval by our common stockholders.

 

The tax protection agreement with the Predecessor Company and its affiliates could limit our ability to sell or otherwise dispose of certain properties.

 

In connection with the formation transaction, we entered into a tax protection agreement with members of the Predecessor Company and certain of their affiliates, including affiliates of Moishe Gubin, our Chairman and Chief Executive Officer and Michael Blisko, one of our directors, that provides that if we dispose of any interest in the protected initial properties in a taxable transaction prior to the tenth anniversary of the completion of the formation transaction, subject to certain exceptions, we will indemnify with the Predecessor Company, its members and their beneficial owners (the “protected parties”) for their tax liabilities attributable to the built-in gain that exists with respect to such property interests as of the time of the formation transaction, and the tax liabilities incurred as a result of such tax protection payment. Pursuant to the tax protection agreement, it is anticipated that the total amount of protected built-in gain on the properties and other assets contributed to the Company in connection with the formation transaction will be approximately $423.4 million. Such indemnification obligations could result in aggregate payments, based on current tax laws, of up to $177.0 million. The amount of tax is calculated without regard to any deductions, losses or credits that may be available.

 

In this regard, the Company has granted the tenants of six of the Company’s properties in southern Illinois an option to purchase the properties for an aggregate price of $27 million. If the tenants had exercised its option as of June 30, 2023, the Company would have recognized a built-in gain of approximately $19.2 million on such properties, which could have required the Company to make a tax indemnity payment of approximately $8.1 million. The Company has also entered into an option agreement with the tenants in 13 of the Company’s properties in Arkansas to grant these tenants an option to purchase the properties for an aggregate price of $90 million. If the Company had sold these properties for this price as of June 30, 2023, the Company would have recognized a built-in gain of approximately $54.4 million on such properties, which could have required the Company to make a tax indemnity payment of approximately $22.6 million.

 

In light of our indemnification obligations under the tax protection agreement, it may be economically prohibitive for us to sell our properties even if it may be otherwise in our stockholders’ best interests to do so. Moreover, as a result of these potential tax liabilities, Moishe Gubin and Michael Blisko may have a conflict of interest with respect to our determination as to the disposition of these properties. In addition, to the extent that any breach, dispute or ambiguity arises with respect to the tax protection agreement, we may choose not to enforce, or to enforce less vigorously, our rights under these agreements due to our ongoing relationships with the members of our executive management team and directors.

 

Our board of directors may change our strategies, policies and procedures without stockholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

 

Our investment, financing, leverage and distribution policies, and our policies with respect to all other activities, including growth, capitalization and operations, will be determined exclusively by our board of directors, and may be amended or revised at any time by our board of directors without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Further, our charter and bylaws do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially adversely affect our financial condition, results of operations and cash flow.

 

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Our rights and the rights of our stockholders to take action against our directors and officers are limited.

 

Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

● actual receipt of an improper benefit or profit in money, property or services; or

 

● active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

 

Our charter requires us to indemnify, and advance expenses to, each director and officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. We intend to enter into indemnification agreements with each of our executive officers and directors whereby we will indemnify our directors and executive officers to the fullest extent permitted by Maryland law against all expenses and liabilities incurred in their capacity as an officer and/or director, subject to limited exceptions. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter or that might exist with other companies.

 

We are a holding company with no direct operations and, as such, we will rely on funds received from our limited ownership interest in the Operating Partnership to pay liabilities, and the interests of our stockholders will be structurally subordinated to all liabilities and obligations of the Operating Partnership and its subsidiaries.

 

We are a holding company and will conduct substantially all of our operations through the Operating Partnership. We do not have, apart from our limited ownership interest in the Operating Partnership, which represents only 12.3% of the outstanding OP units, any independent operations. As a result, we rely on cash distributions from the Operating Partnership to pay any dividends we might declare on shares of our common stock. We also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, your claims as a stockholder will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Operating Partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

 

Our Operating Partnership may issue additional OP units to third parties without the consent of our stockholders, which would reduce our limited ownership percentage in the Operating Partnership even further and could have a dilutive effect on the amount of distributions made to us by the Operating Partnership and, therefore, the amount of distributions we can make to our stockholders.

 

As discussed above, we own approximately 12.3% of the outstanding OP units as of the date of this prospectus. We may, in connection with our acquisition of properties or otherwise, issue additional OP units to third parties. Such issuances would reduce our limited ownership percentage in the Operating Partnership and could affect the amount of distributions made to us by the Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own OP units, you will not have any voting rights with respect to any such issuances or other partnership level activities of the Operating Partnership.

 

If we are deemed to be an investment company under the Investment Company Act, our stockholders’ investment return may be reduced.

 

We are not registered as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), based on exceptions we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, 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 increase our operating expenses.

 

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Risks Related to Status as a REIT

 

Our ownership of and relationship with any future taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

 

A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation (other than a REIT) of which a TRS directly or indirectly owns securities possessing more than 35% of the total voting power or total value of the outstanding securities of such corporation will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s total assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Any domestic TRS that we own or form will pay U.S. federal, state and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification.

 

We do not currently own any subsidiaries that are expected to be TRSs, nor do we have any plans to establish any TRSs in the future. However, in the event we were to form a TRS, it would need to comply with the foregoing requirements.

 

Our ownership of and relationship with our tenants will be limited and a failure to comply with such limits would jeopardize our REIT status.

 

If a REIT owns, actually or constructively, 10% or more (measured by voting power or fair market value) of the stock of a corporate lessee, or 10% or more of the assets or net profits of any non-corporate lessee (each a “related party tenant”), other than a TRS, any income that a REIT receives from the lessee will be non-qualifying income for purposes of a REIT’s 75% or 95% gross income tests. The constructive ownership rules generally provide that, if 10% or more in value of our stock is owned, directly or indirectly, by or for any person, the REIT is considered as owning the shares or other equity interests owned, directly or indirectly, by or for such person. A REIT that fails either the 75% or 95% gross income tests, or both, in a taxable year, may nonetheless continue to qualify as a REIT, if the failure was due to reasonable cause and not willful neglect and the nature and amounts of the REIT’s items of gross income are properly disclosed to the Internal Revenue Service. However, in such a case, the REIT would be required to pay a penalty tax equal to (1) the greater of (A) the amount by which we fail to satisfy the 75% gross income test and (B) the amount by which we fail to satisfy the 95% gross income test, multiplied by (2) a fraction intended to reflect our profitability.

 

Our charter prohibits transfers of our stock that would cause us to own actually or constructively, 10% or more of the ownership interests in any non-TRS lessee. Based on the foregoing, we should not own, actually or constructively, 10% or more of any lessee other than a TRS. However, because the constructive ownership rules are broad and it is not possible to monitor continually direct and indirect transfers of our stock, no absolute assurance can be given that such transfers or other events of which we have no knowledge will not cause us to own constructively 10% or more of a lessee (or a subtenant, in which case only rent attributable to the subtenant is disqualified) other than a TRS at some future date. At the present time, to our knowledge, no person beneficially or constructively owns more than 9.8% of our stock. Two of our directors, Moishe Gubin and Michael Blisko, beneficially own approximately 8.4% of our outstanding common stock as well as 83.5% of the outstanding OP units in the Operating Partnership. They also own majority interests in more than 41 of our tenants. We believe that these tenants would not currently be treated as related party tenants for purposes of the REIT qualification requirements because we believe that Mr. Gubin and Mr. Blisko do not constructively own 10% of the Company. However, if their constructive ownership of the Company were to exceed 10% in the future, or if interests in these tenants are otherwise treated as constructively owned by us, the rental income from the tenants controlled by Mr. Gubin and Mr. Blisko would not be qualifying income for REIT qualification purpose, which would cause us to fail to satisfy the REIT gross income tests and could cause us to fail to qualify as a REIT or be subject to a substantial penalty tax. The Company intends to closely monitor their ownership of the Company to avoid this issue.

 

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We must distribute earnings and profits in our first taxable year as a REIT that were attributable to any period before we were a REIT.

 

We were taxable as a C corporation prior to 2022, and have taxable income and accumulated earnings and profits for the period from June 8, 2021, to December 31, 2021. We made a distribution of such accumulated earnings and profits attributable to this period during the tax year beginning on January 1, 2022

 

We may potentially have additional tax exposure from built-in gains from the disposal of assets that we held at the time that we became a REIT.

 

We elected to be taxed as a REIT for the tax year beginning on January 1, 2022. Notwithstanding our qualification and taxation as a REIT, we may still be subject to corporate taxation in particular circumstances. If we recognize gain on the disposition of any REIT asset that is held by us on the date that we become a REIT (i.e., January 1, 2022) during a specified period (generally five years) thereafter, then we will generally pay tax at the highest regular corporate tax rate, currently 21%, on the lesser of (a) the excess, if any, of the asset’s fair market value over our basis in the asset, each determined on January 1, 2022, or (b) our gain recognized in the disposition. Accordingly, any taxable disposition during the specified period of a REIT asset we held on January 1, 2022 could be subject to this built-in gains tax.

 

If any of the Promissory Notes or other Obligations we hold do not meet the straight debt safe harbor under Code Section 856(m) and cause the Company to not satisfy the 10% value test, then the Company will not satisfy the REIT asset tests and our REIT qualification could be threatened.

 

To qualify as a REIT, we must satisfy certain asset tests at the end of each quarter of each taxable year, including that we may not own more than 10% of the value of any one issuer’s outstanding securities. Most promissory notes and debt obligations are treated as securities for purposes of this test. Promissory notes and debt obligations secured by real estate, issued by individuals, estates or REITs or which meet the straight debt safe harbor in Code Section 856(m) are not counted for purposes of this test. We hold various unsecured promissory notes and other obligations issued by entities that have arisen in the course of our business. The IRS has issued very limited guidance to date regarding qualification under the straight debt safe harbor. As a result, it is possible that the IRS may take the position that one or more of the promissory notes or obligations we own do not meet the straight debt safe harbor. If any of these unsecured promissory notes or other obligations do not meet the straight debt safe harbor or another exemption and constitute more than 10% of the value of any one issuer’s outstanding securities, then we will not meet the REIT asset tests if held at the end of any calendar quarter.

 

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In the event that we violate the 10% value test described above at the end of any calendar quarter, we will not lose our REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of our assets or $10 million) and (ii) we dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure. In the event of a more than de minimis failure of the 10% value test, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT qualification if we (i) dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure, (ii) file a schedule with the IRS describing the assets that caused such failure in accordance with regulations promulgated by the Secretary of the U.S. Treasury and (iii) pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which we failed to satisfy this asset test. It is not possible to state whether we would be entitled to the benefit of these relief provisions with regard any promissory notes or obligations we hold or may hold or in any other circumstances. If these relief provisions are inapplicable to the holding of a promissory note or obligation that violates the 10% value test, we will not qualify as a REIT.

 

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

 

Dividends payable by non-REIT corporations to non-REIT stockholders that are individuals, trusts and estates are generally taxed at reduced tax rates. Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including shares of our common stock. However, dividends received from a REIT by certain noncorporate taxpayers, including individuals, may qualify for a deduction of up to 20% for REIT ordinary dividends under Section 199A of the Code for taxable years prior to 2026.

 

Qualifying as a REIT involves highly technical and complex provisions of the Code.

 

Qualifying as a REIT involves the application of highly technical and complex provisions of the Code for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully monitored on a continuing basis, and there can be no assurance that our personnel responsible for doing so will be able to successfully monitor our compliance. In addition, our ability to satisfy the requirements to qualify to be taxed as a REIT may depend, in part, on the actions of third parties over which we have either no control or only limited influence.

 

The prohibited transactions tax may limit our ability to dispose of our properties.

 

A REIT’s net income from prohibited transactions is subject to a tax of 100%. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through a TRS, which would be subject to federal and state income taxation.

 

If our Operating Partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

 

We believe that our Operating Partnership will be treated as a partnership for federal income tax purposes. As a partnership, our Operating Partnership generally will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. For example, the IRS could attempt to classify the Operating Partnership as a publicly traded partnership for U.S. income tax purposes if the IRS does not agree that the Operating Partnership qualifies for the private placement exclusion. See “Material U.S. Federal Income Tax Consequences — Other Tax Consequences — Tax Aspects of Our Investments in Our Operating Partnership and Subsidiary Partnerships - Classification as Partnerships”.

 

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Furthermore, if the IRS were successful in treating our Operating Partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we may fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we could cease to qualify as a REIT. Also, the failure of our Operating Partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would significantly reduce the amount of cash available for debt service and for distribution to its partners, including us.

 

Legislative, administrative, regulatory or other actions affecting REITs, including positions taken by the IRS, could have an adverse impact on our investors or us.

 

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 (the “Treasury”). Changes to the tax laws, such as the tax law informally known as the Tax Cuts and Jobs Act enacted on December 22, 2017 (“TCJA”) or the PATH Act enacted on December 18, 2015, or interpretations thereof by the IRS and the Treasury, with or without retroactive application, could materially and adversely affect our investors or the Company. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify to be taxed as a REIT and/or the U.S. federal income tax consequences to our investors and the Company of such qualification.

 

REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

 

In order for us to qualify to be taxed as a REIT, and assuming that certain other requirements are also satisfied, we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders each year, so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT, but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% non-deductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal income tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements.

 

Under some circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying dividends to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year (“deficiency dividends”). Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends. We will, however, be required to pay interest based upon the amount of any deduction taken for deficiency dividends.

 

The IRS has also issued Revenue Procedure 2017-45, authorizing elective stock dividends to be made by public REITs. Pursuant to this revenue procedure, effective for distributions declared on or after August 11, 2017, the IRS will treat the distribution of stock pursuant to an elective stock dividend as a distribution of property under Section 301 of the Code (i.e., as a dividend to the extent of our earnings and profits), as long as at least 20% of the total dividend is available in cash and certain other requirements outlined in the revenue procedure are met. In the case of a taxable stock dividend, stockholders may be required to include the dividend as income and would be required to satisfy the potential tax liability associated with the distribution with cash from other sources.

 

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From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, or make taxable distributions of our capital stock or debt securities to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Further, amounts distributed will not be available to fund investment activities. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our shares. Any restrictions on our ability to incur additional indebtedness or make certain distributions could preclude us from meeting the 90% distribution requirement. Decreases in FFO due to unfinanced expenditures for acquisitions of properties or increases in the number of shares outstanding without commensurate increases in FFO each would adversely affect our ability to maintain distributions to our stockholders. Consequently, there can be no assurance that we will be able to make distributions at the anticipated distribution rate or any other rate. Please refer to “Distribution Policy.”

 

Complying with REIT requirements may cause us to forego otherwise attractive acquisition opportunities or liquidate otherwise attractive investments.

 

To qualify to be taxed as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consist of cash, cash items, government securities and “real estate assets” (as defined in the Code), including certain mortgage loans and securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer.

 

Additionally, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. Please refer to “Material U.S. Federal Income Tax Considerations.” If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

In addition to the asset tests set forth above, to qualify to be taxed as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our shares. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

 

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

 

The REIT provisions of the Code substantial