UNITED STATES
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Washington, D.C. 20549
FORM
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STRAWBERRY FIELDS REIT, INC.
FORM 10-Q
September 30, 2024
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in $000’s, except share data)
| September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Real estate investments, net | $ | $ | ||||||
| Cash and cash equivalents | ||||||||
| Restricted cash and equivalents | ||||||||
| Straight-line rent receivable, net | ||||||||
| Right of use lease asset | ||||||||
| Goodwill, other intangible assets and lease rights | ||||||||
| Deferred financing expenses | ||||||||
| Notes receivable, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Bonds, net | ||||||||
| Notes payable and other debt | ||||||||
| Operating lease liability | ||||||||
| Other liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Equity | ||||||||
| Common stock, $ par value, shares authorized, shares and issued and outstanding | $ | $ | ||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Retained earnings | ||||||||
| Total Stockholders’ Equity | $ | $ | ||||||
| Non-controlling interest | $ | $ | ||||||
| Total Equity | $ | $ | ||||||
| Total Liabilities and Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(Amounts in $000’s, except share and per share data)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | ||||||||||||||||
| Rental revenues | $ | $ | $ | $ | ||||||||||||
| Expenses: | ||||||||||||||||
| Depreciation | $ | $ | $ | $ | ||||||||||||
| Amortization | ||||||||||||||||
| Loss on real estate investment impairment | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Property taxes | ||||||||||||||||
| Facility rent expenses | ||||||||||||||||
| Total expenses | $ | $ | $ | $ | ||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Mortgage insurance premium | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total interest expense | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other (loss) Income: | ||||||||||||||||
| Other expense | ( | ) | ||||||||||||||
| Foreign currency transaction gain | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less - | ||||||||||||||||
| Net income attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income attributable to common stockholders | ||||||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Gain (loss) due to foreign currency translation | ( | ) | ||||||||||||||
| Reclassification of foreign currency transaction gain | ( | ) | ( | ) | ||||||||||||
| Comprehensive (income) loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
| Net income attributable to common stockholders | $ | $ | ||||||||||||||
| Basic and diluted income per common share | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 4 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in $000’s)
| Number of common shares | Additional Paid-in Capital | Accumulated other comprehensive income | Retained Earnings | Non- controlling interest | Total | |||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, March 31, 2023 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, June 30, 2023 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common shares in exchange for OP units (unaudited) | ||||||||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, September 30, 2023 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Number of common shares | Additional Paid-in Capital | Accumulated other comprehensive income | Retained Earnings | Non- controlling interest | Total | |||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Common Stock Retirement (unaudited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, March 31, 2024 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Common Stock Retirement (unaudited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| OP Units Converted to Common Stock (unaudited) | ||||||||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | |||||||||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, June 30, 2024 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Comon Stock Retirement (unaudited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| OP Units Converted to Common Stock (unaudited) | ||||||||||||||||||||||||
| Common Stock Issued for Property Acquisition (unaudited) | ||||||||||||||||||||||||
| ATM Stock Sales (unaudited) | ||||||||||||||||||||||||
| Dividends (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Non-controlling interest distributions (unaudited) | - | ( | ) | ( | ) | |||||||||||||||||||
| Net change in foreign currency translation (unaudited) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net income (unaudited) | - | |||||||||||||||||||||||
| Balance, September 30, 2024 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 5 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in $000’s)
Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of bond issuance costs | ||||||||
| Loss on real estate investment impairment | ||||||||
| Amortization of deferred financing costs | ||||||||
| Increase in other assets | ( | ) | ( | ) | ||||
| Amortization of right of use asset | ||||||||
| Foreign currency transaction gain | ( | ) | ||||||
| Foreign currency translation adjustment | ||||||||
| Increase in straight-line rent receivables, net | ( | ) | ( | ) | ||||
| (Decrease) increase in accounts payable and accrued liabilities and other liabilities | ( | ) | ||||||
| Repayment of operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | $ | $ | ||||||
| Cash flow from investing activities: | ||||||||
| Purchase of real estate investments | $ | ( | ) | $ | ( | ) | ||
| Purchase of lease rights | ( | ) | ||||||
| Increase in notes receivable | ( | ) | ||||||
| Principal payments of notes receivable | ||||||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows from financing activities: | ||||||||
| Deferred financing cost | $ | $ | ( | ) | ||||
| Proceeds from notes payable and other debt, net | ||||||||
| Proceeds from issuance of bonds, net | ||||||||
| Proceeds from ATM Stock Sales, net | ||||||||
| Repayment of bonds | ( | ) | ( | ) | ||||
| Repayment of notes payable and other debt | ( | ) | ( | ) | ||||
| Repayment of non-controlling interest redemption liability | ( | ) | ||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Non-controlling interest distributions | ( | ) | ( | ) | ||||
| Common Stock Retirement | ( | ) | ||||||
| Net cash provided by financing activities | $ | $ | ||||||
| Increase (decrease) in cash and cash equivalents and restricted cash and equivalents | $ | $ | ( | ) | ||||
| Cash and cash equivalents and restricted cash and equivalents at the beginning of the period | $ | $ | ||||||
| Cash and cash equivalents and restricted cash and equivalents at the end of the period | $ | $ | ||||||
| 6 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Amounts in $000’s)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Supplemental schedule of noncash activities: | ||||||||
| Accumulated other comprehensive income: | ||||||||
| Foreign currency translation adjustments | $ | $ | ||||||
| Right of use lease asset obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Right of use lease asset and lease liability terminated | $ | $ | ||||||
| Common shares issued for property acquisition | $ | $ | ||||||
| Assumption of notes payable and other debt for property acquisition | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
| 7 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Business
Overview
The Company
STRAWBERRY
FIELDS REIT, Inc. (the “Company”) is a Maryland corporation formed in July 2019. The Company commenced operations on June
8, 2021. The Company conducts its business through a traditional UPREIT structure in which substantially all of its assets are owned
by subsidiaries of Strawberry Fields Realty, LP, a Delaware limited partnership formed in July 2019 (the “Operating Partnership”).
The Company is the general partner of the Operating Partnership. The Company owns approximately
As the sole general partner of the Operating Partnership, the Company has the exclusive power under the partnership agreement to manage and conduct the business affairs of the Operating Partnership, subject to certain limited approval and voting rights of the limited partners. The Company may cause the Operating Partnership to issue additional OP units in connection with property acquisitions, compensation or otherwise. The Company became a publicly traded entity on September 21, 2022.
The Company is engaged in the ownership, acquisition, financing and triple-net leasing of skilled nursing facilities and other post-acute healthcare properties. The Company’s portfolio consists of 104 healthcare properties with an aggregate of 12,889 licensed beds. The Company holds fee title to 103 of these properties and holds 1 property under a long-term lease. These properties are located in Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas. The Company generates substantially all of its revenues by leasing its 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. Each healthcare facility located at its properties is managed by a qualified operator with an experienced management team.
Interim Condensed Consolidated Financial Statements
The accompanying unaudited, condensed consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s condensed consolidated financial position as of September 30, 2024, and the condensed consolidated results of operations and cash flows for the periods presented. The condensed consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2024.
Variable Interest Entity
The Company consolidates the Operating Partnership, a variable interest entity (“VIE”) in which the Company is considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
Non-Controlling Interest
A
non-controlling interest is defined as the portion of the equity in an entity not attributable, directly or indirectly, to the primary
beneficiary. Non-controlling interests are required to be presented as a separate component of equity on a condensed consolidated balance
sheets. Accordingly, the presentation of net income is modified to present the income attributed to controlling and non-controlling interests.
The non-controlling interest on the Company’s condensed consolidated balance sheets represents OP units not held by the Company
and represents approximately
Basis of Presentation
The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
| 8 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies
Use of Estimates
Management is required to make estimates and assumptions in the preparation of the condensed consolidated financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from management’s estimates.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and the Operating Partnership and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short-term investments with original maturities of three months or less when purchased.
The
Company’s cash, cash equivalents and restricted cash and cash equivalents periodically exceed federally insurable limits. The Company
monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could
be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date,
the Company has experienced no loss or lack of access to the cash in its operating accounts. On September 30, 2024 and December 31, 2023,
the Company had $
Restricted Cash and Cash Equivalents
Restricted cash primarily consists of amounts held by mortgage lenders to provide for real estate tax expenditures, tenant improvements, capital expenditures and security deposits, as well as escrow accounts related to principal and interest payments on Bonds.
Real Estate Depreciation
Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated over the expected life of the asset on a straight-line basis. The Company considers the period of future benefit of an asset to determine its appropriate useful life. The Company does not incur expenditures for tenant improvements as they are the responsibility of the tenant per their respective leases. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
| Building and improvements | ||
| Equipment and personal property |
| 9 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Real Estate Valuation
In determining fair value and the allocation of the purchase price of acquisitions, the Company uses current appraisals or third-party valuations services. The most significant components of these allocations are typically the allocation of fair value to land and buildings and, for certain of its acquisitions, in place leases and other intangible assets. In the case of the fair value of buildings and the allocation of value to land and other intangibles, the estimates of the values of these components will affect the amount of depreciation and amortization the Company records over the estimated useful life of the property acquired or the remaining lease term. In the case of the value of in place leases, the Company makes best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease up periods, market conditions and costs to execute similar leases. These assumptions affect the amount of future revenue that the Company will recognize over the remaining lease term for the acquired in place leases.
The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. Transaction costs related to acquisitions that are not deemed to be businesses are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be businesses are expensed as incurred. All of the Company’s acquisitions of investment properties qualified as asset acquisitions during the periods ended September 30, 2024 and 2023.
Revenue Recognition
Rental income from operating leases is generally recognized on a straight-line basis over the terms of the leases. Substantially all of the Company’s leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of three methods depending on specific provisions of each lease as follows:
| (i) | a
specified annual increase over the prior year’s rent, generally between | |
| (ii) | a calculation based on the Consumer Price Index; or | |
| (iii) | specific dollar increases. |
Contingent revenue is not recognized until all possible contingencies have been eliminated. The Company considers the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. The Company follows a policy related to rental income whereby the Company considers a lease to be non-performing after 60 days of non-payment of past due amounts and does not recognize unpaid rental income from that lease until the amounts have been received.
Rental revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis. Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset included in our accompanying condensed consolidated balance sheets. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the straight-line rent receivable asset decreasing to zero over the remainder of the lease term. The Company assesses the collectability of straight-line rent in accordance with the applicable accounting standards and reserve policy. If the lessee becomes delinquent in rent owed under the terms of the lease, the Company may provide a reserve against the recognized straight-line rent receivable asset for a portion, up to its full value, that the Company estimates may not be recoverable.
| 10 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Revenue Recognition (Cont.)
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market leases are accreted to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
The Company reports revenues and expenses within our triple-net leased properties for real estate taxes that are escrowed and obligations of the tenants in accordance with their respective lease with us.
Gain from sale of real estate investments is recognized when control of the property is transferred and it is probable that substantially all consideration will be collected.
Allowance for Doubtful Accounts
The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA (defined as earnings before interest, tax, depreciation and amortization), along with other liquidity measures. The Company evaluates, on a monthly basis or immediately upon a significant change in circumstance, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company.
The Company maintains an allowance for doubtful accounts for straight-line rent receivables resulting from tenants’ inability to make contractual rent and tenant recovery payments or lease defaults. For straight-line rent receivables, the Company’s assessment is based on amounts estimated to be recoverable over the lease term.
Impairment of Long-Lived Assets and Goodwill
The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected future undiscounted cash flows to the carrying value of the real estate assets. The expected future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If the carrying value exceeds the expected future undiscounted cash flows, an impairment loss will be recognized to the extent that the carrying value of the real estate assets is greater than their fair value.
Goodwill is tested for impairment at least annually based on certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. Potential impairment indicators include a significant decline in real estate values, significant restructuring plans, current macroeconomic conditions, state of the equity and capital markets or a significant decline in the Company’s market capitalization. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company applies the required two-step quantitative approach. The quantitative procedures of the two-step approach (i) compare the fair value of a reporting unit with its carrying value, including goodwill, and, if necessary, (ii) compare the implied fair value of reporting unit goodwill with the carrying value as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the fair value of assets and liabilities, excluding goodwill, is the implied value of goodwill and is used to determine the impairment amount, if any. The Company has selected the fourth quarter of each fiscal year to perform its annual impairment test.
| 11 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and cash equivalents, notes receivable and operating leases on owned properties. These financial instruments are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. Cash and cash equivalents, restricted cash and equivalents are held with various financial institutions. From time to time, these balances exceed the federally insured limits. These balances are maintained with high quality financial institutions which management believes limits the risk.
With respect to notes receivable, the Company obtains various collateral and other protective rights, and continually monitors these rights, in order to reduce such possibilities of loss. In addition, the Company provides reserves for potential losses based upon management’s periodic review of our portfolio.
On
September 30, 2024, the Company held four notes receivable with an outstanding balance of $
Market Concentration Risk
Debt and Capital Raising Issuance Costs
Costs incurred in connection with the issuance of equity interests are recorded as a reduction of additional paid-in capital. Debt issuance costs related to debt instruments, excluding line of credit arrangements, are deferred, recorded as a reduction of the related debt liability, and amortized to interest expense over the remaining term of the related debt liability utilizing the interest method. Deferred financing costs related to line of credit arrangements are deferred, recorded as an asset and amortized to interest expense over the remaining term of the related line of credit arrangement utilizing the interest method.
Penalties incurred to extinguish debt and any remaining unamortized debt issuance costs, discounts and premiums are recognized as income or expense in the condensed consolidated statements of income at the time of extinguishment.
Segment Reporting
Accounting guidance regarding disclosures about segments of an enterprise and related information establishes standards for the manner in which public business enterprises report information about operating segments. The Company’s investment decisions in health care properties, and resulting investments are managed as a single operating segment for internal reporting and for internal decision-making purposes. Therefore, the Company has concluded that it operates as a single segment.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
The Company calculates basic income per common share by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. At September 30, 2024 and 2023, there were and OP units outstanding which were potentially dilutive securities. During the nine month periods ended September 30, 2024 and 2023, the assumed conversion of the OP units had no impact on basic income per share.
Foreign Currency Translation and Transactions
Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during the related period. Gains or losses resulting from translation are included in accumulated other comprehensive income, a component of equity on the condensed consolidated balance sheets.
Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates of the transactions. The effects of transaction gains or losses, if any, are included in other income (loss), in the condensed consolidated statements of income.
Fair Value Measurement
The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
● Level 1—quoted prices for identical instruments in active markets;
● Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
● Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1. In instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies the asset or liability in Level 2. If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow valuation models.
| 13 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Summary of Significant Accounting Policies (Cont.)
Real Estate Investments – Held for Sale
On September 30, 2024 and December 31, 2023, the Company had one property included in real estate investments which was held for sale and carried at the lower of its net book value or fair value on a non-recurring basis on the condensed consolidated balance sheets. The Company’s real estate investments held for sale were classified as Level 3 of the fair value hierarchy.
Stock-Based Compensation
The Company accounts for share-based payment awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the condensed consolidated financial statements. ASC 718 requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions. The Company recognizes share-based payments over the vesting period.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The main provisions are:
1. Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”).
2. Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.
3. Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.
4. Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit
5. Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
6. Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this Update and all existing segment disclosures in Topic 280.
This update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
This adoption is not expected to have a significant impact on our condensed consolidated financial statements.
In 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022- 12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12- month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in ASU 2022-06 issued in December 2022, defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements.
| 14 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. Restricted Cash and Equivalents
The following table presents the Company’s restricted cash and equivalents and escrow deposits:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (amounts in $000’s) | ||||||||
| MIP escrow accounts | $ | $ | ||||||
| Other escrow and debt deposits | ||||||||
| Property tax and insurance escrow | ||||||||
| Interest and expense reserve bonds escrow | ||||||||
| HUD replacement reserves | ||||||||
| Total restricted cash and equivalents | $ | $ | ||||||
MIP escrow accounts - The Company is required to make monthly escrow deposits for mortgage insurance premiums on the HUD guaranteed mortgage loans.
Other escrow and debt deposits – The Company funds various escrow accounts under certain of its loan agreements, primarily to cover debt service on underlying loans.
Property tax and insurance escrow - The Company funds escrows for real estate taxes and insurance under certain of its loan agreements.
Interest and expense reserve bonds escrow - The indentures for the Series A, C and D Bonds require the funding of a six-month interest reserve as well as an expense reserve. See Note 7 - Notes Payable and Other Debt.
HUD replacement reserves - The Company is required to make monthly payments into an escrow for replacement and improvement of the project assets covered by HUD guaranteed mortgage loans. A portion of the replacement reserves are required to be maintained until the applicable loan is fully paid.
NOTE 4. Real Estate Investments, net
Real estate investments consist of the following:
Estimated Useful Lives | September 30, 2024 | December 31, 2023 | ||||||||
| (Years) | (Amounts in $000’s) | |||||||||
| Buildings and improvements | $ | $ | ||||||||
| Equipment and personal property | ||||||||||
| Land | - | |||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Real estate investments, net | $ | $ | ||||||||
For
the three-month periods ended September 30, 2024 and 2023, total depreciation expense was $
| 15 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. Real Estate Investments, net (Cont.)
Acquisition of Properties
On
August 30, 2024 the Company completed the acquisition of two skilled nursing facilities with 254 licensed beds near San Antonio, TX.
The acquisition was for $
On
August 30, 2024 the Company exercised its purchase option for two skilled nursing facilities with 248 licensed beds near Johnson City,
TN. The acquisition was for $
On
September 25, 2024 the Company completed the acquisition for a property comprised of an 83-bed skilled nursing facility and 25 bed
assisted living facility near Nashville, Tennessee. The acquisition was for $
| 16 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. Intangible Assets and Goodwill
Intangible assets consist of the following goodwill, Certificate of Need (“CON”) licenses and lease rights:
Goodwill including CON Licenses | Lease Rights | Total | ||||||||||
| (Amounts in $000’s) | ||||||||||||
| Balances, December 31, 2022 | ||||||||||||
| Gross | $ | $ | $ | |||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Net carrying amount | ||||||||||||
| Amortization | ( | ) | ( | ) | ||||||||
| Balances, September 30, 2023 | ||||||||||||
| Gross | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Net carrying amount | $ | $ | $ | |||||||||
| Balances, December 31, 2023 | ||||||||||||
| Gross | $ | $ | $ | |||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Net carrying amount | ||||||||||||
| Acquisition of lease rights | ||||||||||||
| Amortization | ( | ) | ( | ) | ||||||||
| Balances, September 30, 2024 | ||||||||||||
| Gross | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Net carrying amount | $ | $ | $ | |||||||||
Estimated amortization expense for all lease rights for each of the future years ending December 31, is as follows:
Amortization of Lease Rights |
||||
(Amounts in $000’s) |
||||
| 2024 (three months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 17 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Leases
As
of September 30, 2024, and December 31, 2023, the Company had leased
The following table provides additional information regarding the properties owned/leased by the Company for the periods indicated:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Cumulative number of facilities (properties) | ) | ) | ||||||
| Cumulative number of licensed beds | ||||||||
The following table provides additional information regarding the facilities leased by the Company as of September 30, 2024:
| State | Number of Operational Beds/Units | Owned by Company | Leased by Company | Total | ||||||||||||
| Arkansas | ||||||||||||||||
| Illinois | ||||||||||||||||
| Indiana | ||||||||||||||||
| Kentucky | ||||||||||||||||
| Michigan | ||||||||||||||||
| Ohio | ||||||||||||||||
| Oklahoma | ||||||||||||||||
| Tennessee | ||||||||||||||||
| Texas | ||||||||||||||||
| Total Facilities | ||||||||||||||||
| Facility Type | ||||||||||||||||
| Skilled Nursing Facilities | ||||||||||||||||
| Long-Term Acute Care Hospitals | ||||||||||||||||
| Assisted Living Facility | ||||||||||||||||
| Total facilities | ||||||||||||||||
As of September 30, 2024, total future minimum rental revenues for the Company’s tenants are as follows:
| Year | Amount | |||
| (Amounts in $000s) | ||||
| 2024 (three month period) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 18 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Leases (Cont.)
The following table provides summary information regarding the number of operational beds associated with a property leased by the Company and subleased to third-party operators:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Number of facilities leased and subleased to third parties | ||||||||
| Number of operational beds | ||||||||
Right of use assets and operating lease liabilities are disclosed as separate line items in the condensed consolidated balance sheets and are valued based on the present value of the future minimum lease payments at the lease commencement. As the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense is recognized on a straight-line basis over the lease term. The Company’s operating lease obligation is for one skilled nursing facility in Indiana. The Indiana lease has an initial term that expires on March 1, 2028, and has two five-year renewal options. The lease is a triple net lease, which requires the Company to pay real and personal property taxes, insurance expenses and all capital improvements. The Company subleases the building as part of the Indiana master lease. Based on the sublease with the Company’s tenant, the tenant is required to pay real and personal property taxes, insurance expenses and all capital improvements. The Company leased two other facilities in Tennessee starting in January 2024. However, The Company acquired these facilities on August 31, 2024 and the Tennessee facilities are now fully owned by The Company.
The components of lease expense and other lease information are as follows (dollars in thousands):
Nine Month Period ended September 30, | Three Month Period ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost | $ | |||||||||||||||
September30, 2024 | December 31, 2023 | |||||||
| Operating lease right of use asset | $ | $ | ||||||
| Operating lease liability | $ | $ | ||||||
| Weighted average remaining lease term-operating leases (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
Future minimum operating lease payments under non-cancellable leases as of September 30, 2024, reconciled to the Company’s operating lease liability presented on the condensed consolidated balance sheets are:
(Amounts in $’000s) | ||||
| 2024 (three month period) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
| Less Interest | ( | ) | ||
| Total operating lease liability | $ | |||
Other Properties leased by the Company
The
Company, through one of its subsidiaries, leases its office spaces from a related party. Rental expense under the leases for the nine-month
periods ended September 30, 2024 and 2023, was $
| 19 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt
Bonds, Notes Payable and Other Debt consist of the following:
| Weighted Interest Rate at September 30, | September 30, | December 31, | ||||||||||
| 2024 | 2024 | 2023 | ||||||||||
| (Amounts in $’000s) | ||||||||||||
| HUD guaranteed loans | % | $ | $ | |||||||||
| Bank loans | % | |||||||||||
| Series A, C and D Bonds | % | |||||||||||
| Gross Bonds, Notes Payable and other Debt | $ | $ | ||||||||||
| Debt issuance costs | ( | ) | ( | ) | ||||||||
| Net Bonds, Notes Payable and other Debt | $ | $ | ||||||||||
Principal payments on the Bonds, Notes Payable and Other Debt payable through maturity are as follows (amounts in $’000s):
| Year Ending December 31, | Amount | |||
| 2024 (three-month period) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
Debt Covenant Compliance
As
of September 30, 2024 and December 31, 2023, the Company was party to approximately
Commercial Bank Mortgage Loan Facility
On
March 21, 2022, the Company obtained a mortgage loan facility with a commercial bank pursuant to which the Company borrowed approximately
$
On
August 25, 2023, the Company closed a mortgage loan facility with a commercial bank pursuant to which the Company borrowed
approximately $
| 20 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Commercial Bank Mortgage Loan Facility (Cont.)
Both
credit facilities financial covenants consist of
Mortgage Loans Guaranteed by HUD
As
of September 30, 2024 and December 31, 2023, the Company had HUD guaranteed mortgage loans from financial institutions of approximately
$
Series A Bonds
In
November 2015, the Company, through a subsidiary, issued Series A Bonds in the face amount of NIS
Series A Bonds
In
August 2024, Strawberry Fields, Inc completed, directly, an initial offering on the Tel Aviv Stock Exchange (“TASE”) of Series A Bonds
with a par value of NIS
Exchange of Series D Bonds for Series A Bonds
In
September 2024 the Company made an exchange tender offer of outstanding Series D Bonds for Series A Bonds. The interest rate
on Series D Bonds is
As
of September 30, 2024 the outstanding balance of the Series A Bonds were $
Interest
The
Series A Bonds have an interest rate of
Interest on the Series A Bonds is payable semi-annually in arrears on March 31 and September 30 of each year. The interest rate may increase if certain financial ratios are not achieved, as discussed below.
Payment Terms
The
principal amount of the Series A Bonds is payable in three annual installments due on September 30 of each of the years 2024 through
2026. The first two principal payments are equal to
Financial Covenants
Until the date of full repayment of the Series A Bonds, the Company must comply with certain financial covenants described below. The application of the covenants is based on the financial statements of the Company as prepared under the GAAP accounting method. The financial covenants are as follows:
●
On the last day of each calendar quarter, the consolidated equity of the Company (excluding minority rights), as set forth in the Company’s
financial statements, will not be less than USD
● On the last day of each calendar quarter, the ratio between the Financial Debt and EBITDA shall not exceed 10
● The DSCR shall not be less than 1.05
| 21 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Dividend Restrictions
As long as the Company does not breach any of the Financial Covenants, no distribution restriction shall hinder the Company. If the Company is in non-compliance one or more of the Financial Covenants, the Company can make a distribution in an amount that does not exceed the amount required to meet the U.S. legal requirements applicable to REITs.
Increase in Interest Rate
In the event that
| ● | The Company’s bond rating ilA+ or equivalent is lowered | |
| ● | The EBITDA ratio exceeds 8 | |
| ● | EBITDA to total debt service payments fall below 1.10 | |
| ● | Consolidated
Equity is less than USD $ |
An
additional rate of
Security
The Company has committed not to pledge its assets under general liens without obtaining the consent in advance of the Bond holders. Nevertheless, The Company is entitled to register specific liens on its properties and also to provide guarantees; and its subsidiaries are entitled to register liens, including general and specific, on their assets.
Additional Bonds
The
British Virgin Islands Company, (BVI Company) can issue additional Series A Bonds at any time not to exceed a maximum outstanding of NIS
Redemption Provisions
The Company may, at its discretion, call the Series A Bonds for early repayment. In the event of the redemption of all of the Series A Bonds, the Company would be required to pay the highest of the following amounts:
| ● | the market value of the balance of the Series A Bonds in circulation which will be determined based on the average closing price of the Series A Bonds for thirty (30) trading days before the date on which the board of directors resolves to undertake the early redemption; |
| ● | the par value of the Series A Bonds available for early redemption in circulation (i.e., the principal balance of the Series A Bonds plus accrued interest until the date of the actual early redemption); or |
| ● | the
balance of the payments under the Series A Bonds (consisting of future payments of principal and interest), when discounted to their
present value based on the annual yield of the Israeli government bonds plus an “additional rate” of |
Change of Control
The holders of a majority of the Series A Bonds may accelerate the outstanding balance of the Bonds if the control of the Company is transferred, directly or indirectly, unless the transfer of control is approved by the holders of a majority of the Series A Bonds.
For purposes of the Series A Bonds, the “controlling stockholders” of the Company are deemed to be Moishe Gubin and Michael Blisko.
For the purpose of this provision, a transfer of control means a change of control of the Company such that the Company has a controlling stockholder that is not any of the “controlling stockholders” and/or is in the hands of any of their immediate family members (including through trusts that the controlling stockholders and/or any of their immediate family members are the beneficiaries under and/or are their managers). In this regard, “control” is defined in the Israeli Companies Law
Series C Bonds
In
July 2021, the Strawberry Fields REIT, LTD (“BVI Company”), a wholly owned subsidiary of the Company, completed an
initial offering on the Tel Aviv Stock Exchange (“TASE”) of Series C Bonds with a par value of NIS
| 22 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Series C Bonds (Cont.)
Interest
The
Series C Bonds initially bore interest at a rate of
Interest on the Series C Bonds is payable semi-annually in arrears on July 31 and January 31 of each year. The interest rate may increase if certain financial ratios are not achieved, as discussed below.
Payment Terms
The
principal amount of the Series C Bonds is payable in five annual installments due on July 31 of each of the years 2022 through 2026.
The first four principal payments are equal to
Financial Covenants
Until the date of full repayment of the Series C Bonds, the BVI Company must comply with certain financial covenants described below. The application of the covenants is based on the financial statements of the BVI Company as prepared under the IFRS accounting method. The financial covenants are as follows:
●
The stockholders’ equity of the BVI Company may not be less than $
●
The ratio of the condensed consolidated stockholders’ equity of the BVI Company to its total condensed consolidated balance sheet
may not be less than
● The ratio of the adjusted net financial debt to adjusted EBITDA of the BVI Company (for the past four quarters) may not exceed 12.
●
The ratio of the outstanding amount of the Series C Bonds to the fair market value of the collateral may not exceed
| 23 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Series C Bonds (Cont.)
Dividend Restrictions
The indenture for the Series C Bonds limits the amount of dividends that may be paid by the BVI Company to the Operating Partnership. The BVI Company may not make any distribution unless all of the following conditions are fulfilled (with all amounts calculated under IFRS):
●
The distribution amount may not exceed
●
The ratio of the consolidated stockholders’ equity of the BVI Company to its total consolidated balance sheet may not be less than
● The distributable profits for which no distribution was performed in a specific year will be added to the following quarters.
●
The BVI Company’s equity at the end of the last quarter, before the distribution of dividends, less the dividends distributed,
may not be less than $
As of September 30, 2024, the BVI Company met these financial conditions, and the BVI Company was not in violation of any of its material undertakings to the holders of the Series C Bonds.
Increase in Interest Rate
In the event that:
(i)
the stockholders’ equity of the BVI Company (excluding minority interests) is less than $
(ii) the ratio of the adjusted net financial debt to adjusted EBITDA (for the latest four quarters) exceeds 11;
(iii)
the ratio of the consolidated equity of the BVI Company to total consolidated assets of the BVI Company is below
(iv)
the ratio of outstanding amount of the Series C Bonds to the fair market value of the collateral for the Series C Bonds exceeds
then,
in each case, the interest on the Series C Bonds will increase by an additional
Additionally,
if a decline in the rating of the Series C Bonds should take place, then for each single ratings decrease, the interest will be increased
by
In
any case, the total increase in the interest rate as a result of the above adjustments will not exceed
| 24 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Series C Bonds (Cont.)
Security
The Series C Bonds are secured by first mortgage liens on nine properties. In addition, the Series C Bonds are also secured by interest and expenses reserves. The BVI Company has agreed not to pledge its assets pursuant to a general lien without obtaining the prior consent of the holders of the Series C Bonds, provided that the BVI Company is entitled to register specific liens on its properties and also to provide guarantees and its subsidiaries are entitled to register general and specific liens on their assets.
Additional Bonds
The
BVI Company can issue additional Series C Bonds at any time not to exceed a maximum outstanding of NIS
Redemption Provisions
The BVI Company may, at its discretion, call the Series C Bonds for early repayment. In the event of the redemption of all of the Series C Bonds, the BVI Company would be required to pay the highest of the following amounts:
| ● | the market value of the balance of the Series C Bonds in circulation which will be determined based on the average closing price of the Series C Bonds for thirty (30) trading days before the date on which the board of directors resolves to undertake the early redemption; |
| ● | the par value of the Series C Bonds available for early redemption in circulation (i.e., the principal balance of the Series C Bonds plus accrued interest until the date of the actual early redemption); or |
| ● | the
balance of the payments under the Series C Bonds (consisting of future payments of principal and interest), when discounted to their
present value based on the annual yield of the Israeli government bonds plus an “additional rate.” The additional rate
will be |
Change of Control
The holders of a majority of the Series C Bonds may accelerate the outstanding balance of the Bonds if the control of the BVI Company is transferred, directly or indirectly, unless the transfer of control is approved by the holders of a majority of the Series C Bonds.
For purposes of the Series C Bonds, the “controlling stockholders” of the BVI Company are deemed to be Moishe Gubin and Michael Blisko.
| 25 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Change of Control (Cont.)
For the purpose of this provision, a transfer of control means a change of control of the BVI Company such that the BVI Company has a controlling stockholder that is not any of the “controlling stockholders” and/or is in the hands of any of their immediate family members (including through trusts that the controlling stockholders and/or any of their immediate family members are the beneficiaries under and/or are their managers). In this regard, “control” is defined in the Israeli Companies Law.
Series D Bonds
In
June 2023, the BVI Company completed an initial offering on the Tel Aviv Stock Exchange (“TASE”) of Series D Bonds with a
par value of NIS
Exchange of Series D Bonds for Series A Bonds
In
September 2024 the Company made an exchange tender offer of outstanding Series D Bonds for par value A
Bonds. The interest rate on Series A Bonds is
As
of September 30, 2024 and December 31, 2023, the outstanding balance of the Series D Bonds were $
Interest
The
Series D Bonds initially bore interest at a rate of
Interest on the Series D Bonds is payable semi-annually in arrears on March 31 and September 30 of each year. The interest rate may increase if certain financial ratios are not achieved, as discussed below.
Payment Terms
The
principal amount of the Series D Bonds is payable in three annual installments due on September 30 of each of the years 2024 through
2026. The first two principal payments are equal to
Financial Covenants
Until the date of full repayment of the Series D Bonds, the BVI Company must comply with certain financial covenants described below. The application of the covenants is based on the financial statements of the BVI Company as prepared under the IFRS accounting method. The financial covenants are as follows:
●
The stockholders’ equity of the BVI Company may not be less than $
●
The ratio of the condensed consolidated stockholders’ equity of the BVI Company to its total condensed consolidated balance sheet
may not be less than
● The ratio of the adjusted net financial debt to adjusted EBITDA of the BVI Company (for the past four quarters) may not exceed 12.
| 26 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Series D Bonds (Cont.)
Dividend Restrictions
The indenture for the Series D Bonds limits the amount of dividends that may be paid by the BVI Company to its stockholders. The BVI Company may not make any distribution unless all of the following conditions are fulfilled (with all amounts calculated under IFRS):
●
The distribution amount may not exceed
●
The ratio of the consolidated stockholders’ equity of the BVI Company to its total consolidated balance sheet may not be less than
● The distributable profits for which no distribution was performed in a specific year will be added to the following quarters.
●
The BVI Company’s equity at the end of the last quarter, before the distribution of dividends, less the dividends distributed,
may not be less than $
● The BVI Company meets the financial conditions described above, and the BVI Company is not in violation of all and/or any of its material undertakings to the holders of the Series D Bonds as of September 30, 2024.
Increase in Interest Rate
In the event that:
(i)
the stockholders’ equity of the BVI Company (excluding minority interests) is less than $
(ii) the ratio of the adjusted net financial debt to adjusted EBITDA (for the latest four quarters) exceeds 11;
(iii)
the ratio of the consolidated equity of the BVI Company to total consolidated assets of the BVI Company is below
then,
in each case, the interest on the Series D Bonds will increase by an additional
Additionally,
if a decline in the rating of the Series D Bonds should take place, then for each single ratings decrease, the interest will be increased
by
In
any case, the total increase in the interest rate as a result of the above adjustments will not exceed
| 27 |
STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Series D Bonds (Cont.)
Security
The BVI Company has committed not to pledge its assets under general liens without obtaining the consent in advance of the Bond holders. Nevertheless, the BVI Company is entitled to register specific liens on its properties and also to provide guarantees; and its subsidiaries are entitled to register liens, including general and specific, on their assets.
Additional Bonds
The
BVI Company can issue additional Series D Bonds at any time not to exceed a maximum outstanding of NIS
Redemption Provisions
The BVI Company may, at its discretion, call the Series D Bonds for early repayment. In the event of the redemption of all of the Series D Bonds, the BVI Company would be required to pay the highest of the following amounts:
| ● | the market value of the balance of the Series D Bonds in circulation which will be determined based on the average closing price of the Series D Bonds for thirty (30) trading days before the date on which the board of directors resolves to undertake the early redemption; |
| ● | the par value of the Series D Bonds available for early redemption in circulation (i.e., the principal balance of the Series D Bonds plus accrued interest until the date of the actual early redemption); or |
| ● | the
balance of the payments under the Series D Bonds (consisting of future payments of principal and interest), when discounted to their
present value based on the annual yield of the Israeli government bonds plus an “additional rate.” The additional rate
will be |
Change of Control
The holders of a majority of the Series D Bonds may accelerate the outstanding balance of the Bonds if the control of the BVI Company is transferred, directly or indirectly, unless the transfer of control is approved by the holders of a majority of the Series D Bonds.
For purposes of the Series D Bonds, the “controlling stockholders” of the BVI Company are deemed to be Moishe Gubin and Michael Blisko.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bonds, Notes Payable and Other Debt (Cont.)
Change of Control (Cont.)
For the purpose of this provision, a transfer of control means a change of control of the BVI Company such that the BVI Company has a controlling stockholder that is not any of the “controlling stockholders” and/or is in the hands of any of their immediate family members (including through trusts that the controlling stockholders and/or any of their immediate family members are the beneficiaries under and/or are their managers). In this regard, “control” is defined in the Israeli Companies Law.
NOTE 8. Commitments and Contingencies
Commitments
The Company guarantees from time-to-time obligations of its wholly-owned subsidiaries.
Contingencies
The Company’s operating results and financial condition are dependent on the ability of its tenants to meet their lease obligations to us.
We are not currently a party to any material legal proceedings, that are not covered by insurance and expected to be resolved within policy limits, other than the following:
In March 2020, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a complaint in the U.S. District Court for the Northern District of Illinois against Moishe Gubin, Michael Blisko, the Predecessor Company and 21 of its subsidiaries, as well as the operators of 17 of the facilities operated at our properties. The complaint was related to the Predecessor Company’s acquisition of 16 properties located in Arkansas and Kentucky that were completed between May 2018 and April 2019 and the attempt to purchase an additional five properties located in Massachusetts. The complaint was dismissed by the Court in 2020 on jurisdictional grounds. The plaintiffs did not file an appeal with respect to this action, and the time for an appeal has expired.
In August 2020, Joseph Schwartz, Rosie Schwartz and several companies controlled by them filed a second complaint in the Circuit Court in Pulaski County, Arkansas. The second complaint had nearly identical claims as the federal case, but was limited to matters related to the Predecessor Company’s acquisition of properties located in Arkansas. The sellers, which were affiliates of Skyline Health Care, had encountered financial difficulties and requested the Predecessor Company to acquire these properties. The defendants have filed an answer denying the plaintiffs’ claims and asserting counterclaims based on breach of contract. This case has been dismissed without prejudice
In January 2021, Joseph Schwartz, Rosie Schwartz and certain companies owned by them filed a third complaint in Illinois state court in Cook County, Illinois, which has nearly identical claims to the initial federal case but was limited to claims related to the Kentucky and Massachusetts properties. The complaint has not been properly served on any of the defendants, and, accordingly, the defendants did not respond to the complaint. On January 11, 2023, the Cook County Circuit Court granting a motion to quash service on all defendants. In March 2023, the plaintiffs filed a new complaint and again attempted to serve it on the defendants. It is the defendants’ position that service was (once again, potentially) defective and sought a dismissal of the matter for want of prosecution by Joseph Schwartz, Rosie Schwartz and certain companies owned by them. The dismissal was granted, but has been appealed to the Illinois Appellate Court, and now has been dismissed.
In April of 2024, Joseph Schwartz, Rosie Schwartz and several companies controlled by them filed a third complaint in the Circuit Court in Pulaski County, Arkansas. This third complaint had nearly identical claims as the federal case and the Illinois state court matter.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. Commitments and Contingencies (Cont.)
In each of these complaints, the plaintiffs asserted claims for fraud, breach of contract and rescission arising out of the defendants’ alleged failure to perform certain post-closing obligations under the purchase contracts. 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. We and the named defendants believe that the claims set forth in the complaints are without merit. The named defendants intend to vigorously defend the litigation and to assert counterclaims against the plaintiffs based on their failure to fulfill their obligations under the purchase contracts, interim management agreement, and operations transfer agreements. We believe this matter will be resolved without a material adverse effect to the Company.
As
noted above, the March 2020 and January 2021 and April 2024 complaints also related to the Predecessor Company’s planned acquisition
of five properties located in Massachusetts. A subsidiary of the Predecessor Company purchased loans related to these properties in 2018
for a price of $
The
Predecessor Company intends to institute legal proceedings to collect the outstanding amount of these loans and to assert related claims
against the sellers and their principals for the unpaid principal balances as well as protective advances and collection costs. In connection
with enforcing their rights, in July 2022, the Company foreclosed, and (as lender) sold four of the five properties at auction for the
total amount of $
Note 9. Equity Incentive Plan
The Company has adopted the 2021 Equity Incentive Plan (the “Plan”). The Plan permits the grant of both options qualifying under Section 422 of the Internal Revenue Code (“incentive stock options”) and options not so qualifying, and the grant of stock appreciation rights, stock awards, incentive awards, performance units, and other equity-based awards. A total of shares have been authorized to be granted under the Plan. On May 30, 2024, shareholders approved an amendment to increase the number of shares authorized to be granted under the plan to shares.
As of September 30, 2024, shares were available for grant. shares were issued during the nine month periods ended September 30, 2024 and 2023.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. Stockholders’ Equity and Distributions
The
Company elected and qualified to be treated as a REIT commencing with the taxable year ended December 31, 2022.
As of September 30, 2024, there were a total of shares of common stock issued and outstanding. The outstanding shares were held by a total of approximately 1,331 stockholders of record, including certain affiliates of the Company who held of these shares.
At
September 30, 2024, there were
The Company has reserved a total of shares of common stock that may be issued, at the Company’s option, upon redemption of the OP units outstanding as of September 30, 2024.
NOTE 11. Related Party Transactions and Economic Dependence
The following entities and individuals are considered to be Related Parties:
| Moishe Gubin | CEO & Chairman of the Board and a stockholder of the Company |
| Michael Blisko | Director and a stockholder of the Company |
Lease Agreements with Related Parties
As of September 30, 2024 and December 31, 2023, each of the Company’s facilities was leased and operated by separate tenants. Each tenant is an entity that leases the facility from one of the Company’s subsidiaries and operates the facility as a healthcare facility. The Company had 68 tenants out of 114 who were related parties as of September 30, 2024, and 64 tenants out of 107 who were related parties as of December 31, 2023. Most of the lease agreements are triple net leases.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. Related Party Transactions and Economic Dependence (cont.)
Lease Agreements with Related Parties (cont.)
The related party interests were via Gubin Enterprises LP and Blisko Enterprises LP. Gubin Enterprises LP is controlled by Moishe Gubin, Chairman of the Board. Blisko Enterprises LP is controlled by Michael Blisko, who serves as Director on the Board of Directors. The related party facilities are concentrated in 3 states: Indiana, Illinois and Tennessee. As of September 30, 2024, in these states, the Company leased 40, 12 and 16 facilities, respectively to related parties.
Balances with Related Parties
September 30, 2024 |
December 31, 2023 |
|||||||
| (amounts in $000s) | ||||||||
| Straight-line rent receivable | $ | $ | ||||||
| Tenant portion of replacement reserve | $ | $ | ||||||
| Notes receivable | $ | $ | ||||||
Payments from and to Related Parties
| Nine Months ended September 30, | Three Months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (amounts in $000s) | (amounts in $000s) | |||||||||||||||
| Rental income received from related parties | $ | $ | ||||||||||||||
Other Related Party Relationships
On
September 30, 2024 and December 31, 2023, the Company had approximately $
On
June 14, 2022, the Company purchased an $
NOTE 12. Income Taxes
The Company elected and qualified to be taxed as a REIT for federal income tax purposes commencing with the year ended December 31, 2022.
As a REIT, the Company generally is not subject to federal income tax on its net taxable income that it distributes currently to its 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 the Company fails to qualify for taxation as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company’s income for that year will be taxed at regular corporate rates, and the Company would be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. Even if the Company qualifies as a REIT for federal income tax purposes, it may still be subject to state and local taxes on its income and assets and to federal income and excise taxes on its undistributed income.
The Company follows recent accounting guidance relating to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-than-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
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STRAWBERRY FIELDS REIT, INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. Fair Value of Financial Instruments
The Company is required to disclose the fair value of financials instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximate their carrying value on the condensed consolidated balance sheets due to their short-term nature. The Company’s foreclosed real estate is recorded at fair value on a non-recurring basis and is included in real estate investments on the condensed consolidated balance sheets. Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market values by licensed appraisers or local real estate brokers and knowledge and experience of management. The fair values of the Company’s remaining financial instruments that are not reported at fair value on the condensed consolidated balance sheets are reported below:
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||
| (amounts in $000s) | Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
| Note payable, other debt, and bonds | 3 | $ | $ | $ | $ | |||||||||||||||
| Notes receivable, net | 3 | $ | $ | $ | ||||||||||||||||
The fair value of the notes payable, other debt, bonds and notes receivable are estimated using a discounted cash flow analysis.
NOTE 14. Subsequent Events
On
October 8, 2024, the Company entered into a Purchase and Sale Agreement with an unaffiliated seller with respect to eight healthcare
facilities located in Missouri. The purchase price for the Facilities is $
On
October 11, 2024 the Company acquired an 86-bed skilled nursing facility in Indianapolis, Indiana. The acquisition was for $
On
October 14, 2024, The BVI Company, a wholly owned subsidiary of the Company, issued additional Series C bonds with a par value of
NIS
NOTE 15. Financing Income (Expenses), Net
| Nine months ended September 30, | Three months ended September 30 | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (amounts in $000s) | (amounts in $000s) | |||||||||||||||
| Financing expenses | ||||||||||||||||
| Interest expenses with respect to bonds | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Interest expenses on loans from banks and others | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expenses with respect to leases | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other financing expenses (including related parties), net | ( | ) | ( | ) | ||||||||||||
| Total financing expenses | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Financing income | $ | $ | $ | $ | ||||||||||||
| Interest Expense, Net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain statements in this quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. federal securities laws. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. This Form 10-Q also contains forward-looking statements by third parties relating to market and industry data and forecasts; forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this Form 10-Q. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, Funds From Operations (“FFO”), our strategic plans and objectives, cost management, potential property acquisitions, anticipated capital expenditures (and access to capital), amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and other similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. Readers are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
● risks and uncertainties related to the national, state and local economies, particularly the economies of Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas, and the real estate and healthcare industries in general;
● availability and terms of capital and financing;
● the impact of existing and future healthcare reform legislation on our tenants, borrowers and guarantors;
● adverse trends in the healthcare industry, including, but not limited to, changes relating to reimbursements available to our tenants by government or private payors;
● competition in the long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including skilled nursing facilities;
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements (continued)
● our tenants’ ability to make rent payments;
● our dependence upon key personnel whose continued service is not guaranteed;
● availability of appropriate acquisition opportunities and the failure to integrate successfully;
● ability to source target-marketed deal flow;
● ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to deploy the proceeds therefrom on favorable terms;
● fluctuations in mortgage and interest rates;
● changes in the ratings of our debt securities;
● risks and uncertainties associated with property ownership and development;
● the potential need to fund improvements or other capital expenditures out of operating cash flow;
● potential liability for uninsured losses and environmental liabilities;
● the outcome of pending or future legal proceedings;
● changes in tax laws and regulations affecting REITs;
● our ability to maintain our qualification as a REIT; and
● the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action, particularly in the healthcare industry.
This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us.
Overview
Strawberry Fields REIT, Inc. (the “Company”) is engaged in the ownership, acquisition, financing and triple-net leasing of skilled nursing facilities and other post-acute healthcare properties. Currently, our portfolio consists of 104 healthcare properties with an aggregate of 12,889 licensed beds. We hold fee title to 103 of these properties and hold one property under a long-term lease. These properties are located in Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas. We generate substantially all 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. Each healthcare facility located at our properties is managed by a qualified operator with an experienced management team.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview (continued)
We employ a disciplined approach in our investment strategy by investing in healthcare real estate assets. We seek to invest in assets that will provide attractive opportunities for dividend growth and appreciation in asset value, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value. We expect to grow our portfolio by diversifying our investments by tenant, facility type and geography.
We are entitled to monthly rent paid by the tenants and we do not receive any income or bear any expenses from the operations of such facilities. As of September 30, 2024, the aggregate annualized average base rent under the leases for our properties was approximately $109.2 million.
We elected a REIT status for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2022. We are organized in an UPREIT structure in which we own substantially all of our assets and conduct substantially all of our business through the Operating Partnership. We are the general partner of the Operating Partnership and as of the date of the report own approximately 14.2% of outstanding OP units.
Recent Developments
On January 1, 2024, the Company commenced its lease for two skilled nursing facilities with 248 licensed beds near Johnson City, Tennessee. The lease includes a purchase option which the Company intends to exercise once certain conditions precedent are met. On August 30, 2024, the Company exercised its purchase option. The acquisition was for $4.0 million, and the Company funded the acquisition utilizing cash from the balance sheet. The properties were leased to Infinity, a related party operator. The rent for the properties did not change ($400 thousand per year) and the properties will be added to the Tennessee Master Lease 1.
On February 8, 2024, the BVI Company issued additional Series D Bonds with a par value of NIS 100.0 million and raised a gross amount of $26.7 million (NIS 98.2 million). The Bonds were issued at a price of 106.3%; which equates to a coupon of approximately 7.7%.
On February 20, 2024 the Company entered into a new, replacement master lease for the properties included in the Indiana acquisition completed in August of 2023. The tenants remain a group affiliated with two of the Company’s directors, Moishe Gubin and Michael Blisko. The new master lease has an initial term of ten years and is subject to 2 five-year extensions. The initial annual base rent for the properties is $14.5 million dollars and is subject to annual increases of 3%. In connection with the new master lease, the existing purchase option held by the tenant, which was granted by the prior owner of the properties, of $127.0 million was terminated. Consideration for the termination of the purchase option and inducement for entering into the new, replacement master lease was $18.0 million paid to the tenants. The $18.0 million payment was funded by cash and the proceeds from the additional Series D Bond issuance in February 2024.
On March 25, 2024, the Company entered into a purchase agreement for a property comprised of a 68-bed skilled nursing facility and 10 bed assisted living facility near Georgetown, Indiana. The Company closed on the property May 31, 2024, for $5.83 million in an all cash transaction. The facility was leased to Infinity, a related party operator. On June 1st, 2024, the facility was added to the IN Master Lease in the second amendment to the master lease.
On April 1, 2024, the Company renewed the IN Master Lease (original expiration date July 31, 2025) for 10 years with two 5 years options and added to the lease one more entity that was not part of the original lease. The base rent for the first year is $15.5 million with 3% annual escalations. On June 1, 2024, a second amendment was filed with this Master Lease to include the new property purchased in Georgetown, Indiana.
On April 30, 2024, the company sold a property 107 South Lincoln Street to The Village of Smithton, a municipality in Illinois and paid off the existing mortgage. The building was sold to the municipality for $1. The Company paid $1.2 million in related debt and closing fees for this transaction.
On July 12, 2024, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission (“SEC”). On August 1, 2024, the SEC declared the Registration Statement effective. In connection with the Registration Statement the Company established an at-the-market equity program (the “ATM Program”). The ATM Program will allow the Company to issue and sell to the public from time to time, at the Company’s discretion, newly issued shares of common stock. The ATM Program is expected to provide the Company with additional financing flexibility and intends to use the net proceeds from the ATM Program to increase stock liquidity and facilitate growth.
On August 5, 2024, the Company issued 145.6 million NIS in Series A Bonds on the Tel Aviv stock exchange (“TASE”), which is approximately $38.1 million. The bonds are unsecured, were issued at par and have a fixed interest rate of 6.97%. Repayment of the bond principal, at 6% of the principal, will be paid in the years 2024 and 2025, with the remaining 88% due in 2026. Interest payments will be due concurrent with the principal payments on September 30th of the years 2024, 2025 and 2026. In addition, the investors in Series D bond were offered to exchange their holdings with certificates of Series A bonds at a conversion rate of 1.069964 bond A for each certificate of bond D. As of September 30, 2024, 47.2 million NIS ($12.7 million USD) Series D bonds have been exchanged for 50.6 million NIS ($13.6 million) Series A bonds.
On August 30, 2024, the Company completed the acquisition for two skilled nursing facilities with 254 licensed beds near San Antonio, TX. The acquisition was for $15.25 million. The Company funded the acquisition utilizing cash from the balance sheet. The facilities are leased to the Tide Health Group, a 3rd party operator. The properties are leased in the Texas Master Lease 2, which includes an annual base rent of $1.5 million dollars with 3% annual rent increases and an initial term of 10 years with two options of 5 year extensions.
On September 25, 2024, the Company completed the acquisition of a property comprised of an 83-bed skilled nursing facility and 23 bed assisted living facility near Nashville, Tennessee. The acquisition was for $6.7 million and the Company funded the acquisition by assuming $2.8 million of existing debt on the facilities, $3.1 million was paid by the Company issuing common stock to the seller, and another $0.8 million by transferring other assets to the seller. The property was leased to Infinity, a related party operator. The property annual rent is $670 thousand dollars and the property will be added to the Tennessee Master Lease 1.
As of the date of this report, none of the Company’s tenants are delinquent on the payment of rent, and there have been no requests to amend the terms of their respective leases or to reduce current or future lease payments.
Related Party Tenants
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, exercise its 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 68 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Operating Results
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023:
Three Months Ended September 30, | |||||||