UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020 

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-52566

 

SUMMIT HEALTHCARE REIT, INC.

(Exact name of registrant as specified in its charter)

 

MARYLAND	73-1721791
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

2 SOUTH POINTE DRIVE, SUITE 100, LAKE FOREST, CA	92630
(Address of principal executive offices)	(Zip Code)

 

800-978-8136

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes  ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes  x No

 

As of November 9, 2020, we had 23,027,978 shares of common stock of Summit Healthcare REIT, Inc. outstanding.

 

  

FORM 10-Q

 

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited)	4
	Condensed Consolidated Statement of Equity (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
SIGNATURES		38
EX-31.1
EX-31.2
EX-32

  

  

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		September 30, 2020				December 31, 2019
ASSETS
Cash and cash equivalents		$	15,544,000			$	13,260,000
Restricted cash			3,108,000				2,817,000
Real estate properties, net			45,319,000				46,513,000
Notes receivable			325,000				575,000
Tenant and other receivables, net			4,028,000				3,812,000
Deferred leasing commissions, net			554,000				607,000
Other assets, net			420,000				594,000
Equity-method investments			11,979,000				13,131,000
Total assets		$	81,277,000			$	81,309,000
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities		$	2,595,000			$	2,504,000
Security deposits			664,000				664,000
Loans payable, net of debt issuance costs			45,519,000				45,577,000
Total liabilities			48,778,000				48,745,000
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares  issued or outstanding at September 30, 2020 and December 31, 2019			—				—
Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at September 30, 2020 and December 31, 2019			23,000				23,000
Additional paid-in capital			116,299,000				116,184,000
Accumulated deficit			(84,018,000	)			(83,843,000	)
Total stockholders’ equity			32,304,000				32,364,000
Noncontrolling interests			195,000				200,000
Total equity			32,499,000				32,564,000
Total liabilities and equity		$	81,277,000			$	81,309,000

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

  

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

		Three Months Ended September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Revenues:
Total rental revenues		$	1,624,000			$	1,594,000			$	4,828,000			$	5,268,000
Acquisition and asset management fees			292,000				325,000				910,000				861,000
Interest income from notes receivable			7,000				8,000				21,000				21,000
Total operating revenue			1,923,000				1,927,000				5,759,000				6,150,000
Expenses:
Property operating costs			252,000				183,000				722,000				684,000
General and administrative			779,000				764,000				2,566,000				3,481,000
Depreciation and amortization			417,000				416,000				1,252,000				1,332,000
Total operating expenses			1,448,000				1,363,000				4,540,000				5,497,000
Other operating income:
Gain on sale of real estate properties			—				22,000				—				4,227,000
Operating income			475,000				586,000				1,219,000				4,880,000
Income from equity-method investees			179,000				60,000				346,000				90,000
Other income			5,000				52,000				53,000				152,000
Interest expense			(531,000	)			(628,000	)			(1,754,000	)			(2,009,000	)
Net income (loss)			128,000				70,000				(136,000	)			3,113,000
Noncontrolling interests’ share in net (income) loss			(16,000	)			(12,000	)			(39,000	)			99,000
Net income (loss) applicable to common stockholders		$	112,000			$	58,000			$	(175,000	)		$	3,212,000
Earnings per common share:
Basic:
Net income (loss) applicable to common stockholders		$	0.00			$	0.00			$	(0.01	)		$	0.14
Diluted:
Net income (loss) applicable to common stockholders		$	0.00			$	0.00			$	(0.01	)		$	0.14
Weighted average shares used to calculate earnings per common share
Basic			23,027,978				23,027,978				23,027,978				23,027,978
Diluted			23,515,414				23,513,331				23,027,978				23,513,331

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

		Common Stock
		Number of Shares				Common Stock Par Value				Additional Paid-In Capital				Accumulated Deficit				Total Stockholders’ Equity				Noncontrolling Interests				Total Equity
Balance — January 1, 2020			23,027,978			$	23,000			$	116,184,000			$	(83,843,000	)		$	32,364,000			$	200,000			$	32,564,000
Stock-based compensation			—				—				42,000				—				42,000				—				42,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(12,000	)			(12,000	)
Net (loss) income			—				—				—				(213,000	)			(213,000	)			12,000				(201,000	)
Balance — March 31, 2020			23,027,978			$	23,000			$	116,226,000			$	(84,056,000	)		$	32,193,000			$	200,000			$	32,393,000
Stock-based compensation			—				—				38,000				—				38,000				—				38,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(15,000	)			(15,000	)
Net (loss) income			—				—				—				(74,000	)			(74,000	)			11,000				(63,000	)
Balance — June 30, 2020			23,027,978			$	23,000			$	116,264,000			$	(84,130,000	)		$	32,157,000			$	196,000			$	32,353,000
Stock-based compensation			—				—				35,000				—				35,000				—				35,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(17,000	)			(17,000	)
Net income			—				—				—				112,000				112,000				16,000				128,000
Balance — September 30, 2020			23,027,978			$	23,000			$	116,299,000			$	(84,018,000	)		$	32,304,000			$	195,000			$	32,499,000

 

		Common Stock
		Number of Shares				Common Stock Par Value				Additional Paid-In Capital				Accumulated Deficit				Total Stockholders’ Equity				Noncontrolling Interests				Total Equity
Balance — January 1, 2019			23,027,978			$	23,000			$	115,950,000			$	(86,956,000	)		$	29,017,000			$	349,000			$	29,366,000
Stock-based compensation			—				—				68,000				—				68,000				—				68,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(13,000	)			(13,000	)
Net income (loss)			—				—				—				3,923,000				3,923,000				(123,000	)			3,800,000
Balance — March 31, 2019			23,027,978			$	23,000			$	116,018,000			$	(83,033,000	)		$	33,008,000			$	213,000			$	33,221,000
Stock-based compensation			—				—				81,000				—				81,000				—				81,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(12,000	)			(12,000	)
Net (loss) income			—				—				—				(769,000	)			(769,000	)			12,000				(757,000	)
Balance — June 30, 2019			23,027,978			$	23,000			$	116,099,000			$	(83,802,000	)		$	32,320,000			$	213,000			$	32,533,000
Stock-based compensation			—				—				43,000				—				43,000				—				43,000
Distributions paid to noncontrolling interests			—				—				—				—				—				(13,000	)			(13,000	)
Net income			—				—				—				58,000				58,000				12,000				70,000
Balance — September 30, 2019			23,027,978			$	23,000			$	116,142,000			$	(83,744,000	)		$	32,421,000			$	212,000			$	32,633,000

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months Ended September 30,
		2020				2019
Cash flows from operating activities:
Net (loss) income		$	(136,000	)		$	3,113,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of debt issuance costs			72,000				101,000
Depreciation and amortization			1,252,000				1,332,000
Straight-line rents			(178,000	)			(281,000	)
Write-off of debt issuance costs			77,000				-
Stock-based compensation expense			115,000				192,000
Gain on sale of real estate properties			-				(4,227,000	)
Income from equity-method investees			(346,000	)			(90,000	)
Change in operating assets and liabilities:
Tenant and other receivables, net			591,000				302,000
Other assets			102,000				-
Accounts payable and accrued liabilities			162,000				80,000
Net cash provided by operating activities			1,711,000				522,000
Cash flows from investing activities:
Proceeds from sale of real estate properties, net of transaction costs			-				24,805,000
Investment in equity-method investees			-				(5,030,000	)
Distributions received from equity-method investees			866,000				822,000
Issuance of notes receivable			-				(253,000	)
Payments from notes receivable			250,000				323,000
Net cash provided by investing activities			1,116,000				20,667,000
Cash flows from financing activities:
Proceeds from issuance loans payable			11,863,000				3,872,000
Payments of loans payable			(11,415,000	)			(22,779,000	)
Distributions payable			-				(1,499,000	)
Distributions paid to noncontrolling interests			(44,000	)			(38,000	)
Debt issuance costs			(656,000	)			(210,000	)
Net cash used in financing activities			(252,000	)			(20,654,000	)
Net increase in cash, cash equivalents and restricted cash			2,575,000				535,000
Cash, cash equivalents and restricted cash – beginning of period			16,077,000				14,956,000
Cash, cash equivalents and restricted cash – end of period		$	18,652,000			$	15,491,000
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,391,000			$	1,776,000

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

 

1. Organization

 

Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of three properties, 95.3% of four properties, a 10% equity interest in an unconsolidated equity-method investment that holds 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds two properties, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, a 10% equity interest in an unconsolidated equity-method investment that holds six properties and a 15% equity interest in an unconsolidated equity-method investment that holds 14 properties. Summit is a Maryland corporation, formed in 2004 under the General Corporation Law of Maryland for the purpose of investing in and owning real estate. As used in these notes, the “Company”, “we”, “us” and “our” refer to Summit and its consolidated subsidiaries, except where the context otherwise requires.

 

We conduct substantially all of our operations through Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), which is a Delaware limited partnership. We own a 99.88% general partner interest in the Operating Partnership, and Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements.

 

Cornerstone Healthcare Partners LLC – Consolidated Joint Venture

 

We own 95% of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% noncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated with our financial statements and owns four properties (the “JV Properties”) with another partially owned subsidiary. As of September 30, 2020, we own a 95.3% interest in the four JV Properties, and CHREF owns a 4.7% interest. See Note 13 for the disposition of real estate properties in 2019 which includes one of the JV Properties.

 

Summit Union Life Holdings, LLC – Equity-Method Investment

 

In April 2015, through our Operating Partnership, we entered into a limited liability company agreement with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 10% interest in the SUL JV which owns 17 properties.

 

Summit Fantasia Holdings, LLC – Equity-Method Investment

 

In September 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed Summit Fantasia Holdings, LLC (the “Fantasia JV”). The Fantasia JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 35% interest in the Fantasia JV which owns two properties.

 

Summit Fantasia Holdings II, LLC – Equity-Method Investment

 

In December 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 20% interest in the Fantasia II JV which owns two properties.

 

 

Summit Fantasia Holdings III, LLC– Equity-Method Investment

 

In July 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 10% interest in the Fantasia III JV which owns nine properties.

 

Summit Fantasy Pearl Holdings, LLC– Equity-Method Investment

 

In October 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 10% interest in the FPH JV which owns six properties.

 

Indiana JV– Equity-Method Investment

 

In February 2019, through our wholly-owned subsidiary, Summit Indiana, LLC, we formed a new joint venture, a Delaware limited liability company (the “Indiana JV”). On March 13, 2019, we entered into a Limited Liability Company Agreement (the “Indiana JV Agreement”) with two unrelated parties: a real estate holding company and a global institutional asset management firm, both Delaware limited liability companies. The Indiana JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method. As of September 30, 2020 and December 31, 2019, we have a 15% interest in the Indiana JV which owns 14 properties.

 

Summit Healthcare Asset Management, LLC (TRS)

 

Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia JV, Fantasia II JV, Fantasia III JV, and FPH JV, and as the operating member of the Indiana JV (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All acquisition fees and asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.

 

2. Summary of Significant Accounting Policies

 

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 25, 2020. There have been no material changes to our policies since that filing.

 

The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2019 consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 25, 2020 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those in the consolidated financial statements contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2019 have been omitted in this report.

 

 

Principles of Consolidation and Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership (of which the Company owns 99.88%) and CHP LLC (of which the Company owns 95%). All intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Cash and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.

 

		September 30, 2020				December 31, 2019
Cash and cash equivalents		$	15,544,000			$	13,260,000
Restricted cash			3,108,000				2,817,000
Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows		$	18,652,000			$	16,077,000

 

Recently Issued Accounting Pronouncements

 

In January 2020, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2020-01 to clarify the interaction among the accounting standards for equity securities, equity method investments and certain derivatives. The new ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not expect the new standard to have a material impact on its financial position, results of operations, or cash flows.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in ASU 2016-13 are an improvement because they eliminate the probable initial recognition threshold under current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2018-19”), which amends ASU 2016-13 to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20, and instead, impairment of such receivables should be accounted for in accordance with ASU 2016-02, Leases, as amended by subsequent ASUs (“Topic 842”). In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”), which amends ASU 2016-13 to clarify or address stakeholders’ specific issues about certain aspects of ASU 2016-13. ASU 2016-13, ASU 2018-19 and ASU 2019-11 are effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted as of the fiscal years beginning after December 15, 2018. The Company adopted ASU 2016-13, ASU 2018-19 and ASU 2019-11 (collectively, “Topic 326”) on January 1, 2020. The adoption of the new standard on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations, or cash flows.

 

 

Coronavirus (COVID-19)

 

Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the United States and more than 200 countries. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The COVID-19 pandemic and measures to prevent its spread are expected to negatively impact senior housing and skilled nursing facilities in a number of ways, including but not limited to:

 

·

Decreased occupancy and increased operating costs for the Company’s tenants and borrowers, which may adversely impact their ability to make full and timely rental and debt payments to the Company. In some cases, the Company may have to restructure tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to the Company as those currently in place. Reduced or modified rental and debt amounts could result in the determination that the full amounts of the Company’s real estate properties and notes receivable are not recoverable, which could result in an impairment charge.

 

·

Decreased occupancy and increased operating costs for the Company’s Equity-Method Investments as they own senior housing and skilled nursing facilities which may negatively impact the operating results of these investments. In some cases, the Equity-Method Investments may have to restructure tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to the Equity-Method Investments as those currently in place. Prolonged deterioration in the operating results for these investments could result in the determination that the full amounts of the Company’s investments are not recoverable, which could result in an impairment charge.

 

It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on our operations and results as the situation is continuing to evolve.  We have not seen a material impact on rental revenue from any of our consolidated properties or debt payments from borrowers on notes receivable. However, subsequent to September 30, 2020, under a court order, a receiver assumed the responsibilities of operating and managing the Pennington Gardens facility in Chandler, Arizona. See Note 14, “Subsequent Events,” for additional discussion. Based upon need and request, the Company may provide rent relief, either in the form of a temporary rent reduction to be paid back over time or permanent abatement of rent for a specific time period. Additionally, some of our Equity-Method Investment tenants have also experienced decreased occupancy and increased operating costs related to COVID-19, however, this has not had a material effect on our condensed consolidated financial statements. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the demand for senior housing and skilled nursing and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity, including recording impairments, lease modifications and credit losses associated with notes receivable in future periods. 

 

CARES Act

 

At the end of March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act is a stimulus package that provides various forms of relief through, among other things, grants, loans and tax incentives to certain businesses and individuals. In particular, the CARES Act created an emergency lending facility known as the Paycheck Protection Program (PPP), which is administered by the Small Business Administration (SBA) and provides federally insured and, in some cases, forgivable loans to certain, eligible businesses so that those businesses can continue to cover certain of their near-term operating expenses and retain employees. We did not obtain a PPP loan. We have evaluated the CARES Act and determined that there was no impact on the Company for the nine months ended September 30, 2020. We will continue to evaluate and monitor the CARES Act, and any new COVID-19-related legislation to determine the ultimate impact and benefits, if any, to the Company.

 

 

3. Investments in Real Estate Properties

 

As of September 30, 2020 and December 31, 2019, our investments in real estate properties including those held by our consolidated subsidiaries (excluding the 50 properties owned by our unconsolidated Equity-Method Investments) are set forth below:

 

		September 30, 2020				December 31, 2019
Land		$	6,237,000			$	6,237,000
Buildings and improvements			48,295,000				48,295,000
Less: accumulated depreciation			(9,501,000	)			(8,444,000	)
Buildings and improvements, net			38,794,000				39,851,000
Furniture and fixtures			4,132,000				4,230,000
Less: accumulated depreciation			(3,844,000	)			(3,805,000	)
Furniture and fixtures, net			288,000				425,000
Real estate properties, net		$	45,319,000			$	46,513,000

 

For the three months ended September 30, 2020 and 2019, depreciation expense (excluding leasing commission amortization) was approximately $0.4 million and $0.4 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense (excluding leasing commission amortization) was approximately $1.2 million and $1.3 million, respectively.

 

As of September 30, 2020, our portfolio consisted of seven real estate properties which were 100% leased to the tenants of the related facilities. See Note 13 for further information regarding the February 2019 disposition of our four properties located in North Carolina.

 

The following table provides summary information regarding our portfolio (excluding the 50 properties owned by our unconsolidated Equity-Method Investments) as of September 30, 2020:

 

Property

Location

Date Purchased

Type(1)

Purchase  Price

Loans  Payable, Excluding Debt Issuance Costs

Sheridan Care Center

Sheridan, OR

August 3, 2012

SNF

$

4,100,000

$

4,369,000

Fernhill Care Center

Portland, OR

August 3, 2012

SNF

4,500,000

3,833,000

Friendship Haven Healthcare and Rehabilitation Center

Galveston County, TX

September 14, 2012

SNF

15,000,000

11,796,000

Pacific Health and Rehabilitation Center

Tigard, OR

December 24, 2012

SNF

8,140,000

6,390,000

Brookstone of Aledo

Aledo, IL

July 2, 2013

AL

8,625,000

6,891,000

Sundial Assisted Living

Redding, CA

December 18, 2013

AL

3,500,000

3,805,000

Pennington Gardens

Chandler, AZ

July 17, 2017

AL/MC

13,400,000

10,367,000

Total:

$

57,265,000

$

47,451,000

 

(1)	SNF is an abbreviation for skilled nursing facility. AL is an abbreviation for assisted living facility. MC is an abbreviation for memory care facility.

 

 

Future Minimum Lease Payments

 

The future minimum lease payments to be received under our existing tenant operating leases (excluding the 50 properties owned by our unconsolidated Equity-Method Investments) as of September 30, 2020, for the period from October 1, 2020 to December 31, 2020 and for each of the four following years and thereafter ending December 31 are as follows:

 

Years ending
October 1, 2020 to December 31, 2020		$	1,358,000
2021			5,511,000
2022			5,626,000
2023			5,742,000
2024			5,441,000
Thereafter			28,890,000
		$	52,568,000

 

2020 Acquisitions

 

None.

 

2019 Acquisitions

 

None.

 

Leasing Commissions

 

As a self-managed REIT, we no longer pay leasing commissions. Leasing commissions were capitalized at cost and amortized on a straight-line basis over the related lease term. As of September 30, 2020 and December 31, 2019, total costs incurred were $1.1 million, and the unamortized balance of capitalized leasing commissions was approximately $0.6 million. Amortization expense for the three months ended September 30, 2020 and 2019 was approximately $18,000 and $18,000, respectively. Amortization expense for the nine months ended September 30, 2020 and 2019 was approximately $53,000 and $34,000, respectively.

 

4. Loans Payable

 

As of September 30, 2020 and December 31, 2019, our loans payable consisted of the following:

 

		September 30, 2020				December 31, 2019
Loan payable to CIBC Bank USA refinanced in April 2020 and as of December 31, 2019, collateralized by Friendship Haven.		$	-			$	10,725,000
Loan payable to Capital One Multifamily Finance, LLC (insured by HUD) in monthly installments of approximately $49,000, including interest at a fixed rate of 4.23%, due in September 2053, and collateralized by Pennington Gardens.		$	10,367,000			$	10,473,000
Loans payable to ORIX (insured by HUD) in monthly installments of approximately $183,000, including interest, ranging from a fixed rate of 2.79% to 4.2%, due in September 2039 through April 2055, and as of September 30, 2020, collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial Assisted Living and Friendship Haven. As of December 31, 2019, collateralized by Sheridan, Fernhill, Pacific Health, Aledo and Sundial Assisted Living.		$	37,084,000			$	25,804,000
			47,451,000				47,002,000
Less debt issuance costs			(1,932,000	)			(1,425,000	)
Total loans payable		$	45,519,000			$	45,577,000

 

 

As of September 30, 2020, we have total debt obligations of approximately $47.5 million that will mature between 2039 and 2055. See Note 3 for loans payable balance for each property.

 

In connection with our loans payable, we incurred debt issuance costs. As of September 30, 2020 and December 31, 2019, the unamortized balance of the debt issuance costs was approximately $1.9 million and $1.4 million, respectively. These debt issuance costs are being amortized over the life of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For the three months ended September 30, 2020 and 2019, $18,000 and $44,000, respectively, of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations. For the nine months ended September 30, 2020 and 2019, $0.1 million of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations for each period. Included in the amortization of debt issuance costs for the nine months ended September 30, 2020 is $77,000 related to the write off of debt issuance costs for CHP Friendswood SNF, LLC’s prior loan.

 

During the three months ended September 30, 2020 and 2019, we incurred approximately $0.5 million and $0.6 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable. During the nine months ended September 30, 2020 and 2019, we incurred approximately $1.6 million and $1.9 million, respectively, of interest expense (excluding debt issuance costs amortization) related to our loans payable.

 

The principal payments due on the loans payable (excluding debt issuance costs) for the period from October 1, 2020 to December 31, 2020 and for each of the four following years and thereafter ending December 31 are as follows:

 

Years Ending		Principal Amount
October 1, 2020 to December 31, 2020		$	263,000
2021			1,076,000
2022			1,116,000
2023			1,158,000
2024			1,201,000
Thereafter			42,637,000
		$	47,451,000

 

The following information describes our loan activity for 2020 and 2019:

 

CIBC Bank USA

 

In March 2019, CHP Friendswood SNF, LLC entered into a $10,725,000, three-year term loan and security agreement with CIBC Bank USA, which was collateralized by the Friendship Haven facility. On April 23, 2020, we refinanced the existing CIBC loan with an ORIX Real Estate Capital, LLC (“ORIX”) HUD-insured loan. See below under ORIX Real Estate Capital, LLC for further information

 

Capital One Multifamily Finance, LLC

 

In September 2019, we refinanced our Capital One loan and entered into a HUD-insured loan with Capital One Multifamily Finance, LLC which is collateralized by the Pennington Gardens facility. The note contains a prepayment penalty of 10% in year 1, which reduces each year by 100 basis points, until there is no longer a prepayment penalty beginning in year 11.

 

See table above listing loans payable for further information.

 

 

ORIX Real Estate Capital, LLC

 

We have several properties with HUD-insured loans from ORIX. See table above listing loans payable for further information.

 

On April 23, 2020, we refinanced our outstanding $10,725,000 loan payable for CHP Friendswood, LLC with a HUD-insured loan through ORIX. The loan bears interest at a fixed rate of 2.79%, plus 0.65% for mortgage insurance premiums for the term of the loan and is collateralized by Friendship Haven. The loan matures in April 2055 and amortizes over 35 years. The loan proceeds of approximately $11.9 million were used to pay down the outstanding loan balance of approximately $10.8 million to CIBC, to fund certain HUD reserves and to pay debt issuance costs of approximately $0.7 million. The note contains a prepayment penalty of 10% in year 1, which reduces each year by 100 basis points, until there is no longer a prepayment penalty beginning in year 11.

 

In April 2019, we entered into the HUD-insured loan through ORIX of approximately $3.8 million, which is collateralized by the Sundial Assisted Living facility. The loan bears interest at a fixed rate of 4.2%, plus 0.65% for mortgage insurance premiums, for the term of the loan. The loan matures in April 2054 and amortizes over 35 years. We incurred approximately $0.2 million in debt issuance costs. The note contains a prepayment penalty of 10% in year 1, which reduces each year by 100 basis points, until there is no longer a prepayment penalty beginning in year 11.

 

All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our condensed consolidated balance sheets. As of September 30, 2020, we were in compliance with all of our debt covenants.

 

5. Equity-Method Investments

 

As of September 30, 2020 and December 31, 2019, the balances of our Equity-Method Investments were approximately $12.0 million and $13.1 million, respectively, and are as follows:

 

Summit Union Life Holdings, LLC

 

The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”).

 

Under the SUL LLC Agreement, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Years pari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing or another capital event will be paid first to the Operating Partnership and Best Years pari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.

 

In April 2015, the Operating Partnership recorded a receivable for approximately $362,000 for distributions that could not be paid prior to the contribution of the original six properties contributed in April 2015 (“JV 2 Properties”) due to cash restrictions related to the loans payable for the contributed JV 2 Properties. As of September 30, 2020 and December 31, 2019, the receivable balance of $184,000 due from the JV 2 properties is included in tenant and other receivables in our condensed consolidated balance sheets.

 

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the SUL JV was approximately $3.0 million and $3.1 million, respectively.

 

Our equity-method investment in the SUL JV is considered a significant investee as our proportionate share of its income is greater than 20% of our total net loss. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	4,553,000			$	4,701,000			$	13,703,000			$	13,679,000
Income from operations		$	1,995,000			$	1,889,000			$	5,851,000			$	5,994,000
Net income		$	771,000			$	532,000			$	2,467,000			$	1,547,000
Summit equity interest in SUL JV net income		$	77,000			$	53,000			$	247,000			$	154,000

  

 

Summit Fantasia Holdings, LLC

 

The Fantasia JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia JV (the “Fantasia LLC Agreement”).

 

Under the Fantasia LLC Agreement, as amended in April 2019, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 50% to Fantasia and 50% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 50% to Fantasia and 50% to the Operating Partnership.

 

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia JV was approximately $2.0 million and $2.1 million, respectively.

 

Our equity-method investment in the Fantasia JV is considered a significant investee. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended  September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	1,033,000			$	1,079,000			$	3,106,000			$	2,191,000
Income from operations		$	156,000			$	194,000			$	460,000			$	583,000
Net income (loss)		$	7,000			$	(48,000	)		$	(72,000	)		$	(326,000	)
Summit equity interest in Fantasia JV net income (loss)		$	2,000			$	(17,000	)		$	(25,000	)		$	(114,000	)

    

Summit Fantasia Holdings II, LLC

 

The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”).

 

Under the Fantasia II LLC Agreement, net operating cash flow of the Fantasia JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 8% return, and thereafter 70% to Fantasia and 30% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia II JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.

 

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia II JV was approximately $1.4 million and $1.5 million, respectively.

 

Our equity-method investment in the Fantasia II JV is considered a significant investee as our proportionate share of its income is greater than 20% of our total net loss. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended  September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	886,000			$	888,000			$	2,668,000			$	2,644,000
Income from operations		$	483,000			$	468,000			$	1,474,000			$	1,431,000
Net income		$	240,000			$	220,000			$	748,000			$	690,000
Summit equity interest in Fantasia II JV net income		$	48,000			$	44,000			$	149,000			$	138,000

   

Summit Fantasia Holdings III, LLC

 

The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”).

 

Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV will be distributed quarterly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership.

 

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.7 million and $1.6 million, respectively.

 

Our equity-method investment in the Fantasia III JV is considered a significant investee as our proportionate share of its income is greater than 20% of our total loss. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended  September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	1,985,000			$	1,980,000			$	5,986,000			$	5,934,000
Income from operations		$	1,099,000			$	1,039,000			$	3,240,000			$	3,095,000
Net income		$	470,000			$	328,000			$	1,437,000			$	931,000
Summit equity interest in Fantasia III JV net income		$	47,000			$	33,000			$	144,000			$	94,000

  

Summit Fantasy Pearl Holdings, LLC

 

The FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).

 

Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed quarterly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the members pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.

 

  

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the FPH JV was approximately $0.2 million and $0.5 million, respectively.

 

Our equity-method investment in the FPH JV is considered a significant investee as our proportionate share of its net loss is greater than 20% of our total net loss. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended  September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	879,000			$	884,000			$	2,650,000			$	2,674,000
Income from operations		$	417,000			$	424,000			$	1,256,000			$	1,253,000
Net loss		$	230,000			$	(304,000	)		$	(1,175,000	)		$	(1,231,000	)
Summit equity interest in FPH JV net loss		$	23,000			$	(30,000	)		$	(117,000	)		$	(123,000	)

  

Indiana JV

 

The Indiana JV will continue until an event of dissolution occurs, as defined in the Indiana JV Agreement.

 

Under the Indiana JV Agreement, net operating cash flow of the Indiana JV will be distributed monthly to the members pari passu in accordance with their respective capital percentages, and thereafter as defined in the Indiana JV Agreement.

 

As of September 30, 2020 and December 31, 2019, the balance of our equity-method investment related to the Indiana JV was approximately $3.7 million and $4.3 million, respectively.

 

Our equity-method investment in the Indiana JV is considered a significant investee as our proportionate share of its assets are greater than 20% of our total assets as of December 31, 2019. The results of operations for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

		Three Months Ended  September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Total revenue		$	2,946,000			$	2,947,000			$	8,839,000			$	6,517,000
Income from operations		$	1,857,000			$	1,874,000			$	5,579,000			$	4,171,000
Net loss		$	(135,000	)		$	(177,000	)		$	(356,000	)		$	(395,000	)
Summit equity interest in Indiana JV net loss		$	(20,000	)		$	(27,000	)		$	(53,000	)		$	(60,000	)

  

Distributions from Equity-Method Investments

 

As of September 30, 2020 and December 31, 2019, we have distributions receivable from our Equity-Method Investments, which is included in tenant and other receivables in our condensed consolidated balance sheets, as follows:

 

		September 30, 2020				December 31, 2019
SUL JV		$	225,000			$	97,000
Fantasia JV			36,000				180,000
Fantasia II JV			51,000				48,000
Fantasia III JV			133,000				117,000
FPH JV			23,000				39,000
Indiana JV			305,000				162,000
Total		$	773,000			$	643,000

 

 

For the nine months ended September 30, 2020 and 2019, we have received cash distributions, which are included in our cash flows from operating activities in tenant and other receivables, and cash flows from investing activities, as follows:

 

		Nine months Ended September 30, 2020												Nine months Ended September 30, 2019
		Total Cash Distributions Received				Cash Flow from Operating Activities				Cash Flow from Investing Activities				Total Cash Distributions Received				Cash Flow from Operating Activities				Cash Flow from Investing Activities
SUL JV		$	352,000			$	246,000			$	106,000			$	401,000			$	155,000			$	246,000
Fantasia JV			144,000				-				144,000				-				-				-
Fantasia II JV			219,000				150,000				69,000				212,000				138,000				74,000
Fantasia III JV			104,000				104,000				-				118,000				93,000				25,000
FPH JV			118,000				-				118,000				251,000				-				251,000
Indiana JV			429,000				-				429,000				226,000				-				226,000
Total		$	1,366,000			$	500,000			$	866,000			$	1,208,000			$	386,000			$	822,000

 

Acquisition and Asset Management Fees

 

We serve as the manager or operating member of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager or operating member, we are paid an acquisition fee, as defined in the applicable joint venture agreements. Additionally, as the manager or operating member, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in the applicable joint venture agreements. For the three months ended September 30, 2020 and 2019, we recorded approximately $0.3 million and $0.3 million, respectively, in acquisition and asset management fees from our Equity-Method Investments. For the nine months ended September 30, 2020 and 2019, we recorded approximately $0.9 million and $0.9 million, respectively, in acquisition and asset management fees from our Equity-Method Investments.

 

6. Receivables

 

Notes Receivable

 

Friendswood TRS Note

 

The Operating Partnership entered into an amended and restated promissory note dated January 1, 2018, with Friendswood TRS for approximately $1.1 million. The note does not bear interest and is due in 48 equal payments of approximately $22,000. We recorded a discount of approximately $95,000 on the note using an imputed interest rate of 4.25%. As of September 30, 2020 and December 31, 2019, the balance on the note was approximately $0.3 million and $0.5 million, respectively.

 

Tenant and Other Receivables, Net

 

Tenant and other receivables, net consists of:

 

		September 30, 2020				December 31, 2019
Straight-line rent receivables		$	2,724,000			$	2,546,000
Distribution receivables from Equity-Method Investments			773,000				643,000
Receivable from JV 2 properties			184,000				184,000
Asset management fees			322,000				430,000
Other receivables			25,000				9,000
Total		$	4,028,000			$	3,812,000

 

The allowance for credit losses on accounts receivable is maintained at a level believed adequate to absorb potential losses in our receivables. The determination of the credit allowance is based on a quarterly evaluation of each of these receivables, including general economic conditions and estimated collectability. We evaluate the collectability of our receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical charge-offs, and financial strength of the lessee or equity method investment. A receivable is considered to have deteriorated in credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due. As of September 30, 2020, the allowance for credit losses is immaterial.

 

7. Related Party Transactions

 

CRA

 

Prior to the termination of our advisory agreement on April 1, 2014 with CRA (our former advisor, a related party), we incurred costs related to fees paid and costs reimbursed for services rendered to us by CRA through September 30, 2014. Some of the fees we had paid to CRA were considered to be in excess of allowed amounts and, therefore, CRA was required to reimburse us for the amount of the excess costs we paid to them. As of September 30, 2020 and December 31, 2019, the receivables from CRA are fully reserved due to the uncertainty of collectability and are included in tenant and other receivables in our condensed consolidated balance sheets (see Note 10).

 

  

As of September 30, 2020 and December 31, 2019, we had the following receivables and reserves related to CRA:

 

		Receivables				Reserves				Balance
Organizational and offering costs		$	738,000			$	(738,000	)		$	-
Asset management fees and expenses			32,000				(32,000	)			-
Operating expenses (direct and indirect)			189,000				(189,000	)			-
Operating expenses (2%/25% Test)			1,717,000				(1,717,000	)			-
Total		$	2,676,000			$	(2,676,000	)		$	-

 

Equity-Method Investments

 

See Notes 5 and 6 for further discussion of distributions and acquisition and asset management fees related to our Equity-Method Investments.  

 

8. Concentration of Risk

 

Our cash is generally invested in short-term money market instruments. As of September 30, 2020, we had cash and cash equivalent accounts in excess of FDIC-insured limits. However, we do not believe the risk associated with this excess is significant. 

 

As of September 30, 2020, we owned one property in California, three properties in Oregon, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 50 properties held by our Equity-Method Investments). Accordingly, there is a geographic concentration of risk subject to economic conditions in certain states.

 

Additionally, for the three months ended September 30, 2020, we leased our seven real estate properties to five different tenants under long-term triple net leases, and four of the five tenants each represented rental revenue greater than 10% (35%, 24%, 20% and 15%). For the three months ended September 30, 2019, we leased our seven real estate properties to five different tenants under long-term triple net leases, and four of the five tenants each represented rental revenue greater than 10% (35%, 24%, 19% and 15%).

 

For the nine months ended September 30, 2020, we leased our seven real estate properties to five different tenants under long-term triple net leases, and four of the five tenants each represented rental revenue greater than 10% (35%, 24%, 20% and 15%). For the nine months ended September 30, 2019, we leased our seven healthcare properties to five different tenants under long-term triple net leases, and four of the five tenants each represented rental revenue greater than 10% (31%, 22%, 18% and 13%).

 

As of September 30, 2020, we have one tenant that constitutes a significant asset concentration, as the net assets of the tenant are approximately 20% of our total assets.

 

9. Fair Value Measurements of Financial Instruments

 

Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, notes receivable, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value for such financial instruments because of the short period of time between origination of the instruments and their expected payment.

 

As of September 30, 2020 and December 31, 2019, the fair value of loans payable was $53.0 million and $47.6 million, compared to the principal balance (excluding debt discount) of $47.5 million and $47.0 million, respectively. The fair value of loans payable was estimated using lending rates available to us for financial instruments with similar terms and maturities. To estimate fair value as of September 30, 2020, we utilized discount rates ranging from 2.8% to 4.2% and a weighted average discount rate of 2.8%. As the inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy.

 

  

As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances. No impairments were recorded during the three and nine months ended September 30, 2020 and 2019. 

 

At September 30, 2020 and December 31, 2019, we do not have any financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.

 

10. Commitments and Contingencies

 

We inspect our properties under a Phase I assessment for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

 

Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.

 

Legal Proceedings

 

On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its former directors, one of its officers and one of its former officers as defendants, seeking declaratory and injunctive relief and compensatory and punitive damages. On September 17, 2014, we filed a First Amended Cross-Complaint seeking compensatory damages and an accounting pursuant to Sections 10(c)(i) and 17(c)(ii) of the Advisory Agreement and including any monies Plaintiffs and Terry Roussel directly or indirectly received from or paid to the Company. On February 22, 2018, the action was assigned to a different trial judge. On May 29, 2018, the Company filed a motion for terminating and monetary sanctions against CRA, Cornerstone Ventures, Inc. and their counsel, Winget Spadafora & Schwartzberg. On November 30, 2018, the new trial judge vacated the trial date, pending resolution of the Company’s motion for terminating and monetary sanctions against CRA and Cornerstone Ventures, Inc. and denied the Company’s motion for sanctions against Winget Spadafora & Schwartzberg. On February 13, 2019, the trial judge held another hearing on the Company’s motion for terminating and monetary sanctions and indicated that it intended to grant the Company’s motion for terminating sanctions and award the Company monetary sanctions. On March 14, 2019, the Court entered an Order and Judgment granting the Company’s motion for terminating sanctions, awarding the Company monetary sanctions in the amount of $588,672, and dismissing CRA and Cornerstone Ventures Inc.’s Complaint with prejudice. On May 21, 2019, CRA and Cornerstone Ventures, Inc. filed a notice of appeal from the Judgment and, on June 3, 2019, the Company filed a notice of cross-appeal from the Judgment. On July 9, 2019, the California Court of Appeal, Fourth District dismissed CRA and Cornerstone Ventures, Inc.’s appeal with prejudice. The briefing to the Court of Appeal, Fourth District on the Company’s appeals against CRA, Cornerstone Ventures, Inc and Winget Spadafora & Schwartzberg was completed on April 27, 2020. On October 28, 2020, the Court of Appeal issued an opinion affirming in part, and reversing, in part, the trial court’s opinion and remanded the action back to the trial court.

 

In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. The Bankruptcy Court granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay.  The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay.  This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court.  The Bankruptcy Court has not taken any action on the matter since the Third Circuit remanded the case. We believe that all of HCRE’s remaining alleged claims are without merit and will vigorously defend ourselves.

 

 

 

  

Indemnification and Employment Agreements

 

We have entered into indemnification agreements with certain of our executive officers and directors which indemnify them against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding. Additionally, effective October 1, 2018, we amended our employment agreements with our executive officers to extend the term of each agreement for an additional three years. These employment agreements include customary terms relating to salary, bonus, position, duties and benefits (including eligibility for equity compensation), as well as a cash payment following a change in control of the Company, as defined in such agreements.

 

Management of our Equity-Method Investments

 

As the manager of our Equity-Method Investments, we are responsible for managing the day-to-day operations and are, thus, subject to contingencies that may arise in the normal course of their operations. Additionally, we could be subject to a capital call from our Equity-Method Investments.

 

11. Equity

 

Share-Based Compensation Plan

 

Upon the grant of stock options, we determine the exercise price by using our estimated per-share value, which is calculated by aggregating the estimated fair value of our investments in real estate and the estimated fair value of our other assets, subtracting the book value of our liabilities, utilizing a discount for the fact that the shares are not currently traded on a national securities exchange and a lack of a control premium, and divided by the total by the number of our common shares outstanding at the time the options were granted.

 

The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions required by the model include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The expected life of the options was based on the simplified method as we do not have sufficient historical exercise data. The risk-free interest rate was based on the U.S. Treasury yield curve at the date of grant with maturity dates approximating the expected term of the options at the date of grant. Volatility was based on historical volatility of the stock prices for a sample of publicly traded companies with risk profiles similar to ours. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option.

 

On January 1, 2020, the Compensation Committee of the Board of Directors approved the issuance of 45,000 stock options under our Summit Healthcare REIT, Inc. 2015 Omnibus Incentive Plan (“Incentive Plan”) to our non-executive employees. The stock options vest monthly beginning on February 1, 2020 and continuing over a three-year period through January 1, 2023. The options expire 10 years from the grant date. The weighted-average fair value per share of the stock options granted was $0.57.

 

  

The estimated fair value using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

		2020
Stock options granted			45,000
Expected volatility			22.31	%
Expected term			5.75 years
Risk-free interest rate			1.72	%
Dividend yield			0	%
Fair value per share		$	0.57

 

The following table summarizes our stock options as of September 30, 2020:

 

		Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Options outstanding at January 1, 2020			1,826,908			$	2.09
Granted			45,000				2.26
Exercised			—
Cancelled/forfeited			—
Options outstanding at September 30, 2020			1,871,908			$	2.09				7.06			$	1,375,000
Options exercisable at September 30, 2020			1,664,480			$	2.06				6.89			$	1,258,000

 

For our outstanding non-vested options as of September 30, 2020, the weighted average grant date fair value per share was $0.57. As of September 30, 2020, we have unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, which is expected to be recognized as follows:

 

Years Ending December 31,
October 1, 2020 to December 31, 2020		$	36,000
2021			66,000
2022			15,000
2022			1,000
		$	118,000

 

 

The stock-based compensation expense reported for the three months ended September 30, 2020 and 2019 was approximately $35,000 and $43,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations. The stock-based compensation expense reported for the nine months ended September 30, 2020 and 2019 was approximately $115,000 and $192,000, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations.

 

  

12. Earnings Per Share

 

The following table presents the calculation of basic and diluted earnings per share (“EPS”) for the Company’s common stock for the three and nine months ended September 30, 2020 and 2019, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS:

 

		Three Months Ended September 30,								Nine months Ended September 30,
		2020				2019				2020				2019
Numerator:
Income (loss)		$	128,000			$	70,000			$	(136,000	)		$	3,113,000
(Income) loss attributable to noncontrolling interest			(16,000	)			(12,000	)			(39,000	)			99,000
Income (loss) applicable to common stockholders		$	112,000			$	58,000			$	(175,000	)		$	3,212,000
Denominator:
Basic:
Denominator for basic EPS - weighted average shares			23,027,978				23,027,978				23,027,978				23,027,978
Effect of dilutive shares:
Stock options			487,436				485,353				-				485,353
Denominator for diluted EPS – adjusted weighted average shares			23,515,414				23,513,331				23,027,978				23,513,331
Basic EPS		$	0.00			$	0.00			$	(0.01	)		$	0.14
Diluted EPS		$	0.00			$	0.00			$	(0.01	)		$	0.14

 

13. Dispositions

 

Sale of Four North Carolina Properties

 

On February 14, 2019, our wholly-owned subsidiaries HP Shelby, LLC, HP Hamlet, LLC, HP Carteret, LLC, and our 95%-owned subsidiary, HP Winston-Salem, LLC, sold to Agemark Acquisition, LLC the following four properties located in North Carolina (“NC Properties”): The Shelby House, an assisted living facility located in Shelby, North Carolina; The Hamlet House, an assisted living facility located in Hamlet, North Carolina, The Carteret House, an assisted living facility located in Newport, North Carolina and Danby House, an assisted living and memory care facility located in Winston-Salem, North Carolina.

 

The total consideration received by the Company and its subsidiaries pursuant to that sale was $27.0 million in cash. The Company incurred approximately $1.2 million is transaction costs, mainly for the prepayment penalty related to the HUD-insured loans (the “HUD Loans”). On the date of the sale, the total assets of the NC Properties were approximately $22.1 million, and liabilities were approximately $19.5 million, including approximately $19.4 million of outstanding principal on the HUD Loans. The HUD Loans were paid off in full using the proceeds of the sale. As a result of the sale, as of February 15, 2019, the NC Properties are no longer included in our condensed consolidated financial statements.

 

During the period ended September 30, 2019, we recorded a gain of approximately $4.2 million on the sale of the NC Properties.

 

14. Subsequent Events

 

On  October 7, 2020, a receiver assumed the responsibilities of operating and managing the healthcare facility (the “Pennington Gardens Facility”) owned by our wholly owned subsidiary Summit Chandler, LLC (“Summit Chandler”) in Chandler, Arizona.

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 25, 2020.

 

  

Overview

 

As of September 30, 2020, our ownership interests in our seven real estate properties of senior housing facilities was as follows: 100% ownership of three properties and a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC. Additionally, we have a 10% interest in an unconsolidated equity-method investment that owns 17 properties, a 35% equity interest in an unconsolidated equity-method investment that holds two properties, a 20% equity interest in an unconsolidated equity-method investment that holds two properties, a 10% equity interest in an unconsolidated equity-method investment that holds nine properties, a 10% equity interest in an unconsolidated equity-method investment that holds six properties and a 15% equity interest in an unconsolidated equity-method investment that holds 14 properties (collectively, our “Equity-Method Investments”). As used in this report, the “Company,” “we,” “us” and “our” refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.

 

Our revenues are comprised largely of tenant rental income from our seven real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, and acquisition and asset management fees resulting from our Equity-Method Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our condensed consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture equity or other equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with sustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.

 

We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled nursing facilities (“SNF”), assisted living facilities (“AL”), memory care facilities (“MC”) and continuing care retirement communities (“CCRC”). Each of these types of facilities focuses on different segments of the senior population.

 

Coronavirus (COVID-19)

 

Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the United States and more than 200 countries.  It has been reported that COVID-19 appears most dangerous for seniors, and the mortality rate increases with age. Some of the properties in which we have an interest are located in states that are currently seeing a high level of COVID-19 infections, including California, Texas and Arizona. The occupancy at our properties could significantly decrease if COVID-19 or another public health outbreak results in resident deaths, early resident move-outs, a delay accepting new residents due to quarantines or otherwise, or potential residents postpone moving to a senior housing facility. A decrease in occupancy or increase in costs is likely to have a material adverse effect on the ability of our tenants to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations. In addition, actions our tenants take to address COVID-19 are expected to materially increase their operating costs, including costs related to enhanced health and safety precautions among other measures, which could have a material adverse effect on the ability of our tenants to meet their financial and other contractual obligations to us, including the payment of rent. Furthermore, infections at our facilities could lead to material increases in litigation costs for which our tenants, or possibly we, may be liable. We have not seen a material impact on rental revenue from any of our consolidated properties or debt payments from borrowers on notes receivable. However, subsequent to September 30, 2020, under a court order, a receiver assumed the responsibilities of operating and managing the Pennington Gardens facility in Chandler, Arizona. See Note 14, “Subsequent Events,” in the accompanying Notes to Condensed Consolidated Financial Statements for additional discussion. Based upon need and request, the Company may provide rent relief, either in the form of a temporary rent reduction to be paid back over time or permanent abatement of rent for a specific time period. Additionally, some of our Equity-Method Investment tenants have also experienced decreased occupancy and increased operating costs related to COVID-19 , however, this has not had a material effect on our operations. If these types of developments continue or increase in severity, or arise with more frequency, they are likely to have a material adverse effect on our business and results of operations. The extent to which COVID-19 could impact our business and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.

 

  

Summit Portfolio Properties

 

At September 30, 2020, our portfolio consisted of seven real estate properties as noted below. All of the properties are 100% leased on a triple net basis. The following table provides summary information (excluding the 50 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of September 30, 2020:

 

		Properties				Beds				Square Footage				Purchase Price
SNF			4				337				109,306			$	31,740,000
AL or AL/MC			3				221				136,765				25,525,000
Total Real Estate Properties			7				558				246,071			$	57,265,000

 

Property

Location

Date Purchased

Type

Beds

2020 Rental Revenue1

Sheridan Care Center

Sheridan, OR

August 3, 2012

SNF

51

$

369,000

Fernhill Care Center

Portland, OR

August 3, 2012

SNF

63

394,000

Pacific Health and Rehabilitation Center

Tigard, OR

December 24, 2012

SNF

73

726,000

Friendship Haven Healthcare and Rehabilitation Center

Galveston County TX

September 14, 2012

SNF

150

1,059,000

Brookstone of Aledo

Aledo, IL

July 2, 2013

AL

66

573,000

Sundial Assisted Living

Redding, CA

December 18, 2013

AL

65

296,000

Pennington Gardens

Chandler, AZ

July 17, 2017

AL/MC

90

835,000

Total

558

 

¹ Represents year-to-date through September 30, 2020 rental revenue based on in-place leases, including straight-line rent and excluding tenant reimbursements.

 

Summit Equity-Method Investment Portfolio Properties

 

We continue to believe that raising institutional joint venture equity to make acquisitions will be accretive to shareholder value. Our sole source of equity since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments. We still believe this is a prudent strategy for growth; however, in the future, we may raise additional equity capital through alternative methods if warranted by market conditions.

 

A summary of the condensed combined financial data for the balance sheets and statements of income for all unconsolidated Equity-Method Investments are as follows:

 

Condensed Combined Balance Sheets:		September 30, 2020				December 31, 2019
Total Assets		$	414,651,000			$	421,268,000
Total Liabilities		$	320,030,000			$	318,150,000
Members Equity:
Summit		$	12,090,000			$	13,245,000
JV Partners		$	82,531,000			$	89,873,000
Total Members Equity		$	94,621,000			$	103,118,000

 

  

		Three Months Ended September 30,								Nine months Ended September 30,
Condensed Combined Statements of Income:		2020				2019				2020				2019
Total Revenue		$	12,282,000			$	12,479,000			$	36,952,000			$	33,639,000
Net Operating Income		$	9,635,000			$	9,687,000			$	28,807,000			$	27,067,000
Income from Operations		$	6,007,000			$	5,888,000			$	17,860,000			$	16,527,000
Net Income		$	1,583,000			$	551,000			$	3,049,000			$	1,216,000
Summit equity interest in Equity-Method Investments net income		$	177,000			$	56,000			$	345,000			$	89,000
JV Partners interest in Equity-Method Investments net income		$	1,406,000			$	495,000			$	2,704,000			$	1,127,000

 

As of September 30, 2020 and 2019, the total number of beds in our Equity-Method investments was 4,781.

 

Summit Union Life Holdings, LLC

 

In April 2015, through our operating partnership (“Operating Partnership”), we formed Summit Union Life Holdings, LLC (“SUL JV”) with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and entered into a limited liability company with Best Years with respect to the SUL JV (the “SUL LLC Agreement”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method.

 

Under the SUL LLC Agreement, as amended, net operating cash flow of the SUL JV will be distributed monthly, first to the Operating Partnership and Best Years pari passu up to a 9% to 10% annual return, as defined, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing, or another capital event will be paid first to the Operating Partnership and Best Years pari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.

 

The following reconciles our 10% equity investment in the SUL JV from inception through September 30, 2020:

 

JV 2 Properties (Colorado, Oregon and Virginia) – April 2015		$	1,059,000
Creative Properties (Texas) – October 2015			837,000
Cottage Properties (Wisconsin) – December 2015			613,000
Riverglen (New Hampshire) – April 2016			424,000
Delaware Properties – September 2016			1,846,000
Total investments			4,779,000
Income from equity-method investee			1,213,000
Distributions			(3,054,000	)
Total investment at September 30, 2020		$	2,938,000

 

A summary of the condensed consolidated financial data for the balance sheets and statements of income for the unconsolidated SUL JV, of which we own a 10% equity interest, is as follows:

 

Condensed Consolidated Balance Sheets of SUL JV:		September 30, 2020				December 31, 2019
Real estate properties and intangibles, net		$	131,063,000			$	135,038,000
Cash and cash equivalents			5,772,000				4,928,000
Other assets			11,479,000				10,882,000
Total Assets:		$	148,314,000			$	150,848,000
Loans payable, net		$	104,935,000			$	106,049,000
Other liabilities			7,460,000				7,268,000
Members’ equity:
Best Years			32,866,000				34,245,000
Summit			3,053,000				3,286,000
Total Liabilities and Members’ Equity		$	148,314,000			$	150,848,000

 

 

		Three Months Ended September 30,								Nine months Ended September 30,
Condensed Consolidated Statements of Income of SUL JV:		2020				2019				2020				2019
Total revenue		$	4,553,000			$	4,701,000			$	13,703,000			$	13,679,000
Property operating expenses			(1,124,000	)			(1,283,000	)			(3,533,000	)			(3,080,000	)
Net operating income			3,429,000				3,418,000				10,170,000				10,599,000
General and administrative expense			(96,000	)			(95,000	)			(294,000	)			(304,000	)
Depreciation and amortization expense			(1,338,000	)			(1,434,000	)			(4,025,000	)			(4,301,000	)
Income from operations			1,995,000				1,889,000				5,851,000				5,994,000
Interest expense			(1,171,000	)			(1,332,000	)			(3,581,000	)			(4,149,000	)
Amortization of debt issuance costs			(54,000	)			(32,000	)			(160,000	)			(84,000	)
Interest income			1,000				3,000				5,000				9,000
Other expense, net			-				4,000				352,000				(223,000	)
Net Income		$	771,000			$	532,000			$	2,467,000			$	1,547,000
Summit equity interest in SUL JV net income		$	77,000			$	53,000			$	247,000			$	154,000

 

As of September 30, 2020, the 17 properties held by SUL JV, our unconsolidated 10% equity-method investment, 15 of which are 100% leased on a triple net basis, are as follows:

 

Property		Location		Type			Number of Beds
Lamar Estates		Lamar, CO			SNF		60
Monte Vista Estates		Monte Vista, CO			SNF		60
Myrtle Point Care Center		Myrtle Point, OR			SNF		55
Gateway Care and Retirement Center		Portland, OR			SNF/IL		91
Applewood Retirement Community		Salem, OR			IL		69
Shenandoah Assisted Living		Front Royal, VA			AL		78
Pine Tree Lodge Nursing Center		Longview, TX			SNF		92
Granbury Care Center		Granbury, TX			SNF		181
Twin Oaks Nursing Center		Jacksonville, TX			SNF		116
Dogwood Trails Manor		Woodville, TX			SNF		90
Carolina Manor		Appleton, WI			AL		45
Carrington Manor		Green Bay, WI			AL		20
Marla Vista Manor		Green Bay, WI			AL		40
Marla Vista Gardens		Green Bay, WI			AL		20
Riverglen House of Littleton		Littleton, NH			AL		59
Atlantic Shore Rehabilitation and Health Center		Millsboro, DE			SNF		181
Pinnacle Rehabilitation and Health Center		Smyrna, DE			SNF		151
Total:							1,408

 

Equity-Method Partner - Fantasia Investment III LLC

 

In 2016 and 2017, through our Operating Partnership, we entered into three separate limited liability company agreements (collectively, the “Fantasia Agreements”) with Fantasia Investment III LLC (“Fantasia”), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed three separate companies, Summit Fantasia Holdings, LLC (“Fantasia I”), Summit Fantasia Holdings II, LLC (“Fantasia II”) and Summit Fantasia Holdings III, LLC (“Fantasia III”) (collectively, the “Fantasia JVs”). The Fantasia JVs are not consolidated in our condensed consolidated financial statements and are accounted for under the equity-method. Through the Fantasia JVs: we own a 35% interest in two senior housing facilities, one located in California and one located Oregon; a 20% interest in two skilled nursing facilities located in Rhode Island; and a 10% interest in nine skilled nursing facilities located in Connecticut.

 

 

Under the Fantasia Agreements, net operating cash flow of the Fantasia JVs will be distributed monthly, first to the Operating Partnership and Fantasia pari passu (8% for Fantasia I and II and 9% for Fantasia III) until each member has received an amount equal to its accrued, but unpaid return, and thereafter 50% to Fantasia and 50% to the Operating Partnership for Fantasia I, 70% to Fantasia and 30% to the Operating Partnership for Fantasia II, and 75% to Fantasia and 25% to the Operating Partnership for Fantasia III. All capital proceeds from the sale of the properties held by the Fantasia JVs, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu as noted above until each has received an amount equal to its accrued but unpaid return plus its total capital contribution, and thereafter to Fantasia and to the Operating Partnership, as noted above.

 

The following reconciles our equity investments in the Fantasia JVs from inception through September 30, 2020:

 

Summit Fantasia Holdings, LLC – October 2016		$	2,524,000
Summit Fantasia Holdings II, LLC – February 2017			1,923,000
Summit Fantasia Holdings III, LLC – August 2017			1,953,000
Total investment			6,400,000
Income from Fantasia JVs			944,000
Distributions			(2,214,000	)
Total Fantasia investments at September 30, 2020		$	5,130,000

 

A summary of the condensed combined financial data for the balance sheets and statements of income for the unconsolidated Fantasia JVs, of which we own a 10% to 35% equity interest, is as follows:

 

Condensed Combined Balance Sheets of Fantasia JVs:		September 30, 2020				December 31, 2019
Real estate properties, net		$	102,077,000			$	104,244,000
Cash and cash equivalents			5,567,000				5,893,000
Other assets			6,692,000				4,423,000
Total Assets:		$	114,336,000			$	114,560,000
Loans payable, net		$	75,750,000			$	75,830,000
Other liabilities			6,657,000				6,835,000
Members’ equity:
Fantasia JVs			26,799,000				26,691,000
Summit			5,130,000				5,204,000
Total Liabilities and Members’ Equity		$	114,336,000			$	114,560,000

 

		Three Months Ended September 30,								Nine months Ended September 30,
Condensed Combined Statements of Income of Fantasia JVs:		2020				2019				2020				2019
Total revenue		$	3,904,000			$	3,947,000			$	11,760,000			$	10,769,000
Property operating expenses			(1,394,000	)			(1,392,000	)			(4,228,000	)			(3,092,000	)
Net operating income			2,510,000				2,555,000				7,532,000				7,677,000
General and administrative expense			(45,000	)			(127,000	)			(178,000	)			(388,000	)
Depreciation and amortization expense			(727,000	)			(727,000	)			(2,180,000	)			(2,180,000	)
Income from operations			1,738,000				1,701,000				5,174,000				5,109,000
Interest expense			(978,000	)			(1,133,000	)			(2,888,000	)			(3,436,000	)
Amortization of debt issuance costs			(45,000	)			(85,000	)			(192,000	)			(255,000	)
Interest income			2,000				17,000				19,000				47,000
Other expense, net			-				-				-				(170,000	)
Net Income		$	717,000			$	500,000			$	2,113,000			$	1,295,000
Summit equity interest in Fantasia JVs net income		$	97,000			$	60,000			$	268,000			$	118,000

 

As of September 30, 2020, the 13 properties held by the Fantasia JVs, our unconsolidated equity-method investments, are all 100% leased on a triple net basis, and are as follows:

 

 

Property		Location		Type			Number of Beds
Sun Oak Assisted Living		Citrus Heights, CA			AL/MC		78
Regent Court Senior Living		Corvallis, OR			MC		48
Trinity Health and Rehabilitation Center		Woonsocket, Rhode Island			SNF		185
Hebert Nursing Home		Smithfield, Rhode Island			SNF		133
Chelsea Place Care Center		Hartford, CT			SNF		234
Touchpoints at Manchester		Manchester, CT			SNF		131
Touchpoints at Farmington		Farmington, CT			SNF		105
Fresh River Healthcare		East Windsor, CT			SNF		140
Trinity Hill Care Center		Trinity Hill, CT			SNF		144
Touchpoints at Bloomfield		Bloomfield, CT			SNF		150
Westside Care Center		Westside, CT			SNF		162
Silver Springs Care Center		Meriden, CT			SNF		159
Touchpoints of Chestnut		Chestnut, CT			SNF		60
Total:							1,729

 

Summit Fantasy Pearl Holdings, LLC

 

In October 2017, through our Operating Partnership, we entered into a limited liability company agreement (the “FPH LLC Agreement”) with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and will be accounted for under the equity-method.

 

Under the FPH LLC Agreement, net operating cash flow of the FPH JV will be distributed monthly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a refinancing or another capital event, will be paid to the members pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.

 

The following reconciles our equity investment in the FPH JV from inception through September 30, 2020:

 

Iowa properties – November 2017		$	929,000
Total investment			929,000
Loss from equity-method investee			(154,000	)
Distributions			(533,000	)
Total FPH investment at September 30, 2020		$	242,000

 

A summary of the condensed consolidated financial data for the balance sheets and statements of operations for the unconsolidated FPH JV is as follows:

 

Condensed Consolidated Balance Sheets of FPH JV:		September 30, 2020				December 31, 2019
Real estate properties, net		$	26,375,000			$	27,296,000
Cash and cash equivalents			1,175,000				1,186,000
Other assets			1,014,000				784,000
Total Assets:		$	28,564,000			$	29,266,000
Loans payable, net		$	21,296,000			$	21,600,000
Other liabilities			3,398,000				1,796,000
Members’ equity:
Other FPH JV members			3,628,000				5,407,000
Summit			242,000				463,000
Total Liabilities and Members’ Equity		$	28,564,000			$	29,266,000

 

 

		Three Months Ended September 30,								Nine months Ended September 30,
Condensed Consolidated Statements of Operations of FPH JV:		2020				2019				2020				2019
Total revenue		$	879,000			$	884,000			$	2,650,000			$	2,674,000
Property operating expenses			(117,000	)			(117,000	)			(364,000	)			(387,000	)
Net operating income			762,000				767,000				2,286,000				2,287,000
General and administrative expense			(38,000	)			(36,000	)			(109,000	)			(113,000	)
Depreciation and amortization expense			(307,000	)			(307,000	)			(921,000	)			(921,000	)
Income from operations			417,000				424,000				1,256,000				1,253,000
Interest expense			(260,000	)			(265,000	)			(777,000	)			(1,216,000	)
Amortization of debt issuance costs			(16,000	)			(34,000	)			(46,000	)			(399,000	)
Other income			89,000				(429,000	)			(1,608,000	)			(869,000	)
Net income and loss		$	230,000			$	(304,000	)		$	(1,175,000	)		$	(1,231,000	)
Summit equity interest in FPH JV net income and loss		$	23,000			$	(30,000	)		$	(117,000	)		$	(123,000	)

 

As of September 30, 2020, the six properties held by the FPH JV, our unconsolidated equity-method investments, all of which are 100% leased on a triple net basis, are as follows:

 

Property		Location		Type			Number of Beds
Accura Healthcare of Bancroft		Bancroft, Iowa			SNF/AL		50
Accura Healthcare of Milford		Milford, Iowa			SNF/AL		94
Accura Healthcare of Carroll		Carroll, Iowa			SNF/IL		124
Accura Healthcare of Cresco		Cresco, Iowa			SNF		59
Accura Healthcare of Marshalltown		Marshalltown, Iowa			SNF		86
Accura Healthcare of Spirit Lake		Spirit Lake, Iowa			SNF		98
Total:							511

 

Indiana JV

 

On February 28, 2019 we formed a new joint venture, a Delaware limited liability company (the “Indiana JV”), and on March 13, 2019, we entered into a Limited Liability Company Agreement (the “Indiana JV Agreement”) through our wholly-owned subsidiary, Summit Indiana, LLC, with two unrelated parties: a real estate holding company and a global institutional asset management firm, both Delaware limited liability companies.  The Indiana JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method.

 

Under the Indiana JV Agreement, net operating cash flow of the Indiana JV will be distributed monthly to the members pari passu in accordance with their respective capital percentages, and thereafter as defined in the Indiana JV Agreement.

 

 

The following reconciles our equity investment in the Indiana JV from inception through September 30, 2020:

 

Indiana properties – March 2019		$	4,906,000
Total investment			4,906,000
Loss from equity-method investee			(130,000	)
Distributions			(1,111,000	)
Total Indiana JV investment at September 30, 2020		$	3,665,000

 

A summary of the condensed consolidated financial data for the balance sheet and statements of operations for the unconsolidated Indiana JV is as follows:

 

Condensed Consolidated Balance Sheets of Indiana JV:		September 30, 2020				December 31, 2019
Real estate properties, net		$	117,164,000			$	122,343,000
Cash and cash equivalents			3,152,000				3,137,000
Other assets			3,121,000				1,114,000
Total Assets:		$	123,437,000			$	126,594,000
Loans payable, net		$	95,557,000			$	95,329,000
Other liabilities			4,977,000				3,443,000
Members’ equity:
Indiana JV			19,238,000				23,530,000
Summit			3,665,000				4,292,000
Total Liabilities and Members’ Equity		$	123,437,000			$	126,594,000

 

		Three Months Ended September 30,								Nine months Ended September 30,
Condensed Consolidated Statements of Operations of Indiana JV:		2020				2019				2020				2019
Total revenue		$	2,946,000			$	2,947,000			$	8,839,000			$	6,517,000
Property operating expenses			(12,000	)			-				(20,000	)			(13,000	)
Net operating income			2,934,000				2,947,000				8,819,000				6,504,000
General and administrative expense			(174,000	)			(170,000	)			(529,000	)			(377,000	)
Depreciation and amortization expense			(903,000	)			(903,000	)			(2,711,000	)			(1,956,000	)
Income from operations			1,857,000				1,874,000				5,579,000				4,171,000
Interest expense			(1,916,000	)			(1,975,000	)			(5,707,000	)			(4,401,000	)
Amortization of debt issuance costs			(76,000	)			(76,000	)			(228,000	)			(165,000	)
Net loss		$	(135,000	)		$	(177,000	)		$	(356,000	)		$	(395,000	)
Summit equity interest in Indiana JV net loss		$	(20,000	)		$	(27,000	)		$	(53,000	)		$	(60,000	)

 

As of September 30, 2020, the 14 properties of our unconsolidated equity-method investments in Indiana JV, all of which are 100% leased on a triple net basis, are as follows:

 

Property		Location			Type		Number of Beds
Bloomington Nursing and Rehab		Bloomington, IN			SNF		38
Summerfield Health Care Center		Cloverdale, IN			SNF		43
University Nursing and Rehab		Evansville, IN			SNF/AL		47/22
Sugar Creek Nursing and Rehab		Greenfield, IN			SNF		60
Hanover Nursing Center		Hanover, IN			SNF/AL		125/12
New Albany Nursing and Rehabilitation		New Albany, IN			SNF/AL		122/21
Willow Manor Nursing and Rehab		Vincennes, IN			SNF		170
North Ridge Village and Rehab Center		Albion, IN			SNF/AL		77/12
Greenhill Manor		Fowler, IN			SNF		64
Meridian Nursing and Rehab		Indianapolis, IN			SNF		44
Wintersong Village		Knox, IN			SNF		48
Essex Nursing and Rehab		Lebanon, IN			SNF		38
Washington Nursing Center		Washington, IN			SNF		140
Rural Health Care		Indianapolis, IN			SNF		50
Total:							1,133

 

 

Distributions from Equity-Method Investments

 

For the nine months ended September 30, 2020 and 2019, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:

 

		Nine months Ended September 30,
		2020				2019
Distributions		$	1,496,000			$	1,339,000
Cash received for distributions		$	1,366,000			$	1,208,000

 

Acquisition and Asset Management Fees

 

We serve as the manager or operating member (collectively, the manager) of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager or operating member, we are paid an acquisition fee, as defined in the applicable joint venture agreements. Additionally, as the manager or operating member, we are paid an annual asset management fee for managing the properties owned by our Equity-Method Investments, as defined in the applicable joint venture agreements. For the three months ended September 30, 2020 and 2019, we recorded approximately $0.3 million and $0.3 million, respectively, in acquisition and asset management fees. For the nine months ended September 30, 2020 and 2019, we recorded approximately $0.9 million and $0.9 million, respectively, in acquisition and asset management fees.

 

Critical Accounting Policies

 

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 25, 2020.

 

Results of Operations

 

Our results of operations are described below:

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

		Three Months Ended September 30,
		2020				2019				$ Change
Total rental revenues			1,624,000				1,594,000				30,000
Property operating costs			(252,000	)			(183,000	)			(69,000	)
Net operating income (1)			1,372,000				1,411,000				(39,000	)
Acquisition & asset management fees			292,000				325,000				(33,000	)
Interest income from notes receivable			7,000				8,000				(1,000	)
General and administrative			(779,000	)			(764,000	)			(15,000	)
Depreciation and amortization			(417,000	)			(416,000	)			(1,000	)
Income from equity-method investees			179,000				60,000				119,000
Other income			5,000				52,000				(47,000	)
Interest expense			(531,000	)			(628,000	)			97,000
Gain on sale of real estate properties			-				22,000				(22,000	)
Net income			128,000				70,000				58,000
Noncontrolling interests’ share in (income) loss			(16,000	)			(12,000	)			(4,000	)
Net income applicable to common stockholders		$	112,000			$	58,000			$	54,000

 

 

(1)

Net operating income (“NOI”) is a non-GAAP supplemental measure used to evaluate the operating performance of real estate properties. We define NOI as total rental revenues less property operating costs. NOI excludes acquisition and asset management fees, interest income from notes receivable, general and administrative expense, depreciation and amortization, income from equity-method investees, and other income, interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of the REIT’s real estate at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess and compare property-level performance. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect the aforementioned excluded items. Additionally, NOI as we define it may not be comparable to NOI as defined by other REITs or companies, as they may use different methodologies for calculating NOI.

 

The decrease in interest expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 is primarily due to the refinancing of one of our properties to a HUD-insured loan in 2020, resulting in less interest expense for the three months ended September 30, 2020.

 

The net increase in income from equity-method investees of approximately $0.1 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 is primarily due to the increase in income for the three months ended September 30, 2020 from Fantasia JV and decrease in the loss from FPH JV.

 

Nine months Ended September 30, 2020 Compared to Nine months Ended September 30, 2019

 

		Nine months Ended September 30,
		2020				2019				$ Change
Total rental revenues			4,828,000				5,268,000				(440,000	)
Property operating costs			(722,000	)			(684,000	)			(38,000	)
Net operating income (1)			4,106,000				4,584,000				(478,000	)
Acquisition & asset management fees			910,000				861,000				49,000
Interest income from notes receivable			21,000				21,000				-
General and administrative			(2,566,000	)			(3,481,000	)			915,000
Depreciation and amortization			(1,252,000	)			(1,332,000	)			80,000
Income from equity-method investees			346,000				90,000				256,000
Other income			53,000				152,000				(99,000	)
Interest expense			(1,754,000	)			(2,009,000	)			255,000
Gain on sale of real estate properties			-				4,227,000				(4,227,000	)
Net (loss) income			(136,000	)			3,113,000				(3,249,000	)
Noncontrolling interests’ share in (income) loss			(39,000	)			99,000				(138,000	)
Net (loss) income applicable to common stockholders		$	(175,000	)		$	3,212,000			$	(3,387,000	)

 

Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Property operating costs include insurance, property taxes and other operating expenses. Net operating income decreased $0.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the sale of our four NC Properties (see Note 13 to the accompanying Notes to Condensed Consolidated Financial Statements).

 

 

The net decrease in general and administrative expenses of $0.9 million is primarily due to a decrease in executive bonuses of approximately $0.6 million, other payroll and stock-based compensation of approximately $0.2 million, and legal and other professional expenses of approximately $0.1 million.

 

The net decrease in depreciation and amortization and interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 is primarily due to the sale of our four NC Properties (see Note 13 to the accompanying Notes to Condensed Consolidated Financial Statements).

 

The net increase in income from equity-method investees of approximately $0.3 million is primarily due to the following transactions in the nine months ended September 30, 2019: (i) refinancing of the FPH JV properties and the related write off of fees and deferred financing costs from the previous lender; (ii) the termination of two leases in our JV properties; and (iii) the write off of certain costs associated with those lease terminations. Additionally, we have benefited from the decline in applicable interest rates on our loans with variable interest rates in 2020.

 

The decrease in the gain on sale of real estate properties is due to the sale of our four NC Properties (see Note 13 to the accompanying Notes to Condensed Consolidated Financial Statements) in 2019.

 

Liquidity and Capital Resources

 

As of September 30, 2020, we had approximately $15.5 million in cash and cash equivalents on hand. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.

 

Going forward, we expect our primary sources of cash to be rental revenues, joint venture distributions, and acquisition and asset management fees. In addition, we may increase cash through the sale of additional properties, which may result in the deconsolidation of properties we already own, or borrowing against currently-owned properties. For the foreseeable future, we expect our primary uses of cash to be for funding future acquisitions, investments in joint ventures, operating expenses, interest expense on outstanding indebtedness and the repayment of principal on loans payable. We may also incur expenditures for renovations of our existing properties, making our facilities more appealing in their market.

 

We continue to pursue options for repaying and/or refinancing debt obligations with long-term, fixed rate U.S. Department of Housing and Urban Development (“HUD”)-insured loans. In September 2018, April 2019 and April 2020, we refinanced three outstanding loans with HUD-insured loans that mature between 2053 and 2055, respectively. Additionally, in 2017, as part of our responsibilities under the operating agreements as the manager of our Equity-Method Investments, we refinanced seven existing loans of our Equity-Method Investments with HUD-insured loans.

 

Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties.

 

CARES Act

 

At the end of March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act is a stimulus package that provides various forms of relief through, among other things, grants, loans and tax incentives to certain businesses and individuals. In particular, the CARES Act created an emergency lending facility known as the Paycheck Protection Program (PPP), which is administered by the Small Business Administration (SBA) and provides federally insured and, in some cases, forgivable loans to certain, eligible businesses so that those businesses can continue to cover certain of their near-term operating expenses and retain employees. We did not obtain a PPP loan. We have evaluated the CARES Act and determined that there was no impact to the Company for the nine months ended September 30, 2020. We will continue to evaluate and monitor the CARES Act, and any new COVID-19-related legislation to determine the ultimate impact and benefits, if any, to the Company.

 

 

Credit Facilities and Loan Agreements

 

As of September 30, 2020, we had debt obligations of approximately $47.5 million. The outstanding balance by loan agreement is as follows (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements for further information regarding our financing arrangements):

 

·

Capital One Multifamily Finance, LLC (HUD-insured) – approximately $10.4 million maturing September 2053

 

·

ORIX (HUD-insured) – approximately $37.1 million maturing from September 2039 through April 2055

 

Distributions

 

The Company declared a cash distribution of approximately $1.5 million in November 2018, which was paid on January 31, 2019 to shareholders of record as of January 15, 2019. No distributions were declared in 2019 or as of September 30, 2020. 

 

Funds from Operations (“FFO”)

 

FFO is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.

 

Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.

 

The following is the reconciliation from net (loss) income applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the three and nine months ended September 30, 2020 and 2019: 

 

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2020				2019				2020				2019
Net income (loss) applicable to common stockholders (GAAP)		$	112,000			$	58,000			$	(175,000	)		$	3,212,000
Adjustments:
Depreciation and amortization			417,000				416,000				1,252,000				1,332,000
Depreciation and amortization related to non-controlling interests			(10,000	)			(10,000	)			(30,000	)			(32,000	)
Depreciation related to Equity-Method Investments			557,000				567,000				1,672,000				1,485,000
Gain on sale of real estate properties			-				(22,000	)			-				(4,227,000	)
Funds provided by operations (FFO) applicable to common stockholders		$	1,076,000			$	1,009,000			$	2,719,000			$	1,770,000
Weighted-average number of common shares outstanding - basic			23,027,978				23,027,978				23,027,978				23,027,978
FFO per weighted average common shares - basic		$	0.05			$	0.04			$	0.12			$	0.08
Weighted-average number of common shares outstanding - diluted			23,515,414				23,513,331				23,027,978				23,513,331
FFO per weighted average common shares - diluted		$	0.05			$	0.04			$	0.12			$	0.08

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) evaluated the effectiveness of our disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter, including but not limited to changes resulting from the COVID-19 pandemic, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its former directors, one of its officers and one of its former officers as defendants, seeking declaratory and injunctive relief and compensatory and punitive damages. On September 17, 2014, we filed a First Amended Cross-Complaint seeking compensatory damages and an accounting pursuant to Sections 10(c)(i) and 17(c)(ii) of the Advisory Agreement and including any monies Plaintiffs and Terry Roussel directly or indirectly received from or paid to the Company. On February 22, 2018, the action was assigned to a different trial judge. On May 29, 2018, the Company filed a motion for terminating and monetary sanctions against CRA, Cornerstone Ventures, Inc. and their counsel, Winget Spadafora & Schwartzberg. On November 30, 2018, the new trial judge vacated the trial date, pending resolution of the Company’s motion for terminating and monetary sanctions against CRA and Cornerstone Ventures, Inc. and denied the Company’s motion for sanctions against Winget Spadafora & Schwartzberg. On February 13, 2019, the trial judge held another hearing on the Company’s motion for terminating and monetary sanctions and indicated that it intended to grant the Company’s motion for terminating sanctions and award the Company monetary sanctions. On March 14, 2019, the Court entered an Order and Judgment granting the Company’s motion for terminating sanctions, awarding the Company monetary sanctions in the amount of $588,672, and dismissing CRA and Cornerstone Ventures Inc.’s Complaint with prejudice. On May 21, 2019, CRA and Cornerstone Ventures, Inc. filed a notice of appeal from the Judgment and, on June 3, 2019, the Company filed a notice of cross-appeal from the Judgment. On July 9, 2019, the California Court of Appeal, Fourth District dismissed CRA and Cornerstone Ventures, Inc.’s appeal with prejudice. The briefing to the Court of Appeal, Fourth District on the Company’s appeals against CRA, Cornerstone Ventures, Inc and Winget Spadafora & Schwartzberg was completed on April 27, 2020. On October 28, 2020, the Court of Appeal issued an opinion affirming in part, and reversing, in part, the trial court’s opinion and remanded the action back to the trial court.

 

 

In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. The Bankruptcy Court granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay.  The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay.  This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court.  The Bankruptcy Court has not taken any action on the matter since the Third Circuit remanded the case. We believe that all of HCRE’s remaining alleged claims are without merit and will vigorously defend ourselves.

 

Item 1A. Risk Factors.

 

Except as set forth below, there have been no material changes to the Risk Factors described in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

We may face risks related to the receivership of the Pennington Gardens Facility.

 

On October 7, 2020, a receiver assumed the responsibilities of operating and managing the health facility (the “Pennington Gardens Facility”) owned by our wholly owned subsidiary Summit Chandler, LLC (“Summit Chandler”) in Chandler, Arizona. Summit Chandler financed the Pennington Gardens Facility through a U.S. Department of Housing and Urban Development loan (the “Chandler HUD Loan”). If the receivership is not successful in operating and managing the Pennington Gardens Facility, including the full and timely payment of rent to Summit Chandler, we may not be able to meet all of our obligations under the Chandler HUD Loan. Additionally, failure of the receiver to successfully operate and manage the Pennington Gardens Facility may result in the diminution of the value of our investment in the Pennington Gardens Facility, and either such event could adversely impact our results of operations and cash flow.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the periods covered by this Form 10-Q.

 

(b) Not applicable.

 

(c) During the nine months ended September 30, 2020, we redeemed no shares pursuant to our stock repurchase program.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits. 

 

Ex.		Description
3.1		Amendment and Restatement of Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed on March 24, 2006).
3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-11 (No. 333-121238) filed on December 23, 2005).
3.3		Articles of Amendment of the Company dated October 16, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 22, 2013).
3.4		Second Articles of Amendment and Restatement of Articles of Incorporation of the Company dated June 30, 2010 (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K filed on March 20, 2015).
4.1		Subscription Agreement (incorporated by reference to Appendix A to the prospectus included on Post-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-155640) filed on April 16, 2010 (“Post-Effective Amendment No. 2”)).
4.2		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No. 333-121238) filed on December 14, 2004).
4.3		Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the prospectus dated April 16, 2010 included on Post-Effective Amendment No. 2).
4.4		2015 Omnibus Incentive Plan dated October 28, 2015 (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed on September 28, 2015).
31.1		Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
101.1		The following information from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SUMMIT HEALTHCARE REIT, INC.
	/s/ Kent Eikanas
Date: November 12, 2020	Kent Eikanas
	President (Principal Executive Officer)
	/s/ Elizabeth A. Pagliarini
Date: November 12, 2020	Elizabeth A. Pagliarini
	Chief Financial Officer (Principal Financial Officer)