UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

        For the quarterly period ended March 31, 2021

OR

 

For the transition period from              to ______

Commission file number:  000-54685

 

  

 

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

 

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

 

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

 

 

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 Exchange Act).    Yes ☐    No ☒

Securities registered pursuant to Section 12(b) of the Act:

 

The number of shares of common stock of the registrant outstanding as of May 12, 2021 was 173,960,540.

 

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

 

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Item 1. Condensed Consolidated Financial Information

 

CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share data)

 

 

See accompanying notes to condensed consolidated financial statements

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(in thousands)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

(in thousands, except per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

CNL Healthcare Properties, Inc. (the “Company”) is a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) for United States (“U.S.”) federal income tax purposes.  The Company has been and intends to continue to be organized and operate in a manner that allows it to remain qualified as a REIT for U.S. federal income tax purposes. The Company conducts substantially all of its operations either directly or indirectly through: (1) an operating partnership, CHP Partners, LP (“Operating Partnership”), in which the Company is the sole limited partner and its wholly-owned subsidiary, CHP GP, LLC, is the sole general partner; (2) a wholly-owned taxable REIT subsidiary (“TRS”), CHP TRS Holding, Inc.; (3) property owner and lender subsidiaries, which are single purpose entities; and (4) investments in joint ventures.

The Company is externally managed and advised by CNL Healthcare Corp. (“Advisor”), which is an affiliate of CNL Financial Group, LLC (“Sponsor”).  The Sponsor is an affiliate of CNL Financial Group, Inc. (“CNL”). The Advisor is responsible for managing the Company’s day-to-day operations, serving as a consultant in connection with policy decisions to be made by the board of directors, and for identifying, recommending and executing on possible strategic alternatives and dispositions on the Company’s behalf pursuant to an advisory agreement among the Company, the Operating Partnership and the Advisor.  Substantially all of the Company’s operating, administrative and certain property management services are provided by affiliates of the Advisor. In addition, certain property management services are provided by third-party property managers.  

In 2017, the Company began evaluating possible strategic alternatives to provide liquidity to the Company’s stockholders.  In April 2018, the Company’s board of directors formed a special committee consisting solely of its independent directors (“Special Committee”) to consider possible strategic alternatives, including, but not limited to (i) the listing of the Company’s or one of its subsidiaries’ common stock on a national securities exchange, (ii) an orderly disposition of the Company’s assets or one or more of the Company’s asset classes and the distribution of the net sale proceeds thereof to the stockholders of the Company and (iii) a potential business combination or other transaction with a third party or parties that provides the stockholders of the Company with cash and/or securities of a publicly traded company (collectively, among other options, “Possible Strategic Alternatives”). Since 2018, the Special Committee has engaged KeyBanc Capital Markets Inc. to act as a financial advisor to the aforementioned Special Committee. As of December 2018, as part of executing on Possible Strategic Alternatives, the Company had committed to a plan to sell 70 properties which included the sale of its 63 property MOB/Healthcare Portfolio (consisting of 53 medical office buildings (“MOBs”), five post-acute care facilities and five acute care hospitals across the US) plus seven skilled nursing facilities.  During the year ended December 31, 2019, the Company sold 61 of the properties, during the year ended December 31, 2020, the Company sold seven additional properties and in September 2020, the Company decided to discontinue marketing for sale its Hurst Specialty Hospital due to financial difficulties experienced by the tenant of this property. In January 2021, the Company sold its last remaining acute care property classified as assets held for sale.

As of March 31, 2021, the Company’s healthcare investment portfolio was geographically diversified with properties in 26 states and consisted of interests in 73 properties, including 71 senior housing communities, one acute care property and one vacant land parcel.  The Company has primarily leased its seniors housing properties to wholly-owned TRS entities and engaged independent third-party managers under management agreements to operate the properties under the RIDEA structures; however, the Company has also leased some of its properties to third-party tenants under triple-net or similar lease structures, where the tenant bears all or substantially all of the costs (including cost increases, for real estate taxes, utilities, insurance and ordinary repairs).  In addition, most of the Company’s investments have been wholly owned, although, it has, to a lesser extent, invested through partnerships with other entities where it was believed to be appropriate and beneficial.  

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

 

Basis of Presentation and Consolidation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the U.S. (“GAAP”).  The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair statement of the Company’s results for the interim period presented.  Operating results for the three months ended March 31, 2021 may not be indicative of the results that may be expected for the year ending December 31, 2021. Amounts as of December 31, 2020 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date but do not include all disclosures required by GAAP.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The accompanying unaudited condensed consolidated financial statements include the Company’s accounts, the accounts of wholly owned subsidiaries or subsidiaries for which the Company has a controlling interest, the accounts of two variable interest entities (“VIEs”) in which the Company is the primary beneficiary, and the accounts of other subsidiaries over which the Company has a controlling financial interest.  All material intercompany accounts and transactions have been eliminated in consolidation.

Risks and Uncertainties — The outbreak of the novel coronavirus (“COVID-19”) pandemic around the globe continues to adversely impact commercial activity and has contributed to significant volatility in financial markets.  Various states in which the Company owns properties have reacted by, among other things, instituting quarantines and move-in restrictions that have negatively impacted occupancy at seniors housing communities.  While some of these restrictions have been relaxed, many of these restrictions remain in place.  The pandemic has also resulted in the incurrence of costs related to disease control and containment. Such actions have and continue to create significant business disruption and have and continue to adversely impact the senior housing sector.  COVID-19 has had a continued and prolonged adverse impact on economic and market conditions and has triggered a period of economic slowdown which may have a material adverse effect on the Company’s results and financial condition.

The full impact of COVID-19 on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic and (v) the timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the disclosure of contingent liabilities. For example, significant assumptions are made in the analysis of real estate impairments, the valuation of contingent assets and liabilities, and the valuation of restricted common stock (“Restricted Stock”) shares issued to the Advisor.  Accordingly, actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements — In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This new guidance was effective for the Company beginning on January 1, 2021 and did not have a material impact on the Company’s financial statements.

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

In Q1 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation.  The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

The following table presents disaggregated revenue related to the Company’s resident fees and services during the three months ended March 31, 2021 and 2020:

 

 

 

The gross carrying amount and accumulated depreciation of the Company’s real estate assets as of March 31, 2021 and December 31, 2020 are as follows, excluding assets held for sale (in thousands):

 

 

Depreciation expense on the Company’s real estate investment properties, net was approximately $12.5 million and $12.4 million for the three months ended March 31, 2021 and 2020, respectively.

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

As described in Note 1. “Organization,” as part of executing on Possible Strategic Alternatives, as of December 31, 2019, the Company had completed the sale of 61 properties and had eight properties classified as held for sale.  During the three months ended March 31, 2020, the Company completed the sale of seven properties, which included one post-acute care property and the six properties in the Perennial Communities and recorded a gain on sale of $1.1 million for financial reporting purposes. As of December 31, 2020, the Company had one remaining acute care property classified as held for sale.  The Company sold this last property in January 2021 and did not record any gain or loss on sale of the property for financial reporting purposes.  

The Company classified the revenues and expenses related to the Company’s acute care property sold in January 2021 and its post-acute care property sold in February 2020 as discontinued operations in the accompanying condensed consolidated statements of operations, as it believed the sale of these properties represented a strategic shift in the Company’s operations.  The following table is a summary of the Company’s (loss) income from discontinued operations for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

As of March 31, 2021 and December 31, 2020, the Company had two subsidiaries classified as VIEs. These subsidiaries are joint ventures with completed real estate under development in which their equity interest consists of non-substantive protective voting rights.  Additionally, one of the subsidiaries has insufficient equity at risk due to the development nature of the joint venture. The Company determined it is the primary beneficiary and holds a controlling financial interest in each of these subsidiaries due to its power to direct the activities that most significantly impact the economic performance of the entities, as well as its obligation to absorb the losses and its right to receive benefits from these entities that could potentially be significant to these entities. As such, the transactions and accounts of these VIEs are included in the accompanying consolidated financial statements.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is limited to its net investment in these entities which totaled approximately $13.0 million as of March 31, 2021. The Company’s exposure is limited because of the non-recourse nature of the borrowings of the VIEs.

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

 

The Company had liquidity of $157.1 million as of March 31, 2021 (consisting of $68.4 million in cash and $88.7 million of availability under its Revolving Credit Facility) and is well positioned to manage its near-term debt maturities.  The Company has $8.5 million of scheduled payments coming due during the remainder of 2021 and has a material maturity in January 2022 of $236.4 million, consisting of debt collateralized by 22 properties.  The Company has had early discussions with its lenders about repayment or refinancing options upon maturity.  The Company has several other options, including but not limited to, refinancing the facility with the existing lender or another lending institution as a secured loan facility, liquidating all or a portion of the 22 properties to satisfy the obligation, or adding all or a portion of the 22 properties to the existing Credit Facilities and repaying the balance with a draw on the Revolving Credit Facility. The addition of all 22 properties to the borrowing base of the Credit Facilities would result in at least $150 million of additional availability under the Revolving Credit Facility.  

The following table provides the details of the fair market value and carrying value of the Company’s indebtedness as of March 31, 2021 and December 31, 2020 (in millions):

 

 

These fair market values are based on current rates and spreads the Company would expect to obtain for similar borrowings.  Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage notes payable is categorized as Level 3 on the three-level valuation hierarchy.  

Generally, the loan agreements for the Company’s mortgage loans contain customary financial covenants and ratios; including (but not limited to) the following: debt service coverage ratio, minimum occupancy levels, limitations on incurrence of additional indebtedness, etc.  The loan agreements also contain customary events of default and remedies for the lenders.  As of December 31, 2020 and as of March 31, 2021, the Company’s 22 properties that are cross collateralized in a secured debt transaction did not achieve a minimum debt service coverage covenant.  The missed covenant requires that the annual taxes and insurance premiums for each of the 22 properties (estimated at an annualized amount of approximately $6.0 million in the aggregate for all 22 properties) be escrowed monthly, until such time that the covenant is achieved.  In accordance with the cure provision under its loan agreement, the Company has been working with its lender since earlier in the year to establish the cash escrow accounts and anticipates escrowing the approximate $6.0 million over the next nine months with its lender.

The credit facilities contain affirmative, negative, and financial covenants which are customary for loans of this type, including (but not limited to): (i) maximum leverage, (ii) minimum fixed charge coverage ratio, (iii) minimum consolidated net worth, (iv) restrictions on payments of cash distributions except if required by REIT requirements, (v) maximum secured indebtedness, (vi) maximum secured recourse debt, (vii) minimum unsecured interest coverage, (viii) maximum unsecured indebtedness ratio, and (ix) limitations on certain types of investments and with respect to the pool of properties supporting borrowings under the credit facilities, minimum weighted average occupancy, and remaining lease terms, as well as property type, MSA, operator, and asset value concentration limits.  The limitations on distributions generally include a limitation on the extent of allowable distributions, which are not to exceed the greater of 95% of adjusted FFO (as defined per the credit facilities) and the minimum amount of distributions required to maintain the Company’s REIT status.  As of March 31, 2021, the Company was in compliance with all financial covenants related to its Credit Facilities.

 

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

 

During each of the three months ended March 31, 2021 and 2020, the Company paid approximately $0.07 million of cash distributions on restricted stock issued through March 2017 pursuant to the Advisor expense support agreement.  These amounts have been recognized as compensation expense and included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The expenses and fees incurred by and reimbursable to the Company’s related parties, including amounts included in income from discontinued operations, for the three months ended March 31, 2021 and 2020, and related amounts unpaid as of March 31, 2021 and December 31, 2020 are as follows (in thousands):

 

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FOOTNOTES:

During the three months ended March 31, 2021 and 2020, the Company recorded an income tax benefit (expense) of approximately $1.3 million and ($0.6) million, respectively. The income tax benefit for three months ended March 31, 2021, includes approximately $1.4 million related to an increase to the Company’s net deferred tax assets primarily due to the generation of Company’s TRS’s federal and state net operating loss carryforwards, offset by approximately ($0.1) million of current income tax expense.  The income tax expense for three months ended March 31, 2020, includes approximately ($0.4) million related to a decrease to the Company’s net deferred tax assets primarily due to the utilization of a portion of the Company’s TRS’s federal and state net operating loss carryforwards, plus approximately ($0.2) million of current income tax expense.

From time to time, the Company may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, its business, including proceedings to enforce its contractual or statutory rights.  While the Company cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, the Company does not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on its results of operations or financial condition.

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CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

 

As a result of the Company’s completed seniors housing developments continuing to move towards or achieving stabilization, the Company monitors the lease-up of these properties to determine whether the established performance metrics have been met as of each reporting period.  The Company has three remaining promoted interest agreements with third-party developers pursuant to which certain operating targets have been established that, upon meeting such targets, result in the developer being entitled to additional payments based on enumerated percentages of the assumed net proceeds of a deemed sale, subject to achievement of an established internal rate of return on the Company’s investment in the development.  None of the established performance metrics were met or probable of being met as of March 31, 2021.

The Company’s Advisor has approximately 1.3 million contingently issuable Restricted Stock shares for financial reporting purposes that were issued pursuant to the Advisor expense support agreement.  Refer to Note 8. “Related Party Arrangements” for information on distributions declared related to these Restricted Stock shares.

 

 

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

Caution Concerning Forward-Looking Statements

Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31, 2021 that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995.  The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events and circumstances.  Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should,” and “could” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated net asset value per share of the Company’s common stock, and/or other matters.  The Company’s forward-looking statements are not guarantees of future performance.  While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances.  As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized.  The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict.  Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors.  

Important factors that could cause the Company's actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to government regulation, economic, strategic, political and social conditions and the following:

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Given these uncertainties, the Company cautions you not to place undue reliance on forward-looking information.

For further information regarding risks and uncertainties associated with the Company’s business and other important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described in the Company’s  reports filed from time to time with the SEC, including, but not limited to, the Company’s quarterly reports on Form 10-Q and the Company’s annual reports on Form 10-K, copies of which may be obtained from the Company’s website at www.cnlhealthcareproperties.com.  One of the most significant factors is the ongoing and potential impact of the current outbreak of the COVID-19 pandemic on the economy and the broader financial markets, which may have a significant negative impact on the Company’s financial condition, results of operations and cash flows.  The Company is unable to predict whether the continuing effects of the COVID-19 pandemic will trigger a further economic slowdown or a recession and to what extent the Company will experience disruptions related to the COVID-19 pandemic in the second quarter or thereafter.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note.  Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

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Introduction

The following discussion is based on the condensed consolidated financial statements as of March 31, 2021 (unaudited) and December 31, 2020.  Amounts as of December 31, 2020 included in the unaudited condensed consolidated balance sheets have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated balance sheets and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

CNL Healthcare Properties, Inc. is a Maryland corporation that elected to be taxed as a REIT for U.S. federal income tax purposes.  We have and intend to continue to be organized and operate in a manner that allows us to remain qualified as a REIT for federal income tax purposes. The terms “us,” “we,” “our,” “Company” and “CNL Healthcare Properties” include CNL Healthcare Properties, Inc. and each of its subsidiaries.

Substantially all of our assets are held by, and all operations are conducted, either directly or indirectly, through: (1) the Operating Partnership in which we are the sole limited partner and our wholly owned subsidiary, CHP GP, LLC, is the sole general partner; (2) a wholly owned TRS, CHP TRS Holding, Inc.; (3) property owner subsidiaries and lender subsidiaries, which are single purpose entities; and (4) investments in joint ventures.

We are externally managed and advised by CNL Healthcare Corp. (the “Advisor”).  Our Advisor has responsibility for our day-to-day operations, serving as our consultant in connection with policy decisions to be made by our board of directors, and for identifying, recommending and executing on Possible Strategic Alternatives (as described below under “Possible Strategic Alternatives”), and dispositions on our behalf pursuant to an advisory agreement.  For additional information on our Advisor, its affiliates or other related parties, as well as the fees and reimbursements we pay, see Note 8. “Related Party Arrangements.”

As of March 31, 2021, our healthcare investment portfolio consisted of interests in 73 properties, comprising of 71 senior housing communities, one acute care property and one vacant land parcel.  We are currently invested in a geographically diversified portfolio of 71 seniors housing properties.  The types of seniors housing properties that we own include independent and assisted living facilities, continuing care retirement communities and Alzheimer’s/memory care facilities. Five of our 71 seniors housing properties were owned through an unconsolidated joint venture.  

COVID-19

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a pandemic around the globe.  Average occupancy began to decline starting in the second half of March 2020 and continued to trend lower through the three months ended March 31, 2021.  Most of our communities are accepting new residents and we have seen activity in tours and move-ins since the beginning of the year. We continue to incur costs related to disease control and containment including higher labor costs, costs to obtain personal protective equipment and other costs related to disease control and containment. The COVID-19 pandemic has resulted in a decline in occupancy, resident fees and revenues, and coupled with an increase in COVID-19 operating expenses, has had a negative impact on results of operations and cash flow from operations at our communities.  We continue to proactively work closely with our tenants and third-party operators to monitor the impact from COVID-19 on the operations of our seniors housing communities.

The continued impact of COVID-19 on the financial and credit markets and consequently on our business, financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond our control including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the United States and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic and (v) the timing and speed of economic recovery, including the distribution and acceptance of vaccinations for COVID-19.

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As of March 31, 2021, our 71 seniors housing communities were located throughout the United States in 26 states with a population of nearly 7,000 residents and approximately 5,700 community-level staff.  As of May 12, 2021, as reported by our senior housing operators, we had five active, confirmed positive cases among our residents and staff members in three of our communities located in three states.  The number of confirmed cases in our senior housing communities may continue to increase depending on the duration, scope and depth of the COVID-19 pandemic as well as the timing and extent of ceasing stay at home and other social distancing restrictions from state and local governmental agencies.

As described below in “Liquidity and Capital Resources”, as of March 31, 2021, we had $157.1 million in liquidity, consisting of approximately $68.4 million in cash on hand and approximately $88.7 million of availability under our Revolving Credit Facility.  We remain focused on maintaining liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19.

Of our 71 senior housing communities, we owned 15 properties leased to two separate third party tenants under triple-net leases (“NNN”), and the remaining 56 properties were managed through third party operators, including five senior housing communities owned through our unconsolidated joint venture. As of May 12, 2021, we had collected 100% of all rental amounts related to the 13 seniors housing properties leased to one of our third-party tenants under NNN leases and had collected installments relating to the $2 million payment deferral (granted during May 2020), as scheduled.  In April 2021, we entered into an agreement with our other tenant that leases two properties under NNN leases to provide rent relief (after application of rent security deposits) in the form of a maximum rent deferral of $0.9 million for rental amounts due between May 1, 2021 and December 1, 2022.  In exchange for the rent relief, our tenant exercised their first five-year renewal option under the terms of each of their leases and agreed to terminate and release us from any further promoted interest obligations under development agreements.  No rent concessions were granted as part of the rent relief.  The tenant may replenish the security deposits and repay any amounts deferred (up to $0.9 million) at any time but no later than August 2025.  As of May 12, 2021, we had collected 100% of rental amounts due under their NNN leases either in the form of cash collections or the application of security deposits. No amounts had been deferred as of May 12, 2021 under the rent relief agreement.

We believe we are taking appropriate actions to manage through the COVID-19 pandemic.  However, the full impact of COVID-19 is unknown and cannot be reasonably estimated. The ultimate extent of the impact of COVID-19 on the financial performance of our Company will depend on future developments, including the duration and spread of COVID-19 and its effect on the overall economy, all of which are highly uncertain and cannot be predicted. 

Possible Strategic Alternatives

In 2017, we began evaluating possible strategic alternatives to provide liquidity to the Company’s stockholders.  In April 2018, our board of directors formed a special committee consisting solely of our independent directors (“Special Committee”) to consider possible strategic alternatives, including, but not limited to (i) the listing of the Company’s or one of its subsidiaries’ common stock on a national securities exchange, (ii) an orderly disposition of the Company’s assets or one or more of the Company’s asset classes and the distribution of the net sale proceeds thereof to the stockholders of the Company and (iii) a potential business combination or other transaction with a third-party or parties that provides the stockholders of the Company with cash and/or securities of a publicly traded company (collectively, among other options, “Possible Strategic Alternatives”).  Since 2018, the Special Committee has engaged KeyBanc Capital Markets Inc. to act as its financial advisor in connection with exploring our Possible Strategic Alternatives.  

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In connection with our consideration of the Possible Strategic Alternatives, our board of directors suspended both our Reinvestment Plan and our Redemption Plan effective July 11, 2018.  As part of executing on Possible Strategic Alternatives, our board of directors committed to a plan to sell 70 properties which included the MOB/Healthcare Portfolio, a portfolio of 63 properties (consisting of 53 medical office buildings (“MOBs”), five post-acute care facilities and five acute care hospitals across the US) plus seven skilled nursing facilities. Through December 31, 2020, we sold 68 properties, received net sales proceeds of $1,442.3 million, used the net sales proceeds to: (1) repay indebtedness secured by the properties; (2) strategically rebalance other corporate borrowings; (3) make a special cash distribution in May 2019 of $347.9 million ($2.00 per share) to our stockholders and (4) retained net sales proceeds for other corporate purposes, as we were focused on maintaining balance sheet strength and liquidity during COVID-19 to enhance financial flexibility.  We decided to discontinue marketing for sale our Hurst Specialty Hospital due to financial difficulties experienced by the tenant of this property and as of December 31, 2020, we had one remaining acute care property classified as held for sale, which we sold to the tenant of the property in January 2021.  We received net sales proceeds of $7.4 million and retained these proceeds for corporate purposes.

During the year ended December 31, 2020, we shifted our focus away from the pursuit of larger strategic alternatives to provide further liquidity to our shareholders due to the market and industry disruptions in the seniors housing sector from COVID-19.  However, our Special Committee continues to work with our financial advisor to carefully study market data and potential options to determine suitable liquidity alternatives that are in the best interests of all of our shareholders.

Seniors Housing Portfolio

Our remaining investment focus is in seniors housing communities. We invested in or developed the following types of seniors housing properties:

Independent Living Facilities. Independent living facilities are age-restricted, multi-family rental or ownership (condominium) housing with central dining facilities that provide residents, as part of a monthly fee, meals and other services such as housekeeping, linen service, transportation, social and recreational activities.

Assisted Living Facilities. Assisted living facilities are usually state-regulated rental properties that provide the same services as independent living facilities, but also provide, in a majority of the units, supportive care from trained employees to residents who are unable to live independently and require assistance with activities of daily living.  The additional services may include assistance with bathing, dressing, eating, and administering medications.

Memory Care/Alzheimer’s Facilities. Those suffering from the effects of Alzheimer’s disease or other forms of memory loss need specialized care. Memory care/Alzheimer’s centers provide the specialized care for this population including residential housing and assistance with the activities of daily living.

Portfolio Overview

As of March 31, 2021, our healthcare investment portfolio consisted of interests in 73 properties, comprising 71 senior housing communities, one vacant land parcel and one acute care hospital.  Of our properties held as of March 31, 2021, five of our 71 seniors housing properties were owned through an unconsolidated joint venture.    

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We believe demographic trends and compelling supply and demand indicators presented a strong case for an investment focus on seniors housing real estate and real estate-related assets.  Our seniors housing investment portfolio is geographically diversified with properties in 26 states. The map below shows our remaining healthcare investment portfolio across geographic regions as of May 12, 2021:

 

 

 

The following table summarizes our seniors housing investment portfolio by investment structure as of May 12, 2021:

 

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FOOTNOTES:

Portfolio Evaluation

While we are not directly impacted by the performance of the underlying properties leased to third-party tenants, we believe that the financial and operational performance of our tenants provides an indication about the stability of our tenants and their ability to pay rent.  To the extent that our tenants, managers or joint venture partners experience operating difficulties and become unable to generate sufficient cash to make rent payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.  Our tenants and managers are generally contractually required to provide this information to us in accordance with their respective lease, management and/or joint venture agreements.  Therefore, in order to mitigate the aforementioned risk, we monitor our investments through a variety of methods determined by the type of property.

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We monitor the performance of our tenants and third-party operators to stay abreast of any material changes in the operations of the underlying properties by (1) reviewing the current, historical and prospective operating margins (measured by a tenant’s earnings before interest, taxes, depreciation, amortization and facility rent), (2) monitoring trends in the source of our tenants’ revenue, including the relative mix of public payors (including Medicare, Medicaid, etc.) and private payors (including commercial insurance and private pay patients), (3) evaluating the effect of evolving healthcare legislation and other regulations on our tenants’ profitability and liquidity, and (4) reviewing the competition and demographics of the local and surrounding areas in which the tenants operate. We have and continue to proactively work closely with our tenants and third-party operators to monitor the impact from COVID-19 on the operations of our seniors housing communities.

When evaluating the performance of our seniors housing portfolio, management reviews property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits.  Management also reviews occupancy levels and monthly revenue per occupied unit, which we define as total revenue divided by average number of occupied units.  Similarly, when evaluating the performance of our third-party operators, management reviews monthly financial statements, property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits.  All of the aforementioned operating and statistical metrics assist us in determining the ability of our properties or operators to achieve market rental rates, to assess the overall performance of our diversified healthcare portfolio, and to review compliance with leases, debt, licensure, real estate taxes, and other collateral.

Significant Tenants and Operators

Our real estate portfolio of 73 properties is operated by a mix of national or regional operators and the following represent the significant tenants and operators that lease or manage 10% or more of our rentable space as of May 12, 2021, excluding the vacant land parcel and the five properties owned through our unconsolidated joint venture.  The lease expirations reflect the renewal options that were exercised in April 2021:

 

 

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FOOTNOTES:

 

Tenant Lease Expirations

As of March 31, 2021, we owned 15 seniors housing properties and one acute care property that were leased to third party tenants under triple-net operating leases.  During the three months ended March 31, 2021, our rental income from continuing operations represented approximately 10.1% of our total revenues from continuing operations.  

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Under the terms of our triple-net lease agreements, each tenant is responsible for payment of property taxes, general liability insurance, utilities, repairs and maintenance, including structural and roof expenses.  Each tenant is expected to pay real estate taxes directly to the taxing authorities. However, if the tenant does not pay the real estate taxes, we would be liable. Refer to “Liquidity and Capital Resources – Tenant Financial Difficulties” below for information on real estate taxes paid relating to our one acute care property.

As of March 31, 2021, none of our rental income from continuing operations was scheduled to expire until February 2022.  Therefore, we do not expect lease turnover to have a significant impact on our cash flows from operations during 2021.  We work with and begin lease-related negotiations well in advance of the lease expirations or renewal period options in order for us to maintain a balanced lease rollover schedule and high occupancy levels, as well as to enhance the value of our properties through extended lease terms. Certain amendments or modifications to the terms of existing leases could require lender approval.

The following table lists, on an aggregate basis, scheduled expirations for the remainder of 2021, each of the next nine years and thereafter on our consolidated healthcare investment portfolio, assuming that none of the tenants exercise any of their renewal options (in thousands, except for number of tenants and percentages).  The table updated as of May 12, 2021, reflects the renewal options that were exercised in April 2021:

 

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FOOTNOTES:

Liquidity and Capital Resources

General

 

Our ongoing primary source of capital includes proceeds from operating cash flows.  Our primary use of capital includes the payment of distributions, payment of operating expenses, funding capital improvements to existing properties and payment of debt service.  Generally, we expect to meet short-term working capital needs from our cash flows from operations. Our ongoing sources and uses of capital have been and will continue to be impacted by the COVID-19 pandemic as described above in “COVID-19”.  As necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures or to cover periodic shortfalls between distributions paid and cash flows from operating activities.  

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As of March 31, 2021, we had approximately $157.1 million of liquidity (consisting of approximately $68.4 million in cash on hand and approximately $88.7 million of undrawn availability under our Revolving Credit Facility).  We remain focused on maintaining liquidity and financial flexibility and continue to monitor developments as we continue to deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19.  However, the full impact of COVID-19 is unknown and cannot be reasonably estimated.  The ultimate extent of the impact of COVID-19 on the financial performance of our Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

We have pledged certain of our properties in connection with our borrowings and may continue to strategically leverage our real estate and use debt financing as a means of providing additional funds for the payment of distributions to stockholders, working capital and for other corporate purposes.  Our ability to increase our borrowings could be adversely affected by credit market conditions, including the COVID-19 pandemic, which could result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate.  We may also be negatively impacted by rising interest rates on our unhedged variable rate debt or the timing of when we seek to refinance existing debt. In addition, we continue to evaluate the need for additional interest rate protection in the form of interest rate swaps or caps on unhedged variable rate debt.

Our cash flows from operating and investing activities as described within “Sources of Liquidity and Capital Resources” and “Uses of Liquidity and Capital Resources” represent cash flows from continuing operations and exclude the results of two properties that were classified as discontinued operations, one of which was sold in January 2021 and the other which was sold in February 2020.

Sources of Liquidity and Capital Resources

 

Proceeds from Sale of Real Estate – Continuing Operations

As part of executing under our Possible Strategic Alternatives, during the three months ended March 31, 2020, we closed on the sale of six skilled nursing properties (the Perennial Communities) and received net sales proceeds of $53.7 million.   We retained the net sales proceeds for corporate purposes given our focus on maintaining a strong balance sheet, liquidity and financial flexibility given the uncertainty relating to COVID-19. We did not sell any properties from continuing operations during the three months ended March 31, 2021.

Proceeds from Sale of Real Estate – Discontinued Operations

As part of executing under our Possible Strategic Alternatives, during the three months ended March 31, 2021 and 2020, we closed on the sale of one acute care property and received net sales proceeds of $7.4 million and one post-acute care property and received new sales proceeds of $28.4 million, respectively.  We retained these net sales proceeds for corporate purposes to maintain liquidity due to COVID-19.

Borrowings

There were no borrowings during the three months ended March 31, 2021 and 2020. However, we may borrow money to fund enhancements to our portfolio, as well as to cover periodic shortfalls between distributions paid and cash flows from operating activities, to the extent impacted by the disruption and uncertainties from COVID-19.  

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Net Cash Provided by Operating Activities – Continuing Operations

 

We experienced positive cash flow from operating activities for the three months ended March 31, 2021 and 2020 of approximately $12.6 million and $17.5 million, respectively.  The change in cash flows from operating activities for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily the result of the following:

Tenant Financial Difficulties

The tenant of our Hurst Specialty Hospital experienced financial difficulties during the second half of 2020, was unable to remain current under its lease obligation and had $1.2 million of past due rents and real estate tax receivables outstanding (all of which were reserved) as of December 31, 2020.  We assessed that collectability of lease payments was not probable and record rental income on a cash basis for this tenant and are pursuing collection of all past due amounts.  The tenant paid approximately $0.5 million representing all rental amounts due under its lease agreement during the three months ended March 31, 2021.

Uses of Liquidity and Capital Resources

Capital Expenditures

 

We paid approximately $2.0 million and $2.5 million in capital expenditures during the three months ended March 31, 2021 and 2020, respectively.  

Debt Repayments

During the three months ended March 31, 2021, we paid approximately $2.8 million of scheduled repayments on our mortgages and other notes payable. During the three months ended March 31, 2020, we paid approximately $23.3 million, which included approximately $20.5 million of debt obligations that were scheduled to mature in June 2020 and $2.8 million of scheduled repayments on our mortgages and other notes payable.

On an ongoing basis, we monitor our debt maturities, engage in dialogue with third-party lenders about various financing scenarios and analyze our overall portfolio borrowings in advance of scheduled maturity dates of the debt obligations to determine the optimal borrowing strategy.  

We had liquidity of $157.1 million as of March 31, 2021 (consisting of $68.4 million of cash on hand and $88.7 million of availability under our Revolving Credit Facility) and were well positioned to manage our near-term debt maturities.  We have $8.5 million of scheduled payments coming due during 2021 and have a material maturity in January 2022 of $236.4 million, consisting of debt collateralized by 22 properties.  We have had early discussions with our lender about repayment or refinancing options upon maturity.  We have several other options, including but not limited to, refinancing the facility with the existing lender or another lending institution as a secured loan facility, liquidating all or a portion of the 22 properties to satisfy the obligation, or adding all or a portion of the 22 properties to our existing Credit Facilities and repaying the balance with a draw on the Revolving Credit Facility. We estimate that the addition of all 22 properties to the borrowing base of our Credit Facilities would result in at least $150 million of additional availability under our Revolving Credit Facility.

The aggregate amount of long-term financing is not expected to exceed 60% of our gross asset values (as defined in our Credit Facilities) on an annual basis.  As of March 31, 2021 and December 31, 2020, we had an aggregate debt leverage ratio of approximately 32.1% and 32.3%, respectively, of the aggregate carrying value of our assets.

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Generally, the loan agreements for our mortgage loans contain customary financial covenants and ratios; including (but not limited to) the following: debt service coverage ratio, minimum occupancy levels, limitations on incurrence of additional indebtedness, etc.  The loan agreements also contain customary performance criteria and remedies for the lenders.  As of December 31, 2020 and March 31, 2021, our 22 properties that are cross collateralized in a secured debt transaction did not achieve a minimum debt service coverage covenant.  The missed covenant requires that the annual taxes and insurance premiums for each of the 22 properties (estimated at an annualized amount of approximately $6.0 million in the aggregate for all 22 properties) be escrowed monthly, until such time that the covenant is achieved.  In accordance with the cure provision under our loan agreement, we have been working with our lender since earlier in the year to establish the cash escrow accounts and anticipates escrowing the approximate $6.0 million over the next nine months with our lender.

The Credit Facilities contain affirmative, negative, and financial covenants which are customary for loans of this type.  As of March 31, 2021, we were in compliance with all financial covenants related to our Credit Facilities.

Distributions

In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income. We may make distributions in the form of cash or other property, including distributions of our own securities.  While we generally expect to pay distributions from cash flows provided by operating activities, we have and may continue to cover periodic shortfalls between distributions paid and cash flows from operating activities with proceeds from other sources; such as from cash flows provided by financing activities (“Other Sources”), a component of which could include borrowings, whether collateralized by our properties or unsecured, or net sales proceeds from the sale of real estate. 

The following table represents total cash distributions declared, distributions reinvested and cash distributions per share for three months ended March 31, 2021 and 2020 (in thousands, except per share data):    

 

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FOOTNOTES:

Results of Operations

Except for the impact from the COVID-19 pandemic as described above in “COVID-19”, we are not aware of other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the  operation of properties, , other than those referred to in the risk factors identified in “Part II, Item 1A” of this report and the “Risk Factors” section of our Annual Report.

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The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto.

Three months ended March 31, 2021 as compared to the three months ended March 31, 2020

As of March 31, 2021, excluding the five properties owned by the unconsolidated joint venture and our unimproved land, we owned 67 consolidated operating investment properties.

 

 

Rental Income and Related Revenues. Rental income and related revenues was approximately $7.3 million for the three months ended March 31, 2021 as compared to $8.1 million for the three months ended March 31, 2020.  This decrease was primarily due to sale of the six skilled nursing facilities located in Arkansas (“Perennial Communities”) in March 2020.   

Resident Fees and Services. Resident fees and services income was approximately $64.8 million for the three months ended March 31, 2021, as compared to approximately $73.6 million for the three months ended March 31, 2020.  As described above in “Liquidity and Capital Resources - COVID-19”, resident fees and services were negatively impacted starting in mid-March, 2020 as a result of declines in occupancy levels affected by move-in restrictions, intensified screening and other measures enacted at our communities to address the spread of COVID-19.

Property Operating Expenses. Property operating expenses were approximately $47.9 million for the three months ended March 31, 2021 as compared to approximately $48.2 million for the three months ended March 31, 2020.  

General and Administrative Expenses. General and administrative expenses were approximately $2.2 million for the three months ended March 31, 2021, as compared to approximately $2.1 million for the three months ended March 31, 2020.  General and administrative expenses were comprised primarily of personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, franchise taxes, accounting and legal fees, and board of director fees.

Asset Management Fees. We incurred asset management fees of approximately $4.5 million and $4.6 million for the three months ended March 31, 2021 and 2020, respectively. Monthly asset management fees equal to 0.08334% of invested assets are paid to our Advisor for the management of our real estate assets, including our pro rata share of investments in unconsolidated entities, loans and other permitted investments.

Property Management Fees.  We incurred property management fees of approximately $3.1 million and $3.5 million for the three months ended March 31, 2021 and 2020, respectively. The decrease across periods is reflective of the decrease in resident fees and service revenue over the same period.

Depreciation and Amortization. Depreciation and amortization expenses were approximately $12.6 million and $12.5 million for the three months ended March 31, 2021 and 2020, respectively.  Depreciation and amortization expenses are comprised of depreciation and amortization of the buildings, equipment, land improvements and in-place leases related to our real estate portfolio.

Gain on Sale of Real Estate. Gain on sale of real estate relating to the sale of the Perennial Communities was approximately $1.1 million for the three months ended March 31, 2020. We did not sell any properties from continuing operations during the three months ended March 31, 2021.

Interest Expense and Loan Cost Amortization. Interest expense and loan cost amortization were approximately $5.3 million for the three months ended March 31, 2021, as compared to approximately $7.1 million for the three months ended March 31, 2020.  The decrease in interest expense and loan cost amortization was primarily the result of the reduction in average debt outstanding and a reduction in LIBOR rates.

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(Loss) Income from Discontinued Operations. We classified the revenues and expenses related to one post-acute care and one acute care property as discontinued operations because we believed the sale of these properties, along with the other properties included in our MOB portfolio, would cause a strategic shift in our operations.  We had a loss from discontinued operations of approximately $10,000 for the three months ended March 31, 2021, as compared to income from discontinued operations of approximately $0.4 million for the three months ended March 31, 2020.  The decrease in income from discontinued operations across periods primarily resulted from the sale of these properties in February 2020 and January 2021. Refer to Note 5. “Assets and Associated Liabilities Held For Sale and Discontinued Operations” for additional information.

Net Operating Income

We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from NOI.  We define NOI, a non-GAAP measure, as total revenues less the property operating expenses and property management fees from managed properties.  We use NOI as a key performance metric for internal monitoring and planning purposes, including the preparation of annual operating budgets and monthly operating reviews, as well as to facilitate analysis of future investment and business decisions.  It does not represent cash flows from operating activities in accordance with GAAP and should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as an indication of our operating performance or to be an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.  We believe the presentation of this non-GAAP measure is important to the understanding of our operating results for the periods presented because it is an indicator of the return on property investment and provides a method of comparing property performance over time.  In addition, we have aggregated NOI on a “same-store” basis only for comparable properties that we have owned during the entirety of all periods presented.  Non-same-store NOI represents NOI from the Perennial Communities that were sold in March 2020, as we did not own those properties during the entirety of all periods presented. The chart below presents a reconciliation of our net income to NOI for the three months ended March 31, 2021 and 2020 (in thousands) and the amount invested in properties as of March 31, 2021 and 2020 (in millions), excluding properties classified as discontinued operations:

 

 

Overall, our same-store NOI for the year ended March 31, 2021 decreased by approximately $7.8 million as compared to the same period in the prior year.  As described above in “COVID-19”, same store NOI was negatively impacted as a result of declines in property occupancy levels, resident fees and services affected by move-in restrictions, intensified screening and other measures enacted at our communities to address the spread of COVID-19, coupled with an increase in COVID-19 operating related expenses, which included higher labor costs, costs to obtain personal protective equipment and other costs related to disease control and containment.

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Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, (“NAREIT”) promulgated a measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT.  The use of FFO is recommended by the REIT industry as a supplemental performance measure.  FFO is not equivalent to net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT.  NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, plus depreciation and amortization of real estate related assets, and after adjustments for unconsolidated partnerships and joint ventures.  Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.  Historical accounting for real estate involves the use of GAAP.  Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP.  Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss.  However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating operating performance.  The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model) to an expensed-as-incurred model that were put into effect in 2009, and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP and accounted for as operating expenses.  Our management believes these fees and expenses do not affect our overall long-term operating performance.  Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.  While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases.  Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA has standardized a measure known as modified funds from operations (“MFFO”) which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT.  MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended.  We believe that because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place.

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By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired.  We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted from a GAAP accrual basis in order to reflect such payments on a cash basis of amounts expected to be received for such lease and rental payments); contingent purchase price consideration adjustments; accretion of discounts and amortization of premiums on debt investments;  mark-to-market adjustments included in net income or loss; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.  The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above.  In calculating MFFO, we exclude acquisition related expenses.  Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss.  These expenses are paid in cash by us.  All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter.  As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner.  We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.  For example, acquisition costs are funded from our subscription proceeds and other financing sources and not from operations.   

By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful.  Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (or loss) or income (or loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders.  FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.  MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO.  In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

 

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The following table presents a reconciliation of net income to FFO and MFFO for the three months ended March 31, 2021 and 2020 (in thousands, except per share data):

 

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FOOTNOTES:

 

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Related-Party Transactions

See Item 1. “Condensed Consolidated Financial Information” and our Annual Report on Form 10-K for the year ended December 31, 2020 for a summary of our related party transactions.

Critical Accounting Policies and Estimates

See Item 1. “Condensed Consolidated Financial Information” and our Annual Report on Form 10-K for the year ended December 31, 2020 for a summary of our critical accounting policies and estimates.

Recent Accounting Pronouncements

See Item 1. “Condensed Consolidated Financial Information” for a summary of the impact of recent accounting pronouncements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risks

We may be exposed to interest rate changes primarily as a result of the long-term debt we used to acquire properties and other permitted investments. Our management objectives related to interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs.  To achieve our objectives, we borrow at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert from variable rates to fixed rates.  With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The following is a schedule as of March 31, 2021 of our fixed and variable rate debt maturities for the remainder of 2021, and each of the next four years and thereafter (principal maturities only) (in thousands):

 

_____________

FOOTNOTE:

 

 

Management estimates that a hypothetical one-percentage point increase in LIBOR compared to LIBOR rates as of March 31, 2021, considering the impact of our interest rate caps, would increase interest expense approximately $0.5 million for the quarter ended March 31, 2021.  This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and actual results will likely vary given that our sensitivity analysis on the effects of changes in LIBOR does not factor in a potential change in variable rate debt levels.

 

As of March 31, 2021, the Company’s debt is comprised of approximately 55.8% in fixed rate debt, approximately 37.5% in variable rate debt with current interest rate protection and approximately 6.7% of unhedged variable rate debt.  The remaining unhedged variable rate debt primarily relates to our Term Loan Facility.  Overall, we believe longer term fixed rate debt could be beneficial in a rising interest rate or rising inflation rate environment and as such we continue to evaluate the need for additional interest rate protection on unhedged variable rate debt or variable rate debt with interest rate protection scheduled to mature.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there were no changes in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including proceedings to enforce our contractual or statutory rights.  While we cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, we do not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

Unregistered Sales of Equity Securities – None

Issuer Purchases of Equity Securities – None

Secondary Sales of Registered Shares between Investors

 

During the three months ended March 31, 2021 and 2020, there were approximately 61,000 shares and 35,000 shares transferred between investors, respectively, at an average sales price per share of approximately $4.51 and $5.58, respectively.  We are not aware of any other trades of our shares, other than previous purchases made in our Offerings and/or redemptions of shares by us.

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosure – Not Applicable

Item 5. Other Information – None

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

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EXHIBIT INDEX

 

Exhibits

 

The following exhibits are included, or incorporated by reference in this Quarterly Report on Form 10-Q for the three months ended March 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K).

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 14th day of May 2021.

 

 

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