Sila Realty Trust, Inc. (SILA) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Annual Report on Form 10-K. The discussion contains forward looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under “Risk Factors” and “Forward-Looking Statements.” All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.
This section of the Annual Report on Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. A discussion of the changes in our financial condition and results of operations for the years ended December 31, 2023 and 2022 may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal years ended December 31, 2023 and December 31, 2022.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD: SEC filings; press releases; public conference calls; or our website. We routinely post important information on our website at www.silarealtytrust.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. The contents of our website address referenced herein is included in this Annual Report on Form 10-K as a textual reference only and is not incorporated by reference into this Annual Report on Form 10-K.
Overview
We invest in high quality properties leased to tenants capitalizing on critical and structural economic growth drivers. We are primarily focused on investing in healthcare facilities across the continuum of care, which we believe typically generate predictable, durable and growing income streams. We may also make other real estate-related investments, which may include equity or debt interests in other real estate entities.
As of December 31, 2024, we owned 135 real estate properties and two undeveloped land parcels.
Recent Developments
New York Stock Exchange Listing and Reverse Stock Split
On June 13, 2024, our Common Stock was listed and began trading on the NYSE under the ticker symbol "SILA". Upon the Listing, all outstanding shares of Class I Common Stock and Class T Common Stock were automatically converted into shares of Class A Common Stock on a one-for-one basis and authorized but unissued shares of Class I Common Stock, Class T Common Stock and Class T2 Common Stock were reclassified into additional shares of Class A Common Stock. Class A Common Stock was then immediately renamed “Common Stock” and is the sole class of stock traded on the NYSE.
On April 8, 2024, in anticipation of the Listing, we amended our charter to effect a one-for-four reverse stock split, or the Reverse Stock Split, of each issued and outstanding share of each class of our Common Stock, effective May 1, 2024, and we also amended our charter to decrease the par value of each issued and outstanding share of our Common Stock from $0.04 par value per share to $0.01 par value per share immediately after the Reverse Stock Split. In addition, equitable adjustments were made to the maximum number of shares of our Common Stock that may be issued pursuant to the A&R Incentive Plan to reflect the Reverse Stock Split. The number of shares of our Common Stock subject to outstanding awards under the A&R Incentive Plan were also equitably adjusted to reflect the Reverse Stock Split. The Reverse Stock Split affected all record holders of our Common Stock uniformly and did not affect any record holder’s percentage ownership interest. The Reverse Stock Split did not affect the number of our authorized shares of Common Stock.
Share Repurchase Program
On August 16, 2024, the Board authorized a share repurchase program of up to the lesser of 1,500,000 shares of our outstanding Common Stock, or $25,000,000 in gross purchase proceeds for a period of 12 months from August 16, 2024. Repurchases of Common Stock under the Share Repurchase Program may be made from time to time in the open market, in privately negotiated purchases, in accelerated share repurchase programs or by any other lawful means. The number of shares of Common Stock purchased and the timing of any purchases will depend on a number of factors, including the price and availability of Common Stock and general market conditions. We did not repurchase any shares under the Share Repurchase
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Program during the year ended December 31, 2024. Therefore, as of December 31, 2024, up to $25,000,000 of our Common Stock remained available for repurchase under the Share Repurchase Program.
Termination of Share Repurchase Program and Distribution Reinvestment Plan
In light of our intention to pursue the Listing, on April 5, 2024, the Board approved the suspension of the Terminated SRP, effective immediately, and the termination of the Terminated SRP, effective upon the Listing. On April 5, 2024, the Board also approved the termination of the DRIP effective May 1, 2024.
"Dutch Auction" Tender Offer
On June 13, 2024, in conjunction with the Listing, we commenced the Tender Offer to purchase shares of our Common Stock for cash at a price per share of not greater than $24.00 nor less than $22.60, net to the seller in cash, less any applicable withholding taxes and without interest, for a maximum aggregate purchase price of no more than $50,000,000. The Tender Offer expired on July 19, 2024. As a result of the Tender Offer, we accepted for purchase 2,212,389 shares of Common Stock (which represented approximately 3.9% of the total number of shares of Common Stock outstanding as of July 19, 2024) at a purchase price of $22.60 per share, for an aggregate purchase price of approximately $50,000,000, excluding all related costs and fees. We incurred $2,093,000 of costs and fees related to the Tender Offer which are recorded as a reduction in equity on the accompanying consolidated financial statements. We funded the Tender Offer and related costs and fees with our available cash.
Critical Accounting Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. From time to time, we evaluate our estimates based on historical experience and various assumptions that we believe are reasonable under the circumstances. Although our actual results historically have not deviated materially from those determined using estimates, our results of operations or financial condition could differ materially from these estimates under different assumptions or conditions.
We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the impairment of long-lived assets.
We review our real estate assets on an asset group basis for impairment. Typically, an individual property constitutes an asset group. We identify an asset group based on the lowest level of identifiable cash flows. In the impairment analysis we must determine whether there are indicators of impairment. For operating properties, these indicators could include a reduction in our expected holding period, a tenant having unpaid rent or a delinquency, a significant decline in a property’s leased percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a significant decline in lease rates for that property or others in the property’s market, a significant change in the market value of the property, or an adverse change in the financial condition of significant tenants. The length of the expected holding period coupled with these other indicators impact the projected undiscounted cash flows.
If we determine that an asset has indicators of impairment, we then determine whether the undiscounted cash flows associated with the asset group over the expected holding period exceed the carrying amount of the asset group. In calculating the undiscounted net cash flows of an asset group, we use considerable judgment to estimate several inputs. We estimate future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values, among other things. In addition, if there are alternative strategies for the future use of the asset, we assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset group.
In determining the fair value of an asset group, we exercise considerable judgment on several factors. We may determine fair value by using a direct capitalization method, a discounted cash flow method or by utilizing comparable sales information. The direct capitalization method is based on a capitalization rate applied to the underlying asset group's stabilized next twelve-month net operating income at the measurement date. The discounted cash flow method is based on estimated future cash flow projections utilizing discount rates, terminal capitalization rates, and planned capital expenditures. We use judgment to determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. We also use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.
The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. Significant increases or decreases in any of these inputs, particularly with regard to the expected holding period, cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value measurement of the real estate assets being assessed. Additionally, changes in economic and operating conditions, including changes in the financial
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condition of our tenants, and changes to our intent and ability to hold the related asset, that occur after our impairment assessment could impact the assumptions used in that assessment and could result in future charges to earnings if assumptions regarding those investments differ from actual results.
Real Estate Acquisitions and Dispositions in 2024
•We purchased eight healthcare properties, comprising approximately 307,000 rentable square feet for an aggregate purchase price of approximately $164,053,000.
•We sold four healthcare properties for an aggregate sale price of $18,700,000 and generated net proceeds of $17,705,000.
Factors That May Influence Results of Operations
We are not aware at this time of any material trends or uncertainties, other than national economic conditions and those discussed below and in Part I. Item 1A. "Risk Factors" of this Annual Report on Form 10-K, affecting our real estate properties, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income, management and operation of our properties.
Economic and Market Conditions
Our operating results have been and will continue to be generally impacted by global and national economic and market conditions and by the local economic conditions where our real estate properties are located. Increased interest rates, persistent inflation, ongoing geopolitical tensions, and increased volatility in public and private equity and fixed income markets have led to increased costs and have limited the availability of capital. In response to inflationary pressures, the Federal Reserve began raising interest rates in 2022. Though these higher interest rates began to decline in 2024, and there are signs that the limitations on the availability of capital are moderating, there can be no assurances that this will continue to be the case. Higher interest rates imposed by the Federal Reserve to address potential inflation may adversely impact our borrowing costs and real estate asset values generally, including our real estate properties. In addition, any tariffs imposed by the current administration or other countries may cause further inflationary pressures in the economy.
To the extent our tenants have also experienced difficulties due to the foregoing economic and market conditions, and if there are changes to government reimbursements, they may be unable or unwilling to make payments or perform their obligations when due. Most of our lease agreements contain provisions designed to mitigate the adverse impact of inflation, including annual rent increases based on stated increases or consumer price index (CPI) increases.
Rental Revenue
The amount of rental revenue generated by our properties depends principally on our ability to maintain the occupancy rates of leased space and to lease available space at existing rental rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. We continually monitor our tenants' ability to meet their lease obligations to pay us rent to determine if any adjustments should be reflected currently. As of December 31, 2024, our properties were 96.0% leased.
PAM Amended Lease Agreements
On December 17, 2024, we entered into 15 amended lease agreements, effective December 1, 2024, with certain subsidiaries of Post Acute Medical, LLC, related to 15 properties. The PAM Amended Lease Agreements extend the term of each lease to a 20-year remaining lease term, with each maturing on November 30, 2044, and no changes to the base rental rate.
Steward Bankruptcy Filing
On May 6, 2024, Steward, the sponsor and owner of a tenant at the Stoughton Healthcare Facility, announced that it filed for Chapter 11 bankruptcy protection under the United States Bankruptcy Code. During the year ended December 31, 2024, we received $1,392,000 of contractual base rent from Steward, which represents monthly contractual base rent, except for April and May for which Steward did not pay, and prorated rent through September 19, 2024, when the U.S. Bankruptcy Court for the Southern District of Texas approved Steward's request to reject our lease.
On August 12, 2024, we entered into a contract for sale with a buyer for the Stoughton Healthcare Facility; however, the buyer terminated the contract on November 4, 2024. The Stoughton Healthcare Facility is vacant as of December 31, 2024. We are actively marketing the property for sale or lease.
During the three months ended December 31, 2023, due to the ongoing operational and liquidity challenges faced by Steward, we determined the collectability of amounts owed under the contractual terms of Steward's lease were no longer reasonably assured. As a result, we ceased recognizing rent on a straight-line basis and have only recorded rent for Steward to the extent we have received cash. We recorded a write-off of straight-line rent receivables related to Steward of $1,604,000
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during the three months ended December 31, 2023, as a reduction in rental revenue, because the amounts were determined to be uncollectible. In addition, we recorded $10,945,000 of impairment losses (including goodwill impairments of $350,000) on the real estate property leased to Steward during the three months ended December 31, 2023. There were no further impairment losses recorded on the real estate property leased to Steward for the year ended December 31, 2024.
GenesisCare Bankruptcy Filing
As disclosed in the Current Report on Form 8-K that we filed with the SEC on June 5, 2023, GenesisCare, the sponsor and owner of the tenant in certain of our real estate properties announced that it filed for Chapter 11 bankruptcy protection under the United States Bankruptcy Code on June 1, 2023. During the bankruptcy proceedings, GenesisCare sought U.S. bankruptcy court approval to reject certain unexpired real property leases. GenesisCare's lease obligations with us were not included in any motions. On March 27, 2024, we entered into the GenesisCare Amended Master Lease with GenesisCare in connection with its emergence from bankruptcy on February 16, 2024. Prior to the GenesisCare Amended Master Lease, GenesisCare was a tenant at 17 of our real estate properties pursuant to the GenesisCare Master Lease. The GenesisCare Amended Master Lease removed the Severed Properties from the GenesisCare Master Lease. The seven properties remaining under the GenesisCare Amended Master Lease will continue to be leased to GenesisCare and had no material changes in lease terms pursuant to the GenesisCare Master Lease. As a result of the GenesisCare Amended Master Lease, we entered into lease agreements with new tenants at seven of the Severed Properties during the year ended December 31, 2024. The remaining three Severed Properties were sold during the year ended December 31, 2024. The Fort Myers Healthcare Facilities were sold on September 25, 2024 for a sales price of $15,500,000, generating net proceeds of $14,679,000, excluding real estate tax pro-rations. Additionally, the Yucca Valley Healthcare Facility was sold on December 10, 2024 for a sales price of $1,700,000, generating net proceeds of $1,587,000. In exchange for the Severed Properties, we received a $2,000,000 severance fee from GenesisCare, or the GenesisCare Severance Fee, on March 27, 2024. We will recognize the GenesisCare Severance Fee in rental revenue on a straight-line basis over the remaining GenesisCare Amended Master Lease term. During the year ended December 31, 2024, we recognized $173,000 of amortization of the GenesisCare Severance Fee in rental revenue in the accompanying consolidated statements of comprehensive income.
Due to GenesisCare filing for bankruptcy, we determined the collectability of amounts owed under the contractual terms of the GenesisCare Master Lease were no longer reasonably assured. As a result, effective June 1, 2023, we ceased recognizing rent on a straight-line basis and recorded rent for GenesisCare to the extent we had received cash. Effective October 1, 2024, we commenced recognizing rent on a straight-line basis for the seven properties remaining under the GenesisCare Amended Master Lease that continue to be leased to GenesisCare, as we determined the collectability of amounts owed under the contractual terms were reasonably assured based on our analysis of historical payments. GenesisCare continues to make its lease payments due to us in accordance with the GenesisCare Amended Master Lease and made its lease payments throughout its bankruptcy pursuant to the GenesisCare Master Lease.
We recorded impairment losses of $418,000, for the year ended December 31, 2024, attributable to the Fort Myers Healthcare Facilities, following a reduction in the expected sales price that occurred during the three months ended June 30, 2024. During the year ended December 31, 2024, we recognized a loss on disposition of $792,000 attributable to the Fort Myers Healthcare Facilities, related to costs to sell, which is presented in impairment and disposition losses in the consolidated statements of comprehensive income. Additionally, during the year ended December 31, 2024, we recognized a gain on sale of $265,000 attributable to the Yucca Valley Healthcare Facility, which is presented in gain on dispositions of real estate in the consolidated statements of comprehensive income. During the year ended December 31, 2024, we recorded accelerated amortization of in-place lease intangible assets, above-market lease intangible assets and below-market lease intangible liabilities of $4,646,000, $2,667,000, and $2,038,000, respectively, as a result of the GenesisCare Amended Master Lease.
We recorded a write-off of straight-line rent receivables related to GenesisCare of $1,630,000 for the year ended December 31, 2023, as a reduction in rental revenue because the collectibility of the amounts was not probable. We recorded impairment losses on certain real estate properties leased or formerly leased to GenesisCare of $9,480,000 (including goodwill impairments of $1,238,000), for the year ended December 31, 2023 as a result of GenesisCare announcing it had filed bankruptcy. In addition, during the year ended December 31, 2023, we recorded an impairment of in-place lease and above-market lease intangible assets on certain real estate properties formerly leased to GenesisCare of $1,130,000 and $260,000, respectively.
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Results of Operations
Our results of operations are influenced by the timing of acquisitions and the performance of our real estate properties.
The following table shows the property statistics of our real estate properties as of December 31, 2024 and 2023:
| December 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Number of real estate properties (1) | 135 | 131 | |||
| Leased square feet | 5,050,000 | 5,085,000 | |||
| Weighted average percentage of rentable square feet leased | 96.0 | % | 99.4 | % |
(1)As of December 31, 2024, we owned 135 real estate properties and two undeveloped land parcels. As of December 31, 2023, we owned 131 real estate properties and two undeveloped land parcels.
The following table summarizes our real estate activity for the years ended December 31, 2024 and 2023:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| Real estate properties acquired | 8 | 2 | ||||||||
| Real estate properties disposed | 4 | 3 | ||||||||
| Aggregate purchase price of real estate properties acquired (1) | $ | 164,053,000 | $ | 69,822,000 | ||||||
| Net book value of real estate properties disposed | $ | 18,099,000 | $ | 270,279,000 | ||||||
| Leased square feet of real estate property additions | 307,000 | 130,000 | ||||||||
| Leased square feet of real estate property dispositions (2) | 71,000 | 551,000 |
(1)Includes capitalized acquisition costs associated with transactions determined to be asset acquisitions.
(2)The Fort Myers Healthcare Facilities and the Yucca Valley Healthcare Facility were vacant upon disposition on September 25, 2024 and December 10, 2024, respectively.
This section describes and compares our results of operations for the years ended December 31, 2024 and 2023. We generate substantially all of our revenue from property operations. In order to evaluate our overall portfolio, management analyzes the results of our same store properties. We define "same store properties" as properties that were owned and operated for the entirety of both calendar periods being compared and exclude properties under development, re-development, or classified as held for sale.
By evaluating the results of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and readily observe the expected effects of our new acquisitions and dispositions on net income.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
The following table details our total rental revenue for the year ended December 31, 2024, compared to the comparable period in 2023 (amounts in thousands):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| Same store rental revenue | $ | 152,969 | $ | 149,673 | $ | 3,296 | 2.2 | % | ||||||
| Same store tenant reimbursements | 12,694 | 12,022 | 672 | 5.6 | % | |||||||||
| Non-same store rental revenue | 18,822 | 26,650 | (7,828) | (29.4) | % | |||||||||
| Non-same store tenant reimbursements | 2,350 | 714 | 1,636 | 229.1 | % | |||||||||
| Other operating income | 21 | 6 | 15 | 250.0 | % | |||||||||
| Total rental revenue | $ | 186,856 | $ | 189,065 | $ | (2,209) | (1.2) | % |
•Same store rental revenue increased primarily due to a $1,604,000 increase in the write-off of straight-line rent receivables in the prior period related to Steward, a $964,000 increase due to the write-off of straight-line rent receivables in the prior period related to GenesisCare, a $769,000 increase as a result of new and renewal leasing activity, a $696,000 increase in accelerated amortization of below-market lease intangible liabilities related to properties formerly leased to GenesisCare,
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a $677,000 increase in rent recognized on cash basis as a result of two tenants with payment uncertainty who were paying less rent in the prior period being compared and had annual base rent escalations in the current year being compared, a $639,000 increase in annual base rent escalations for leases indexed to CPI, a $173,000 increase attributable to the amortization of the GenesisCare Severance Fee and a $140,000 increase due to the write-off of straight-line rent receivables in the prior period related to a tenant at a multi-tenant property, partially offset by a $998,000 decrease resulting from the Steward lease termination, a $483,000 decrease as a result of entering into lease agreements with new tenants for lower rental rates at properties formerly leased to GenesisCare, a $457,000 increase in accelerated amortization of above-market lease intangible assets as a result of lease amendments, and a $428,000 decrease due to certain amended leases with lower rental rates in exchange for longer lease terms.
•Same store tenant reimbursements increased primarily due to higher operating costs in the current year which are generally passed along to our tenants.
•Non-same store rental revenue decreased primarily due to a $18,158,000 decrease from properties sold since January 1, 2023, a $2,407,000 increase in accelerated amortization of above-market lease intangibles related to properties formerly leased to GenesisCare, and a $889,000 decrease related to a re-development property that was formerly leased to GenesisCare, partially offset by a $12,705,000 increase attributable to properties acquired since January 1, 2023, a $1,342,000 increase in accelerated amortization of below-market lease intangible liabilities related to properties formerly leased to GenesisCare, a $666,000 increase due to the write-off of straight-line rent receivables in the prior period related to GenesisCare, and a $465,000 increase due to the write-off of straight-line rent receivables in the prior period as a result of tenant uncertainty. In addition, we recognized lease termination income of $4,098,000 during the year ended December 31, 2024 and $5,650,000 of lease termination income during the year ended December 31, 2023.
•Non-same store tenant reimbursements increased primarily due to properties acquired since January 1, 2023.
•There were no material changes in other operating income.
Changes in our expenses are summarized in the following table (amounts in thousands):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| Same store rental expenses | $ | 19,838 | $ | 18,535 | $ | 1,303 | 7.0 | % | ||||||
| Non-same store rental expenses | 3,300 | 1,661 | 1,639 | 98.7 | % | |||||||||
| Listing-related expenses | 3,012 | — | 3,012 | n/a | ||||||||||
| General and administrative expenses | 25,336 | 23,896 | 1,440 | 6.0 | % | |||||||||
| Depreciation and amortization | 74,754 | 74,293 | 461 | 0.6 | % | |||||||||
| Impairment and disposition losses | 1,210 | 24,252 | (23,042) | (95.0) | % | |||||||||
| Total operating expenses | $ | 127,450 | $ | 142,637 | $ | (15,187) | (10.6) | % |
•Same store rental expenses increased primarily due to a $631,000 increase in non-reimbursable operating costs resulting from the Steward lease termination, and a $672,000 increase in expenses, certain of which are subject to reimbursement by our tenants, due to higher operating costs in the current period.
•Non-same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to a $1,870,000 increase from properties acquired since January 1, 2023, partially offset by a $231,000 decrease primarily attributable to properties sold since January 1, 2023.
•Listing-related expenses of $3,012,000 were recorded during the year ended December 31, 2024, consisting of advisory fees for legal, banking, and other advisory services, related to the Listing on June 13, 2024.
•General and administrative expenses increased primarily due to a $2,655,000 increase in personnel costs primarily attributable to separation pay resulting from the departure of our former chief accounting officer and former chief investment officer and performance bonuses, a $618,000 increase in accelerated stock-based compensation as a result of accelerated awards due to severance, and a $463,000 increase in other administrative costs primarily due to audit and tax fees, partially offset by a $1,052,000 decrease in stock-based compensation, a $891,000 decrease in costs primarily attributable to transfer agent and custodial fees as result of the Listing, a $203,000 decrease in legal fees, and a $150,000 decrease in directors and officers insurance expense.
•Depreciation and amortization increased primarily due to a $6,723,000 increase due to properties acquired since January 1, 2023, a $3,516,000 increase in accelerated amortization of in-place lease intangible assets related to properties formerly leased to GenesisCare, and a $181,000 increase due to assets placed in service since January 1, 2023, partially offset by a
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$8,058,000 decrease from property dispositions, a $1,035,000 decrease related to properties impaired in prior periods, and a $866,000 decrease attributable to fully amortized in-place lease intangible assets and fully depreciated tenant improvements.
•Impairment and disposition losses were recorded in the aggregate amount of $1,210,000 during the year ended December 31, 2024, attributable to the disposition of the Fort Myers Healthcare Facilities. We recorded impairment losses on real estate of $20,242,000 during the year ended December 31, 2023, of which $8,242,000 was a result of triggering events at properties leased or formerly leased to GenesisCare, $10,595,000 was recorded relating to Steward, and $1,405,000 was recorded as a result of a property sale. In addition, during the year ended December 31, 2023, we recorded goodwill impairment losses on real estate of $4,010,000, of which $2,422,000 was a result of property sales and tenant related triggering events that occurred at certain properties, $1,238,000 was a result of triggering events at properties leased or formerly leased to GenesisCare, and $350,000 was related to Steward.
Changes in other (expense) income are summarized in the following table (amounts in thousands):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| Gain on dispositions of real estate | $ | 341 | $ | 22 | $ | 319 | 1,450.0 | % | ||||||
| Interest and other income | 4,130 | 702 | 3,428 | 488.3 | % | |||||||||
| Interest expense | (21,220) | (23,110) | 1,890 | (8.2) | % | |||||||||
| Total other (expense) income | $ | (16,749) | $ | (22,386) | $ | 5,637 | (25.2) | % |
•During the year ended December 31, 2024, we recognized a gain on disposition on two real estate properties. On January 31, 2024, we sold one property for a sales price of $1,500,000, resulting in a gain on sale of $76,000. On December 10, 2024, we sold the Yucca Valley Healthcare Facility for a sales price of $1,700,000, resulting in a gain on sale of $265,000. During the year ended December 31, 2023, we recognized a gain on disposition on two real estate properties. On September 29, 2023, we sold one property for a sales price of $250,000, resulting in a gain on sale of $1,000. On March 31, 2023, we sold one property for a sales price of $12,500,000, resulting in a gain on sale of $21,000.
•Interest and other income increased primarily due to increases in dividend income from money market funds.
•Interest expense decreased primarily due to a $1,481,000 decrease related to a reduction in the weighted average outstanding principal balance on our credit facility of $45,631,000 and a decrease of $1,157,000 related to a reduction in the weighted average interest rate on our credit facility, partially offset by a $520,000 increase in amortization of deferred financing costs and a $228,000 increase in loss on extinguishment of debt.
Liquidity and Capital Resources
Our principal uses of funds are for acquisitions of real estate and real estate-related investments, capital expenditures, operating expenses, distributions to, and share repurchases from, stockholders, and principal and interest payments on current and future indebtedness. While interest rates on variable rate debt increased in recent years and then declined some due to the recent interest rate cuts by the Federal Reserve, we believe our exposure to increased or fluctuating interest rates is limited at this time due to our hedging strategy, which has effectively fixed 100% of our outstanding debt as of December 31, 2024, and therefore allowed us to reasonably project our liquidity needs. Generally, cash for these items is generated from operations of our current and future investments. Our sources of funds are primarily operating cash flows, our credit facility and other potential borrowings.
When we acquire a property, we prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include, for example, costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit, operating cash generated by the investment, additional equity investments from us, and when necessary, capital reserves. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or, as necessary, to respond to unanticipated additional capital needs.
Short-term Liquidity and Capital Resources
For at least the next twelve months, we expect our principal demands for funds will be for operating expenses, including our general and administrative expenses, as well as the acquisition of real estate and real estate-related investments, including mezzanine loans, and funding of capital improvements and tenant improvements, distributions to, and potential stock repurchases from, stockholders, and interest payments on our credit facility. We expect to meet our short-term liquidity
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requirements through net cash flows provided by operations and borrowings on our credit facility and potential other borrowings.
We believe we will have sufficient liquidity available to meet our obligations in a timely manner, under both normal and stressed conditions, for the next twelve months. In addition, we expect that the Listing will enhance our liquidity given that we now have publicly-traded stock. We may issue such publicly-traded stock within the next twelve months, afterwards, or both to raise funds to meet our liquidity needs.
Long-term Liquidity and Capital Resources
Beyond the next twelve months, we expect our principal demands for funds will be for costs to acquire additional real estate properties, interest and principal payments on our credit facility, long-term capital investment demands for our real estate properties and distributions necessary to maintain our REIT status.
We currently expect to meet our long-term liquidity requirements through proceeds from cash flows from operations and borrowings on our credit facility, potential other borrowings and potential equity offerings.
We expect to pay distributions to our stockholders from cash flows from operations; however, we have used, and may continue to use, other sources to fund distributions, as necessary. To the extent cash flows from operations are lower due to lower-than-expected returns on the properties held or the disposition of properties, distributions paid to stockholders may be lower. We currently expect that substantially all net cash flows from our operations will be used to fund acquisitions, certain capital expenditures identified at acquisition, ongoing capital expenditures, interest and principal payments on outstanding debt and distributions to our stockholders.
Material Cash Requirements
As of December 31, 2024, we had $39,844,000 in cash and cash equivalents. In addition to the cash we need to conduct our normal business operations, we expect to require $44,584,000 in cash over the next twelve months, of which $24,259,000 is related to estimated interest payments on our outstanding debt (calculated based on our effective interest rates as of December 31, 2024), $17,543,000 is related to unfunded loan commitment amounts undrawn on our mezzanine loans, and $2,782,000 is related to our various obligations as lessee. We cannot provide assurances, however, that actual expenditures will not exceed these estimates. In addition, we may provide capital expenditure or tenant improvement allowances in new or renewal leases for the purpose of refurbishing or renovating tenant space. We may also assume tenant improvement obligations included in leases acquired in our real estate acquisitions. Many of these allowances are subject to contingencies that make it difficult to predict when they will be utilized, if at all.
As of December 31, 2024, we had material obligations beyond twelve months in the amount of $679,195,000, inclusive of $564,548,000 related to principal and estimated interest payments on our outstanding debt (calculated based on our effective interest rates as of December 31, 2024) and $114,647,000 related to our various obligations as lessee.
One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. As of December 31, 2024, we had $525,000,000 of principal outstanding under our Unsecured Credit Facility (as defined below). We are required by the terms of certain loan documents relating to the Unsecured Credit Facility to meet certain covenants, such as financial ratios and reporting requirements. As of December 31, 2024, we were in compliance with all such covenants and requirements on our Unsecured Credit Facility.
As of December 31, 2024, the aggregate notional amount under our derivative instruments was $525,000,000. We have agreements with each derivative counterparty that contain cross-default provisions; if we default on our indebtedness, then we could also be declared in default on our derivative obligations, resulting in an acceleration of payment of any net amounts due under our derivative contracts. As of December 31, 2024, we were in compliance with all such cross-default provisions.
Debt Service Requirements
Credit Facility
As of December 31, 2024, the maximum commitments available under our senior unsecured revolving line of credit with Truist Bank, as Administrative Agent for the lenders, or the 2026 Revolving Credit Agreement, were $500,000,000, which may be increased, subject to lender approval, through incremental term loans and/or revolving loan commitments in an aggregate amount not to exceed $1,000,000,000. The maturity date for the 2026 Revolving Credit Agreement is February 15, 2026, which, at our election, may be extended for a period of six-months on no more than two occasions, subject to certain conditions, including the payment of an extension fee. As of December 31, 2024, the 2026 Revolving Credit Agreement had no outstanding principal balance.
As of December 31, 2024, the maximum commitments available under the 2027 Term Loan Agreement, were $250,000,000, which may be increased, subject to lender approval, to an aggregate amount not to exceed $500,000,000. The
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2027 Term Loan Agreement has a maturity date of March 20, 2027, and, at our election, may be extended for a period of one year on no more than two occasions, subject to the satisfaction of certain conditions, including the payment of an extension fee. The 2027 Term Loan Agreement was entered into on March 20, 2024, to replace our prior senior unsecured term loan with Truist Bank, as Administrative Agent for the lenders, that had a maturity date of December 31, 2024, or the 2024 Term Loan, which was paid off in its entirety upon closing of the 2027 Term Loan Agreement. As of December 31, 2024, the 2027 Term Loan Agreement had an aggregate outstanding principal balance of $250,000,000.
As of December 31, 2024, the maximum commitments available under our senior unsecured term loan with Truist Bank, as Administrative Agent for the lenders, or the 2028 Term Loan Agreement, were $275,000,000, which may be increased, subject to lender approval, to an aggregate amount not to exceed $500,000,000 and has a maturity date of January 31, 2028. The 2028 Term Loan Agreement is pari passu with our 2026 Revolving Credit Agreement and 2027 Term Loan Agreement. As of December 31, 2024, the 2028 Term Loan Agreement had an aggregate outstanding principal balance of $275,000,000.
We refer to the 2026 Revolving Credit Agreement, the 2027 Term Loan Agreement and the 2028 Term Loan Agreement, collectively, as the “Unsecured Credit Facility,” which has aggregate commitments available of $1,025,000,000, as of December 31, 2024. Generally, the proceeds of loans made under our Unsecured Credit Facility may be used for acquisition of real estate investments, funding of tenant improvements and leasing commissions with respect to real estate, repayment of indebtedness, funding of capital expenditures with respect to real estate, and general corporate and working capital purposes.
As of December 31, 2024, we had a total pool availability under our Unsecured Credit Facility of $1,025,000,000 and an aggregate outstanding principal balance of $525,000,000; therefore, $500,000,000 was available to be drawn under our Unsecured Credit Facility. We were in compliance with all the financial covenant requirements of the Unsecured Credit Facility as of December 31, 2024.
On February 18, 2025, we entered into a senior unsecured revolving credit agreement, or the 2029 Revolving Credit Agreement, with Bank of America, N.A., as Administrative Agent for the lenders, for aggregate commitments available of up to $600,000,000, which may be increased, subject to lender approval, through incremental term loans and/or revolving loan commitments in an aggregate amount not to exceed $1,500,000,000. The maturity date for the 2029 Revolving Credit Agreement is February 16, 2029, which, at our election, may be extended for a period of six-months on no more than two occasions, subject to certain conditions, including a payment of an extension fee. The 2029 Revolving Credit Agreement was entered into to replace the 2026 Revolving Credit Agreement, which had a maturity date of February 15, 2026, with the option to extend for two six-month periods. We did not exercise the option to extend. Upon closing of the 2029 Revolving Credit Agreement, we extinguished all commitments associated with the 2026 Revolving Credit Agreement. At the Company’s election, borrowings under the 2029 Revolving Credit Agreement may be made as Base Rate loans or Secured Overnight Financing Rate, or SOFR, loans. The applicable margin for loans that are Base Rate loans is adjustable based on a total leverage ratio, ranging from 0.25% to 0.90%. The applicable margin for loans that are SOFR loans is adjustable based on a total leverage ratio, ranging from 1.25% to 1.90%. In addition to interest, the Company is required to pay a fee on the unused portion of the lenders’ commitments under the 2029 Revolving Credit Agreement at a rate per annum equal to 0.20% if the average daily amount outstanding under the 2029 Revolving Credit Agreement is less than 50% of the aggregate commitments, or 0.15% if the average daily amount outstanding under the 2029 Revolving Credit Agreement is equal to or greater than 50% of the aggregate commitments. The unused fee is payable quarterly in arrears. Additionally, upon closing of the 2029 Revolving Credit Agreement, the Company entered into a First Amendment to the 2027 Term Loan Agreement and a Second Amendment to the 2028 Term Loan Agreement, to align certain terms and covenants to the 2029 Revolving Credit Agreement.
Cash Flows
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | Change | |||||||
| Net cash provided by operating activities | $ | 132,847 | $ | 128,924 | $ | 3,923 | ||||
| Net cash (used in) provided by investing activities | $ | (149,687) | $ | 197,307 | $ | (346,994) | ||||
| Net cash used in financing activities | $ | (145,501) | $ | (137,129) | $ | (8,372) |
Operating Activities
•Net cash provided by operating activities increased primarily due to cash collected for rent resulting from property acquisitions, annual rent increases, dividend income from money market funds and a decrease in interest paid on our credit facility, partially offset by a decrease in cash due to property dispositions, vacancies, and lease terminations with Steward and GenesisCare.
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Investing Activities
Significant investing activities included:
•Investment of $164,053,000 to purchase eight properties in four separate transactions during the year ended December 31, 2024, compared to an investment of $69,822,000 to purchase two properties during the year ended December 31, 2023.
•Received $17,705,000 from the sale of four properties during the year ended December 31, 2024, compared to receiving $270,306,000 from the sale of three properties during the year ended December 31, 2023.
•Incurred capital expenditures, primarily for tenant improvements, of $2,989,000 during the year ended December 31, 2024, compared to incurring $3,177,000 during the year ended December 31, 2023.
Financing Activities
Significant financing activities included:
•Payment of $81,367,000 in cash distributions to common stockholders, including cash distributions on vested performance-based deferred stock unit awards, during the year ended December 31, 2024, compared to $66,515,000 during the year ended December 31, 2023.
•Tender Offer repurchase of $50,000,000 of Common Stock and $2,093,000 of costs and fees related to the Tender Offer during the year ended December 31, 2024.
•Repurchase of $9,402,000 of Common Stock pursuant to the Terminated SRP and for the net settlement of withholding taxes in connection with the vesting of restricted stock during the year ended December 31, 2024, compared to $12,374,000 during the year ended December 31, 2023.
•Payment of $2,578,000 in deferred financing costs as a result of entering into the 2027 Term Loan Agreement during the year ended December 31, 2024, compared to $193,000 during the year ended December 31, 2023.
•The following Unsecured Credit Facility related activity during the year ended December 31, 2024:
◦Replacement of $250,000,000 on our prior term loan with borrowings from the 2027 Term Loan Agreement.
◦Draw of $20,000,000 on the 2026 Revolving Credit Agreement to fund an acquisition.
◦Repayment of $20,000,000 on the 2026 Revolving Credit Agreement with proceeds from dispositions and cash flows from operations.
•The following Unsecured Credit Facility related activity during the year ended December 31, 2023:
◦Repayment of $58,000,000 on the 2026 Revolving Credit Agreement with cash flows from operations and proceeds from a disposition.
◦Repayment of $50,000,000 on the 2024 Term Loan Agreement with proceeds from a disposition, the collection of a note receivable related to a disposition and cash flows from operations; and
◦Draw of $50,000,000 on the 2026 Revolving Credit Agreement to fund an acquisition.
Distributions to Stockholders
We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the year ended December 31, 2024, our cash flows provided by operations of approximately $132,847,000 covered 100% of our ordinary distributions paid (total ordinary distributions were approximately $91,346,000, of which $81,367,000 was cash and $9,979,000 was reinvested in shares of our common stock pursuant to the DRIP) during such period. For the year ended December 31, 2023, our cash flows provided by operations of approximately $128,924,000 covered 100% of our ordinary distributions paid (total ordinary distributions were approximately $91,266,000, of which $66,515,000 was cash and $24,751,000 was reinvested in shares of our common stock pursuant to the DRIP) during such period.
We do not currently have any limits on the sources of funding distribution payments to our stockholders. We may pay distributions from any source, such as the sale of assets, the sale of additional securities, offering proceeds, and borrowings, and we do not currently have any limits on the amounts we may pay from such sources. See “Risk Factors – General Risk Factors – Distributions paid from sources other than our cash flows from operations, including from the proceeds of any offerings of our securities, will result in us having fewer funds available for the acquisition of properties and real estate-related investments, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect a stockholder’s overall return” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of risks related to funding distribution payments from various sources.
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For federal income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain distributions, or nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, such excess will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. Further, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as a realized gain.
The following table shows the sources of distributions paid during the years ended December 31, 2024 and 2023:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| Character of Distributions(1): | 2024 | 2023 | ||||
| Ordinary dividends | 62.79 | % | 61.41 | % | ||
| Capital gain distributions | — | % | — | % | ||
| Nontaxable distributions | 37.21 | % | 38.59 | % | ||
| Total | 100.00 | % | 100.00 | % |
(1)Attributable to Class A shares, Class I shares, and Class T shares of common stock until the Listing and attributable to Common Stock after the Listing for the year ended December 31, 2024. Attributable to Class A shares, Class I shares, and Class T shares of common stock for the year ended December 31, 2023.
The amount of distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including our funds available for distribution, financial condition, lenders' restrictions and limitations, capital expenditure requirements, corporate law restrictions and the annual distribution requirements needed to maintain our status as a REIT under the Code. The Board must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions and, therefore, distribution payments are not guaranteed. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, which may reduce the amount of capital we ultimately invest in properties or other permitted investments. We have funded distributions with operating cash flows from our properties and previously through funds equal to amounts reinvested in the DRIP. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders.
In light of our intention to pursue the Listing, on April 5, 2024, the Board approved the termination of the DRIP, effective May 1, 2024. All participating DRIP stockholders will continue to receive their full declared distributions, which will be payable in cash as opposed to additional shares of Common Stock and will result in an increase in cash used in financing activities.
Non-GAAP Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. We use the following non-GAAP financial measures: Funds From Operations, or FFO, Core Funds From Operations, or Core FFO, and Adjusted Funds From Operations, or AFFO.
Net Income and FFO, Core FFO and AFFO
A description of FFO, Core FFO, and AFFO and reconciliations of these non-GAAP measures to net income, the most directly comparable GAAP measure, are provided below.
The National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated the FFO measure, which we believe is an appropriate additional 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 our net income as determined under GAAP.
We define FFO, consistent with NAREIT’s definition, as net income (calculated in accordance with GAAP), excluding gains from sales of real estate assets, impairment of real estate assets and disposition losses from sales of real estate assets, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. We do not have any investments in unconsolidated partnerships or joint ventures.
We, along with many of our peers in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income analysis of real estate portfolio performance that excludes non-cash items such as real estate depreciation and amortization and real estate impairments. We believe FFO provides a useful understanding of our performance to the investors and to our management, and when compared to year over year, FFO reflects the impact on our operations from trends in occupancy.
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We calculate Core FFO by adjusting FFO to remove the effect of certain GAAP non-cash income and expense items, unusual and infrequent items that are not expected to impact our operating performance on an ongoing basis, items that affect comparability to prior periods and/or items that are not related to our core real estate operations. We consider it to be a useful supplemental financial performance measure because it provides investors with additional information to understand our sustainable performance. Excluded items include listing-related expenses, severance, write-off of straight-line rent receivables related to prior periods, accelerated stock-based compensation, amortization of above- and below-market lease intangibles (including ground leases) and loss on extinguishment of debt.
We calculate AFFO by further adjusting Core FFO for the following items: deferred rent, current period straight-line rent adjustments, amortization of deferred financing costs and stock-based compensation. We believe AFFO is a supplemental performance measure that provides investors appropriate supplemental information to evaluate our ongoing operations. AFFO is a metric used by management to evaluate our dividend policy.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO, Core FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO, Core FFO and AFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance or as an indication of our liquidity, including our ability to make distributions to our stockholders. FFO, Core FFO and AFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods. All of our non-GAAP financial measures should be reviewed in conjunction with other measurements as an indication of our performance. The method used to evaluate the value and performance of real estate under GAAP should be considered a more relevant measure of operating performance and more prominent than the non-GAAP financial measures presented here.
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Reconciliation of Net Income to FFO, Core FFO and AFFO
The following table presents a reconciliation of net income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO, Core FFO and AFFO for the years ended December 31, 2024 and 2023 (amounts in thousands):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| Net income attributable to common stockholders | $ | 42,657 | $ | 24,042 | ||||||
| Adjustments: | ||||||||||
| Depreciation and amortization of real estate assets | 74,660 | 74,202 | ||||||||
| Gain on dispositions of real estate | (341) | (22) | ||||||||
| Impairment and disposition losses | 1,210 | 24,252 | ||||||||
| FFO(1) | $ | 118,186 | $ | 122,474 | ||||||
| Adjustments: | ||||||||||
| Listing-related expenses | 3,012 | — | ||||||||
| Severance | 1,885 | 1,401 | ||||||||
| Write-off of straight-line rent receivables related to prior periods | — | 3,268 | ||||||||
| Accelerated stock-based compensation | 936 | 318 | ||||||||
| Amortization of above (below) market lease intangibles, including ground leases, net | 1,778 | 1,386 | ||||||||
| Loss on extinguishment of debt | 228 | — | ||||||||
| Core FFO(1) | $ | 126,025 | $ | 128,847 | ||||||
| Adjustments: | ||||||||||
| Deferred rent(2) | 3,510 | 1,644 | ||||||||
| Straight-line rent adjustments | (5,555) | (5,465) | ||||||||
| Amortization of deferred financing costs | 2,185 | 1,665 | ||||||||
| Stock-based compensation | 4,914 | 5,966 | ||||||||
| AFFO(1) | $ | 131,079 | $ | 132,657 |
(1)The years ended December 31, 2024 and 2023 include $4,098,000 and $5,650,000, respectively, of lease termination fee income received.
(2)The year ended December 31, 2024 includes the $2,000,000 GenesisCare Severance Fee, which will be recognized in rental revenues over the remaining GenesisCare Amended Master Lease term.