Chiron Real Estate Inc. (XRN) FY 2023 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 should be read in conjunction with our financial statements, including the notes to those financial statements, included elsewhere in this Report. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Report entitled “Special Note Regarding Forward-Looking Statements.” Certain risk factors may cause actual results, performance, or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Report entitled “Risk Factors.” Unless otherwise indicated, all dollar and share amounts in the following discussion are presented in thousands.
Objective of MD&A
Management’s Discussion and Analysis (“MD&A”) is a narrative explanation of the financial statements and other statistical data that we believe will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations.
The objectives of MD&A are:
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| a. | To provide a narrative explanation of our financial statements that enables investors to see the Company from management’s perspective; |
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| b. | To enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and |
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| c. | To provide information about the quality of, and potential variability of, our earnings and cash flow so that investors can ascertain the likelihood that past performance is indicative of future performance. |
Overview
Global Medical REIT Inc. (the “Company,” “us,” “we,” or “our”) is a Maryland corporation and internally managed REIT that owns and acquires healthcare facilities and leases those facilities to physician groups and regional and national healthcare systems. We hold our facilities and conduct our operations through a Delaware limited partnership subsidiary, Global Medical REIT L.P. (the “Operating Partnership”). Our wholly owned subsidiary, Global Medical REIT GP LLC, is the sole general partner of our Operating Partnership and, as of December 31, 2023, we owned 92.91% of the outstanding common operating partnership units (“OP Units”) of our Operating Partnership, with an aggregate of 7.09% of the Operating Partnership owned by holders of long-term incentive plan units (“LTIP Units”) and third-party limited partners who contributed properties or services to the Operating Partnership in exchange for OP Units.
Our revenues are derived from the rental and operating expense reimbursement payments we receive from our tenants, and most of our leases are medium to long-term triple net leases with contractual rent escalation provisions. Our primary expenses are depreciation, interest, and general and administrative expenses. We finance our acquisitions with a mixture of debt and equity primarily from our cash from operations, borrowings under our Second Amended and Restated Credit Facility (the “Credit Facility”), and stock issuances.
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2023 Executive Summary
The following tables summarize the primary changes in our business and operations during the years presented.
| | | | | | | |
|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||
| | 2023 | 2022 | ||||
| | | (in thousands, except per share and unit amounts) | ||||
| Rental revenue | | $ | 140,934 | | $ | 137,167 |
| Depreciation and amortization expense | | $ | 58,135 | | $ | 56,723 |
| Interest expense | | $ | 30,893 | | $ | 25,230 |
| General and administrative expense | | $ | 16,853 | | $ | 16,545 |
| Gain on sale of investment properties | | $ | 15,560 | | $ | 6,753 |
| | | | | | | |
| Net income attributable to common stockholders per share | | $ | 0.23 | | $ | 0.20 |
| FFO per share and unit(1) | | $ | 0.83 | | $ | 0.92 |
| AFFO per share and unit(1) | | $ | 0.91 | | $ | 0.98 |
| Dividends per share of common stock | | $ | 0.84 | | $ | 0.84 |
| | | | | | | |
| Weighted average common stock outstanding | | 65,550 | | 65,462 | ||
| Weighted average OP Units outstanding | | 2,077 | | 1,669 | ||
| Weighted average LTIP Units outstanding | | 2,751 | | 2,531 | ||
| Total weighted average shares and units outstanding | | 70,378 | | 69,662 |
| Column 1 | Column 2 |
|---|---|
| (1) | See “—Non-GAAP Financial Measures,” for a description of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures. |
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | As of | ||||||
| | | December 31, | | December 31, | |||
| | 2023 | 2022 | |||||
| | | (dollars in thousands) | |||||
| Investment in real estate, gross | | $ | 1,426,969 | | $ | 1,484,177 | |
| Total debt, net | | $ | 611,232 | | $ | 694,119 | |
| Weighted average interest rate | | 3.83 | % | 4.20 | % | ||
| Total equity (including noncontrolling interest) | | $ | 605,814 | | $ | 649,065 | |
| Net leasable square feet | | 4,748,626 | | 4,895,635 | |
Our Properties
Completed Acquisitions
During the year ended December 31, 2023 we completed one acquisition encompassing 18,698 leasable square feet for a contractual purchase price of $6.7 million with annualized base rent of $0.5 million. We funded this acquisition primarily through the issuance of OP Units to the seller. As of December 31, 2023, our portfolio consisted of gross investment in real estate of $1.4 billion, with an aggregate of 4.7 million leasable square feet and an aggregate $110.2 million of annualized base rent.
Completed Property Dispositions
During the year ended December 31, 2023, the Company completed three dispositions that generated aggregate gross proceeds of $80.5 million, resulting in an aggregate gain of $15.6 million.
Debt Activity
During the year ended December 31, 2023, we borrowed $83.1 million under our Credit Facility and repaid $136.4 million, for a net amount repaid of $53.3 million. As of December 31, 2023, the net outstanding Credit Facility balance was $307.6 million and as of February 26, 2024, we had unutilized borrowing capacity under the Credit Facility of $293.6 million.
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In December 2023, we completed the defeasance of a CMBS loan by making a total payment of $31.5 million, including transaction costs, that was funded by borrowings on our Revolver. The carrying value of the loan, net of unamortized debt issuance costs, was $30.6 million on the date of the defeasance, resulting in a loss on extinguishment of debt of $0.9 million. In connection with the loan defeasance, we subsequently received $8.4 million in escrowed funds held by the CMBS servicer and used those funds to reduce our total debt.
Capital Raising Activity
In January 2024, the Company and the Operating Partnership implemented a $300 million “at-the-market” equity offering program, pursuant to which we may offer and sell, from time to time, shares of our common stock (the “2024 ATM Program”). No shares were sold under the 2024 ATM Program from January 2024 through February 26, 2024.
Trends Which May Influence Our Results of Operations
We believe the following trends may positively impact our results of operations:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | An aging population. According to the 2020 U.S. Census, the nation’s 65-and-older population has grown rapidly since 2010, driven by the aging of Baby Boomers born between 1946 and 1964. The 65-and-older population grew by over a third during the past decade, and by 3.2% from 2018 to 2019. We believe this segment of the U.S. population will utilize many of the services provided at our healthcare facilities such as orthopedics, cardiac, gastroenterology and rehabilitation. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | A continuing shift towards outpatient care. According to the American Hospital Association, patients are demanding more outpatient operations. We believe this shift in patient preference from inpatient to outpatient facilities will benefit our tenants as most of our properties consist of outpatient facilities. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Physician practice group and hospital consolidation. We believe the trend towards physician group consolidation will serve to strengthen the credit quality of our tenants if our tenants merge or are consolidated with larger health systems. |
We believe the following trends may negatively impact our results of operations:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Fed’s “wait-and-see” approach could cause interest rates to remain elevated for longer than previously expected. Market reaction to the Fed’s commentary after its January 2024 meeting, where it maintained the target range for the Federal Funds Rate at 5.25% to 5.50%, indicated that the Fed does not plan to cut interest rates until mid-2024 at the earliest, which could result in continued elevated interest rates for the first half of 2024, if not longer. Although term SOFR, which is the reference rate for our floating rate debt, is expected to decrease during 2024 and 2025, any action or inaction by the Fed in the coming months could affect the timing and amounts of such decreases. |
Continued elevated interest rates have contributed to a continued lull in the common stock prices of many REITs, including the price of the Company’s common stock. A continued low stock price and elevated interest rates have caused the Company’s cost of capital to remain elevated, which, in turn, has significantly reduced the ability to acquire assets that meet the Company’s investment requirements.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Continuation of the COVID-19 epidemic. The COVID-19 epidemic has affected the healthcare industry in many ways. Many stories exist about U.S. healthcare workers, especially nurses, experiencing burnout due to the length and severity of the epidemic, and this has caused many nurses and other medical professionals to switch jobs within the medical profession or quit their professions altogether. This phenomenon has led to material increases in labor costs for healthcare systems, especially hospital systems, as some employers have had to rely on higher costing contract nursing labor to sustain their businesses. The increase in labor costs, among various other factors, contributed to the rapid increase in inflation during 2022, which remained elevated during 2023. Furthermore, the continued spread of variants and subvariants of COVID-19 in the U.S. has prolonged the COVID-19 epidemic. |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Changes in third party reimbursement methods and policies. The price of healthcare services has been increasing, and, as a result, we believe that third-party payors, such as Medicare and commercial insurance companies, will continue to scrutinize and reduce the types of healthcare services eligible for, and the amounts of, reimbursement under their health insurance plans. Additionally, many employer-based insurance plans continue to increase the percentage of insurance premiums for which covered individuals are responsible, which makes healthcare services more expensive for individuals. We expect these trends will only be exacerbated by the COVID-19 epidemic, as medical expenditures increased significantly during the epidemic. If these trends continue, our tenants’ businesses will continue to be negatively affected, which may impact their ability to pay rent to us. |
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time-to-time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.
For a more detailed discussion of our significant accounting policies, see Note 2 – “Summary of Significant Accounting Policies” in the footnotes to the accompanying consolidated financial statements. Below is a discussion of accounting policies that we consider critical in that it may require complex judgment in its application or require estimates about matters that are inherently uncertain.
We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the following:
●Investment in Real Estate
●Impairment of Long-Lived Assets
●Revenue Recognition
Investment in Real Estate
All of our facility acquisitions for the years ended December 31, 2023 and 2022 were accounted for as asset acquisitions because substantially all of the fair value of the gross assets that we acquired were concentrated in a single asset or group of similar identifiable assets. Accordingly, the purchase prices of acquired tangible and intangible assets and liabilities were recorded and allocated at fair value on a relative basis. The recorded allocations are based on estimated cash flow projections of the properties acquired, which incorporates discount, capitalization and interest rates as well as available comparable market information. We use considerable judgement in our estimates of cash flow projections, discount, capitalization and interest rates, fair market lease rates, carrying costs during hypothetical expected lease-up periods, and costs to execute similar leases.
While our methodology for purchase price allocations did not change during the year ended December 31, 2023, the real estate market is fluid and our assumptions are based on information currently available in the market at the time of acquisition. Significant increases or decreases in these key estimates, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value allocated to acquired tangible and intangible assets and liabilities.
In the case of the fair value of buildings and fair value of land and certain other intangibles, our estimates of the values of these components will affect the amount of depreciation or amortization we record over the estimated useful life of the property acquired or the remaining lease term. In the case of the fair value of above-market or below-market lease intangibles, our estimates of the values of these components will affect the amount of rental revenue we record as these values are amortized as a reduction of or an addition to rental income over the estimated remaining term of the respective leases.
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Impairment of Long-Lived Assets
We review our real estate assets on an asset group basis for impairment. 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 estimated hold period, a significant decline in a property’s leasing 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.
If we determine that an asset has indicators of impairment, we must determine whether the undiscounted cash flows associated with the asset exceed the carrying amount of the asset. In calculating the undiscounted net cash flows of an asset, we use considerable judgement to estimate a number of inputs. We must 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.
In determining the fair value of an asset, we exercise considerable judgment on a number of factors. We may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information. We use judgement 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 regards to 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 condition of our tenants, and changes to our intent and ability to hold the related asset, that occur subsequent to 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.
Revenue Recognition
Our operations primarily consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. Management exercises considerable judgment in the rental property revenue recognition process including the treatment of the contractual rental stream and the determination of its collectability.
Our leases have been accounted for as operating leases. For operating leases with contingent rental escalators, revenue is recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term, when we believe substantially all lease income, including the related straight-line receivable, is probable of collection.
We monitor the liquidity and creditworthiness of our tenants and operators and exercise considerable judgement in assessing the probability of collection. Our assessment of collectability incorporates available operational performance measures such as sales and the aging of billed amounts as well as other publicly available information with respect to our tenant’s financial condition, liquidity and capital resources, including declines in such conditions. In the event that we determine receivables are not probable of collection, lease income will be recorded on a cash basis, with the corresponding tenant receivable and straight-line rent receivable charged as a direct write-off against rental revenue in the period of the change in our collectability determination. If management’s assumptions regarding the collectability of lease-related receivables prove incorrect, we could experience decreases in rental revenue, including decreases in excess of any amounts initially recognized.
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Consolidated Results of Operations
The major factors that resulted in variances in our results of operations for each revenue and expense category for the year ended December 31, 2023 compared to the year ended December 31, 2022, were higher interest rates, significantly lower acquisition activity, increased disposition activity, and the recognition of a reserve related to one tenant. Regarding acquisitions, we completed one acquisition for a contractual purchase price of $6.7 million during the year ended December 31, 2023 compared to 14 completed acquisitions for an aggregate contractual purchase price of $148.9 million during the year ended December 31 2022. Regarding dispositions, we had three property dispositions during the year ended December 31, 2023 that generated aggregate gross proceeds of $80.5 million compared to one property disposition during the year ended December 31, 2022 that generated gross proceeds of $17.9 million. Our total investments in real estate, net of accumulated depreciation and amortization, was $1.2 billion and $1.3 billion as of December 31, 2023 and 2022, respectively.
For a discussion related to our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended December 31, | | | | ||||
| | 2023 | 2022 | $ Change | ||||||
| | | (in thousands) | | | | ||||
| Revenue | | | | | |||||
| Rental revenue | | $ | 140,934 | | $ | 137,167 | | $ | 3,767 |
| Other income | | 115 | | 116 | | (1) | |||
| Total revenue | | 141,049 | | 137,283 | | 3,766 | |||
| | | | | | | | | | |
| Expenses | | | | | | | | | |
| General and administrative | | 16,853 | | 16,545 | | 308 | |||
| Operating expenses | | 28,082 | | 25,188 | | 2,894 | |||
| Depreciation expense | | 41,266 | | 40,008 | | 1,258 | |||
| Amortization expense | | 16,869 | | 16,715 | | 154 | |||
| Interest expense | | 30,893 | | 25,230 | | 5,663 | |||
| Preacquisition expense | | 44 | | 354 | | (310) | |||
| Total expenses | | 134,007 | | 124,040 | | 9,967 | |||
| Income before gain from sale of investment properties and loss on extinguishment of debt | | | 7,042 | | | 13,243 | | | (6,201) |
| Gain on sale of investment properties | | | 15,560 | | | 6,753 | | | 8,807 |
| Loss on extinguishment of debt | | | (868) | | | — | | | (868) |
| Net income | | $ | 21,734 | | $ | 19,996 | | $ | 1,738 |
Revenue
Total Revenue
Total revenue for the year ended December 31, 2023 was $141.0 million, compared to $137.3 million for the same period in 2022, an increase of $3.7 million. The increase primarily resulted from the recognition of a full year of rental revenue in 2023 from acquisitions that were completed during 2022, partially offset by the impact of property dispositions and the recognition of reserves for $0.9 of rent and the write-off of $0.2 million of deferred rent. Within that increase, $19.5 million in revenue was recognized from net lease expense recoveries during the year ended December 31, 2023, compared to $18.7 million for the same period in 2022.
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Expenses
General and Administrative
General and administrative expenses for the year ended December 31, 2023 were $16.9 million, compared to $16.5 million for the same period in 2022, an increase of $0.4 million. The increase resulted from an increase in cash compensation costs and general corporate expenses, partially offset by a reduction in non-cash LTIP compensation expense, which was $4.2 million for the year ended December 31, 2023, compared to $4.7 million for the same period in 2022.
Operating Expenses
Operating expenses for the year ended December 31, 2023 were $28.1 million, compared with $25.2 million for the same period in 2022, an increase of $2.9 million. The increase results primarily from $19.5 million of recoverable property operating expenses incurred during the year ended December 31, 2023, compared to $18.7 million for the same period in 2022. In addition, our operating expenses included $5.9 million of non-recoverable property operating expenses from gross leases for the year ended December 31, 2023, compared to $4.7 million for the same period in 2022.
Depreciation Expense
Depreciation expense for the year ended December 31, 2023 was $41.3 million, compared to $40.0 million for the same period in 2022, an increase of $1.3 million. The increase resulted primarily from the recognition of a full year of depreciation expense in 2023 from acquisitions that were completed during 2022, partially offset by the impact of property dispositions.
Amortization Expense
Amortization expense for the year ended December 31, 2023 was $16.9 million, compared to $16.7 million for the same period in 2022, an increase of $0.2 million. The increase resulted primarily from the recognition of a full year of amortization expense in 2023 from acquisitions that were completed during 2022, partially offset by the impact of property dispositions.
Interest Expense
Interest expense for the year ended December 31, 2023 was $30.9 million, compared to $25.2 million for the same period in 2022, an increase of $ 5.7 million. This increase was due to increased interest rates, partially offset by lower average borrowings during the year ended December 31, 2023, compared to the same period in 2022.
The weighted average interest rate of our debt for the year ended December 31, 2023 was 4.12% compared to 3.43% in 2022. Additionally, the weighted average interest rate and term of our debt was 3.83% and 2.9 years, respectively, at December 31, 2023.
Income Before Gain on Sale of Investment Properties and Loss on Extinguishment of Debt
Income before gain on sale of investment properties and loss on extinguishment of debt for the year ended December 31, 2023 was $8.1 million, compared to $13.2 million for the same period in 2022, a decrease of $5.1 million.
Gain on Sale of Investment Properties
During the year ended December 31, 2023, we completed three dispositions. In August 2023, we sold a medical office building located in North Charleston, South Carolina receiving gross proceeds of $10.1 million, resulting in a gain of $2.3 million. In June 2023, we sold a portfolio of four medical office buildings located in Oklahoma City, Oklahoma receiving gross proceeds of $66.0 million, resulting in a gain of $12.8 million. In March 2023, we sold a medical office building located in Jacksonville, Florida receiving gross proceeds of $4.4 million, resulting in a gain of $0.5 million.
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During the year ended December 31, 2022, we sold a medical office building located in Germantown, Tennessee receiving gross proceeds of $17.9 million, resulting in a gain of $6.8 million.
Loss on Extinguishment of Debt
In December 2023, we completed the defeasance of a CMBS loan by making a total payment of $31.5 million, including transaction costs, that was funded by borrowings on our Revolver. The carrying value of the loan, net of unamortized debt issuance costs, was $30.6 million on the date of the defeasance, resulting in a loss on extinguishment of debt of $0.9 million. In connection with the loan defeasance, we subsequently received $8.4 million in escrowed funds held by the CMBS servicer and used those funds to reduce our total debt.
Net Income
Net income for the year ended December 31, 2023 was $22.8 million compared to $20.0 million for the same period in 2022, an increase of $2.8 million.
Assets and Liabilities
As of December 31, 2023 and 2022, our principal assets consisted of investments in real estate, net, of $1.2 billion and $1.3 billion, respectively. We completed one acquisition during the year ended December 31, 2023 and sold six medical office buildings through three disposition transactions. Our liquid assets consisted primarily of cash and cash equivalents and restricted cash of $6.7 million and $14.5 million, as of December 31, 2023 and 2022, respectively.
The decrease in our cash and cash equivalents and restricted cash balances to $6.7 million as of December 31, 2023, compared to $14.5 million as of December 31, 2022, was primarily due to net repayments on our Credit Facility primarily using funds from our property dispositions, funds used to pay dividends to our common and preferred stockholders and holders of OP Units and LTIP Units, a payment for the defeasance of a CMBS loan, and funds used for capital expenditures on existing real estate investments, partially offset by net proceeds received from the sale of investment properties and net cash provided by operating activities.
The decrease in our total liabilities to $662.0 million as of December 31, 2023 compared to $744.2 million as of December 31, 2022, was primarily the result of lower net borrowings outstanding.
Liquidity and Capital Resources
General
Our short-term (up to 12 months) liquidity requirements include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Interest expense and scheduled principal payments on outstanding indebtedness; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | General and administrative expenses; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Property operating expenses; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Property acquisitions; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Distributions on our common and preferred stock and OP Units and LTIP Units; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Capital and tenant improvements. |
In 2024, we are contractually obligated to pay, or have capital commitments for, approximately (i) $34.8 million of principal and interest payments on our outstanding debt, and (ii) $0.7 million in ground and operating lease expenses. In addition, if we decide to redeem our preferred stock, we would have to pay the liquidation preference of $77.6 million plus accrued dividends, fees and expenses.
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Our long-term (beyond 12 months) liquidity requirements consist primarily of funds necessary to pay for acquisitions, capital and tenant improvements at our properties, scheduled debt maturities, general and administrative expenses, operating expenses, and distributions. Beyond 2024, we are contractually obligated to pay, or have capital commitments for, approximately (i) $655.5 million of principal and interest payments on our outstanding debt, and (ii) $12.7 million in ground and operating lease expenses.
We expect to satisfy our short and long-term liquidity needs through various internal and external sources, including cash flow from operations, debt financing, sales of additional equity securities, the issuance of OP Units in connection with acquisitions of additional properties, proceeds from select property dispositions and recapitalization transactions.
As of December 31, 2023, the Company had aggregate capital improvement commitments and obligations to improve, expand, and maintain the Company’s existing facilities of approximately $18 million. Many of these amounts are subject to contingencies that make it difficult to predict when they will be utilized, if at all. In accordance with the terms of the Company’s existing and proposed leases, capital improvement obligations in the next 12 months are expected to total approximately $14 million.
Internal Sources of Liquidity
Our primary internal sources of liquidity include cash flow from operations and proceeds from select property dispositions and recapitalization transactions.
External Sources of Liquidity
Our primary external sources of liquidity include net proceeds received from equity issuances, including the issuance of OP Units in connection with acquisitions of additional properties, and debt financing, including borrowings under our Credit Facility and secured term loans.
Equity Issuances
In January 2024, the Company and the Operating Partnership implemented the 2024 ATM Program, pursuant to which we may offer and sell, from time to time, shares of our common stock. No shares were sold under the 2024 ATM Program from January 2024 through February 26, 2024. In March 2022, the Company and the Operating Partnership implemented a $300 million “at-the-market” equity offering program, pursuant to which the Company could offer and sell, from time to time, shares of its common stock (the “2022 ATM Program”). No shares were sold under the 2022 ATM Program during the year ended December 31, 2023. The 2022 ATM Program was terminated in connection with implementing the 2024 ATM Program.
Debt Financing.
Credit Facility. Our Credit Facility consists of (i) the $350 million Term Loan A, (ii) the $150 million Term Loan B, and (iii) the $400 million Revolver. The Credit Facility also contains a $500 million accordion feature. As of February 26, 2024, we had unutilized borrowing capacity under the Credit Facility of $293.6 million.
The Credit Facility is an unsecured facility with a term of (i) four years (beginning on August 1, 2022) for the Revolver (subject to two, six-month extension options), (ii) five years for Term Loan A (beginning on its origination date of May 3, 2021), and (iii) five years and six months (beginning on August 1, 2022) for Term Loan B.
We are subject to a number of financial covenants under the Credit Facility, including, among other things, the following as of the end of each fiscal quarter, (i) a maximum consolidated unsecured leverage ratio of less than 60%, (ii) a maximum consolidated secured leverage ratio of less than 30%, (iii) a maximum consolidated secured recourse leverage ratio of less than 10%, (iv) a minimum fixed charge coverage ratio of 1.50:1.00, (v) a minimum unsecured interest coverage ratio of 1.50:1.00, (vi) a maximum consolidated leverage ratio of less than 60%, and (vii) a minimum net worth of $573 million plus 75% of all net proceeds raised through equity offerings subsequent to March 31, 2022. As of December 31, 2023, management believed it complied with all of the financial and non-financial covenants contained in the Credit Facility.
Other Fixed Debt. We have $26.0 million in gross notes payable as of December 31, 2023, which is comprised of three instruments.
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Hedging Instruments. We have ten interest rate swaps and three forward-starting interest rate swaps that are used to manage our interest rate risk. A description of these swaps is below:
Term Loan A Swaps
As of December 31, 2023, six of our interest rate swaps related to Term Loan A. The combined notional value of these swaps is $350 million, with $200 million of the swaps maturing in August 2024 and the remaining $150 million maturing in April 2026. In addition, we have three forward starting interest rate swaps with a combined notional value of $200 million, each with a maturity date of April 2026, that will become effective on the August 2024 maturity date of the existing swaps. Currently, the Term Loan A swaps fix the SOFR component of Term Loan A at a rate of 1.50% through August 2024. From August 2024 to April 2026 the SOFR component of Term Loan A will be fixed at 1.36%.
Term Loan B Swaps
As of December 31, 2023, four of our interest rate swaps related to Term Loan B with a combined notional value of $150 million that fix the SOFR component on Term Loan B through January 2028 at 2.54%.
Total Fixed Debt. Our fixed debt totaled $526.0 million on a gross basis at December 31, 2023, with a weighted average interest rate of 3.31% based on our interest rate swaps and at current leverage. The weighted average maturity of our fixed debt was 2.8 years at December 31, 2023. Due to our forward starting interest rate swaps related to Team Loan A, the weighted average interest rate on fixed debt outstanding as of December 31, 2023 is expected to improve over the next two years.
Cash Flow Information
Net cash provided by operating activities for the year ended December 31, 2023 was $67.6 million, compared to $76.5 million for the same period in 2022. The decrease during the 2023 year was primarily due to lower income before gain on sale of investment properties.
Net cash provided by investing activities for the year ended December 31, 2023 was $67.6 million, compared to net cash used in investing activities of $137.3 million for the same period in 2022. During the 2023 year less funds were used to complete property acquisitions and we received more net proceeds from the sale of investment properties.
Net cash used in financing activities for the year ended December 31, 2023 was $143.8 million, compared to net cash provided by financing activities with $62.4 million for the same period in 2022. During the 2023 year we completed no common equity offerings and therefore did not receive any equity offering proceeds, we made net repayments on our Credit Facility, and we made a payment for the defeasance of a CMBS loan.
Non-GAAP Financial Measures
Management considers certain non-GAAP financial measures to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. The Company reports non-GAAP financial measures because these measures are observed by management to also be among the most predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these non-GAAP financial measures. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of those measures to the most directly comparable GAAP financial measure.
The non-GAAP financial measures presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results,
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these measures should be examined in conjunction with net income and cash flows from operations as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K.
Funds from Operations and Adjusted Funds from Operations
Funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) are non-GAAP financial measures within the meaning of the rules of the SEC. The Company considers FFO and AFFO to be important supplemental measures of its operating performance and believes FFO is frequently used by securities analysts, investors, and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results.
In accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition, FFO means net income or loss computed in accordance with GAAP before noncontrolling interests of holders of OP Units and LTIP Units, excluding gains (or losses) from sales of property and extraordinary items, less preferred stock dividends, plus real estate-related depreciation and amortization (excluding amortization of debt issuance costs and the amortization of above and below market leases), and after adjustments for unconsolidated partnerships and joint ventures. Because FFO excludes real estate-related depreciation and amortization (other than amortization of debt issuance costs and above and below market lease amortization expense), the Company believes that FFO provides a performance measure that, when compared period-over-period, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from the closest GAAP measurement, net income or loss.
AFFO is a non-GAAP measure used by many investors and analysts to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations. Management calculates AFFO by modifying the NAREIT computation of FFO by adjusting it for certain cash and non-cash items and certain recurring and non-recurring items. For the Company these items include recurring acquisition and disposition costs, loss on the extinguishment of debt, recurring straight line deferred rental revenue, recurring stock-based compensation expense, recurring amortization of above and below market leases, recurring amortization of debt issuance costs, and other items.
Management believes that reporting AFFO in addition to FFO is a useful supplemental measure for the investment community to use when evaluating the operating performance of the Company on a comparative basis.
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A reconciliation of FFO and AFFO for the years ended December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended December 31, | |||||||
| | 2023 | 2022 | 2021 | ||||||
| | | (unaudited, in thousands except per share and unit amounts) | |||||||
| Net income | | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
| Less: Preferred stock dividends | | (5,822) | | (5,822) | | (5,822) | |||
| Depreciation and amortization expense | | | 58,007 | | | 56,611 | | | 46,764 |
| Gain on sale of investment properties | | | (15,560) | | | (6,753) | | | (1,069) |
| FFO | | $ | 58,359 | | $ | 64,032 | | $ | 58,215 |
| Loss on extinguishment of debt | | | 868 | | | — | | | — |
| Amortization of above market leases, net | | 1,052 | | 1,027 | | 520 | |||
| Straight line deferred rental revenue | | (2,636) | | (4,251) | | (5,317) | |||
| Stock-based compensation expense | | 4,242 | | 4,681 | | 5,810 | |||
| Amortization of debt issuance costs and other | | 2,376 | | 2,201 | | 1,982 | |||
| Preacquisition expense | | 44 | | 354 | | 151 | |||
| AFFO | | $ | 64,305 | | $ | 68,044 | | $ | 61,361 |
| | | | | | | | | | |
| Net income attributable to common stockholders per share – basic and diluted | | $ | 0.24 | | $ | 0.20 | | $ | 0.19 |
| FFO per share and unit | | $ | 0.83 | | $ | 0.92 | | $ | 0.90 |
| AFFO per share and unit | | $ | 0.91 | | $ | 0.98 | | $ | 0.95 |
| | | | | | | | | | |
| Weighted Average Shares and Units Outstanding – basic and diluted | | 70,378 | | 69,662 | | 64,548 | |||
| | | | | | | | | | |
| Weighted Average Shares and Units Outstanding: | | | | | | | | | |
| Weighted Average Common Shares | | 65,550 | | 65,462 | | 60,640 | |||
| Weighted Average OP Units | | 2,077 | | 1,669 | | 1,732 | |||
| Weighted Average LTIP Units | | 2,751 | | 2,531 | | 2,176 | |||
| Weighted Average Shares and Units Outstanding – basic and diluted | | 70,378 | | 69,662 | | 64,548 |
Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre
The Company calculates EBITDAre in accordance with standards established by NAREIT and defines EBITDAre as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, gain or loss on the sale of investment properties, and impairment loss, as applicable. The Company defines Adjusted EBITDAre as EBITDAre plus loss on extinguishment of debt, non-cash stock compensation expense, non-cash intangible amortization related to above and below market leases, preacquisition expense and other normalizing items. Management considers EBITDAre and Adjusted EBITDAre important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.
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A reconciliation of net income to EBITDAre and Adjusted EBITDAre for the years ended December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||||
| | 2023 | 2022 | 2021 | |||||
| | (unaudited and in thousands) | |||||||
| Net income | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
| Interest expense | 30,893 | | 25,230 | | 19,696 | |||
| Depreciation and amortization expense | | 58,135 | | | 56,723 | | | 46,875 |
| Gain on sale of investment properties | | (15,560) | | | (6,753) | | | (1,069) |
| EBITDAre | $ | 95,202 | | $ | 95,196 | | $ | 83,844 |
| Loss on extinguishment of debt | | 868 | | | — | | | — |
| Stock-based compensation expense | 4,242 | | 4,681 | | 5,810 | |||
| Amortization of above market leases, net | 1,052 | | 1,027 | | 520 | |||
| Preacquisition expense | 44 | | 354 | | 151 | |||
| Adjusted EBITDAre | $ | 101,408 | | $ | 101,258 | | $ | 90,325 |