American Healthcare REIT(AHR) - 2021 Q4 - Annual Report

PART I Item 1. Business A self-managed REIT owning a diversified portfolio of clinical healthcare real estate including MOBs, SNFs, and senior housing Company Overview and Key Transactions The company formed through a 2021 merger and concurrently acquired its external advisor, AHI, to become a self-managed entity - On October 1, 2021, GAHR III and GAHR IV completed a merger, creating a combined company named American Healthcare REIT, Inc, and GAHR III was determined to be the accounting acquirer[12][18] - Simultaneously with the merger, the company acquired its external advisor, AHI, in a transaction valued at approximately $131.7 million, paid in operating partnership units, resulting in the company becoming self-managed[14][16] - The company owns a diversified portfolio of clinical healthcare properties, including medical office buildings, skilled nursing facilities, and senior housing, and operates some facilities under a RIDEA structure[11] - Following the transactions, the company reinstated its Distribution Reinvestment Plan (DRIP) and authorized monthly distributions equal to an annualized rate of $0.40 per share[28] Investment Objectives and Strategy The company aims to preserve capital, pay distributions, and grow value by acquiring a diversified portfolio of clinical healthcare real estate - The company's core investment objectives are: to preserve, protect and return stockholders' capital; to pay regular cash distributions; and to realize growth in the value of its investments[31][35] - The investment strategy targets a diversified portfolio of clinical healthcare real estate, including MOBs, SNFs, senior housing, hospitals, and other related facilities[32][39] - Key attributes for property selection include quality construction, strategic location, favorable market supply/demand, predictable capital needs, and strong current and projected cash flows[40] - The company's borrowing policy targets an overall leverage not to exceed 50.0% of the combined fair market value of all properties; as of December 31, 2021, aggregate borrowings were 46.8% of market value[64] Portfolio Segments and Operations The company operates six segments, with Medical Office Buildings and Integrated Senior Health Campuses being the largest by asset value and revenue Portfolio by Segment (as of December 31, 2021) | Reportable Segment | Number of Buildings/Campuses | GLA (Sq Ft) | % of GLA | Aggregate Contract Purchase Price | Annualized Base Rent/NOI | % of Annualized Base Rent/NOI | |---|---|---|---|---|---|---| | Integrated senior health campuses| 122 | 8,866,000 | 46.2% | $1,787,698,000 | $98,369,000 | 36.5% | | Medical office buildings | 105 | 4,986,000 | 26.0% | $1,249,658,000 | $110,884,000 | 41.1% | | SHOP | 47 | 3,338,000 | 17.4% | $708,050,000 | $15,448,000 | 5.7% | | Senior housing | 20 | 673,000 | 3.5% | $169,885,000 | $12,340,000 | 4.6% | | Skilled nursing facilities | 17 | 1,142,000 | 6.0% | $237,300,000 | $23,665,000 | 8.8% | | Hospitals | 2 | 173,000 | 0.9% | $139,780,000 | $8,964,000 | 3.3% | | Total | 313 | 19,178,000 | 100% | $4,292,371,000 | $269,670,000 | 100% | - The portfolio includes properties operated under a RIDEA structure (SHOP and Integrated Senior Health Campuses) and properties under triple-net leases (Senior Housing, SNFs, Hospitals)[97][98][99][100][102] Competition, Regulation, and Human Capital The company faces significant competition and extensive regulation while managing approximately 100 employees post-internalization - The company competes with numerous other entities in acquiring, developing, and financing healthcare-related real estate, and its tenants' success depends on their ability to compete for patients and residents[76][78] - Properties and tenants are subject to extensive government regulations, including healthcare licensure, Certificate of Need (CON) laws, privacy laws like HIPAA, and the Americans with Disabilities Act (ADA)[79][80][81][82] - After becoming self-managed on October 1, 2021, the company had approximately 100 employees as of December 31, 2021[87] - As of January 31, 2022, the company reported that 69% of its employees are minorities and 67% are female[89] Item 1A. Risk Factors The company faces risks from illiquid stock, the COVID-19 pandemic's impact, heavy regulation, and rising interest rates Investment and Business Risks Key risks include illiquid common stock, adverse impacts from the COVID-19 pandemic, and operational challenges from the new self-managed structure - There is no public market for the company's common stock, making it difficult for stockholders to sell their shares[111][113] - The COVID-19 pandemic has adversely impacted the business, causing an approximate 11.9% decline in resident occupancies at SHOP facilities since February 2020 and a significant increase in costs[134] - The company's recent internalization of management functions could lead to significant unforeseen costs and liabilities associated with being an employer[138] - A significant portion of revenues is derived from campuses managed by TMS, and replacing TMS would be difficult if management agreements were terminated[144][145] Real Estate and Healthcare Industry Risks The portfolio is subject to market downturns, geographic concentration in Indiana, and regulatory risks from Medicare/Medicaid changes - The company has a significant geographic concentration of risk, with properties in Indiana accounting for approximately 30.9% of the total portfolio's annualized base rent or annualized NOI[171] - Tenants' revenue sources, including Medicare and Medicaid, are subject to reduction efforts by payors and legislative changes, which could hinder their ability to make rental payments[206][207] - The trend of seniors delaying moves to senior housing facilities could lead to decreased occupancy rates, higher resident turnover, and increased operating costs[213] - Tenants are subject to federal and state fraud and abuse laws (e.g., Anti-Kickback Statute, Stark Law), and violations could jeopardize their ability to operate and pay rent[215][216] Financing and Tax Risks Financing risks include rising interest rates and the LIBOR transition, while tax risks center on maintaining REIT qualification - The company is exposed to interest rate risk from its variable-rate debt, and the planned cessation of LIBOR after June 30, 2023, creates uncertainty[233][235] - Failure to maintain qualification as a REIT would subject the company to federal income tax at corporate rates, substantially reducing its ability to pay distributions[254][255] - The use of Taxable REIT Subsidiaries (TRSs) subjects that income to corporate-level taxes, and transactions between the REIT and its TRSs are subject to a 100% excise tax if not conducted at arm's-length[257] - The 2021 REIT Merger is intended to qualify as a tax-free reorganization; failure to qualify could have adverse tax consequences for the company and its stockholders[270] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - Not applicable[278] Item 2. Properties The portfolio comprises 313 properties valued at $4.3 billion, with high concentration in MOBs, senior health campuses, and the state of Indiana Real Estate Portfolio Summary (as of December 31, 2021) | Reportable Segment | Number of Buildings/Campuses | GLA (Sq Ft) | Aggregate Contract Purchase Price | Annualized Base Rent/NOI | % of Annualized Base Rent/NOI | |---|---|---|---|---|---| | Integrated senior health campuses| 122 | 8,866,000 | $1,787,698,000 | $98,369,000 | 36.5% | | Medical office buildings | 105 | 4,986,000 | $1,249,658,000 | $110,884,000 | 41.1% | | SHOP | 47 | 3,338,000 | $708,050,000 | $15,448,000 | 5.7% | | Senior housing | 20 | 673,000 | $169,885,000 | $12,340,000 | 4.6% | | Skilled nursing facilities | 17 | 1,142,000 | $237,300,000 | $23,665,000 | 8.8% | | Hospitals | 2 | 173,000 | $139,780,000 | $8,964,000 | 3.3% | | Total | 313 | 19,178,000 | $4,292,371,000 | $269,670,000 | 100% | Lease Expirations by Year (Excluding SHOP and Integrated Senior Health Campuses) | Year | % of Leased Area Expiring | % of Annual Base Rent Expiring | |---|---|---| | 2022 | 9.3% | 7.6% | | 2023 | 7.7% | 7.3% | | 2024 | 9.2% | 7.5% | | 2025 | 9.5% | 9.2% | | Thereafter| 64.3% | 68.4% | - The company's portfolio has a significant geographic concentration in Indiana, which represents 27.1% of total GLA and 31.0% of total annualized base rent/NOI[285] Item 3. Legal Proceedings The company is not currently subject to any material litigation nor is any threatened that would have a material adverse effect - The company is not presently subject to any material litigation nor is any material litigation threatened against it[288][708] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[289] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities There is no public market for the common stock; the board established an estimated NAV of $9.29 per share as of December 31, 2021 - There is no established public trading market for the company's common stock[292] - On March 24, 2022, the board approved an updated estimated per share NAV of $9.29 as of December 31, 2021, an increase from the previous NAV of $9.22[293] - The company authorized distributions equal to an annualized rate of $0.40 per share from October 2021 through March 2022, and the DRIP was reinstated[299][300] - As of March 11, 2022, the company had approximately 48,452 stockholders of record[295] Item 6. [Reserved] This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial results were impacted by the 2021 merger, leading to a net loss of $53.3 million due to acquisition costs and higher expenses Results of Operations Total revenues increased to $1.28 billion in 2021, but the company reported a net loss of $53.3 million due to merger-related expenses Consolidated Results of Operations (in thousands) | Metric | 2021 | 2020 | |---|---|---| | Total revenues and grant income | $1,282,254 | $1,244,301 | | Total expenses | $1,258,330 | $1,152,180 | | Business acquisition expenses | $13,022 | $290 | | Depreciation and amortization | $133,191 | $98,858 | | Interest expense | $72,737 | $75,184 | | Net (loss) income | $(53,269) | $8,863 | - The increase in revenues was primarily due to the acquisition of GAHR IV's portfolio, while increased expenses were driven by merger-related costs and higher G&A from self-management[360][367][369] - Grant income related to CARES Act programs decreased from $55.2 million in 2020 to $17.0 million in 2021[363][364] Liquidity and Capital Resources Liquidity is sourced from operations and borrowings, with $143.4 million available on credit facilities at year-end 2021 Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | |---|---|---| | Net Cash from Operating | $17,913 | $219,156 | | Net Cash Used in Investing| $(138,652) | $(147,945) | | Net Cash from Financing | $94,109 | $(8,811) | | Cash at End of Period | $125,486 | $152,190 | - As of December 31, 2021, the company had aggregate borrowings of $2.34 billion and an available borrowing capacity of $143.4 million under its credit facilities[379][396] - In January 2022, the company terminated its existing credit facilities and entered into a new credit agreement for up to $1.05 billion[378][847] - For 2021, 41.2% of distributions were funded by proceeds from borrowings, compared to 0% in 2020[387] Funds from Operations (FFO) and Modified Funds from Operations (MFFO) FFO and MFFO per share decreased in 2021, influenced by lower government grant income and increased costs from the merger and self-management FFO and MFFO per Share | Metric | 2021 | 2020 | |---|---|---| | FFO attributable to controlling interest | $69,678,000 | $95,675,000 | | FFO per common share | $0.35 | $0.53 | | MFFO attributable to controlling interest | $77,642,000 | $96,672,000 | | MFFO per common share | $0.39 | $0.54 | - FFO and MFFO are presented as supplemental performance measures; MFFO further adjusts FFO for items like acquisition expenses to indicate sustainable operating performance[401][405][407] - Excluding government grants, FFO for 2021 and 2020 would have been approximately $54.5 million and $54.9 million, respectively[411] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from its $1.5 billion in variable-rate debt, which it mitigates with derivatives - The company's primary market risk exposure is to interest rate changes on its long-term debt[422][423] - As of December 31, 2021, a 0.50% increase in market interest rates would increase the company's overall annualized interest expense on its variable-rate debt by approximately $3.5 million[432] - The company is managing the transition from LIBOR to alternative rates like SOFR, and its 2022 Credit Facility is based on SOFR[425][427] Item 8. Financial Statements and Supplementary Data This section refers to the consolidated financial statements and schedules located in Part IV, Item 15 of the report - This item refers to the financial statements and schedules detailed in Part IV, Item 15[436] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[437] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2021 - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[439] - Management concluded that internal control over financial reporting was effective as of December 31, 2021[441] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[442] Item 9B. Other Information Executive Chairman Jeffrey T. Hanson announced his intention to transition to non-executive Chairman of the Board, effective June 30, 2022 - Jeffrey T. Hanson will transition from Executive Chairman to non-executive Chairman of the Board effective June 30, 2022[443] - In connection with his transition, Mr. Hanson will forfeit his performance-based restricted stock units but will retain his time-based restricted shares[446] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[448] PART III Item 10. Directors, Executive Officers and Corporate Governance Information concerning directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of stockholders[451] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of stockholders[452] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of stockholders[453] Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of stockholders[454] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of stockholders[455] PART IV Item 15. Exhibits, Financial Statement Schedules This section contains the consolidated financial statements, the independent auditor's report, schedules, and a list of exhibits - This section includes the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Schedule III for Real Estate and Accumulated Depreciation[459] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion, highlighting critical audit matters related to purchase price allocation and impairment testing - The auditor, Deloitte & Touche LLP, issued an unqualified opinion, stating the financial statements are fairly presented in accordance with GAAP[464] - A critical audit matter was the purchase price allocation for the $1.13 billion of real estate investments acquired in the REIT Merger, which involved significant management estimates[469] - A second critical audit matter was the evaluation of impairment indicators for the historical GAHR III real estate investments, which required significant auditor judgment[472][473] Consolidated Financial Statements Total assets grew to $4.58 billion in 2021 due to the merger, while the company reported a net loss of $53.3 million Key Financial Position Data (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | |---|---|---| | Real estate investments, net | $3,514,686 | $2,330,000 | | Total assets | $4,580,339 | $3,234,937 | | Total liabilities | $2,750,768 | $2,160,114 | | Total stockholders' equity | $1,581,293 | $866,108 | | Total equity | $1,756,846 | $1,034,483 | Key Operational Data (in thousands) | Metric | 2021 | 2020 | 2019 | |---|---|---|---| | Total revenues and grant income | $1,282,254 | $1,244,301 | $1,223,116 | | Net (loss) income | $(53,269) | $8,863 | $(852) | | Net (loss) income per share | $(0.24) | $0.01 | $(0.03) | Item 16. Form 10-K Summary The company did not provide a summary for this item - None[901]