Risk Factors Dashboard
Once a year, publicly traded companies issue a comprehensive report of their business, called a 10-K. A component mandated in the 10-K is the ‘Risk Factors’ section, where companies disclose any major potential risks that they may face. This dashboard highlights all major changes and additions in new 10K reports, allowing investors to quickly identify new potential risks and opportunities.
View risk factors by ticker
Search filings by term
Risk Factors - NHHS
-New additions in green
-Changes in blue
-Hover to see similar sentence in last filing
Item 1A. “Risk Factors” below. The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.
We also consider cybersecurity, along with other top risks, within our enterprise risk management framework. The enterprise risk management framework includes internal reporting at the enterprise level, with consideration of key risk indicators, trends and countermeasures for cybersecurity and other types of significant risks. In the last fiscal year, we have not identified risks from known cybersecurity threats, including any prior cybersecurity incidents, which have materially affected us, including our operations, business strategy, results of operations, cash flow or financial condition. We have not identified cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect us, including with respect to our business strategy, results of operations or financial position. 
3
RISK FACTOR SUMMARY
Investing in our securities involves a high degree of risk. Below is a summary of principal factors that make an investment in our securities speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, as well as other risks that we face, can be found under the heading Item 1A. “Risk Factors” below.
Risks Related to the Merger
•There is no assurance that the merger with an affiliate of Welltower Inc., or the Merger, will be consummated. The consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by our stockholders.
•The announcement and pendency of our proposed Merger could adversely affect our business, financial results and operations.
Risks Related to Our Business and Strategy
•Macroeconomic trends, including unfavorable trends relating to labor costs, unemployment, inflation and interest rates, may adversely affect our business and financial results.
•Market conditions and the actual and perceived state of the capital markets generally could negatively impact our business, financial condition and results of operations.
•We are directly exposed to operational risks at substantially all of our properties and are dependent on the managers of these properties to manage these risks.
•We depend on the manager of our Winterfell portfolio, Solstice Senior Living, or Solstice, for a significant majority of our revenues and net operating income. Adverse developments in Solstice’s business and affairs or financial condition could have a material adverse effect on us. Adverse developments in Watermark’s or Solstice’s business and affairs or financial condition could have a material adverse effect on us. Adverse developments in Watermark’s or Solstice’s business and affairs or financial condition could have a material adverse effect on us.
•If we must replace any of our managers, we might be unable to reposition the properties or fully restore value, and we could be subject to delays, limitations and expenses, all of which could have a material adverse effect on us.
•We are subject to risks associated with capital expenditures, and our failure to adequately manage such risks could have a material adverse effect on our business, financial condition and results of operations.
•Events that adversely affect the ability of seniors and their families to afford resident fees at our seniors housing facilities could cause our occupancy rates, revenues and results of operations to decline.
•Increased competition could adversely affect future occupancy rates, operating margins and profitability at our properties.
•Our strategy depends upon identifying and executing on disposition opportunities that achieve a desired return.
•We may be forced to dispose of assets at suboptimal times due to debt maturities.
•We may not be able to sell our properties quickly in response to changes in economic and other conditions, which may result in losses to us.
•Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return.
•Failure to comply with certain healthcare laws and regulations, and changes in such laws and regulations, could adversely affect our operations.
•Insurance may not cover all potential losses on commercial real estate investments, which may impair the value of our assets.
Risks Related to Our Capital Structure
•We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations.
•We require capital in order to operate our business, and the failure to obtain such capital would have a material adverse effect on our business, financial condition and results of operations.
4
•We are exposed to increases in interest rates, which could reduce our cash flows and adversely impact our ability to refinance existing debt or sell assets.
•We use significant leverage in connection with our investments, which increases the risk of loss associated with our investments and restricts our ability to engage in certain activities.
•We may be adversely affected by our concentration of borrowings with Fannie Mae.
•If we are required to make payments under any “bad boy” non-recourse carve-out guaranties for our mortgage loans, we could be materially and adversely affected.
•Our distribution policy is subject to change. We may not be able to make distributions in the future.
•Stockholders are not currently able to sell any of their shares of our common stock back to us pursuant to our share repurchase program and if they do sell their shares on any limited market that may develop, they may not receive the price they paid upon subscription.
•Our board of directors, or the Board, determined an estimated value per share of $2.96 for our common stock as of June 30, 2024, which may not reflect the current value of shares of our common stock.
•No public trading market for our shares currently exists, and as a result, it will be difficult for stockholders to sell their shares and, if stockholders are able to sell their shares, stockholders will likely sell them at a substantial discount to the price paid for those shares.
•If we do not successfully implement a liquidity transaction, such as the Merger, stockholders may have to hold their investments for an indefinite period.
Risks Related to Our Company and Corporate Structure
•As a self-managed REIT without the resources of our former sponsor, we may encounter unforeseen costs and difficulties.
•Our ability to operate our business successfully would be harmed if key personnel terminate their employment with us.
•We are subject to substantial litigation risks and may face significant liabilities as a result of litigation allegations and negative publicity.
•We are subject to substantial regulation, numerous contractual obligations and extensive internal policies and failure to comply with these matters could have a material adverse effect on our business, financial condition and results of operations.
•Failure to implement effective information and cybersecurity policies, procedures and capabilities could disrupt our business and harm our results of operations.
Risks Related to Regulatory Matters and Our REIT Tax Status
•Maintenance of our Investment Company Act exemption imposes limits on our operations.
•Our failure to continue to qualify as a real estate investment trust, or REIT, would subject us to federal income tax.
5
PART I
Item 1. Business
References to “we,” “us” or “our” refer to NorthStar Healthcare Income, Inc. and its subsidiaries, unless context specifically requires otherwise.
Overview
We own a diversified portfolio of seniors housing properties, including independent living facilities, or ILFs, assisted living facilities, or ALFs, and memory care facilities, or MCFs, located throughout the United States.
We were formed in October 2010 as a Maryland corporation and commenced operations in February 2013. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, commencing with the taxable year ended December 31, 2013. We conduct our operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
We raised $2.0 billion in total gross proceeds from the sale of shares of our common stock in our continuous, public offerings, including $232.6 million pursuant to our distribution reinvestment plan, or the DRP, collectively referred to as our Offering.From inception through December 31, 2022, we raised $2.0 billion in total gross proceeds from the sale of shares of our common stock in our continuous, public offerings, including $232.6 million pursuant to our distribution reinvestment plan, or our DRP, collectively referred to as our Offering.
The Internalization
From inception through October 21, 2022, we were externally managed by CNI NSHC Advisors, LLC or its predecessor, or the Former Advisor, an affiliate of NRF Holdco, LLC, or the Former Sponsor. The Former Advisor was responsible for managing our operations, subject to the supervision of our Board, pursuant to an advisory agreement. The Former Advisor was responsible for managing our operations, subject to the supervision of our board of directors, pursuant to an advisory agreement. On October 21, 2022, we completed the internalization of our management function, or the Internalization. In connection with the Internalization, we agreed with the Former Advisor to terminate the advisory agreement. In connection with the Internalization, we agreed with the Former Advisor to terminate the advisory agreement and arranged for the Former Advisor to continue to provide certain services for a transition period.
Merger Agreement
On January 29, 2025, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Compound Holdco LLC, a Delaware limited liability company, or the Parent, Compound Merger Sub LLC, a Delaware limited liability company and a subsidiary of Parent, or the Merger Sub, and, solely for purposes of Section 10.14 thereof, Welltower OP LLC, a Delaware limited liability company and a subsidiary of Welltower Inc., or the Guarantor. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, we will merge with and into Merger Sub, with Merger Sub continuing as the surviving entity, or the Merger. The Merger Agreement and the transactions contemplated thereby were unanimously approved by our Board.
Upon consummation of the Merger, our stockholders will receive $3.03 in cash for each share of our common stock, without interest and subject to any applicable withholding tax obligations.
The completion of the Merger is subject to certain customary closing conditions, including, among others, (1) approval of the Merger by our stockholders; (2) material compliance with covenants; (3) accuracy of each party’s representations, subject to materiality thresholds; (4) absence of injunctions or orders that prohibit or restrain the consummation of the Merger; (5) the receipt by us and Merger Sub of a written legal opinion addressing our qualification as a REIT; (6) the absence of a material adverse effect on us prior to the closing; and (7) our completion of the distribution of the interests in the limited partners of our operating partnership to NorthStar Healthcare.
We have made customary representations and warranties and have agreed to certain customary covenants in the Merger Agreement, including, among others, covenants to conduct our business in the ordinary course and maintain our REIT status.
Our stockholders will be asked to vote to approve, among other things, the Merger at a special meeting of stockholders that will be held on a date yet to be announced. Approval of the Merger requires the affirmative vote of the holders of at least a majority of the shares of our outstanding common stock entitled to vote on the Merger as of the record date for the special meeting.
The Merger is expected to close in the second quarter of 2025, although there can be no assurances as to when or if the closing will occur.
Our Strategy
Our primary objective is to maximize value and generate liquidity for stockholders. The key elements of our strategy include:
•Grow the Operating Income Generated by Our Portfolio. We are focused on growing the net operating income generated by our properties, through active portfolio management and selectively deploying capital expenditures to improve occupancy and resident rates while managing expenses, in an effort to enhance the overall value of our assets.
6
•Pursue Disposition Opportunities that Maximize Value. We will pursue dispositions of assets and portfolios where we believe the disposition will achieve a desired return or strategic outcome, with the goal of maximizing value for stockholders overall. Consistent with this strategy, we are presently pursuing the Merger, as described above.
Our Investments
We operate our seniors housing investments portfolio through two reportable segments: operating investments and net lease investments. Our operating investments segment includes properties operated pursuant to management agreements with managers, in which we own a controlling interest. Our net lease investments segment includes properties operated under net leases with an operator, in which we own a controlling interest. As of December 31, 2024, all four properties in our net lease investment segment were designated as held for sale and the sale was completed in January 2025. We also hold assets outside of our reportable business segments, which include corporate assets, primarily cash and cash equivalents, as well as unconsolidated joint venture investments, in which we own a minority, non-controlling interest.
For financial information regarding our reportable segments, refer to Note 11, “Segment Reporting” in our accompanying consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data.”
The following table and charts present a summary of our seniors housing investments portfolio as of December 31, 2024, excluding properties classified as held for sale as of December 31, 2024 (dollars in thousands):
_______________________________________
(1)Classification based on predominant services provided, but may include other services.
(2)Amount represents gross real estate carrying value, net of impairment, before accumulated depreciation, as presented in our consolidated financial statements as of December 31, 2024. For additional information, refer to “Note 3, Operating Real Estate” of Part II, Item 8. “Financial Statements and Supplementary Data.”
_______________________________________
(1)Classification based on predominant services provided, but may include other services.
7
Our seniors housing investments include the following types of properties:
•Independent living facilities. ILFs are properties with central dining facilities that provide services that include security, housekeeping, nutrition and laundry services. ILFs are designed specifically for independent seniors who are able to live on their own, but desire the security and conveniences of community living. ILFs typically offer several services covered under a regular monthly fee. Fees at these communities are paid from private sources. As of December 31, 2024, we had 34 ILFs in our operating investments segment. As of December 31, 2022, we had eight full-time employees.
•Assisted living facilities. ALFs provide services that include minimal assistance for activities in daily living and permit residents to maintain some of their privacy and independence as they do not require constant supervision and assistance. Services may be bundled within one monthly fee or based on the care needs of the resident and usually include meals and dining, daily housekeeping, laundry, medical reminders and 24-hour availability of assistance. Services may be bundled within one monthly fee or based on the care needs of the resident and usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24-hour availability of assistance with the activities of daily living, such as eating, dressing and bathing. Revenues generated by ALFs primarily come from private pay sources, including private insurance, and government reimbursement programs, such as Medicaid, to a lesser extent. Revenues generated from SNFs typically come from government reimbursement programs, including Medicare and Medicaid, as well as private pay sources, including private insurance. As of December 31, 2024, we had six properties that are predominantly ALFs in our operating investments segment.
•Memory care facilities. MCFs offer specialized options for seniors with Alzheimer’s disease and other forms of dementia. These facilities offer dedicated care and specialized programming for various conditions relating to memory loss in a secured environment. Residents require a higher level of care and more assistance with activities of daily living than in ALFs. Therefore, these facilities have staff available 24 hours a day to respond to the unique needs of their residents. Fees at these communities are paid primarily from private sources and, to a lesser extent, government reimbursement, such as Medicaid. As of December 31, 2024, we had two properties that are predominantly MCFs in our operating investments segment.
Managers
The following table presents the managers of our seniors housing investments portfolio (dollars in thousands):
_______________________________________
(1)Excludes properties sold or held for sale as of December 31, 2024.
(2)Within our operating investments, we sold two properties and classified one property as held for sale that were managed by Watermark Retirement Communities during the year ended December 31, 2024. The four net lease properties operated by Arcadia Management in our net lease investment segment were classified as held for sale as of December 31, 2024.
Operating Investments
We engage independent managers to operate these facilities pursuant to management agreements, including procuring supplies, hiring and training all employees, entering into all third-party contracts for the benefit of the property, including resident/patient agreements, complying with laws and regulations, including but not limited to healthcare laws, and providing resident care and services, in exchange for a management fee. As a result, we must rely on our managers’ personnel, expertise, technical resources and information systems, risk management processes, proprietary information, good faith and judgment to manage our operating properties efficiently and effectively. We also rely on our managers to set appropriate resident fees, to provide accurate property-level financial results in a timely manner and otherwise operate our seniors housing facilities in compliance with the terms of our management agreements and all applicable laws and regulations. We also rely on our managers to set appropriate resident fees, to provide accurate property-level financial results in a timely manner and otherwise 9Table of Contentsoperate our seniors housing facilities in compliance with the terms of our management agreements and all applicable laws and regulations.
8
Our management agreements generally provide for monthly management fees which are calculated based on various performance measures, including revenue, net operating income and other objective financial metrics. We are also required to reimburse our managers for expenses incurred in the operation of the properties, as well as to indemnify our managers in connection with potential claims and liabilities arising out of the operation of the properties. Our management agreements are terminable after a stated term with certain renewal rights, though we have the ability to terminate earlier upon certain events with or without the payment of a fee.
The following table presents a summary of the terms of our management agreements:
_______________________________________
(1)Affiliates of Watermark also own a 3% non-controlling interest in the Aqua portfolio, which may impact various rights and economics under the management agreements.
Certain managed seniors housing properties are held through joint ventures, where an affiliate of the manager owns a 3% non-controlling interest, primarily to create alignment and incentives for the manager to perform. In addition, we own a 20% interest in Solstice Senior Living, LLC, or Solstice, a management platform formed with affiliates of Integral Senior Living, or ISL, the manager of the Winterfell portfolio, which gives us additional rights and minority protections.
On November 1, 2022, each of the management agreements with Solstice for the Winterfell portfolio properties were amended to include, among other things, a long-term incentive fee, or the Incentive Fee, payable to Solstice if the Winterfell portfolio achieved certain performance goals related to growth in net operating income through 2025.
In the event that the aggregate net operating income generated by the Winterfell portfolio exceeds certain performance goals for the twelve months ending December 31, 2025, or an earlier date if the Winterfell portfolio is sold and Solstice is terminated as the manager, we may be required to pay to Solstice amount equal to 5-20% of the aggregate net operating income for that period in excess of the performance target, calculated in accordance with the terms of the management agreements and subject to the terms and conditions set forth in the management agreements, payable on or before March 2026.
We determined that it is probable that the Incentive Fee will be payable based on performance achieved by the Winterfell portfolio during the year December 31, 2024, and, as a result, accrued an estimated reserve of $6.0 million as of December 31, 2024.
Properties Sold and Held for Sale
In our operating investments segment, during the year ended December 31, 2024, we sold two properties within the Rochester portfolio managed by Watermark. The sales generated net proceeds totaling $14.8 million after the repayment of outstanding borrowings and transaction costs. In addition, in December 2024, we entered into an agreement to sell the remaining property within the Rochester portfolio, which was designated as held for sale as of December 31, 2024. The sale was completed in January 2025 and generated net proceeds of $6.6 million after transaction costs. As of December 31, 2024, we continue to have legal ownership of seven seniors housing properties, or the Rochester Sub-Portfolio, securing seven individual mortgage notes payable, or the Rochester Sub-Portfolio Loan, which were placed into a receivership in October 2023. We continue to work with the receiver and its advisors to facilitate an orderly transition of the ownership of the properties.
As of December 31, 2024, our net lease investments segment included four ALF properties located in New York, or the Arbors portfolio, operated by Arcadia Management under net leases, which were designated as held for sale. In November 2024, we entered into an agreement to sell the Arbors portfolio and the sale was completed in January 2025, generating net proceeds of $1.2 million, after the repayment of outstanding borrowings of $79.1 million and transaction costs. Since February 2021, the operator has failed to remit rent in full and comply with other contractual terms of its lease agreements, which resulted in a
9
default under the operator’s leases. The sale allowed us to repay all outstanding borrowings in advance of a February 2025 debt maturity and exit an underperforming portfolio with a defaulted lease.
Unconsolidated Investments
Until September 20, 2024, we owned a 24.0% minority interest in the Trilogy REIT Holding, LLC, or Trilogy, which indirectly owns integrated senior health campuses, providing services associated with ILFs, ALFs, MCFs and skilled nursing facilities, across the Midwest. On September 20, 2024, we completed the sale of our investment in Trilogy, which generated net proceeds to us of $254.0 million.
As of December 31, 2024, our remaining unconsolidated investment with ongoing operations is our 20.0% minority interest in Solstice, the management platform formed with affiliates of ISL to exclusively manage one of our operating investments, the Winterfell portfolio.
Seasonality
Our revenues are dependent on occupancy and may fluctuate based on seasonal trends. It is difficult to predict the magnitude of seasonal trends and the related potential impact of the cold and flu season, occurrence of epidemics or any other widespread illnesses on the occupancy of our facilities. A decrease in occupancy could adversely affect our operating income. A decrease in occupancy could affect our operating income.
Competition
Our investments will experience local and regional market competition for residents, operators and staff. Competition will be based on quality of care, reputation, physical appearance of properties, services offered, family preference, physicians, staff and price. Competition will come from independent operators as well as companies managing multiple properties, some of which may be larger and have greater resources than our operators. Some of these properties are operated for profit while others are owned by governmental agencies or tax-exempt, non-profit organizations. Competitive disadvantages may result in vacancies at facilities, reductions in net operating income and ultimately a reduction in stockholder value.
Inflation
Macroeconomic trends such as increases in inflation can have a substantial impact on our business and financial results. Many of our costs are subject to inflationary pressures. These include labor, repairs and maintenance, food costs, utilities, insurance and other operating costs. Our managers’ ability to offset increased costs by increasing the rates charged to residents may be limited by competitive pressures, affordability and timing, which may lag behind cost volatility. Our managers’ ability to offset increased costs by increasing the rates charged to residents may be limited and cost inflation may therefore substantially affect the net operating income of our operating properties as well as the ability of our net lease operator to make payments to us. As a result, cost inflation will substantially affect the net operating income of our properties.
Portfolio Management
The portfolio management process for our investments includes oversight by our executive and asset management teams, regular management meetings and an operating results review process. These processes are designed to evaluate and proactively identify asset-specific issues and trends on a portfolio-wide, sub-portfolio or asset type basis. The teams work in conjunction with our managers to create tailored action plans to address issues identified. The teams work in conjunction with our managers and operators to create tailored action plans to address issues identified.
Our executive and asset management teams are experienced and use many methods to actively manage our investments to enhance or preserve our income, value and capital and to mitigate risk. Our teams seek to identify opportunities for our investments that may involve replacing or renovating facilities in our portfolio which, in turn, would allow us to improve occupancy and resident rates and enhance the overall value of our assets. To manage risk, our teams engage in frequent review and dialogue with operators/managers/third party advisors and periodic inspections of our owned properties. In addition, our teams consider the impact of regulatory changes on the performance of our portfolio.
Our teams will continue to monitor the performance of, and actively manage, all of our investments. However, there can be no assurance that our investments will continue to perform in accordance with our expectations.
Profitability and Performance Metrics
We calculate Funds from Operations, or FFO, Modified Funds from Operations, or MFFO, and net operating income, or NOI, to evaluate the profitability and performance of our business. See “Non-GAAP Financial Measures” for a description of these metrics.
10
Human Capital
On October 21, 2022, as a result of completing the Internalization, we became a self-managed REIT. Prior to the Internalization, we had no employees and were externally managed by the Former Advisor or its affiliates, who provided management, acquisition, advisory, marketing, investor relations and certain administrative services for us. As of December 31, 2024, we had eight full-time employees.
We believe our employees are critical to our success. All of our employees are provided with a comprehensive benefits and wellness package, which may include medical, dental and vision insurance, life insurance, 401(k) matching, long-term incentive plans, among other things. In connection with the Internalization, we worked with a compensation consultant to evaluate and benchmark the competitiveness of our compensation programs focused on pay practices that reward performance and support our needs. Our executive management team oversees our human capital resources and employment practices to ensure that an asset as important as our employees is strategically integrated with our goals and business plan as a healthcare REIT.
We are also committed to providing a safe and healthy workplace. We continuously strive to meet or exceed compliance with all laws, regulations and accepted practices pertaining to workplace safety.
We utilize a professional employer organization, or PEO, who is the employer of record of our employees and administers our benefits, payroll and other human resource management services.
Regulation
We are subject, in certain circumstances, to supervision and regulation by state and federal governmental authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:
•require compliance with applicable REIT rules;
•regulate healthcare operators with respect to licensure, certification for participation in government programs and relationships with patients, physicians, tenants and other referral sources;
•regulate occupational health and safety;
•regulate removal or remediation of hazardous or toxic substances;
•regulate land use and zoning;
•regulate removal of barriers to access by persons with disabilities and other public accommodations;
•regulate tax treatment and accounting standards; and
•regulate use of derivative instruments and our ability to hedge our risks related to fluctuations in interest rates and exchange rates.
Tax Regulation
We elected to be taxed as a REIT under the Code, commencing with our taxable year ended December 31, 2013. If we maintain our qualification as a REIT for federal income tax purposes, we will generally not be subject to federal income tax on our taxable income that we distribute as dividends to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and will generally not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income. However, we believe that we are organized and operate in a manner that enables us to qualify for treatment as a REIT for federal income tax purposes and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes. In addition, we operate certain healthcare properties through structures permitted under the REIT Investment Diversification and Empowerment Act of 2007, which permits us, through taxable REIT subsidiaries, or TRSs, to have direct exposure to resident fee income and incur related operating expenses. In addition, we operate certain healthcare properties through structures permitted under the REIT Investment Diversification and Empowerment Act of 2007, which permit the Company, through taxable REIT subsidiaries, or TRSs, to have direct exposure to resident fee income and incur related operating expenses.
U.S. Healthcare Regulation
Overview
Seniors housing facilities may be subject to extensive and complex federal, state and local laws, regulations and industry standards governing their operations. Although the properties within our seniors housing investments portfolio may be subject to varying levels of governmental scrutiny, we expect that the healthcare industry, in general, will continue to face increased
11
regulation and pressure. Changes in laws, regulations, reimbursement and enforcement activity can all have a significant effect on our operations and financial condition, as set forth below and under Item 1A. “Risk Factors.”
Fraud and Abuse Enforcement
Healthcare providers are subject to federal and state laws and regulations that govern their operations, including those that require providers to furnish only medically necessary services and submit to third-party payors valid and accurate statements for each service, as well as kickback laws, self-referral laws and false claims laws. Sanctions for violations of these laws, regulations and other applicable guidance may include, but are not limited to, loss of licensure, loss of certification or accreditation, denial of reimbursement, imposition of civil and criminal penalties and fines, suspension or exclusion from federal and state healthcare programs or closure of the facility.
Reimbursements
Sources of revenues for our seniors housing properties are primarily private payors, including private insurers and self-pay patients, and payments from state Medicaid programs. Medicaid is a medical assistance program for eligible needy persons that is funded jointly by federal and state governments and administered by the states. Medicaid eligibility requirements and benefits vary by state. Medicaid programs are highly regulated and subject to frequent and substantial changes resulting from legislation, regulations and administrative and judicial interpretations of existing law. The Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes resulting from legislation, regulations and administrative and judicial interpretations of existing law.
Federal, state and private payor reimbursement methodologies applied to healthcare providers are continuously evolving. With significant budgetary pressures, federal and state governments continue to seek ways to reduce federal healthcare program spending, such as reductions in reimbursement rates and increased enrollment in managed care programs, among other things. With significant budgetary pressures, federal and state governments continue to seek ways to reduce Medicare and Medicaid spending through reductions in reimbursement rates and increased enrollment in managed care programs, among other things. It is difficult to predict the nature and success of future financial or delivery system reforms, or the extent of any changes to Medicaid eligibility and overall government spending on Medicaid programs, including those that may be implemented by the new Administration, but changes to reimbursement rates and related policies could adversely impact our results of operations. Legislation introduced in the US Congress and certain state legislatures include changes that directly or indirectly affect reimbursement and promote shifts from traditional fee-for-service reimbursement models to alternative payment models that tie reimbursement to quality and cost of care, such as accountable care organizations and bundled payments.
Licensure, Certification and Accreditation
Seniors housing facilities and other healthcare providers that operate healthcare properties in our seniors housing investments portfolio may be subject to extensive state licensing, laws and regulations, which may restrict the ability to add new properties, expand an existing facility’s size or services, or transfer responsibility for operating a particular facility to a new operator. The failure of our operators or managers to obtain, maintain or comply with any required license or other certification, accreditation or regulatory approval (which could be required as a condition of licensure or third-party payor reimbursement) could result in loss of licensure, loss of certification or accreditation, denial of reimbursement, imposition of civil and/or criminal penalties and fines, suspension or exclusion from federal and state healthcare programs or closure of the facility, any of which could have an adverse effect on our operations and financial condition. The failure of our operators or managers to obtain, maintain or comply with any required license, CON or other certification, accreditation or regulatory approval (which could be required as a condition of licensure or third-party payor reimbursement) could result in loss of licensure, loss of certification or accreditation, denial of reimbursement, imposition of civil and/or criminal penalties and fines, suspension or exclusion from federal and state healthcare programs or closure of the facility, any of which could have an adverse effect on our operations and financial condition.
Health Information Privacy and Security
Healthcare providers, including those in our portfolio, are subject to numerous state and federal laws that protect the privacy and security of patient health information. The federal and state governments have significantly increased enforcement of these laws. The federal government, in particular, has significantly increased its enforcement of these laws. The failure of our managers to maintain compliance with privacy and security laws could result in the imposition of penalties and fines, which in turn may adversely impact us. The failure of our operators and managers to maintain compliance with privacy and security laws could result in the imposition of penalties and fines, which in turn may adversely impact us.
CARES ACT and Similar Governmental Funding Programs
A variety of federal, state and local government efforts were initiated in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act. The CARES Act includes provisions reimbursing eligible health care providers for certain health care-related expenses or lost revenues not otherwise reimbursed that were directly attributable to COVID-19 through the U.S. Department of Health and Human Services, or HHS, Provider Relief Fund. We applied for and received grants from the Provider Relief Fund for our seniors housing properties.
The HHS Office of Inspector General and the Pandemic Response Accountability Committee each have the right to conduct audits of our use of funds from the Provider Relief Fund and HHS has the right to recoup some or all of the payments if it determines those payments were not made or the funds were not used in compliance with its rules, regulations and interpretive guidance.
Investment Company Act
We believe that we are not, and intend to conduct our operations so as not to become, regulated as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. We have relied, and intend to continue to rely, on current interpretations of the staff of the SEC in an effort to continue to qualify for an exemption from registration under
12
the Investment Company Act. For more information on the exemptions that we use, refer to Item 1A. “Risk Factors—Risks Related to Regulatory Matters and Our REIT Tax Status—Maintenance of our Investment Company Act exemption imposes limits on our operations.”
For additional information regarding regulations applicable to us, refer to below and Item 1A. “Risk Factors.”
Independent Directors’ Review of Our Policies
As required by our charter, our independent directors have reviewed our policies, including but not limited to our policies regarding investments, leverage and conflicts of interest and determined that they are in the best interests of our stockholders.
Corporate Governance and Internet Address
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our Board consists of a majority of independent directors. Our board of directors consists of a majority of independent directors. The audit committee of our Board, or the Audit Committee, and compensation committee of our Board are composed exclusively of independent directors. The audit committee and compensation committee of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of ethics, which delineate our standards for our officers and directors.
Our internet address is www.northstarhealthcarereit.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, if any, as filed or furnished with the SEC, as soon as reasonably practicable after such filing or furnishing. Our site also contains our code of ethics, corporate governance guidelines, our Audit Committee charter and our compensation committee charter. Our site also contains our code of ethics, corporate governance guidelines, our audit committee charter and our compensation committee charter. Within the time period required by the rules of the SEC, we will post on our website any amendment to our code of ethics or any waiver applicable to any of our directors, executive officers or senior financial officers.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. Although we have entered into the Merger Agreement, there can be no assurance that the Merger will be consummated. The following risk factors describe the risks and uncertainties we may face during the pendency of the consummation of the Merger and in the event the Merger is not consummated. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial or that generally apply to all businesses also may adversely impact our business. If any of the following risks occur, our business, financial condition, operating results, cash flow and liquidity could be materially adversely affected.
Risks Related to the Merger
There is no assurance that the Merger will be consummated.
There is no assurance that the Merger will be consummated or, if the Merger is consummated, that certain terms of the Merger Agreement may not change. The Merger Agreement is subject to a number of conditions that might prevent the closing of the Merger including, but not limited to, obtaining the approval of our stockholders. In addition, the Merger Agreement may be terminated by either party under certain circumstances. In connection with the termination of the Merger Agreement under certain circumstances, we would be required to pay termination amounts in cash ranging from approximately $14.1 million to $22.5 million. Accordingly, there can be no assurance that the Merger will be consummated according to the terms described herein or at all, and if it fails to close we may be liable for a significant termination amount, which may adversely affect our business, financial results and operations.
The announcement and pendency of our proposed Merger could adversely affect our business, financial results and operations.
The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding our business, including by affecting our ability to maintain relationships with our partners, managers and others with whom we do business. Any such disruptions or uncertainty could have an adverse effect on our business, financial results and operations. We have also diverted, and will continue to divert, significant management resources towards the negotiation, entry into and anticipated completion of the Merger, which could adversely affect our business and results of operations. We will continue to invest capital into our investments in order to maintain market position, functional and operating standards, and improve occupancy and resident rates, in an effort to enhance the overall value of our assets.
In addition, without the consent of Welltower and subject to certain other exceptions, we are subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, lease, transfer or dispose of our assets, amend certain contracts or our organizational documents and incur indebtedness. These restrictions could
13
prevent us from pursuing otherwise attractive business opportunities, result in our inability to respond effectively to expiring contracts, developments with our managers (including changes in the financial positions of our managers) or other industry developments, and may otherwise adversely affect our business, financial results and operations.
Risks Related to Our Business and Strategy
Macroeconomic trends, including unfavorable trends relating to labor costs, unemployment, inflation and interest rates, may adversely affect our business and financial results.
Macroeconomic trends, including unfavorable trends relating to labor costs, unemployment, inflation and interest rates, may adversely impact our business, financial condition and results of operations.Macroeconomic trends, including rising labor costs and historically low unemployment, increases in inflation and rising interest rates, may adversely impact our business, financial condition and results of operations. Increased labor costs and a shortage of available skilled and unskilled workers has and may in the future increase the cost of staffing at our seniors housing communities. Increased labor costs and a shortage of available skilled and unskilled workers has and may continue to increase the cost of staffing at our seniors housing communities. To the extent our managers cannot hire sufficient workers, they may be required to enhance pay and benefits packages to compete effectively for such personnel or use more costly contract or overtime labor. If our managers are unable to hire and fill necessary positions, our business may suffer, causing us to forego potential revenue and growth. Rising labor expense may result in a decrease in our net operating income and, as a result, the value of our properties.
Many of our costs, including operating and administrative expenses, interest expense and capital project costs, are subject to inflation. These include expenses for property-related contracted services, utilities, repairs and maintenance and insurance and general and administrative costs. Property taxes are also impacted by inflationary changes because taxes in some jurisdictions are regularly reassessed based on changes in the fair value of our properties. We may not be able to offset such additional costs by passing them through, or increasing the rates we charge, to residents. If there is an increase in these costs, our business, cash flows and operating results could be adversely affected.
Elevated interest rates may also result in higher operating and incremental borrowing costs for us, as well as a decrease in the value of our real estate and a decrease in our cash flows and net income. In addition, elevated inflation or higher than expected interest rates due to macrodevelopments, U.S. government policies, or otherwise, could negatively impact consumer spending and future demand for our properties.
Market conditions and the actual and perceived state of the capital markets generally could negatively impact our business, financial condition and results of operations.
Any disruption to the capital markets or ability to access such markets could impair our ability to execute on our business strategy. Adverse developments affecting economies throughout the world, including rising inflation, a general tightening of availability of credit (including the price, terms and conditions under which it can be obtained), the state of the public and private capital markets, decreased liquidity in certain financial markets, increased interest rates, foreign exchange fluctuations, declining consumer confidence, the actual or perceived state of the real estate market, tightened labor markets or significant declines in stock markets, as well as concerns regarding pandemics, epidemics and the spread of contagious diseases, could impact our business, financial condition and results of operations. For example, unfavorable changes in general economic conditions, including recessions, economic slowdowns, high unemployment and rising prices or the perception by consumers of weak or weakening economic conditions may reduce disposable income and impact consumer spending in healthcare or seniors housing, which could adversely affect our financial results.
To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect the value of our properties, the availability or the terms of financing that a potential purchaser for our properties or we may be able to obtain and our ability to make principal and interest payments on, or refinance when due, any outstanding indebtedness.To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect the value of our properties, the availability or the terms of financing that we have or may be able to obtain and our ability to make principal and interest payments on, or refinance when due, any outstanding indebtedness.
We are directly exposed to operational risks at all of our properties and are dependent on the managers of these properties to manage these risks.
All of our properties are operated pursuant to management agreements, where we are directly exposed to various operational risks. These risks include: (i) fluctuations in occupancy; (ii) fluctuations in private pay rates and government reimbursement; (iii) increases in the cost of food, materials, energy, labor (as a result of workforce challenges or otherwise) or other services; (iv) rent control regulations; (v) national and regional economic conditions; (vi) the imposition of new or increased taxes; (vii) capital expenditure requirements; (viii) federal, state, local licensure, certification and inspection, fraud and abuse, and privacy and security laws, regulations and standards; (ix) professional and general liability claims; (x) the availability and increases in cost of insurance coverage; and (xi) the impact of actual and anticipated outbreaks of disease and epidemics, such as COVID-19. Any one or a combination of these factors may adversely affect our revenue and operations. These risks include: (i) fluctuations in occupancy; (ii) fluctuations in private pay rates and, to a lesser extent, government reimbursement; (iii) increases in the cost of food, materials, energy, labor (as a result of unionization, COVID-19 related workforce challenges or otherwise) or other services; (iv) rent control regulations; (v) national and regional economic conditions; (vi) the imposition of new or increased taxes; (vii) capital expenditure requirements; (viii) federal, state, local licensure, certification and inspection, fraud and abuse, and privacy and security laws, regulations and standards; (ix) professional and general liability claims; (x) the availability and increases in cost of general and professional liability insurance coverage; and (xi) the impact of actual and anticipated outbreaks of disease and epidemics, such as COVID-19. Any one or a combination of these factors may adversely affect our revenue and operations.
Significant uncertainty continues to exist regarding the impact of macroeconomic trends on revenue and expenses at our properties, including with respect to labor and employment, inflation, rising interest rates and potential changes or disruptions in
14
government reimbursement. For all of our directly owned properties, we are responsible for operating shortfalls if the properties do not generate sufficient revenues to cover expenses. For substantially all of our directly owned properties, we are responsible for operating shortfalls if the properties do not generate sufficient revenues to cover expenses.
Although we are directly exposed to operational risks, our managers are ultimately in control of the day-to-day business of our seniors housing facilities. We rely on our managers’ personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our seniors housing facilities efficiently and effectively. We also rely on our managers to set appropriate resident fees, to provide accurate property-level financial results for our properties in a timely manner and to otherwise operate our seniors housing facilities in compliance with all applicable laws and regulations. We also rely on our managers to set appropriate resident fees, to provide accurate property-level financial results in a timely manner and otherwise 9Table of Contentsoperate our seniors housing facilities in compliance with the terms of our management agreements and all applicable laws and regulations. While we have various rights as the property owner under our management agreements, we may have limited recourse under our management agreements if we believe that the managers are not performing adequately. The failure by our managers to effectively manage these properties could have a material adverse effect on our business, results of operations and financial condition.
We depend on the manager of our Winterfell portfolio, Solstice Senior Living, or Solstice, for a significant majority of our revenues and net operating income. Adverse developments in Solstice’s business and affairs or financial condition could have a material adverse effect on us. Adverse developments in Watermark’s or Solstice’s business and affairs or financial condition could have a material adverse effect on us. Adverse developments in Watermark’s or Solstice’s business and affairs or financial condition could have a material adverse effect on us.
As of December 31, 2024, Solstice managed 32 of our seniors housing facilities pursuant to management agreements. For the year ended December 31, 2024, properties managed by Solstice represented 70.3% and 79.2% of our resident fee and rental revenues and our gross real estate carrying value (net of impairment, before accumulated depreciation), respectively. For the year ended December 31, 2022, properties managed by Watermark and Solstice represented 24.6% and 61.1% of our total property and other revenues, respectively, and 22.4% and 59.5% of our operating real estate, respectively.
Solstice, through affiliates, may operate other properties or have other business initiatives that may be in conflict with our interests or cause them to fail to prioritize our properties. In addition, if Solstice is unable to attract, retain and incentivize qualified personnel, it could impair their respective ability to manage our properties efficiently and effectively. In addition, if either Watermark or Solstice are unable to attract, retain and incentivize qualified personnel, it could impair their respective ability to manage our properties 18Table of Contentsefficiently and effectively. Further, any significant changes in senior management or equity ownership, or adverse developments in their businesses and affairs or financial condition, could also impair their respective ability to manage our properties and could have a materially adverse effect on us. Further, any significant changes in senior management or equity ownership, or adverse developments in their businesses and affairs or financial condition, could also impair their respective ability to manage our properties and could have a materially adverse effect on us.
If we must replace any of our managers, we might be unable to reposition the properties and fully restore value, and we could be subject to delays, limitations and expenses, all of which could have a material adverse effect on us.
If our managers experience performance challenges, we may need to negotiate new management agreements with our managers or reposition our properties with new managers. In these circumstances, operating cash flow on the related properties could decline or cease altogether while we reposition the properties. In these circumstances, rental payments or operating cash flow on the related properties could decline or cease altogether while we reposition the properties. We also may not be successful in identifying suitable replacements or enter into new management agreements on a timely basis or on terms as favorable to us as our current management agreements, if at all, and we may be required to fund certain transition-related costs. We also may not be successful in identifying suitable replacements or enter into new leases or management agreements on a timely basis or on terms as favorable to us as our current leases and management agreements, if at all, and we may be required to fund certain expenses and obligations (e. Replacement of managers may also be subject to regulatory approvals. Replacement of operators or managers may also be subject to regulatory approvals. Once a suitable replacement manager has taken over operation of the properties, it may still take an extended period of time before the properties are fully repositioned and value restored, if at all. Once a suitable replacement operator/manager has taken over operation of the properties, it may still take an extended period of time before the properties are fully repositioned and value restored, if at all. If we are unable to find a suitable replacement manager, we may determine to dispose of a property, which may result in a loss. If we are unable to find a suitable replacement operator or manager, we may determine to dispose of a property, which may result in a loss. Any of these results could have a material adverse effect on our business, financial condition and results of operations. Any of these results could have a material adverse effect on our business, financial condition and results of operations.
We are subject to risks associated with capital expenditures, and our failure to adequately manage such risks could have a material adverse effect on our business, financial condition and results of operations.
Our properties require significant investment in capital expenditures. If we fail to adequately invest in capital expenditures, including as a result of restrictions imposed on us by the Merger Agreement, occupancy rates and the amount of rental and reimbursement income generated by our facilities may decline, which would negatively impact the overall value of the affected facilities. If we fail to adequately invest in capital expenditures, occupancy rates and the amount of rental and reimbursement income generated by our facilities may decline, which would negatively impact the overall value of the affected facilities. At the same time, capital expenditures subject us to risks, including cost overruns, the inability of the manager to generate sufficient cash flow to achieve the projected return and potential declines in the value of the property. At the same time, capital expenditures subject us to risks, including cost overruns, the inability of the operator to generate sufficient cash flow to achieve the projected return and potential declines in the value of the property. There can be no assurance that any investment in capital expenditures increases the overall return on our investments. If we fail to adequately manage such risks, it could have a material adverse effect on our business, financial condition and results of operations. These risks may be further heightened due to our limited sources of liquidity, and we could find ourselves in a position with insufficient liquidity to fund future obligations.
Events that adversely affect the ability of seniors and their families to afford resident fees at our seniors housing facilities could cause our occupancy rates, revenues and results of operations to decline.
Costs to seniors associated with independent, assisted living and memory care services are generally not reimbursable under government reimbursement programs such as Medicare and Medicaid.Costs to seniors associated with independent and assisted living services are generally not reimbursable under government reimbursement programs such as Medicare and Medicaid. Only seniors with sufficient income or assets or other resources will be able to afford to pay the monthly resident fees, and a weak economy, depressed housing market or changes in demographics could adversely affect their continued ability to do so. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distribution to stockholders. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distribution to stockholders. If our managers are unable to retain and attract seniors with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services, our
15
occupancy rates and revenues could decline, which could, in turn, materially adversely affect our business, results of operations and financial condition.
Increased competition could adversely affect future occupancy rates, operating margins and profitability at our properties.
The healthcare and seniors housing industries are highly competitive, and our managers may encounter increased competition for residents and patients, including with respect to the scope and quality of care and services provided, reputation and financial condition, physical appearance of the properties, price and location.The healthcare and seniors housing industries are highly competitive, and our operators and managers may encounter increased competition for residents and patients, including with respect to the scope and quality of care and services provided, reputation and financial condition, physical appearance of the properties, price and location. If development outpaces demand in the markets in which our properties are located, those markets may become saturated and our managers could experience decreased occupancy, reduced operating margins and lower profitability, which could have a material adverse effect on us. If development outpaces demand in the markets in which our properties are located, those markets may become saturated and our operators and managers could experience decreased occupancy, reduced operating margins and lower profitability, which could have a material adverse effect on us. Depending on the jurisdiction, there are limited barriers to developing properties in our asset classes, particularly seniors housing. As a result, supply and demand dynamics can change quickly. We may be unable to rebalance our portfolio in a timely manner in order to respond to changes in those dynamics.
Our strategy depends upon identifying and executing on disposition opportunities that achieve a desired return.
An important part of our business strategy has been to identify and execute on disposition opportunities that achieve a desired return.An important part of our business strategy is to identify and execute on disposition opportunities that achieve a desired return. Our ability to execute this strategy is affected by many factors outside of our control, including general economic conditions and disruptions in capital markets. Our ability to execute this strategy is affected by many factors outside of our control, including general economic conditions and disruptions in capital markets. If the Merger is not consummated and performance of our properties does not continue to improve as we anticipate, due to labor markets, inflation, concerns regarding pandemics or otherwise, or rising interest rates or disruptions in the capital markets result in lower asset values, we may be unable to achieve desired returns. If the performance of our properties does not improve, due to labor markets, inflation, concerns regarding pandemics or otherwise, or rising interest rates or disruptions in the capital markets result in lower asset values, we may be unable to achieve desired returns.
We may be forced to dispose of assets at suboptimal times due to debt maturities.
We currently have $614.1 million of borrowings outstanding that mature through 2026. We may be unable to extend or refinance these borrowings without a significant pay down of existing loan balances. If we do not have sufficient capital to pay down existing loan balances, we may be forced to sell assets to generate additional capital or sell the assets in advance of the loan maturities. Our ability to dispose of or refinance these investments depends on a variety of factors that we do not control, including macroeconomic trends, market conditions and the state of the capital markets and restrictions imposed on us by the Merger Agreement. We are dependent on the effectiveness of our information and cyber security policies, procedures and capabilities to protect our computer and telecommunications systems and the data that resides on or is transmitted through them. Further, given the nature of our assets and the magnitude of these borrowings, we may not be able to respond quickly to changes in market conditions. As a result, we may be forced to dispose of these assets at a suboptimal time and may not be able to dispose of these assets for values in excess of outstanding borrowings at that time.
We may not be able to sell our properties quickly in response to changes in economic and other conditions, which may result in losses to us.
Real estate investments are relatively illiquid, and our ability to quickly sell or exchange our properties in response to changes in economic or other conditions is limited. In addition, transfers of seniors housing properties may be subject to regulatory approvals that are not required for transfers of other types of commercial properties. In addition, transfers of healthcare and seniors housing properties may be subject to regulatory approvals that are not required for transfers of other types of commercial properties. Further, to the extent that our asset sales may ultimately be deemed to constitute all or substantially all of our assets, the requirements of our charter to obtain stockholder approval for certain dispositions will substantially limit our ability to move quickly. We cannot assure you that we will recognize the full value of any property that we sell, and the inability to respond quickly to changes in the performance of our investments and market conditions could adversely affect our business, results of operations and financial condition. We cannot assure you that we will recognize the full value of any property that we sell for liquidity or other reasons, and the inability to respond quickly to changes in the performance of our investments could adversely affect our business, results of operations and financial condition.
Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return.
We have a joint venture investment in the Aqua portfolio with Watermark, where we have a controlling, majority interest.
This investment generally involves risks not otherwise present with other methods of investment, including, for example, the following risks:
•fraud or other misconduct by our joint venture partners;
•we may share decision-making authority with our joint venture partner regarding certain major decisions affecting the ownership of the joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the property, which may prevent us from taking actions that are opposed by our joint venture partner;
•such joint venture partner may at any time have economic or business interests or goals that are or that become in conflict with our business interests or goals, including for example the operation of the properties;
•such joint venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
16
•our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest and risk to our REIT status;
•we rely upon our joint venture partners to manage the day-to-day operations of the joint venture and underlying assets, as well as to prepare financial information for the joint venture and any failure to perform these obligations may have a negative impact on our performance and results of operations;
•our joint venture partner may experience a change of control, which could result in new management of our joint venture partner with less experience or conflicting interests to ours and be disruptive to our business;
•we may not be able to control distributions from our joint ventures;
•we may be forced to sell our interest or acquire our partner’s interest at a time we otherwise would not have elected to do so as a result of a buy-sell or forced sale arrangement; and
•the terms of our joint ventures could restrict our ability to sell or transfer our interest to a third party when we desire on advantageous terms, which could result in reduced liquidity.
Failure to comply with certain healthcare laws and regulations could adversely affect our operations.
Our managers of ALFs and MCFs generally are subject to varying levels of state, local, and industry-regulated laws, regulations and standards.Our operators and managers generally are subject to varying levels of federal, state, local, and industry-regulated laws, regulations and standards. For our operating properties, our subsidiaries are generally required to be the holder of the applicable healthcare license and enrolled in government healthcare programs (e. For our operating properties, our subsidiaries are generally required to be the holder of the applicable healthcare license and enrolled in government healthcare programs (e. g., Medicaid), where applicable, and are therefore directly subject to various regulatory obligations. Our managers’ failure to comply with any of these laws, regulations or standards could result in denial of reimbursement, imposition of fines, civil or criminal penalties or damages, suspension or exclusion from federal and state healthcare programs, loss of license, loss of accreditation or certification, or closure of the facility. Our operators’/managers’ failure to comply with any of these laws, regulations or standards could result in denial of reimbursement, imposition of fines, civil or criminal, penalties or damages, suspension or exclusion from federal and state healthcare programs, loss of license, loss of accreditation or certification, or closure of the facility. Such actions may directly expose us to liability and expense, or have an effect on our operators’ ability to meet all of their obligations to us, and adversely impact us. Refer to “U.S. Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K for further discussion.
Changes in the U.S. political and regulatory environment could affect availability of government funding, which could negatively impact our business.
Certain of our properties may rely on government programs as a source of funding, such as reimbursement from Medicaid. Funding from government agencies and reimbursement programs such as Medicaid, including the overall availability and reimbursement rates under these programs, often fluctuates and is subject to the political process, which is often unpredictable. Any reduction in the availability or rate of funding or reimbursement, or delays surrounding the approval of such funding or reimbursement, may adversely impact our business, financial condition or results of operations.
Significant legal actions or regulatory proceedings could subject us to increased operating costs and substantial uninsured liabilities, which could materially adversely affect our liquidity, financial condition and results of operations.Significant legal actions or regulatory proceedings could subject us or our managers and operators to increased operating costs and substantial uninsured liabilities, which could materially adversely affect our or their liquidity, financial condition and results of operations.
We may be subject to claims brought against us in lawsuits and other legal or regulatory proceedings arising out of our alleged actions or the alleged actions of managers. From time to time, we may also be subject to claims brought against us arising out of the alleged actions of operators and for which such operators may have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such litigation or proceeding could materially adversely affect our liquidity, financial condition and results of operations and have a material adverse effect on us. An unfavorable resolution of any such litigation or proceeding could materially adversely affect our or their liquidity, financial condition and results of operations and have a material adverse effect on us.
In certain cases, we and our managers may be subject to professional liability claims brought by plaintiffs’ attorneys seeking significant punitive damages and attorneys’ fees. Due to the historically high frequency and severity of professional liability claims against seniors housing and healthcare providers, the availability of professional liability insurance has decreased and the premiums on such insurance coverage remain costly. These claims, with or without merit, could cause us to incur substantial costs, harm our reputation and adversely affect our ability to attract and retain residents, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, certain types of claims, such as wage and hour employment actions, are not covered by insurance. In addition, certain types of claims, such as wage and hour employment actions, are not covered by insurance. As a result, insurance protection against such claims may not be sufficient to cover all claims against us or our managers, and may not be available at a reasonable cost. As a result, insurance protection against such claims may not be sufficient to cover all claims against us or our managers or operators, and may not be available at a reasonable cost. If we or our managers are unable to maintain adequate insurance coverage or are required to pay punitive damages, we may be exposed to substantial liabilities. If we or our operators and managers are unable to maintain adequate insurance coverage or are required to pay punitive damages, we or they may be exposed to substantial liabilities.
Insurance may not cover all potential losses on commercial real estate investments, which may impair the value of our assets.
We generally maintain comprehensive insurance covering our properties and their operations.We generally maintain or require that our operators obtain comprehensive insurance covering our properties and their operations. While we believe all of our properties are adequately insured, we cannot assure you that we will continue to be able to maintain adequate levels of insurance or that the policies maintained will fully cover all losses on our properties. While we believe all of our properties are adequately insured, we cannot assure you that we or our operators will continue to be able to maintain adequate levels of insurance or that the policies maintained will fully cover all losses on our properties. We may not obtain, or require operators to obtain,
17
certain types of insurance if it is deemed commercially unreasonable. We cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.
Some of our properties are in areas particularly susceptible to revenue loss, cost increase or damage caused by catastrophic or extreme weather and other natural events, including fires, snow, rain or ice storms, windstorms, tornadoes, hurricanes, earthquakes, flooding and other severe weather. These adverse weather and natural events could cause substantial damages or losses to our properties that could exceed our property insurance coverage. We may also be forced to retain additional risk, through higher deductibles, to obtain property insurance coverage on commercially reasonable terms. If we are forced to retain additional risk or incur a loss greater than insured limits, it could materially and adversely affect our business, financial condition and results of operations. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable.
Our investments are subject to the risks typically associated with real estate.
In addition to risks related to the healthcare industry, our investments are subject to the risks typically associated with real estate, including:
•local, state, national or international economic conditions, including market disruptions caused by regional concerns, political upheaval and other factors;
•property operating costs, including insurance premiums, real estate taxes and maintenance costs;
•changes in interest rates and in the availability, cost and terms of mortgage financing;
•costs associated with compliance with the Americans with Disabilities Act of 1990, the Fair Housing Act of 1968, fire and safety regulations, rent control regulations, building codes and other land use regulations and licensing or certification requirements;
•adverse changes in state and local laws, including zoning laws;
•environmental compliance costs and liabilities; and
•other factors which are beyond our control.
Risks Related to Our Capital Structure
We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations.
Our ability to meet all of our existing or potential future debt service obligations, to refinance our indebtedness, and to fund our operations, working capital, capital expenditures or other important business uses, depends on our ability to generate sufficient cash flow. Our future cash flow is subject to, among other factors, the performance of our managers, as well as general economic, industry, financial, competitive, operating, legislative and regulatory conditions, many of which are beyond our control. Our future cash flow is subject to, among other factors, the performance of our operators and managers, as well as general economic, industry, financial, competitive, operating, legislative and regulatory conditions, many of which are beyond our control.
Although we have significant available cash on hand from assets sales and other realization events, if we were to distribute or use this available cash to reduce our borrowings, we cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us on favorable terms, or at all, in amounts sufficient to enable us to meet all of our existing or potential future debt service obligations, or to fund our other important business uses or liquidity needs. As a result, we could be forced to take other actions to meet those needs, such as selling properties or delaying capital expenditures, any of which could have a material adverse effect on us. As a result, we would be forced to take other actions to meet those obligations, such as selling properties or delaying capital expenditures, any of which could have a material adverse effect on us. Furthermore, we cannot assure you that we will be able to effect any of these actions on favorable terms, or at all.
We require capital in order to operate our business, and the failure to obtain such capital would have a material adverse effect on our business, financial condition and results of operations.
We may need to rely on external sources of capital to fund future capital needs. As a result, we may need to rely on external sources of capital to fund future capital needs. Our access to capital depends upon a number of factors over which we have little or no control, including, among others, restrictions imposed on us by the Merger Agreement, the performance of the national and global economies generally, competition in the healthcare and seniors housing industries, issues facing the industries, including regulations and government reimbursement policies, operating costs and the market value of our properties. Our access to capital depends upon a number of factors over which we have little or no control, including, among others, the performance of the national and global economies generally, competition in the healthcare and seniors housing industries, issues facing the industries, including regulations and government reimbursement policies, operating costs and the market value of our properties. Although we believe that we have sufficient access to capital and other sources of funding to meet our expected liquidity needs at this time, we cannot assure you that our access to capital and other sources of funding will not become constrained, particularly if we determine to make special distributions to stockholders or require capital in connection with any potential refinancing of debt as it matures, which could adversely affect our results of operation and financial condition. Although we believe that we have sufficient access to capital and other sources of funding to meet our expected liquidity needs 22Table of Contentsat this time, we cannot assure you that our access to capital and other sources of funding will not become constrained, which could adversely affect our results of operation and financial condition.
18
We are exposed to increases in interest rates, which could reduce our cash flows and adversely impact our ability to refinance existing debt or sell assets.
Interest rates are elevated and may continue to rise. Increases in interest rates may result in a decrease in the value of our real estate. In addition, certain of our borrowings are floating-rate obligations and the increase in interest rates will increase the costs of these borrowings, which may reduce our cash flows and impair our ability to meet our debt obligations. In addition, certain of our borrowings are floating-rate obligations and the increase in interest rates will increase the costs of these borrowings, which may reduce our profitability and impair our ability to meet our debt obligations. An increase in interest rates also could limit our ability to refinance existing debt upon maturity or cause us to pay higher rates upon refinancing, as well as decrease the amount that third parties are willing to pay for our assets, thereby limiting our ability to promptly reposition our portfolio in response to changes in economic or other conditions. An increase in interest rates also could limit our ability to refinance existing debt upon maturity or cause us to pay higher rates upon refinancing, as well as decrease the amount that third parties are willing to pay for our assets, thereby limiting our ability to promptly reposition our portfolio in response to changes in economic or other conditions.
We use significant leverage in connection with our investments, which increases the risk of loss associated with our investments and restricts our ability to engage in certain activities.
As of December 31, 2024, we had $858.5 million of consolidated asset-level borrowings outstanding. We may also incur additional borrowings in the future to satisfy our capital and liquidity needs. Our substantial borrowings, among other things:
•require us to dedicate a large portion of our cash flow to pay principal and interest on our borrowings, which reduces the availability of cash flow to fund working capital, capital expenditures and other business activities;
•increase our vulnerability to general adverse economic and industry conditions, as well as operational failures by our managers;
•subject us to maintaining various debt, operating income, net worth, cash flow and other covenants and financial ratios;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict our operating policies and ability to make strategic dispositions or exploit business opportunities;
•place us at a competitive disadvantage compared to our competitors that have fewer borrowings;
•limit our ability to borrow additional funds (even when necessary to maintain adequate liquidity), dispose of assets or make distributions to stockholders; and
•increase our cost of capital.
If we fail to comply with the covenants in the instruments governing our borrowings or do not generate sufficient cash flow to service our borrowings, our liquidity may be materially and adversely affected. In July 2023, we elected not to use cash reserves to pay debt service on the Rochester Sub-Portfolio Loan secured by the Rochester Sub-Portfolio, which did not generate sufficient cash flow to pay debt service in full. As a result of these defaults or if we default on additional borrowings, we may be required to repay outstanding obligations, including penalties, prior to the stated maturity, be subject to cash flow sweeps or potentially have assets foreclosed upon. In addition, we may be unable to refinance borrowings when they become due on favorable terms, or at all, or dispose of assets prior to the stated maturity of our borrowings for values in excess of the outstanding borrowings, which could have a material adverse impact on our results of operations and the value of our investments.
19
We may be adversely affected by our concentration of borrowings with Fannie Mae.
As of December 31, 2024, approximately 95.0% of our outstanding borrowings are through Fannie Mae. In July 2023, we defaulted on the Rochester Sub-Portfolio Loan, which totaled $99.8 million of borrowings, with Fannie Mae. As a result, a receiver has been appointed for the Rochester Sub-Portfolio and we are in the process of transitioning ownership of these properties to Fannie Mae or its designee. This default, and any other potential future defaults, on our debt with Fannie Mae may impact our relationship with Fannie Mae and therefore indirectly our other borrowings. In addition, to the extent we seek to modify or extend any of our loans, Fannie Mae may have more limited flexibility than other commercial lenders.
If we are required to make payments under any “bad boy” carve-out guaranties that we provide in connection with certain mortgages and related loans, we could be materially and adversely affected.
Although substantially all of our current indebtedness is non-recourse mortgage loans, we have provided, and may continue to provide, standard carve-out guaranties. These guaranties are applicable in connection with certain improper or fraudulent actions of the borrower, as well as certain bankruptcy or similar reorganization proceedings or actions (commonly referred to as “bad boy” guaranties). Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other enforcement actions of lenders due to circumstances beyond the borrower’s control, we cannot assure you that lenders will not seek to allege claims under such guaranties. In the event such a claim was made against us, and was successful, we could be materially and adversely affected.
Our distribution policy is subject to change. We may not be able to make distributions in the future.
Our Board determines an appropriate common stock distribution based upon numerous factors, including our targeted distribution rate, REIT qualification requirements, the amount of cash flow generated from operations, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects.Our board of directors determines an appropriate common stock distribution based upon numerous factors, including our targeted distribution rate, REIT qualification requirements, the amount of cash flow generated from operations, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Future distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this Annual Report on Form 10-K, as well as other factors that our Board may, from time-to-time, deem relevant to consider when determining an appropriate common stock distribution. Future distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this Annual Report on Form 10-K, as well as other factors that our board of directors may, from time-to-time, deem relevant to consider when determining an appropriate common stock distribution. After considering all of these factors, on February 1, 2019, our Board determined to suspend the monthly distribution payments to stockholders. After considering all of these factors, on February 1, 2019, our board of directors determined to suspend the monthly distribution payments to stockholders. Furthermore, the terms of the Merger Agreement restrict us from making distributions, subject to certain exceptions including distributions reasonably necessary for us to maintain our status as a REIT. Based on the current forecasted cash flow and capital needs, we do not anticipate resuming recurring distributions in the near future. In the event the Merger is not completed and the Merger Agreement is terminated, the Board will evaluate special distributions in connection with any sales and other realizations of investments on a case-by-case basis based on, among other factors, current projected liquidity and capital needs; however, we may not be able to make distributions in the future at all or at any particular rate.
If we pay distributions from sources other than our cash flow provided by operations, we will have less cash available for investments and your overall return may be reduced.
Our organizational documents permit us to pay distributions from any source, including offering proceeds, borrowings or sales of assets or we may make distributions in the form of taxable stock dividends. We have not established a limit on the amount of proceeds we may use to fund distributions. We have funded distributions in the past in excess of our cash flow from operations and may continue to do so in the future. If we pay distributions from sources other than our cash flow provided by operations, such as using the proceeds of asset sales, our book value may be negatively impacted and the value of our shares will be reduced.
Stockholders are not currently able to sell any of their shares of our common stock back to us pursuant to our Share Repurchase Program, and if they do sell their shares on any limited market that may develop, they may not receive the price they paid upon subscription.
Our Share Repurchase Program has been suspended since April 2020. Therefore, stockholders do not currently have the opportunity to sell any of their shares of our common stock back to us pursuant to our Share Repurchase Program. If a limited market develops to sell shares of our common stock, through tender offers or otherwise, stockholders are not likely to receive the same price they paid for any shares of our common stock being purchased. If a limited market develops to sell shares of our common stock, through tender offers or otherwise, stockholders are not likely to receive the same price they paid for any shares of our common stock being purchased.
Our Board determined an estimated value per share of $2.96 for our common stock as of June 30, 2024, which may not reflect the current value of shares of our common stock.Our board of directors determined an estimated value per share of $2.93 for our common stock as of June 30, 2022, which may not reflect the current value of shares of our common stock.
On October 15, 2024, our Board approved and established an estimated value per share of $2.96 for our common stock as of June 30, 2024. Our Board’s objective in determining the estimated value per share was to arrive at a value, based on the most
20
recent data available, that it believed was reasonable. However, the market for commercial real estate assets can fluctuate quickly and substantially and values are expected to change in the future and may decrease. However, the market for commercial real 24Table of Contentsestate assets can fluctuate quickly and substantially and values are expected to change in the future and may decrease.
As with any valuation methodology, the methodologies used to determine the estimated value per share are based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different market participants using different assumptions and estimates could derive different estimated values. The estimated value per share may also not represent the price that the shares of our common stock would trade at on a national securities exchange, the amount realized in a sale, merger or liquidation or the amount a stockholder would realize in a private sale of shares.
The estimated value per share of our common stock was calculated as of a specific date and is expected to fluctuate over time in response to future events, including but not limited to, changes to commercial real estate values, particularly healthcare-related commercial real estate, changes in our operating performance, changes in capitalization rates, rental and growth rates, changes in laws or regulations impacting the healthcare industry, demographic changes, returns on competing investments, changes in administrative expenses and other costs, the amount of distributions on our common stock, changes in the number of shares of our common stock outstanding, the proceeds obtained for any common stock transactions, local and national economic factors and the other factors specified in these risk factors.The estimated value per share of our common stock was calculated as of a specific date and is expected to fluctuate over time in response to future events, including but not limited to, changes to commercial real estate values, particularly healthcare-related commercial real estate, changes in our operating performance, changes in capitalization rates, rental and growth rates, the financial impact of COVID-19, changes in laws or regulations impacting the healthcare industry, demographic changes, returns on competing investments, changes in administrative expenses and other costs, the amount of distributions on our common stock, changes in the number of shares of our common stock outstanding, the proceeds obtained for any common stock transactions, local and national economic factors and the other factors specified in these risk factors. There is no assurance that the methodologies used to estimate value per share would be acceptable to the Financial Industry Regulatory Authority, Inc. There is no assurance that the methodologies used to estimate value per share would be acceptable to the Financial Industry Regulatory Authority, Inc. , or FINRA, or in compliance with the Employment Retirement Income Security Act, or ERISA, guidelines with respect to their reporting requirements.
No public trading market for our shares currently exists, and as a result, it will be difficult for stockholders to sell their shares and, if stockholders are able to sell their shares, stockholders will likely sell them at a substantial discount to the price paid for those shares.
Our charter does not require our Board to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require us to list our shares for trading on a national securities exchange by a specified date or otherwise pursue a transaction to provide liquidity to stockholders.Our charter does not require our board of directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require us to list our shares for trading on a national securities exchange by a specified date or otherwise pursue a transaction to provide liquidity to stockholders. There is no public market for our shares and we currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. Our Share Repurchase Program has been suspended and does not currently enable stockholders to sell their shares to us. Therefore, it is difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell their shares, stockholders would likely have to sell them at a substantial discount to the public offering price paid for those shares. If stockholders are able to sell their shares, stockholders would likely have to sell them at a substantial discount to the public offering price paid for those shares. It is also likely that stockholders’ shares would not be accepted as the primary collateral for a loan. It is also likely that stockholders’ shares would not be accepted as the primary collateral for a loan.
If we do not successfully implement a liquidity transaction, such as the Merger, stockholders may have to hold their investments for an indefinite period.
Our charter does not require our Board to pursue a transaction providing liquidity to stockholders.Our charter does not require our board of directors to pursue a transaction providing liquidity to stockholders. If our Board determines to pursue a liquidity transaction, we would be under no obligation to conclude the process within a set time. If our board of directors determines to pursue a liquidity transaction, we would be under no obligation to conclude the process within a set time. We cannot guarantee that we will be able to effect a liquidity event on favorable terms, if at all. If we do not pursue a liquidity transaction or delay such a transaction due to market conditions, our common stock may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert stockholders’ shares to cash easily, if at all, and could suffer losses on their investment in our shares. If we do not pursue a liquidity transaction or delay such a transaction due to market conditions, our common stock may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert stockholders’ shares to cash easily, if at all, and could suffer losses on their investment in our shares.
Risks Related to Our Company and Corporate Structure
As a self-managed REIT without the resources of our Former Sponsor, we may encounter unforeseen costs and difficulties.
As a self-managed REIT, we are directly responsible for our expenses, including the compensation and benefits of our officers, employees and consultants, overhead and other general and administrative expenses, and no longer have any financial support from our Former Sponsor. In addition, we operate on a smaller scale with fewer resources than have historically been available to us through our Former Advisor’s organization, which may expose us to additional risks and adversely impact our ability to achieve our investment objectives. In addition, we anticipate operating on a smaller scale going forward, with fewer resources than have historically been available to us through our Former Advisor’s organization, which may adversely impact our ability to achieve our investment objectives. If we incur additional expenses or encounter unforeseen difficulties as a result of our self-management, our results of operations could be lower than they otherwise would have been.
Our ability to operate our business successfully would be harmed if key personnel terminate their employment with us.
Our success depends to a significant degree upon the contributions of key personnel.Our success depends to a significant degree upon the contributions of key personnel and executive officers. We cannot assure stockholders that our key personnel will continue to be associated with us in the future, particularly in light of our strategic direction. We cannot assure stockholders that our key personnel will continue to be associated with us in the future. Any change in executive officers or other key personnel may have a material adverse effect on our performance, be disruptive to our business and hinder our ability to implement our business strategy.
21
We are subject to substantial litigation risks and may face significant liabilities as a result of litigation allegations and negative publicity.
In the ordinary course of business, we are subject to the risk of substantial litigation and face significant regulatory oversight. In addition, we may be exposed to litigation in connection with the Merger, or litigation or other adverse consequences if investments perform poorly and our investors experience losses. Such litigation and proceedings, including, among others, potential regulatory actions and stockholder class action suits, may result in defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Such litigation and proceedings, including, among others, potential regulatory actions and shareholder class action suits, may result in defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such litigation or proceedings. Allegations of improper conduct by private litigants or regulators, regardless of merit and whether the ultimate outcome is favorable or unfavorable to us, could negatively impact our ability to execute on the Merger, as well as our cash flow, financial condition, results of operations and the value of our common stock.
Our rights and the rights of stockholders to recover claims against our independent directors are limited, which could reduce stockholders’ and our recovery against them if they negligently cause us to incur losses.26Table of ContentsOur rights and the rights of stockholders to recover claims against our independent directors are limited, which could reduce stockholders’ and our recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter generally provides that: (i) no director shall be liable to us or stockholders for monetary damages (provided that such director satisfies certain applicable criteria); (ii) we will indemnify non-independent directors for losses unless they are negligent or engage in misconduct; and (iii) we will indemnify independent directors for losses unless they are grossly negligent or engage in willful misconduct. Our charter generally provides that: (i) no director shall be liable to us or stockholders for monetary damages (provided that such director satisfies certain applicable criteria); (ii) we will indemnify non-independent directors for losses unless they are negligent or engage in misconduct; and (iii) we will indemnify independent directors for losses unless they are grossly negligent or engage in willful misconduct. As a result, stockholders and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce stockholders’ and our recovery from these persons if they act in a negligent manner. As a result, stockholders and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce stockholders’ and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distribution to stockholders. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distribution to stockholders.
We are subject to substantial regulation, numerous contractual obligations and extensive internal policies and failure to comply with these matters could have a material adverse effect on our business, financial condition and results of operations.
We and our subsidiaries are subject to substantial regulation, numerous contractual obligations and extensive internal policies. Given our organizational structure, we are subject to regulation by the SEC, FINRA, IRS, and other federal, state and local governmental bodies and agencies and state blue sky laws. Given our organizational structure, we are subject to regulation by the SEC, FINRA, IRS, and other federal, state and local governmental bodies and agencies and state blue sky laws. These regulations are extensive, complex and require substantial management time and attention. If we fail to comply with any of the regulations that apply to our business, we could be subjected to extensive investigations as well as substantial penalties and our business and operations could be materially adversely affected. If we fail to comply with any of the regulations that apply to our business, we could be subjected to extensive investigations as well as substantial penalties and our business and operations could be materially adversely affected. We also expect to have numerous contractual obligations that we must adhere to on a continuous basis to operate our business, the default of which could have a material adverse effect on our business and financial condition. Our internal policies may not be effective in all regards and, further, if we fail to comply with our internal policies, we could be subjected to additional risk and liability. Our internal policies may not be effective in all regards and, further, if we fail to comply with our internal policies, we could be subjected to additional risk and liability.
We are highly dependent on information systems and systems failures could significantly disrupt our business.
As a commercial real estate company, our business is highly dependent on information technology systems, including systems provided by third parties for which we have no control. Various measures have been implemented to manage our risks related to the information technology systems, but any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our financial performance. Various measures have been implemented to manage our risks related to the information technology systems, but any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our financial performance. Potential sources for disruption, damage or failure of our information technology systems include, without limitation, computer viruses, security breaches, human error, cyber attacks, natural disasters and defects in design. Potential sources for disruption, damage or failure of our information technology systems include, without limitation, computer viruses, security breaches, human error, cyber attacks, natural disasters and defects in design.
Failure to implement effective information and cybersecurity policies, procedures and capabilities could disrupt our business and harm our results of operations.
We have been, and likely will continue to be, subject to computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, phishing, employee error or malfeasance, catastrophes, unforeseen events or other cyber-attacks (refer to Item 1C.Item 1A. Cybersecurity of this Annual Report on Form 10-K for additional detail regarding such process, procedures and internal controls). To date, we have seen no material impact on our business or operations from these attacks or events. Any future externally caused information security incident, such as a hacker attack, virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, loss of competitive position, regulatory actions, breach of contracts, reputational harm or legal liability. Any future externally caused information security incident, such as a hacker attack, virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, loss of competitive position, regulatory actions, breach of contracts, reputational harm or legal liability. We are dependent on the effectiveness of our information and cybersecurity policies, procedures and capabilities to protect our computer and telecommunications systems and
22
the data that resides on or is transmitted through them. The ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment. The ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment. There is no guarantee that these measures will be adequate to safeguard against all data security breaches, system compromises or misuses of data. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We provide stockholders with information using funds from operations, or FFO, Modified Funds from Operations, or MFFO, and Net Operating Income, or NOI, which are not in accordance with accounting principles generally accepted in the United States, or non-GAAP, financial measures that may not be meaningful for comparing the performances of different REITs and that have certain other limitations.We provide stockholders with information using funds from operations, or FFO, and MFFO, which are not in accordance with accounting principles generally accepted in the United States, or non-GAAP, financial measures that may not be meaningful for comparing the performances of different REITs and that have certain other limitations.
We provide stockholders with information using FFO, MFFO and NOI, which are non-GAAP measures, as additional measures of our operating performance.We provide stockholders with information using FFO and MFFO which are non-GAAP measures, as additional measures of our operating performance. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. We compute FFO in accordance with the standards established by National Association of Real Estate Investment Trusts, or NAREIT. We compute MFFO in accordance with the definition established by the Investment Program Association, or the IPA. We compute MFFO in accordance with the definition established by the Investment Program Association, or the IPA. We define NOI as rental and resident fee income, less property operating expenses. However, our computation of FFO, MFFO and NOI may not be comparable to other REITs that do not calculate FFO, MFFO or NOI using these definitions without further adjustments. However, our computation of FFO and MFFO may not be comparable to other REITs that do not calculate FFO or MFFO using these definitions without further adjustments.
None of FFO, MFFO or NOI are equivalent to net income or cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and should not be considered as an alternative to net income, as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
We have broad authority to use leverage and high levels of leverage could hinder our ability to make distributions and decrease the value of stockholders’ investment.
Our charter does not limit us from utilizing financing until our borrowings exceed 300% of our net assets, which is generally expected to approximate 75% of the aggregate cost of our investments, including cash, before deducting loan loss reserves, other non-cash reserves and depreciation. Further, we can incur financings in excess of this limitation with the approval of a majority of our independent directors. Further, we can incur financings in excess of this limitation with the approval of a majority 27Table of Contentsof our independent directors. High leverage levels would cause us to incur higher interest charges and higher debt service payments and the agreements governing our borrowings may also include restrictive covenants. High leverage levels would cause us to incur higher interest charges and higher debt service payments and the agreements governing our borrowings may also include restrictive covenants. These factors could limit the amount of cash we have available to distribute to stockholders and could result in a decline in the value of stockholders’ investment. These factors could limit the amount of cash we have available to distribute to stockholders and could result in a decline in the value of stockholders’ investment.
Our ability to make distributions is limited by the requirements of Maryland law and of the terms of the Merger Agreement.Our ability to make distributions is limited by the requirements of Maryland law.
Our ability to make distributions on our common stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as the liabilities become due in the usual course of business, or generally if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the stockholders whose preferential rights are superior to those receiving the distribution. Under applicable Maryland law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as the liabilities become due in the usual course of business, or generally if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we may not make a distribution on our common stock if, after giving effect to the distribution, we would not be able to pay our liabilities as they become due in the usual course of business or generally if our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences senior to those of our common stock. Accordingly, we may not make a distribution on our common stock if, after giving effect to the distribution, we would not be able to pay our liabilities as they become due in the usual course of business or generally if our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences senior to those of our common stock. Further, the terms of the Merger Agreement restricts us from making distributions, subject to certain exceptions including distributions reasonably necessary for us to maintain our status as a REIT.
Stockholders have limited control over changes in our policies and operations, which increases the uncertainty and risks they face as stockholders.
Our Board determines our major policies, including our policies regarding growth, REIT qualification and distributions.Our board of directors determines our major policies, including our policies regarding growth, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of the stockholders. Our board of directors may amend or revise these and other policies without a vote of the stockholders. We may change our investment policies without stockholder notice or consent, which could result in investments that are different than, or in different proportion than, those described in this Annual Report on Form 10-K. We may change our investment policies without stockholder notice or consent, which could result in investments that are different than, or in different proportion than, those described in this Annual Report on Form 10-K. Under the Maryland General Corporation Law, or MGCL, and our charter, stockholders have a right to vote only on limited matters. Under the Maryland General Corporation Law, or MGCL, and our charter, stockholders have a right to vote only on limited matters. Our Board’s broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face. Our board of directors’ broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face. Our board of directors’ broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face. Under MGCL, and our charter, stockholders have a right to vote only on:
•the election or removal of directors;
23
•amendment of our charter, except that our Board may amend our charter without stockholder approval to (i) increase or decrease the aggregate number of our shares of stock of any class or series that we have the authority to issue; (ii) effect certain reverse stock splits; and (iii) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock;
•our liquidation or dissolution;
•certain reorganizations of our company, as provided in our charter; and
•certain mergers, consolidations or sales or other dispositions of all or substantially all our assets, as provided in our charter.
Pursuant to Maryland law, all matters other than the election or removal of a director must be declared advisable by our Board prior to a stockholder vote. Our Board’s broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face. Our board of directors’ broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face. Our board of directors’ broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face.
Stockholders’ interests in us will be diluted if we issue additional shares, which could reduce the overall value of stockholders’ investment.
Stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue a total of 450.0 million shares of capital stock, of which 400.0 million shares are classified as common stock and 50.0 million shares are classified as preferred stock. Our charter authorizes us to issue a total of 450.0 million shares of capital stock, of which 400.0 million shares are classified as common stock and 50.0 million shares are classified as preferred stock. Our Board may amend our charter from time to time to increase or decrease the number of authorized shares of capital stock or the number of shares of stock of any class or series that we have authority to issue without stockholder approval. Our board of directors may amend our charter from time to time to increase or decrease the number of authorized shares of capital stock or the number of shares of stock of any class or series that we have authority to issue without stockholder approval. Our Board may elect to: (i) sell additional shares in a future public offering; (ii) issue equity interests in private offerings; (iii) issue shares of our common stock to sellers of assets we acquire in connection with an exchange of limited partnership interests of our operating partnership; or (iv) issue shares of our common stock to pay distributions to existing stockholders. To the extent we issue additional equity interests, stockholders’ percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, stockholders may also experience dilution in the book value and fair value of their shares. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, stockholders may also experience dilution in the book value and fair value of their shares.
Our charter permits our Board to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to stockholders.28Table of ContentsOur charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to stockholders.
Our Board may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of any such stock.Our board of directors may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of any such stock. Thus, our Board could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock. Our Board may determine to issue different classes of stock that have different fees and commissions from those being paid with respect to the shares sold in our Offering. Our board of directors may determine to issue different classes of stock that have different fees and commissions from those being paid with respect to the shares sold in our Offering. Additionally, our Board may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of any class or series of stock without stockholder approval. Additionally, our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of any class or series of stock without stockholder approval.
Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.
Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•“business combination” provisions that, subject to limitations, prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and
•“control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting
24
rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.
Pursuant to the Maryland Business Combination Act, our Board has by resolution opted out of the business combination provisions.Pursuant to the Maryland Business Combination Act, our board of directors has by resolution opted out of the business combination provisions. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that these resolutions or exemptions will not be amended or eliminated at any time in the future. There can be no assurance that these resolutions or exemptions will not be amended or eliminated at any time in the future.
Our charter includes a provision that may discourage a person from launching a mini-tender offer for our shares.
Our charter provides that any tender offer made by a person, including any “mini-tender” offer, must comply with most provisions of Regulation 14D of the Exchange Act. A “mini-tender offer” is a public, open offer to all stockholders to buy their stock during a specified period of time that will result in the bidder owning less than 5% of the class of securities upon completion of the mini-tender offer process. A “mini-tender offer” is a public, open offer to all stockholders to buy their stock during a specified period of time that will result in the bidder owning less than 5% of the class of securities upon completion of the mini-tender offer process. Absent such a provision in our charter, mini-tender offers for shares of our common stock would not be subject to Regulation 14D of the Exchange Act. Absent such a provision in our charter, mini-tender offers for shares of our common stock would not be subject to Regulation 14D of the Exchange Act. Tender offers, by contrast, that result in the bidder owning more than 5% of the class of securities are automatically subject to Regulation 14D of the Exchange Act. Tender offers, by contrast, result in the bidder owning more than 5% of the class of securities and are automatically subject to Regulation 14D of the Exchange Act. Pursuant to our charter, the offeror must provide our company notice of such tender offer at least ten business days before initiating the tender offer. Pursuant to our charter, the offeror must provide our company notice of such tender offer at least ten business days before initiating the tender offer. If the offeror does not comply with these requirements, our company will have the right to repurchase the offeror’s shares, including any shares acquired in the tender offer. If the offeror does not comply with these requirements, our company will have the right to repurchase the offeror’s shares, including any shares acquired in the tender offer. In addition, the noncomplying offeror shall be responsible for all of our company’s expenses in connection with that offeror’s noncompliance and no stockholder may transfer any shares to such noncomplying offeror without first offering the shares to us at the tender offer price offered by such noncomplying offeror. In addition, the noncomplying offeror shall be responsible for all of our company’s expenses in connection with that offeror’s noncompliance and no stockholder may transfer any shares to such noncomplying offeror without first offering the shares to us at the tender offer price offered by such noncomplying offeror. This provision of our charter may discourage a person from initiating a mini-tender offer for our shares and prevent stockholders from receiving a premium price for their shares in such a transaction. This provision of our charter may discourage a person from initiating a mini-tender offer for our shares and prevent stockholders from receiving a premium price for their shares in such a transaction.
Risks Related to Regulatory Matters and Our REIT Tax Status
Maintenance of our Investment Company Act exemption imposes limits on our operations.
Neither we, nor our operating partnership, nor any of the subsidiaries of our operating partnership intend to register as an investment company under the Investment Company Act.29Table of ContentsNeither we, nor our operating partnership, nor any of the subsidiaries of our operating partnership intend to register as an investment company under the Investment Company Act. We intend to make investments and conduct our operations so that we are not required to register as an investment company. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
•limitations on capital structure;
•restrictions on specified investments;
•prohibitions on transactions with affiliates; and
•compliance with reporting, recordkeeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.
Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Moreover, we take the position that general partnership interests in joint ventures structured as general partnerships are not considered securities at all and thus are not investment securities.
Because we are a holding company that conducts its businesses through subsidiaries, the securities issued by our subsidiaries that rely on the exception from the definition of “investment company” in Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own directly, may not have a combined value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through these subsidiaries.
We must monitor our holdings and those of our operating partnership to ensure that they comply with the 40% test. Through our operating partnership’s wholly owned or majority-owned subsidiaries, we and our operating partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing real estate properties or otherwise originating or acquiring mortgages and other interests in real estate.
25
Most of these subsidiaries will rely on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of a subsidiary’s portfolio must be qualifying real estate assets and at least 80% of its portfolio must be qualifying real estate assets and real estate-related assets (and no more than 20% can be miscellaneous assets). Qualification for exclusion from registration under the Investment Company Act will limit our ability to acquire or sell certain assets and also could restrict the time at which we may acquire or sell assets. For purposes of the exclusion provided by Section 3(c)(5)(C), we will classify our investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate related asset. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than thirty years ago. In August 2011, the SEC issued a concept release in which it asked for comments on various aspects of Section 3(c)(5)(C), and, accordingly, the SEC or its staff may issue further guidance in the future. Future revisions to the Investment Company Act or further guidance from the SEC or its staff may force us to re-evaluate our portfolio and our investment strategy.
Our failure to continue to qualify as a real estate investment trust, or REIT, would subject us to federal income tax.
We elected to be taxed as a REIT under the Code commencing with the taxable year ended December 31, 2013. We intend to continue to operate in a manner so as to continue to qualify as a REIT for federal income tax purposes.We elected to be taxed as a REIT under the Internal Revenue Code commencing with the taxable year ended December 31, 2013. We intend to continue to operate in a manner so as to continue to qualify as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial and administrative interpretations exist. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to continue to qualify as a REIT. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to continue to qualify as a REIT. If we fail to continue to qualify as a REIT in any taxable year, we would be subject to federal and applicable state and local income tax on our taxable income at corporate rates, in which case we might be required to borrow or liquidate some investments in order to pay the applicable tax. Losing our REIT status would reduce our net income available for investment because of the additional tax liability. In addition, distributions, if any, to stockholders would no longer qualify for the dividends-paid deduction. In addition, distributions, if any, to stockholders would no longer qualify for the dividends-paid deduction. Furthermore, if we fail to qualify as a REIT in any taxable year for which we have elected to be taxed as a REIT, we would generally be unable to elect REIT status for the four taxable years following the year in which our REIT status is lost.
Complying with REIT requirements may force us to borrow funds to make distributions to stockholders or otherwise depend on external sources of capital to fund such distributions.
To continue to qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, if any, subject to certain adjustments, to stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, if any, we will be subject to federal corporate income tax on our undistributed taxable income. To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, if any, we will be subject to federal corporate income tax on the undistributed income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. In that case, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A stockholder, including a tax-exempt or foreign stockholder, would have to file a federal income tax return to claim that credit or refund. A stockholder, including a tax-exempt or foreign stockholder, would have to file a federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to stockholders in a calendar year is less than a minimum amount specified under federal tax laws. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to stockholders in a calendar year is less than a minimum amount specified under federal tax laws. In 2024, we anticipate that our REIT taxable income will be offset by our net operating loss carry-forward and as such, we will not be subject to the distribution requirements. In 2022, we had REIT taxable income that was offset by our net operating loss carry-forward and as such, we were not subject to the distribution requirements.
If we do not have other funds available to make any required distributions, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. These alternatives could increase our costs or reduce our equity.
Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow.
Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to certain federal taxes, including taxes on any undistributed income, a 100% tax on gain from the sale of assets that are treated as dealer property or inventory, and corporate taxes on any taxable income earned by our TRSs.Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income or property. We may also be subject to state or local income, property and transfer taxes, including mortgage recording taxes. Any of these taxes would decrease cash available for distribution to stockholders. Any of these taxes would decrease cash available for distribution to stockholders.
26
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, to the extent we have taxable income, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Compliance with the REIT requirements may also hinder our ability to make otherwise attractive investments. Finally, if we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT.
The formation of any TRS lessees may increase our overall tax liability and transactions between us and any TRS lessee must be conducted on arm’s-length terms to not be subject to a 100% penalty tax on certain items of income or deduction.32Table of ContentsThe formation of any TRS lessees may increase our overall tax liability and transactions between us and any TRS lessee must be conducted on arm’s-length terms to not be subject to a 100% penalty tax on certain items of income or deduction.
We have formed a TRS lessee to lease certain seniors housing facilities that are “qualified health care properties.We have formed a TRS lessee to lease our seniors housing facilities that are “qualified health care properties. ” Our TRS lessee will be subject to federal and state corporate income tax on its taxable income, which will consist of the revenues from the seniors housing facilities leased by the TRS lessee, net of the operating expenses for such properties and rent payments to us. Accordingly, the ownership of our TRS lessee will allow us to participate in the operating income from our properties leased to our TRS lessee on an after-tax basis in addition to receiving rent. Accordingly, the ownership of our TRS lessee will allow us to participate in the operating income from our properties leased to our TRS lessee on an after-tax basis in addition to receiving rent. The after-tax net income of the TRS lessee is available for distribution to us. The after-tax net income of the TRS lessee is available for distribution to us. The REIT rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The REIT rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We will scrutinize all of our transactions with any TRS lessee to ensure that they are entered into on arm’s-length terms, but there can be no assurance that we will be able to comply to avoid application of the 100% excise tax. We will scrutinize all of our transactions with any TRS lessee to ensure that they are entered into on arm’s-length terms, but there can be no assurance that we will be able to comply to avoid application of the 100% excise tax.
Our ability to lease certain of our seniors housing facilities to our TRS lessee will be limited by the ability of those seniors housing facilities to qualify as “qualified health care properties.Our ability to lease certain of the seniors housing facilities we acquire to our TRS lessee will be limited by the ability of those seniors housing facilities to qualify as “qualified health care properties. ”
We may lease certain of our seniors housing facilities to our TRS lessee, which would contract with managers to manage the health care operations at those facilities. Our ability to use this TRS lessee structure may be limited by the ability of those seniors housing facilities to qualify as “qualified health care properties” and the ability of the managers who our TRS lessee engages to manage the “qualified health care properties” to qualify as “eligible independent contractors.”
A “qualified health care property” includes any real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, ALF, congregate care facility, qualified continuing care facility or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of such services which is eligible for participation in the Medicare program with respect to such facilities. Some of our properties may not be treated as “qualified health care properties.” To the extent a property does not constitute a “qualified health care property,” we will be unable to use the TRS lessee structure with respect to that property.
The ability of our TRSs to manage certain of our independent living facilities is dependent on such facilities not constituting “health care facilities.”
We have engaged TRSs to manage certain of our independent living facilities. Our ability to utilize TRSs in such a role depends on those independent living facilities not constituting “health care facilities” within the meaning of the federal income tax rules applicable to REITs. While we believe that such independent living facilities are not “health care facilities, if the IRS challenged such belief and a court sustained such a challenge, the relevant TRSs may fail to qualify as TRSs, and as a result we could fail to qualify as a REIT.
If our TRS lessee failed to qualify as a TRS or the facility managers engaged by our TRS lessee do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT and would be subject to higher taxes.
Rent paid by a lessee that is a “related party operator” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We may lease certain of our seniors housing facilities to our TRS lessee. We may lease certain of our seniors housing facilities to our TRS lessee. So long as our TRS lessee qualifies as a TRS, it will not be treated as a “related party operator” with respect to our properties that are managed by an independent facility manager that qualifies as an “eligible independent contractor. So long as our TRS lessee qualifies as a TRS, it will not be treated as a “related party operator” with respect to our properties that are managed by an independent facility manager that qualifies as an “eligible independent contractor. ” We expect that our TRS lessee will qualify to be treated as a TRS for federal income tax purposes, but there can be no assurance that the IRS will not challenge the status of a TRS for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in disqualifying our TRS lessee from treatment as a TRS, we would fail to meet the asset tests applicable to REITs and a portion of our income would fail to qualify for the gross income tests. If the IRS were successful in disqualifying our TRS lessee from treatment as a TRS, we would fail to meet the asset tests applicable to REITs and a portion of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would lose our REIT qualification for federal income tax purposes unless we qualified for application of statutory savings provisions. If we failed to meet either the asset or gross income tests, we would lose our REIT qualification for federal income tax purposes unless we qualified for application of statutory savings provisions.
27
Additionally, if the managers engaged by our TRS lessee do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT. Each of the managers that enter into a management contract with our TRS lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS lessee to be qualifying income for purposes of the REIT gross income tests. Each of the managers that enter into a management contract with our TRS lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS lessee to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, a manager must not own, directly or indirectly, more than 35% of our outstanding stock and no person or group of persons can own more than 35% of our outstanding stock and the ownership interests of the manager, taking into account certain ownership attribution rules. Among other requirements, in order to qualify as an eligible independent contractor, a manager must not own, directly or indirectly, more than 35% of our outstanding stock and no person or group of persons can own more than 35% of our outstanding stock and the ownership interests of the manager, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex. The ownership attribution rules that apply for purposes of these 35% thresholds are complex. Although we intend to monitor ownership of our stock by our managers and their owners, there can be no assurance that these ownership levels will not be exceeded. Although we intend to monitor ownership of our stock by our managers and their owners, there can be no assurance that these ownership levels will not be exceeded.
In addition, in order to qualify as an “eligible independent contractor,” among other requirements, a manager (or any related person) must be actively engaged in the trade or business of operating “qualified health care properties” for persons who are not related to us or our TRS lessee. Consequently, if a manager (or a related person) from whom we acquire a “qualified health care property” does not operate sufficient “qualified health care properties” for third parties, the manager will not qualify as an “eligible independent contractor. Consequently, if a manager (or a related person) from whom we acquire a “qualified health care property” does not operate sufficient “qualified health care properties” for third parties, the manager will not qualify as an “eligible independent contractor. ” Under this scenario, we would either be required to contract with another third party manager who qualifies as an “eligible independent contractor,” which could serve as a disincentive for the current operator to sell the property to us, or we would be unable to lease the property to our TRS lessee.
Our qualification as a REIT could be jeopardized as a result of our interests in joint ventures.
We acquired limited partner or non-managing member interests in partnerships and limited liability companies that are joint ventures. If Solstice takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company that we invested in could have taken an action which could cause us to fail a REIT gross income or asset test, and that we were not aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to continue to qualify as a REIT unless we are able to qualify for a statutory REIT “savings” provision, which may require us to pay a significant penalty tax to maintain our REIT qualification.
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price paid to stockholders.
Our charter, with certain exceptions, authorizes our Board to take such actions as are necessary and desirable to preserve our qualification as a REIT.Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Code, among other purposes, our charter prohibits a person from directly or constructively owning more than 9.8% in value of the aggregate of the outstanding shares of our stock of any class or series or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, unless exempted (prospectively or retroactively) by our Board. To help us comply with the REIT ownership requirements of the Internal Revenue Code, among other purposes, our charter prohibits a person from directly or constructively owning more than 9.8% in value of the aggregate of the outstanding shares of our stock of any class or series or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, unless exempted (prospectively or retroactively) by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price for holders of our shares of common stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price for holders of our shares of common stock.
Legislative or regulatory tax changes could adversely affect us or stockholders.
At any time, the federal income tax laws can change. Laws and rules governing REITs or the administrative interpretations of those laws may be amended. Laws and rules governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or stockholders. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or stockholders.
If stockholders fail to meet the fiduciary and other standards under ERISA or the Code as a result of an investment in our stock, stockholders could be subject to criminal and civil penalties.If stockholders fail to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, stockholders could be subject to criminal and civil penalties.
Special considerations apply to the purchase of shares by employee benefit plans subject to the fiduciary rules of Title I of ERISA, including pension or profit-sharing plans and entities that hold assets of such plans, or ERISA Plans, and plans and accounts that are not subject to ERISA, but are subject to the prohibited transaction rules of Section 4975 of the Code, including Individual Retirement Accounts, or IRAs, Keogh Plans, and medical savings accounts (collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Code as “Benefit Plans”).Special considerations apply to the purchase of shares by employee benefit plans subject to the fiduciary rules of Title I of ERISA, including pension or profit-sharing plans and entities that hold assets of such plans, or ERISA Plans, and plans and accounts that are not subject to ERISA, but are subject to the prohibited transaction rules of Section 4975 of the Internal Revenue Code, including Individual Retirement Accounts, or IRAs, Keogh Plans, and medical savings accounts (collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Internal Revenue Code as “Benefit Plans”). If stockholders are investing the assets of any Benefit Plan, stockholders should consult with their own counsel and satisfy themselves that:
•their investment is consistent with the fiduciary obligations under ERISA and the Code or any other applicable governing authority in the case of a government plan;
•their investment is made in accordance with the documents and instruments governing the Benefit Plan, including the Benefit Plan’s investment policy;
28
•their investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable and other applicable provisions of ERISA and the Code;
•their investment will not impair the liquidity of the Benefit Plan;
•their investment will not unintentionally produce unrelated business taxable income for the Benefit Plan;
•stockholders will be able to value the assets of the Benefit Plan annually in accordance with the applicable provisions of ERISA and the Code; and
•their investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Fiduciaries may be held personally liable under ERISA for losses as a result of failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA. In addition, if an investment in our shares constitutes a non-exempt prohibited transaction under ERISA or the Code, the fiduciary of the Benefit Plan who authorized or directed the investment may be subject to imposition of excise taxes with respect to the amount invested and an IRA investment in our shares may lose its tax-exempt status. In addition, if an investment in our shares constitutes a non-exempt prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary of the Benefit Plan who authorized or directed the investment may be subject to imposition of excise taxes with respect to the amount invested and an IRA investment in our shares may lose its tax-exempt status.
Governmental plans, church plans and foreign plans that are not subject to ERISA or the prohibited transaction rules of the Internal Revenue Code, may be subject to similar restrictions under other laws.34Table of ContentsGovernmental plans, church plans and foreign plans that are not subject to ERISA or the prohibited transaction rules of the Internal Revenue Code, may be subject to similar restrictions under other laws. A plan fiduciary making an investment in our shares on behalf of such a plan should satisfy themselves that an investment in our shares satisfies both applicable law and is permitted by the governing plan documents. A plan fiduciary making an investment in our shares on behalf of such a plan should satisfy themselves that an investment in our shares satisfies both applicable law and is permitted by the governing plan documents.
We expect that our common stock qualifies as publicly offered securities such that investments in shares of our common stock will not result in our assets being deemed to constitute “plan assets” of any Benefit Plan investor. If, however, we were deemed to hold “plan assets” of Benefit Plan investors: (i) ERISA’s fiduciary standards may apply to us and might materially affect our operations, and (ii) any transaction with us could be deemed a transaction with each Benefit Plan investor and may cause transactions into which we might enter in the ordinary course of business to constitute prohibited transactions under ERISA and/or Section 4975 of the Code. If, however, we were deemed to hold “plan assets” of Benefit Plan investors: (i) ERISA’s fiduciary standards may apply to us and might materially affect our operations, and (ii) any transaction with us could be deemed a transaction with each Benefit Plan investor and may cause transactions into which we might enter in the ordinary course of business to constitute prohibited transactions under ERISA and/or Section 4975 of the Internal Revenue Code.
Item 1B. Unresolved Staff Comments
None.
Item 1C.Item 1A. Cybersecurity
Risk Management and Strategy
We have developed and implemented a cybersecurity framework intended to assess, identify and manage risks from threats to the security of our information, systems, products and network using a risk-based approach. The framework is informed in part by the National Institute of Standards and Technology, or NIST, Cybersecurity Framework, NIST 800-53 and International Organization for Standardization 27001, or ISO 27001, Framework, although we do not comply with all technical standards, specifications or requirements under NIST or ISO 27001.
Our key cybersecurity processes include the following:
•Risk-based controls for information systems and information on our networks. We seek to maintain an information technology infrastructure that implements physical, administrative and technical controls that are calibrated based on risk and designed to protect the confidentiality, integrity and availability of our information systems and information stored on our networks, including personal information, intellectual property and proprietary information.
•Cybersecurity incident responses plan and testing. We have a cybersecurity incident response plan and dedicated team to respond to cybersecurity incidents. When a cybersecurity incident occurs or we identify a vulnerability, we have a Managed Security Service Provider, or MSSP, that is responsible for leading the initial assessment of priority and severity. Our cybersecurity team assists in responding to incidents depending on severity levels and seeks to improve our cybersecurity incident management plan through periodic tabletops or simulations at the enterprise level.
•Training. We provide security awareness training to help our employees understand their information protection and cybersecurity responsibilities. We also provide additional role-based training to some employees based on customer requirements, regulatory obligations and industry risks.
•Supplier risk assessments. We have implemented a third-party risk management process that includes expectations regarding information and cybersecurity. That process, among other things, provides for us to perform cybersecurity assessments on certain suppliers based on an assessment of their risk profile and a related rating process. We also seek
29
contractual commitments from key suppliers to appropriately secure and maintain their information technology systems and protect our information that is processed on their systems.
•Our third-party assessments. We have third-party cybersecurity companies engaged to periodically assess our cybersecurity posture and to assist in identifying and remediating risks from cybersecurity threats.
Governance
Our Audit Committee is responsible for board-level oversight of cybersecurity risk and reports back to our Board about this and other areas within its responsibility. As part of its oversight role, our Audit Committee receives reporting about our practices, programs, notable threats or incidents and other developments related to cybersecurity throughout the year, including through periodic updates from our Chief Financial Officer, and through our MSSP. Our Chief Financial Officer is principally responsible for overseeing our cybersecurity risk management program and incident reporting. In the event there is a material cybersecurity breach or incident, our Chief Financial Officer works in coordination with our MSSP to assess and respond, including by reporting the breach or incident to our Board and/or applicable regulatory authorities, as necessary or required. Our Chief Financial Officer has a high level of exposure to cybersecurity oversight through his current work overseeing our cybersecurity risk management and MSSP and has over 10 years of experience with managing risks in environments similar to ours, including risks arising from cybersecurity threats.
Recently Filed
Click on a ticker to see risk factors
| Ticker * | File Date |
|---|---|
| FETH | an hour ago |
| UBCP | an hour ago |
| NXL | an hour ago |
| FCCO | an hour ago |
| FRBP | 2 hours ago |
| CDIX | 2 hours ago |
| PBT | 2 hours ago |
| MRC | 2 hours ago |
| FSEN | 2 hours ago |
| AIRS | 2 hours ago |
| DTI | 3 hours ago |
| FUSB | 4 hours ago |
| GNE | 4 hours ago |
| SFDL | 4 hours ago |
| CSBB | 4 hours ago |
| WEYS | 4 hours ago |
| NHHS | 4 hours ago |
| ANKM | 4 hours ago |
| SBT | 5 hours ago |
| CBAN | 5 hours ago |
| NECB | 5 hours ago |
| CFBK | 5 hours ago |
| ACNB | 6 hours ago |
| MNSB | 7 hours ago |
| NWFL | 7 hours ago |
| ALRS | 7 hours ago |
| LWAY | 8 hours ago |
| ASTH | 9 hours ago |
| MHH | 9 hours ago |
| GNTY | 9 hours ago |
| HLLY | 10 hours ago |
| BTBT | 10 hours ago |
| RMBL | 20 hours ago |
| JYNT | 21 hours ago |
| HBIO | 21 hours ago |
| TPTA | 21 hours ago |
| TFSA | 21 hours ago |
| RGEN | 21 hours ago |
| PRPL | 22 hours ago |
| BLND | 23 hours ago |
| PHLT | 23 hours ago |
| ATYR | 23 hours ago |
| STRO | 23 hours ago |
| CVKD | 23 hours ago |
| ATLC | 23 hours ago |
| TCX | 23 hours ago |
| RCMT | 23 hours ago |
| AAWH | 23 hours ago |
| BRLT | 23 hours ago |
| FDBC | 1 day ago |
