Overview of Strawberry Fields REIT

Strawberry Fields REIT, Inc. is a real estate investment trust (REIT) that owns and leases skilled nursing facilities and other post-acute healthcare properties. As of the end of 2024, the company’s portfolio consisted of 130 healthcare facilities with 14,540 licensed beds located across 11 states. Strawberry Fields generates the majority of its revenue by leasing these properties to tenants on long-term, triple-net leases, where the tenant is responsible for real estate taxes, insurance, and other operating costs.

The company employs a disciplined investment strategy, seeking to acquire healthcare real estate assets that will provide attractive dividend growth and asset appreciation while maintaining a strong balance sheet and liquidity. Strawberry Fields aims to diversify its portfolio by tenant, facility type, and geography as it continues to grow.

Recent Developments

In 2024, Strawberry Fields completed several notable transactions:

• Acquired a 68-bed skilled nursing facility and 10-bed assisted living facility in Indiana for $5.83 million, leasing it to a related party operator.
• Renewed and expanded its Indiana master lease, adding one more entity and increasing the base rent to $15.5 million with 3% annual escalations.
• Sold a property in Illinois to the local municipality for $1, paying off $1.2 million in related debt.
• Established an at-the-market (ATM) equity program to provide additional financing flexibility and facilitate growth.
• Issued 145.6 million NIS ($37.1 million) in Series A bonds on the Tel Aviv Stock Exchange, with a 6.97% fixed interest rate.
• Acquired two skilled nursing facilities with 254 licensed beds near San Antonio, Texas for $15.25 million, leasing them to a third-party operator.
• Acquired an 83-bed skilled nursing facility and 25-bed assisted living facility near Nashville, Tennessee for $6.7 million, leasing it to a related party operator.
• Acquired eight healthcare facilities with 1,111 licensed beds in Missouri for $87.5 million, leasing them to third-party tenants.
• Acquired a 100-bed skilled nursing facility in Oklahoma for $5 million, leasing it on a triple-net basis.

Related Party Tenants

Strawberry Fields notes that while it does not control the operations of its tenants, including related party tenants, the company’s chairman and a director have the ability to obtain information about these related party tenants and operators and influence their actions, including with respect to occupancy trends.

Results of Operations

In 2024, Strawberry Fields’ rental revenues increased by 17.3% to $117.1 million compared to 2023, driven by the renegotiation of certain leases and the acquisition of new properties. Depreciation and amortization expenses also increased, by 10.8% and 53.8% respectively, due to the new real estate investments.

The company recorded a $2.5 million loss on real estate impairment in 2023 related to the closure of a facility under one of its Southern Illinois master leases. This facility was subsequently sold in 2024.

General and administrative expenses decreased by 21.0% in 2024, while interest expense increased by 33.4% due to larger bond balances and additional commercial bank debt.

Overall, Strawberry Fields’ net income increased by 30.9% from $20.2 million in 2023 to $26.5 million in 2024, primarily due to the increase in rental revenue offset by higher expenses.

Liquidity and Capital Resources

As a REIT, Strawberry Fields is required to distribute at least 90% of its taxable income to shareholders annually. As of the end of 2024, the company had $93.7 million in cash and cash equivalents, as well as the ability to issue additional Series A, C, and D bonds subject to compliance with covenants and market conditions.

The company’s total indebtedness as of December 31, 2024 was $673.9 million, consisting of $262.2 million in HUD-guaranteed mortgage loans, $213.3 million in outstanding bonds, and $198.4 million in commercial mortgages. Strawberry Fields’ debt agreements contain various financial covenants related to leverage, debt service coverage, and minimum equity levels, which the company was in compliance with as of the end of 2024.

The company has several balloon payment obligations coming due through 2027, including $83 million, $68.2 million, and $48.4 million for its Series A, C, and D bonds, respectively, as well as commercial loan payments of $86.1 million, $36.6 million, and $52.5 million. Strawberry Fields believes it will be able to generate sufficient cash flow from operations and access capital markets to meet these obligations.

Cash Flows

Strawberry Fields’ net cash provided by operating activities increased from $54.9 million in 2023 to $59.3 million in 2024, primarily due to the increase in net income. Cash used in investing activities rose by $30.4 million, driven by higher spending on property acquisitions. Financing activities generated $133.3 million in 2024, up from $43.5 million the prior year, due to bond proceeds, equity raises, and lower debt repayments.

Indebtedness

Strawberry Fields’ indebtedness includes:

• $262.2 million in non-recourse mortgage loans guaranteed by HUD, with an average interest rate of 3.91% including mortgage insurance premiums and an average maturity of 22 years.
• $198.4 million in commercial bank term loans, with interest rates based on one-month SOFR plus margins of 3.0-3.5% and maturities ranging from 2027 to 2029. These loans are subject to financial covenants related to leverage, debt service coverage, and minimum equity.
• $213.3 million in outstanding Series A, C, and D bonds, with interest rates ranging from 6.97% to 9.1% and various maturity dates through 2026.

Funds from Operations (FFO) and Adjusted FFO

Strawberry Fields reported FFO of $60.2 million in 2024, up from $49.5 million in 2023. Adjusted FFO, which excludes certain non-recurring items, was $55.8 million in 2024 compared to $52.7 million in 2023.

Outlook and Key Factors

Strawberry Fields’ future results will be influenced by several key factors, including the financial and operational performance of its tenants, trends in healthcare reimbursement, the availability and cost of capital, and competition from other financing sources.

The company actively monitors tenant credit quality, facility conditions, market dynamics, and regulatory changes that could impact its tenants’ profitability and ability to pay rent. Strawberry Fields aims to reduce its reliance on related party tenants over time in order to diversify its tenant base.

Additionally, the long-term, triple-net lease structure of Strawberry Fields’ portfolio provides some protection against the impact of inflation, though the company notes that leases may not reset frequently enough to fully offset rising costs.

Overall, Strawberry Fields appears to have navigated the challenges of the past year well, growing its portfolio and revenue while maintaining a strong financial position. The company’s disciplined investment approach, diversification efforts, and focus on tenant credit quality position it for continued success, though it will need to carefully manage its debt obligations and exposure to industry trends going forward.