10-K: CNL Healthcare Properties Reports on 2024 Performance, NAV at $6.64 Per Share

CNL Healthcare Properties releases its 2024 annual report, highlighting strategic alternatives and a net asset value of $6.64 per share.

Summary

• CNL Healthcare Properties, a Maryland corporation taxed as a REIT, released its annual report for the fiscal year ended December 31, 2024.
• The company is exploring strategic alternatives to provide liquidity to stockholders, including a potential listing on a national securities exchange, an orderly disposition of assets, or a business combination.
• As of December 31, 2024, the investment portfolio consisted of interests in 70 properties, including 69 seniors housing communities and one vacant land parcel.
• The board of directors approved an estimated NAV of $6.64 per share as of December 31, 2024, compared to $6.28 per share as of December 31, 2023, and $6.92 per share as of December 31, 2022.
• The company's strategy focuses on managing its seniors housing portfolio to provide cash distributions, preserve invested capital, and explore liquidity opportunities.
• The company is externally managed by CNL Healthcare Corp., an affiliate of CNL Financial Group, LLC.
• The company's seniors housing investment portfolio is geographically diversified with properties in 26 states.
• The company is required to distribute at least 90% of its taxable income to maintain its REIT status.
• The company's credit facilities contain limitations on distributions.
• The company faces cybersecurity risks and is subject to various federal, state, and local laws and regulations.

Sentiment

Score: 6

Explanation: The sentiment is neutral. While the NAV increased, the company still faces challenges in the current economic environment and is exploring strategic alternatives.

Positives

• The board of directors approved an estimated NAV of $6.64 per share as of December 31, 2024, an increase from the previous year.
• The company's seniors housing investment portfolio is geographically diversified with properties in 26 states.
• Weighted average occupancy was higher during the year ended December 31, 2024 as compared to the year ended December 31, 2023.
• Rate increases at our properties as part of ongoing resident lease renewals combined with improved occupancy as compared to 2023 resulted in an increase in revenues and NOI margins during the year ended December 31, 2024.

Negatives

• The company's common stock may continue to be illiquid, and investors may be unable to convert investor shares to cash easily, if at all.
• The company faces cybersecurity risks and is subject to various federal, state, and local laws and regulations.
• The company's credit facilities contain limitations on distributions.
• Economic and transactional environments were not conducive for dispositions or any type of large-scale strategic transactions in recent years due to a volatile credit and debt capital markets, along with 11 interest rate increases by the Federal Reserve between March 2022 and July 2023 followed by limited interest rate cuts from September 2024 through December 2024.

Risks

• If the company does not successfully implement a liquidity event, investors may have to hold an investment for an indeterminate period of time.
• Valuations and appraisals of the company's properties and outstanding debt are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties.
• Seniors housing properties in the company's portfolio may not be readily adaptable to other uses.
• The financial condition of our operators and tenants can impact the company's operating revenue.
• Events which adversely affect the ability of seniors to afford the company's daily resident fees could cause the occupancy rates, resident fee revenues and results of operations of the company's seniors housing properties to decline.
• Inflation could adversely impact the operating expenses of our tenants and operators.
• There can be no assurance that the company will be able to achieve expected cash flows necessary to pay or maintain distributions at any particular level or that distributions will continue over time.
• An investment return may be reduced if the company is required to register as an investment company under the Investment Company Act.
• Damage from catastrophic weather and other natural events and climate change could result in losses to us.
• Epidemics, pandemics, or other infectious diseases and health and safety measures intended to reduce their spread may have an adverse effect on the company's business, results of operations and financial condition.
• Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
• The Advisor and its affiliates, including all of the company's executive officers and affiliated directors, face conflicts of interest as a result of their compensation arrangements with the company, which could result in actions that are not in the best interest of the company's stockholders.
• The company is not in privity of contract with service providers that may be engaged by the Advisor to perform advisory services and they may be insulated from liabilities to the company, and the Advisor has minimal assets with which to remedy any liabilities to the company.
• Mortgage indebtedness and other borrowings will increase the company's business risks.
• The company uses credit facilities to finance the company's investments, which may require the company to provide additional collateral and significantly impact its liquidity position.
• Increases in interest rates could increase the amount of our loan payments and may adversely affect the company's ability to make distributions.
• Financing arrangements involving balloon payment obligations may adversely affect the company's ability to make distributions.
• The company may acquire various financial instruments for purposes of hedging or reducing the company's risks which may be costly and/or ineffective and will reduce the company's cash available for distribution to its stockholders.
• The company's failure or the failure of the tenants and managers of the company's properties to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect the operations of the company's seniors housing properties.
• Termination of resident lease agreements could adversely affect the company's revenues and earnings for seniors housing properties providing assisted living services.
• Legislation and government regulation may adversely affect the operations of the company's properties.
• Failure to qualify as a REIT would adversely affect the company's operations and the company's ability to pay distributions to investors.
• The company's leases may be re-characterized as financings which would eliminate depreciation deductions with respect to the company's properties.
• The company may have to borrow funds or sell assets to meet the company's distribution requirements.
• Even as a REIT, the company remains subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred.
• The company's investment strategy may cause the company to incur penalty taxes, fail to maintain the company's REIT status or own and sell properties through TRSs, each of which would diminish the return to the company's stockholders.
• The company's TRS structure subjects the company to the risk that the leases with the company's TRSs do not qualify for tax purposes as arms-length, which would expose the company to potentially significant tax penalties.
• If the company's operating partnership fails to maintain its status as either a disregarded entity or an entity taxable as a partnership for federal income tax purposes, the operating partnership's income may be subject to taxation, which would reduce the cash available to the company for distribution to its stockholders.
• If the company's assets are deemed plan assets for the purposes of the Employee Retirement Income Security Act (ERISA), the company could be subject to excise taxes on certain prohibited transactions.
• The limit on the percentage of shares of the company's stock that any person may own may discourage a takeover or business combination that may benefit the company's stockholders.
• The company's board of directors can take many actions without stockholder approval which could have a material adverse effect on the distributions investors receive from the company and/or could reduce the value of the company's assets.
• The company's use of an operating partnership structure may result in potential conflicts of interest with limited partners other than the company, if any, whose interests may not be aligned with those of the company's stockholders.

Future Outlook

The Special Committee continues to work closely with our financial advisor on evaluating the potential return of constructive market conditions and we remain fully committed to our readiness, active study and pursuit of additional Possible Strategic Alternatives to provide incremental liquidity to our stockholders.

Industry Context

The announcement reflects the ongoing challenges and strategic shifts within the non-traded REIT sector, particularly those focused on seniors housing, as they navigate market volatility and seek liquidity options for investors.

Comparison to Industry Standards

• Global Medical REIT Inc. (GMRE) is a publicly traded REIT that invests in healthcare facilities.
• CareTrust REIT, Inc. (CTRE) is a REIT that invests in healthcare-related properties, including skilled nursing facilities and assisted living facilities.
• Omega Healthcare Investors, Inc. (OHI) is a REIT that invests in long-term healthcare facilities, primarily skilled nursing and assisted living facilities.
• Sabra Health Care REIT, Inc. (SBRA) is a REIT that invests in skilled nursing/transitional care facilities, senior housing, and specialty hospitals.
• These companies are all facing similar challenges related to occupancy, labor costs, and interest rates.

Legal Proceedings

• From time to time, we may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including proceedings to enforce our contractual or statutory rights.

Related Party Transactions

• The company is externally managed and advised by CNL Healthcare Corp., an affiliate of CNL Financial Group, LLC.
• The Advisor and its affiliates are entitled to reimbursement of certain costs incurred on our behalf in connection with our organization, acquisitions, dispositions and operating activities.
• The Advisor receives investment services fees, financing coordination fees, and monthly asset management fees.
• CNL Capital Markets LLC, an affiliate of CNL, receives a sliding flat annual rate based on the average number of investor accounts.

Stakeholder Impact

• Stockholders are awaiting a liquidity event.
• Tenants and operators are facing challenges related to occupancy, labor costs, and interest rates.
• Residents may be affected by changes in fees and services.

Next Steps

• The Special Committee continues to work with its financial advisor to study market data and opportunities to provide liquidity to stockholders.
• The company will continue to monitor the credit markets and evaluate the need for additional interest rate protection.

Key Dates