Strawberry Fields REIT, Inc.: Form 10-Q for the period ended Mar 31, 2024

Cash Flows (continued)

Net cash provided by operating activities for the three months ended March 31, 2024, was $2.1 million. It was comprised of net earnings of $6.0 million and depreciation and amortization of $8.1 million, offset by a decrease in accounts payable and accrued liabilities and other liabilities of $8.1 million, an increase in other assets, and amortization of right of use assets. Net cash provided by operating activities for the three months ended March 31, 2023, was $10.0 million primarily consisted of net earnings of $4.1 million, depreciation and amortization of $7.0 million and a loss on real estate investment impairment of $2.5 million. These amounts were offset by a decrease in accounts payable and accrued liabilities and other liabilities of $3.8 million.

Cash provided by investing activities for the three months ended March 31, 2024 mostly consists of an $18.0 million purchase of the replacement Indiana master lease. These properties were acquired in an acquisition completed in August of 2023. Cash used in investing activities for the three months ended March 31, 2023, was comprised of the acquisition of a new facility in Kentucky for $6.0 million and receipt of the principal payments on notes receivable.

Cash flows provided by financing activities for the three months ended March 31, 2024, were primarily comprised of $25.7 million proceeds from the issuance of Series D Bonds offset by $5.4 million for the distributions to non-controlling interest and the repayment of senior debt. Cash provided by financing activities for the three months ended March 31, 2023, were primarily comprised of a private placement of Series C Bonds which netted $10.4 million offset by non-controlling interest distributions and principal debt repayment.

Indebtedness

Mortgage Loans Guaranteed by HUD

As of March 31, 2024, we had non-recourse mortgage loans of $269.4 million from third party lenders that were guaranteed by HUD.

Each loan is secured by first mortgages on certain specified properties, interests in the leases for these properties and second liens on the operator’s assets. In the event of default on any single loan, the loan agreement provides that the applicable lender may require the tenants for the property securing the loan to make all rental payments directly to the lender. In exchange for the HUD guarantee, we pay HUD, on an annual basis, 0.65% of the principal balance of each loan as mortgage insurance premium, in addition to the interest rate denominated in each loan agreement. As a result, the overall average interest rate paid with respect to the HUD guaranteed loans as of March 31, 2024, was 3.91% per annum (including the mortgage insurance payments). The loans have an average maturity of 25.0 years.

Commercial Bank Term Loan

On March 21, 2022, the Company closed a mortgage loan with a commercial bank pursuant to which the Company borrowed approximately $105 million. The loan agreement provides for monthly payments of principal based on a 20-year amortization with a balloon payment due in March 2027. The rate is based on the one-month Secured Overnight Financing Rate (“SOFR”) plus a margin of 3.5% and a floor of 4% (as of March 31, 2024, rate was 8.84%). As of March 31, 2024, and December 31, 2023, total outstanding principal amount was $97.9 million and $98.8 million, respectively. This loan is collateralized by 21 properties owned by the Company.

On August 25, 2023, the Company closed a mortgage loan facility with a commercial bank pursuant to which the Company borrowed approximately $66 million. The facility is an interest only facility for the first 12 months and beginning in the second year monthly payments of principal and interest based on a 20-year amortization schedule with a balloon payment due in August 2028. The rate is based on the one-month Secured Overnight Financing Rate (“SOFR”) plus a margin of 3.5% and a floor of 4% (as of March 31, 2024, the rate was 8.84%). As of March 31, 2024, and December 31, 2023, total amounts outstanding were $66.0 million. This facility loan is collateralized by and was used for the acquisition of 19 properties (24 facilities). See note 4 of the financial statements included in Part I to this Form 10-Q.

The loan agreements covenants consist of (i) a covenant that the ratio of the Company’s indebtedness to its EBITDA cannot exceed 8.0 to 1, (ii) a covenant that the ratio of the Company’s net operating income to its debt service before dividend distribution is at least 1.20 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, (iii) a covenant that the ratio of the Company’s net operating income to its debt service after dividend distribution is at least 1.05 to 1.00 for each fiscal quarter as measured pursuant to the terms of the loan agreement, and (iii) a covenant that the Company’s GAAP equity is at least $20.0 million. As of March 31, 2024, the Company was in compliance with the loan covenants.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business and investment objectives, we expect that the primary market risk to which we will be exposed is interest rate risk.

We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties. As of March 31, 2024, we had $59.9 million outstanding under our Series C Bonds, which bear interest at a fixed rate of 5.7% per annum, $67.1 million outstanding under our Series D Bonds, which bear interest at a fixed rate of 9.1% per annum, and $433.3 million in senior debt notes, of which $269.4 million are HUD guaranteed debt at a fixed interest rate of 3.91% and $163.9 million (30.3% of total debt) are floating rate debt, which bears interest at a variable rate equal to one-month SOFR plus a margin of 3.5% and a floor of 4% (as of March 31, 2024 the rate was 8.84%). As of March 31, 2024, one-month SOFR was 5.34%. Assuming no increase in the amount of our variable interest rate debt, if one-month SOFR increased 100 basis points, our annual cash flow would decrease by approximately $1.6 million. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We also may enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of March 31, 2024, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of March 31, 2024.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.