NorthStar Healthcare Income, Inc. - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-55190

NORTHSTAR HEALTHCARE INCOME, INC.

(Exact Name of Registrant as Specified in its Charter)


Maryland			27-3663988
(State or Other Jurisdiction of			(IRS Employer
Incorporation or Organization)			Identification No.)

16 East 34th Street, 18th Floor, New York, NY 10016

(Address of Principal Executive Offices, Including Zip Code)

(929) 777-3135

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

The Company has one class of common stock, $0.01 par value per share, 185,712,103 shares outstanding as of August 14, 2023.

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NORTHSTAR HEALTHCARE INCOME, INC.

FORM 10-Q

TABLE OF CONTENTS


Index		Page

Part I.	Financial Information	4
Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	4
	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2023 and 2022	5
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2023 and 2022	6
	Consolidated Statements of Equity (unaudited) for the three and six months ended June 30, 2023 and 2022	7
	Consolidated Statements of Cash Flow (unaudited) for the six months ended June 30, 2023 and 2022	9
	Notes to Consolidated Financial Statements (unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Control and Procedures	52
Part II.	Other Information	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
Signatures		57

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to make distributions to our stockholders; our ability to retain our senior executives and other sufficient personnel to manage our business; our ability to realize substantial efficiencies as well as anticipated strategic and financial benefits of the internalization of our management function as operating costs and business disruption may be greater than expected; the operating performance of our investments, our financing needs, the effects of our current strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements.

All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the U.S. Securities and Exchange Commission, or the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” 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.

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PART I—Financial Information

Item 1. Financial Statements

NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Per Share Data)


	June 30, 2023 (Unaudited)		December 31, 2022
Assets
Cash and cash equivalents	$	107,306	$	103,926
Restricted cash	11,856		11,734
Operating real estate, net	888,684		933,002
Investments in unconsolidated ventures ($3,075 held at fair value as of June 30, 2023)	128,153		176,502


Receivables, net	1,619		2,815
Intangible assets, net	2,085		2,253
Other assets	5,937		7,603
Total assets(1)	$	1,145,640	$	1,237,835

Liabilities
Mortgage notes payable, net	$	904,714	$	912,248

Due to related party	283		469
Escrow deposits payable	733		993
Accounts payable and accrued expenses	19,876		21,034
Other liabilities	1,648		2,019
Total liabilities(1)	927,254		936,763
Commitments and contingencies (Note 12)
Equity
NorthStar Healthcare Income, Inc. Stockholders’ Equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Common stock, $0.01 par value, 400,000,000 shares authorized, 185,712,103 and 195,421,656 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	1,857		1,954
Additional paid-in capital	1,716,287		1,729,589
Retained earnings (accumulated deficit)	(1,500,547)		(1,428,840)
Accumulated other comprehensive income (loss)	—		(3,679)
Total NorthStar Healthcare Income, Inc. stockholders’ equity	217,597		299,024
Non-controlling interests	789		2,048
Total equity	218,386		301,072
Total liabilities and equity	$	1,145,640	$	1,237,835

_______________________________________

(1)Includes $175.3 million and $176.0 million of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. Refer to Note 2, “Summary of Significant Accounting Policies.”

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Property and other revenues
Resident fee income	$	11,839	$	10,958	$	23,689	$	21,713
Rental income	38,568		34,277		75,567		66,836
Other revenue	1,096		139		1,815		157
Total property and other revenues	51,503		45,374		101,071		88,706


Expenses
Property operating expenses	35,026		33,230		70,103		66,124
Interest expense	11,534		10,554		22,893		20,863
Transaction costs	—		—		97		—
Asset management fees - related party	—		2,457		—		5,104
General and administrative expenses	3,593		3,755		7,503		7,441
Depreciation and amortization	9,808		9,540		19,457		19,463
Impairment loss	43,422		13,002		43,422		13,002
Total expenses	103,383		72,538		163,475		131,997
Other income (loss)
Other income, net	70		5		202		77
Realized gain (loss) on investments and other	(4,647)		(252)		(4,315)		335
Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax expense	(56,457)		(27,411)		(66,517)		(42,879)
Equity in earnings (losses) of unconsolidated ventures	(2,546)		34,053		(6,468)		36,555
Income tax expense	(11)		(15)		(26)		(30)
Net income (loss)	(59,014)		6,627		(73,011)		(6,354)
Net (income) loss attributable to non-controlling interests	1,233		180		1,304		225
Net income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders	$	(57,781)	$	6,807	$	(71,707)	$	(6,129)
Net income (loss) per share of common stock, basic/diluted(1)	$	(0.30)	$	0.04	$	(0.37)	$	(0.03)
Weighted average number of shares of common stock outstanding, basic/diluted(1)	193,156,094		194,044,709		194,282,546		193,708,466
Distributions declared per share of common stock	$	—	$	0.50	$	—	$	0.50

_______________________________________

(1) The Company issued 203,742 and 116,712 restricted stock units as of June 30, 2023 and June 30, 2022, respectively. The restricted stock units have been excluded from the diluted earnings per share calculation as their impact is anti-dilutive due to the net loss generated during the three and six months ended June 30, 2023 and the six months ended June 30, 2022. The impact of the restricted stock units on the diluted earnings per share calculation is de minimis for the three months ended June 30, 2022.

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income (loss)	$	(59,014)	$	6,627	$	(73,011)	$	(6,354)
Other comprehensive income (loss)
Foreign currency translation adjustments related to investment in unconsolidated venture	2,431		(2,370)		3,679		(2,938)
Total other comprehensive income (loss)	2,431		(2,370)		3,679		(2,938)
Comprehensive income (loss)	(56,583)		4,257		(69,332)		(9,292)
Comprehensive (income) loss attributable to non-controlling interests	1,233		180		1,304		225
Comprehensive income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders	$	(55,350)	$	4,437	$	(68,028)	$	(9,067)

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars and Shares in Thousands)


	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Total Company’s Stockholders’ Equity		Non-controlling Interests		Total Equity
	Shares	Amount
Balance as of December 31, 2021	193,121	$	1,930	$	1,720,719	$	(1,277,688)	$	(486)	$	444,475	$	2,343	$	446,818
Share-based payment of advisor asset management fees	698	7		2,722		—		—		2,729		—		2,729
Amortization of equity-based compensation	—	—		15		—		—		15		—		15
Non-controlling interests - contributions	—	—		—		—		—		—		64		64
Non-controlling interests - distributions	—	—		—		—		—		—		(53)		(53)
Other comprehensive income (loss)	—	—		—		—		(568)		(568)		—		(568)
Net income (loss)	—	—		—		(12,936)		—		(12,936)		(45)		(12,981)
Balance as of March 31, 2022 (Unaudited)	193,819	$	1,937	$	1,723,456	$	(1,290,624)	$	(1,054)	$	433,715	$	2,309	$	436,024
Share-based payment of advisor asset management fees	637	8		2,507		—		—		2,515		—		2,515
Amortization of equity-based compensation	—	—		13		—		—		13		—		13
Non-controlling interests - contributions	—	—		—		—		—		—		113		113
Non-controlling interests - distributions	—	—		—		—		—		—		(61)		(61)
Distributions declared	—	—		—		(97,052)		—		(97,052)		—		(97,052)
Other comprehensive income (loss)	—	—		—		—		(2,370)		(2,370)		—		(2,370)
Net income (loss)	—	—		—		6,807		—		6,807		(180)		6,627
Balance as of June 30, 2022 (Unaudited)	194,456	$	1,945	$	1,725,976	$	(1,380,869)	$	(3,424)	$	343,628	$	2,181	$	345,809

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars and Shares in Thousands)


	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Total Company’s Stockholders’ Equity		Non-controlling Interests		Total Equity
	Shares	Amount
Balance as of December 31, 2022	195,422	$	1,954	$	1,729,589	$	(1,428,840)	$	(3,679)	$	299,024	$	2,048	$	301,072


Non-controlling interests - contributions	—	—		—		—		—		—		45		45
Non-controlling interests - distributions	—	—		—		—		—		—		(22)		(22)



Other comprehensive income (loss)	—	—		—		—		1,248		1,248		—		1,248
Net income (loss)	—	—		—		(13,926)		—		(13,926)		(71)		(13,997)
Balance as of March 31, 2023 (Unaudited)	195,422	$	1,954	$	1,729,589	$	(1,442,766)	$	(2,431)	$	286,346	$	2,000	$	288,346
Non-controlling interests - contributions	—	—		—		—		—		—		55		55
Non-controlling interests - distributions	—	—		—		—		—		—		(33)		(33)
Retirement of common stock (Note 8)	(9,710)	(97)		(13,302)		—		—		(13,399)		—		(13,399)
Other comprehensive income (loss)	—	—		—		—		(844)		(844)		—		(844)
Reclassification of accumulated other comprehensive loss(1)	—	—		—		—		3,275		3,275		—		3,275
Net income (loss)	—	—		—		(57,781)		—		(57,781)		(1,233)		(59,014)
Balance as of June 30, 2023 (Unaudited)	185,712	$	1,857	$	1,716,287	$	(1,500,547)	$	—	$	217,597	$	789	$	218,386

_______________________________________

(1)The Company reclassified the accumulated other comprehensive loss related to foreign currency adjustments for an unconsolidated venture ownership interest that was sold during the three months ended June 30, 2023. The accumulated balance was reclassified to other gain (loss) on investments and other on the consolidated statements of operations.

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	(73,011)	$	(6,354)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses of unconsolidated ventures	6,468		(36,555)
Depreciation and amortization	19,457		19,463
Impairment loss	43,422		13,002

Amortization of below market debt	1,653		1,614


Amortization of deferred financing costs	314		312
Amortization of equity-based compensation	114		93

Realized (gain) loss on investments and other	4,315		(335)
Change in allowance for uncollectible accounts	193		186
Issuance of common stock as payment for asset management fees	—		5,104
Distributions from unconsolidated ventures	10,640		—
Changes in assets and liabilities:
Receivables	1,004		(277)
Other assets	1,013		3,838
Due to related party	(186)		(3,432)
Escrow deposits payable	(260)		(58)
Accounts payable and accrued expenses	(3,822)		(8,735)
Other liabilities	(55)		32
Net cash provided by (used in) provided by operating activities	11,259		(12,102)
Cash flows from investing activities:
Capital expenditures for operating real estate	(11,090)		(10,660)
Sales of real estate	135		—


Distributions from unconsolidated ventures	13,472		38,140

Sales of other assets	523		—
Net cash provided by (used in) investing activities	3,040		27,480
Cash flows from financing activities:

Repayments of mortgage notes	(9,500)		(12,012)


Payments under finance leases	(63)		(272)
Acquisition and retirement of common stock	(1,279)		—
Distributions paid on common stock	—		(97,018)

Contributions from non-controlling interests	100		177
Distributions to non-controlling interests	(55)		(114)
Net cash (used in) provided by financing activities	(10,797)		(109,239)
Net increase (decrease) in cash, cash equivalents and restricted cash	3,502		(93,861)
Cash, cash equivalents and restricted cash-beginning of period	115,660		210,938
Cash, cash equivalents and restricted cash-end of period	$	119,162	$	117,077


	Six Months Ended June 30,
	2023		2022
Supplemental disclosure of cash flow information:
Cash paid for interest	$	20,933	$	18,725
Cash paid for income taxes	47		23
Supplemental disclosure of non-cash investing and financing activities:
Accrued capital expenditures	$	2,550	$	1,047
Distribution payable	—		34
Exchange of ownership interests in unconsolidated ventures for common stock	13,399		—
Assets acquired under capital lease obligations	25		—

Refer to accompanying notes to consolidated financial statements (unaudited).

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business and Organization

NorthStar Healthcare Income, Inc., together with its consolidated subsidiaries (the “Company”), owns a diversified portfolio of seniors housing properties, including independent living facilities (“ILF”), assisted living (“ALF”) and memory care facilities (“MCF”) located throughout the United States. In addition, the Company also has investments through non-controlling interests in joint ventures in a broader spectrum of healthcare real estate, including seniors housing properties, as well as skilled nursing (“SNF”) and ancillary services businesses, located throughout the United States.

The Company was formed in October 2010 as a Maryland corporation and commenced operations in February 2013. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2013. The Company has conducted its operations, and intends to do so in the future, so as to continue to qualify as a REIT for U.S. federal income tax purposes.

Substantially all of the Company’s business is conducted through NorthStar Healthcare Income Operating Partnership, LP (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The limited partners of the Operating Partnership are NorthStar Healthcare Income Advisor, LLC and NorthStar Healthcare Income OP Holdings, LLC (the “Special Unit Holder”), which became indirect subsidiaries of the Company on June 9, 2023. NorthStar Healthcare Income Advisor, LLC invested $1,000 in the Operating Partnership in exchange for common units and the Special Unit Holder invested $1,000 in the Operating Partnership and was issued a separate class of limited partnership units (the “Special Units”), which were collectively recorded as non-controlling interests on the accompanying consolidated balance sheets prior to June 9, 2023. As the Company issued shares, it contributed substantially all of the proceeds from its continuous, public offerings to the Operating Partnership as a capital contribution. As of June 30, 2023, the Company’s limited partnership interest in the Operating Partnership, directly or indirectly, was 100.0%.

The Company’s charter authorizes the issuance of up to 400.0 million shares of common stock with a par value of $0.01 per share and up to 50.0 million shares of preferred stock with a par value of $0.01 per share. The board of directors of the Company is authorized to amend its charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.

The Company raised $2.0 billion in total gross proceeds from the sale of shares of common stock in its continuous, public offerings (the “Offering”), including $232.6 million pursuant to its distribution reinvestment plan (the “DRP”).

The Internalization

From inception through October 21, 2022, the Company was externally managed by CNI NSHC Advisors, LLC or its predecessor (the “Former Advisor”), an affiliate of NRF Holdco, LLC (the “Former Sponsor”). The Former Advisor was responsible for managing the Company’s operations, subject to the supervision of the Company’s board of directors, pursuant to an advisory agreement. On October 21, 2022, the Company completed the internalization of the Company’s management function (the “Internalization”). In connection with the Internalization, the Company 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.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission on March 27, 2023.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates entities in which it has a controlling financial interest by first considering if an entity meets the definition of a variable interest entity (“VIE”) for which the Company is deemed to be the primary beneficiary or if the Company has the power to control an entity through majority voting interest or other arrangements. All significant intercompany balances are eliminated in consolidation.

Variable Interest Entities

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

The Company evaluates its investments and financings, including investments in unconsolidated ventures and securitization financing transactions to determine whether each investment or financing is a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.

As of June 30, 2023, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.

Consolidated VIEs

The most significant VIEs of the Company are certain entities that are consolidated by the Operating Partnership. These entities are VIEs because of non-controlling interests owned by third parties, which do not have substantive kick-out or participating rights. Included in operating real estate, net and mortgage notes payable, net on the Company’s consolidated balance sheet as of June 30, 2023 is $171.2 million and $172.0 million, respectively, related to such consolidated VIEs.

Unconsolidated VIEs

As of June 30, 2023, the Company identified unconsolidated VIEs related to its investments in unconsolidated ventures with a carrying value of $128.2 million. The Company’s maximum exposure to loss as of June 30, 2023 would not exceed the carrying value of its investment in the VIEs. The Company determined that it is not the primary beneficiary of these VIEs and, accordingly, they are not consolidated in the Company’s financial statements as of June 30, 2023. The Company did not provide financial support to its unconsolidated VIEs during the six months ended June 30, 2023. As of June 30, 2023, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to its unconsolidated VIEs.

Voting Interest Entities

A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its

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economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.

The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.

Investments in Unconsolidated Ventures

A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method or the Company may elect the fair value option.

The Company will account for an investment under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model, in which the investment is recognized based on the cost to the investor, which includes acquisition fees. The Company records as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.

The Company may elect the fair value option of accounting for an investment that would otherwise be accounted for under the equity method. The fair value option election allows an entity to make an irrevocable election of fair value for certain financial assets and liabilities on an instrument-by-instrument basis at the initial or subsequent measurement. The decision to elect the fair value option must be applied to an entire instrument and is irrevocable once elected. Under the fair value option, the Company records its share of the changes to fair value of the investment and any unrealized gains and losses.

On June 30, 2023, the Company elected the fair value option method to account for its investment in the Espresso joint venture, which is included in investments in unconsolidated ventures on the consolidated balance sheets. The Company will record any changes to its investment’s fair value in realized gain (loss) on investments and other in the consolidated statements of operations. The fair value election was made based on the Company’s assessment that the expected return of investment was lower than the Company’s carrying value of its investment in the Espresso joint venture, which resulted in an impairment of $4.7 million and reduced the carrying value of its investment to recoverable fair value of $3.1 million as of June 30, 2023. The Company’s assessment for the recoverability of its investment took into consideration the joint venture’s remaining assets and estimated future cash distributions, less transaction and wind down costs. Refer to Note 4, “Investment in Unconsolidated Ventures” and Note 10, “Fair Value” for further discussion.

Non-controlling Interests

A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and comprehensive income (loss) attributable to controlling and non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions. Any estimates of the effects of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions as reflected and/or discussed in these financial statements are based upon the Company's best estimates using information known to the Company as of the date of this Quarterly Report on Form 10-Q. Such estimates may change and the impact of which could be material.

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Cash, Cash Equivalents and Restricted Cash

The Company considers all highly-liquid investments with an original maturity date of three months or less to be cash equivalents. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash and cash equivalents with major financial institutions and money market funds invested in short-term U.S. government securities. To date, the Company has not experienced any losses on cash and cash equivalents.

Restricted cash consists of amounts related to operating real estate (escrows for taxes, insurance, capital expenditures, security deposits received from residents and payments required under certain lease agreements) and other escrows required by lenders of the Company’s borrowings.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets to the total of such amounts as reported on the consolidated statements of cash flows (dollars in thousands):


	June 30, 2023 (Unaudited)		December 31, 2022
Cash and cash equivalents	$	107,306	$	103,926
Restricted cash	11,856		11,734
Total cash, cash equivalents and restricted cash	$	119,162	$	115,660

Operating Real Estate

Operating real estate is carried at historical cost less accumulated depreciation. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. Ordinary repairs and maintenance are expensed as incurred. Operating real estate is depreciated using the straight-line method over the estimated useful life of the assets, summarized as follows:


Category:						Term:
Building						30 to 50 years
Building improvements						Lesser of the useful life or remaining life of the building
Land improvements						9 to 15 years
Tenant improvements						Lesser of the useful life or remaining term of the lease
Furniture, fixtures and equipment						5 to 14 years

Construction costs incurred in connection with the Company’s investments are capitalized and included in operating real estate, net on the consolidated balance sheets. Construction in progress is not depreciated until the asset is available for its intended use.

Lessee Accounting

A leasing arrangement, a right to control the use of an identified asset for a period of time in exchange for consideration, is classified by the lessee either as a finance lease, which represents a financed purchase of the leased asset, or as an operating lease. For leases with terms greater than 12 months, a lease asset and a lease liability are recognized on the balance sheet at commencement date based on the present value of lease payments over the lease term.

Lease renewal or termination options are included in the lease asset and lease liability only if it is reasonably certain that the option to extend would be exercised or the option to terminate would not be exercised. As the implicit rate in most leases are not readily determinable, the Company’s incremental borrowing rate for each lease at commencement date is used to determine the present value of lease payments. Consideration is given to the Company’s recent debt financing transactions, as well as publicly available data for instruments with similar characteristics, adjusted for the respective lease term, when estimating incremental borrowing rates.

Lease expense is recognized over the lease term based on an effective interest method for finance leases and on a straight-line basis for operating leases.

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Right of Use (“ROU”) - Finance Assets

The Company has entered into finance leases for equipment which are included in operating real estate, net on the Company’s consolidated balance sheets. As of June 30, 2023, furniture, fixtures and equipment under finance leases totaled $0.5 million. The leased equipment is amortized on a straight-line basis. Payments for finance leases totaled $0.1 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively.

The following table presents the future minimum lease payments under finance leases and the present value of the minimum lease payments, which are included in other liabilities on the Company’s consolidated balance sheets (dollars in thousands):


July 1 through December 31, 2023	$	47
Years Ending December 31:
2024	69
2025	38
2026	33
2027	18
Thereafter	10
Total minimum lease payments	$	215
Less: Amount representing interest	(31)
Present value of minimum lease payments	$	184

The weighted average interest rate related to the finance lease obligations is 6.9% with a weighted average lease term of 3.3 years.

As of June 30, 2023, there were no leases that had yet to commence which would create significant rights and obligations to the Company as lessee.

Intangible Assets and Deferred Costs

Deferred Costs

Deferred costs consist of deferred financing costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are recorded against the carrying value of such financing and are amortized to interest expense over the term of the financing using the effective interest method. Unamortized deferred financing costs are expensed to realized gain (loss) on investments and other, when the associated borrowing is repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period in which it is determined that the financing will not occur.

Identified Intangibles

The Company records acquired identified intangibles, such as the value of in-place leases and other intangibles, based on estimated fair value at the acquisition date. The value allocated to the identified intangibles is amortized over the remaining lease term. In-place leases are amortized into depreciation and amortization expense.

Impairment analysis for identified intangible assets is performed in connection with the impairment assessment of the related operating real estate. An impairment establishes a new basis for the identified intangible asset and any impairment loss recognized is not subject to subsequent reversal. Refer to “—Impairment on Operating Real Estate and Investments in Unconsolidated Ventures” for additional information.

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Identified intangible assets are recorded in intangible assets, net on the consolidated balance sheets. Intangible assets relate to the Company’s in-place lease values for the Company’s four net lease properties. The following table presents intangible assets, net (dollars in thousands):


	June 30, 2023 (Unaudited)		December 31, 2022
In-place lease value	$	120,149	$	120,149
Less: Accumulated amortization	(118,064)		(117,896)
Intangible assets, net	$	2,085	$	2,253

The Company recorded $0.1 million and $0.2 million of amortization expense for in-place leases for the three and six months ended June 30, 2023 and 2022, respectively.

The following table presents future amortization of in-place lease value (dollars in thousands):


July 1 through December 31, 2023	$	169
Years Ending December 31:
2024	337
2025	337
2026	337
2027	337
Thereafter	568
Total	$	2,085

Derivative Instruments

The Company uses derivative instruments to manage its interest rate risk. The Company’s derivative instruments are recorded at fair value. The accounting for changes in fair value of derivatives depends upon whether or not the Company has elected to designate the derivative in a hedging relationship and the derivative qualifies for hedge accounting. Under hedge accounting, changes in fair value for derivatives are recorded through other comprehensive income. When hedge accounting is not elected, changes in fair value for derivatives are recorded through the income statement.

The Company has interest rate caps that have not been designated for hedge accounting. The fair value of the Company's interest rate caps totaled $0.5 million and $0.7 million as of June 30, 2023 and December 31, 2022, respectively, and are included in other assets on the consolidated balance sheets. Changes in fair value of derivatives were de minimis for the three months ended June 30, 2023 and 2022 and for the six months ended June 30, 2023 and 2022, totaled a $0.2 million decrease and a $0.3 million increase, respectively. Changes in fair value of derivatives have been recorded in realized gain (loss) on investments and other in the consolidated statements of operations.

Revenue Recognition

Operating Real Estate

Rental income from operating real estate is derived from leasing of space to operators and residents, including rent received from the Company’s net lease properties and rent, ancillary service fees and other related revenue earned from ILF residents. Rental income recognition commences when the operator takes legal possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for rentals and expense reimbursements to be paid in monthly installments. Rental income from leases, which includes community and move-in fees, is recognized over the term of the respective leases. ILF resident agreements are generally short-term in nature and may allow for termination with 30 days’ notice.

The Company also generates revenue from operating healthcare properties. Revenue related to operating healthcare properties includes resident room and care charges, ancillary fees and other resident service charges. Rent is charged and revenue is recognized when such services are provided, generally defined per the resident agreement as of the date upon which a resident occupies a room or uses the services. Resident agreements are generally short-term in nature and may allow for termination with 30 days’ notice. Revenue derived from our ALFs and MCFs is recorded in resident fee income in the consolidated statements of operations.

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Revenue from operators and residents is recognized at lease commencement only to the extent collection is expected to be probable. This assessment is based on several qualitative and quantitative factors, including and as appropriate, the payment history, ability to satisfy its lease obligations, the value of the underlying collateral or deposit, if any, and current economic conditions. If collection is assessed to not be probable, thereafter lease income recognized is limited to amounts collected, with the reversal of any revenue recognized to date in excess of amounts received. If collection is subsequently reassessed to be probable, revenue is adjusted to reflect the amount that would have been recognized had collection always been assessed as probable.

The operator of the Company’s four net lease properties failed to remit contractual monthly rent obligations and the Company deemed it not probable that these obligations will be satisfied in the foreseeable future. On March 27, 2023, the Company entered into a lease forbearance and modification agreement (the “Forbearance Agreement”) with the existing operator, pursuant to which, among other things, the Company will be entitled to receive all cash flow in excess of permitted expenses, and be required to fund any operating deficits, through 2025, subject to the terms and conditions thereof. For the three and six months ended June 30, 2023, the Company received excess cash flow of $0.3 million, which was recorded as rental income.

For the three months ended June 30, 2023 and 2022, total property and other revenues includes variable lease revenue of $3.6 million and $5.5 million, respectively. For the six months ended June 30, 2023 and 2022, total property and other revenue includes variable lease revenue of $7.1 million. Variable lease revenue includes ancillary services provided to operator/residents, as well as non-recurring services and fees at the Company’s operating facilities.

Impairment on Operating Real Estate and Investments in Unconsolidated Ventures

At this time, it is difficult for the Company to assess and estimate the lasting effects of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions. The future economic effects will depend on many factors beyond the Company’s control and knowledge. The resulting effect on impairment of the Company's real estate held for investment and held for sale and investments in unconsolidated ventures may materially differ from the Company's current expectations and further impairment charges may be recorded in future periods.

Operating Real Estate

The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, real estate and healthcare sector conditions, together with asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment loss in the consolidated statements of operations.

Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal cost, with any write-down to disposal cost recorded as an impairment loss. For any increase in fair value less disposal cost subsequent to classification as held for sale, the impairment may be reversed, but only up to the amount of cumulative loss previously recognized.

The Company considered the potential impact of the lasting effects of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions on the future net operating income of its healthcare real estate held for investment as an indicator of impairment. Fair values were estimated based upon the income capitalization approach, using net operating income for each property and applying indicative capitalization rates.

During the six months ended June 30, 2023, the Company recorded impairment losses on its operating real estate totaling $38.7 million, including impairment losses of $38.6 million for five facilities within the Rochester portfolio as a result of revised holding period assumptions. Refer to Note 13, “Subsequent Events” for further discussion. Additionally, the Company recorded impairment losses totaling $0.1 million for a land parcel within the Rochester portfolio as a result of lower estimated market value.

During the six months ended June 30, 2022, the Company recorded impairment losses on its operating real estate totaling $13.0 million. The Company recorded impairment losses of $8.5 million and $3.9 million for facilities in its Winterfell and Rochester portfolios, respectively, as a result of declining operating margins and lower projected future cash flows. In addition, the Company recorded impairment losses totaling $0.6 million for property damage sustained by facilities in its Winterfell portfolio.

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Investments in Unconsolidated Ventures

The Company reviews its investments in unconsolidated ventures on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, the Company considers global macroeconomic factors, including real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred on the Company’s investment in unconsolidated ventures, and is considered to be other than temporary, the loss is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in impairment loss in the consolidated statements of operations.

During the six months ended June 30, 2023, the Company recorded an impairment on its investment in the Espresso joint venture totaling $4.7 million, which reduced the carrying value of its investment to $3.1 million. The Company’s assessment for the recoverability of its investment took into consideration the joint venture’s remaining assets and estimated future cash distributions, less transaction and wind down costs. Upon impairing its investment, the Company elected the fair value option method to account for its investment in the Espresso joint venture on June 30, 2023. During the six months ended June 30, 2022, there was no impairment recorded on any of the Company’s investments in unconsolidated ventures.

The joint ventures underlying the Company’s unconsolidated ventures assess and record impairment and reserves on their respective real estate portfolios, goodwill, and other assets, and the Company recognizes its proportionate share through equity in earnings (losses). During the six months ended June 30, 2023, the Diversified US/UK joint venture recorded impairment losses on its remaining properties, 48 care homes located in the United Kingdom (the “UK Portfolio”), due to, among other things, the extended period contemplated for the UK Portfolio to reach stabilization. The Company’s proportionate share of the impairment losses recorded by the Diversified US/UK portfolio totaled $11.4 million. The Company’s proportionate share of impairment and reserves recognized by the underlying joint ventures of its unconsolidated ventures during the six months ended June 30, 2022 was de minimis.

Credit Losses on Receivables

The current expected credit loss model, in estimating expected credit losses over the life of a financial instrument at the time of origination or acquisition, considers historical loss experiences, current conditions and the effects of reasonable and supportable expectations of changes in future macroeconomic conditions. The Company assesses the estimate of expected credit losses on a quarterly basis or more frequently as necessary. The Company considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The Company measures expected credit losses of receivables on a collective basis when similar risk characteristics exist. If the Company determines that a particular receivable does not share risk characteristics with its other receivables, the Company evaluates the receivable for expected credit losses on an individual basis.

When developing an estimate of expected credit losses on receivables, the Company considers available information relevant to assessing the collectability of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. The Company considers relevant qualitative and quantitative factors that relate to the environment in which the Company operates and are specific to the borrower.

Further, the fair value of the collateral, less estimated costs to sell, may be used when determining the allowance for credit losses for a receivable for which the repayment is expected to be provided substantially through the sale of the collateral when the borrower is experiencing financial difficulty.

As of June 30, 2023, the Company has not recorded an allowance for credit losses on its receivables.

Acquisition Fees and Expenses

The Company recorded an expense for certain acquisition costs and fees associated with transactions deemed to be business combinations in which it consolidated the asset and capitalized these costs for transactions deemed to be acquisitions of an asset, including an equity investment.

Equity-Based Compensation

The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. All fixed equity-based awards to directors, which have no vesting conditions other than

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time of service, are amortized to compensation expense over the awards’ vesting period on a straight-line basis. Equity-based compensation is classified within general and administrative expenses in the consolidated statements of operations.

Income Taxes

The Company elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code beginning in its taxable year ended December 31, 2013. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, gross income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute dividends equal to at least 90.0% of its REIT taxable income (with certain adjustments) to its stockholders and meet certain other requirements. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax and potential interest and penalties, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable. The Company has assessed its tax positions for all open tax years, which include 2018 to 2022, and concluded there were no material uncertainties to be recognized.

The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income.

The Company made a joint election to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”) which may be subject to U.S. federal, state and local income taxes. In general, a TRS of the Company may perform services for managers/operators/residents of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate related business.

Certain subsidiaries of the Company are subject to taxation by federal and state authorities for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by the Company with respect to its interest in the TRS. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in provision for income tax benefit (expense) in the consolidated statements of operations. The Company has a deferred tax asset, which as of June 30, 2023 totaled $15.6 million and continues to have a full valuation allowance recognized, as there are no changes in the facts and circumstances to indicate that the Company should release the valuation allowance.

The Company recorded an income tax expense of approximately $11,000 and $26,000 for the three and six months ended June 30, 2023, respectively. The Company recorded an income tax expense of approximately $15,000 and $30,000 for the three and six months ended June 30, 2022, respectively.

Comprehensive Income (Loss)

The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and other comprehensive income (loss) (“OCI”). The only component of OCI for the Company was foreign currency translation adjustments related to its investment in an unconsolidated venture.

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Foreign Currency

Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment is recorded as a component of accumulated OCI in the consolidated statements of equity.

Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period.

For the period December 31, 2022 through June 9, 2023, the Company had exposure to foreign currency through an investment in an unconsolidated venture, the effects of which were recorded as a component of accumulated OCI in the consolidated statements of equity and in equity in earnings (losses) in the consolidated statements of operations. As of June 30, 2023, the Company is no longer exposed to foreign currency as a result of the Sale of Minority Interests. The Company reclassified the accumulated foreign currency losses, totaling $3.3 million, related to the Diversified US/UK joint venture, previously recorded through other comprehensive income on the consolidated statements of equity to realized gain (loss) on investments and other on the consolidated statements of operations. Refer to Note 4, “Investments in Unconsolidated Ventures” for further discussion.

Recent Accounting Pronouncements

Accounting Standards Adopted in 2023

None.

Future Application of Accounting Standards

Reference Rate Reform—In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance in ASU No. 2020-04 is optional, the election of which provides temporary relief for the accounting effects on contracts, hedging relationships and other transactions impacted by the transition from interbank offered rates (such as London Interbank Offered Rate (“LIBOR”)) to alternative reference rates (such as Secured Overnight Financing Rate (“SOFR”)). Modification of contractual terms to effect the reference rate reform transition on debt, leases, derivatives and other contracts is eligible for relief from modification accounting and accounted for as a continuation of the existing contract. ASU No. 2020-04 is effective upon issuance through December 31, 2022, and may be applied retrospectively to January 1, 2020. The Company may elect practical expedients or exceptions as applicable over time as reference rate reform activities occur.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The guidance amends the scope of the recent reference rate reform guidance issued in ASU No. 2020-04. New optional expedients allow derivative instruments impacted by changes in the interest rate used for margining, discounting, or contract price alignment to qualify for certain optional relief. The guidance was effective immediately and may be applied retrospectively to January 1, 2020.

In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The guidance defers the sunset date of ASU No. 2020-04 from December 31, 2022 to December 31, 2024. The Company continues to evaluate the impact of the guidance and may elect practical expedients or exceptions as applicable over time as reference rate reform activities occur. The Company does not anticipate the application of the accounting standards will have a material impact on the Company’s financial statements.

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3. Operating Real Estate

The following table presents operating real estate, net (dollars in thousands):


	June 30, 2023 (Unaudited)		December 31, 2022
Land	$	121,424	$	121,518
Land improvements	19,459		18,945
Buildings and improvements	929,810		957,924
Tenant improvements	372		372
Construction in progress	2,411		6,736
Furniture, fixtures and equipment	98,000		91,058
Subtotal	$	1,171,476	$	1,196,553
Less: Accumulated depreciation	(282,792)		(263,551)
Operating real estate, net	$	888,684	$	933,002

For the three and six months ended June 30, 2023, depreciation expense was $9.7 million and $19.3 million, respectively. For the three and six months ended June 30, 2022, depreciation expense was $9.5 million and $19.3 million, respectively.

Within the table above, operating real estate has been reduced by accumulated impairment losses of $220.2 million and $181.5 million as of June 30, 2023 and December 31, 2022, respectively. Impairment losses on the Company’s operating real estate totaled $38.7 million and $13.0 million for the six months ended June 30, 2023 and 2022, respectively, and are recorded in impairment losses on the consolidated statements of operations. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion.

4. Investments in Unconsolidated Ventures

The Company’s investments in unconsolidated ventures are accounted for under the equity method or fair value option. The following table presents the Company’s investments in unconsolidated ventures (dollars in thousands):


				Carrying Value
Portfolio	Acquisition Date	Ownership		June 30, 2023 (Unaudited)		December 31, 2022
Trilogy(1)	Dec-2015	23.2	%	$	124,816	$	128,884
Espresso(2)	Jul-2015	36.7	%	3,075		18,019
Solstice(3)	Jul-2017	20.0	%	262		323
Investments sold(4)				—		29,276


Investments in Unconsolidated Ventures				$	128,153	$	176,502

_______________________________________

(1)The carrying value for the Company’s investment in the Trilogy joint venture includes $9.8 million of capitalized acquisition costs.

(2)During the three months ended June 30, 2023, the Company recorded an impairment of $4.7 million to reflect the fair value of its investment in the Espresso joint venture, based on the estimated cash distributions to be received from the joint venture. Based on the Company’s assessment, it elected the fair value option method to account for its investment in the Espresso join venture on June 30, 2023.

(3)Represents the Company’s investment in Solstice Senior Living, LLC (“Solstice”), the manager of the Winterfell portfolio. Solstice is a joint venture between affiliates of Integral Senior Living, LLC (“ISL”), a management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and the Company, which owns 20.0%.

(4)In June 2023, the Company sold its ownership interests in the Diversified US/UK and Eclipse joint ventures.

Sale of Minority Interests

In June 2023, the Company sold its 14% interest in Healthcare GA Holdings, General Partnership, which indirectly owned 48 care homes across the United Kingdom (the “Diversified US/UK Portfolio”), and its 6% interest in Eclipse Health, General Partnership, which indirectly owned 34 seniors housing facilities (the “Eclipse Portfolio”), together with $1.1 million in cash, to its Former Sponsor, who is affiliated with the majority partner of each joint venture, for all of the Company’s equity securities held by the Former Sponsor and its affiliates, including 9,709,553 shares of common stock of the Company, 100 common units in the Operating Partnership and 100 special units in the Operating Partnership (the “Sale of Minority Interests”).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the results of the Company’s investment in unconsolidated ventures (dollars in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
		2023	2022				2023				2022
Portfolio			Equity in Earnings (Losses)		Cash Distribution		Equity in Earnings (Losses)		Cash Distribution		Equity in Earnings (Losses)		Cash Distribution		Equity in Earnings (Losses)		Cash Distribution
Trilogy			$	909	$	2,334	$	2,678	$	2,299	$	600	$	4,668	$	4,705	$	4,600
Espresso(1)			9,119		19,444		31,999		28,788		9,228		19,444		33,953		30,988
Solstice			(31)		—		(22)		—		(60)		—		(58)		—
Investments sold(2)			(12,543)		—		(602)		—		(16,236)		—		(2,045)		2,552


Total			$	(2,546)	$	21,778	$	34,053	$	31,087	$	(6,468)	$	24,112	$	36,555	$	38,140

_______________________________________

(1)The Espresso joint venture recognized net gains related to sub-portfolio sales, of which the Company’s proportionate share totaled $9.2 million for the three and six months ended June 30, 2023 and $31.2 million and $32.0 million for the three and six months ended June 30, 2022, respectively. The Company was distributed its proportionate share of the net proceeds generated from the sales during the six months ended June 30, 2023 and 2022, totaling $17.3 million and $27.4 million, respectively.

(2)The Diversified US/UK joint venture recognized impairment, of which the Company’s proportionate share totaled $11.4 million and is included in equity in earnings (losses) for the three and six months ended June 30, 2023.

5. Borrowings

The following table presents the Company’s mortgage notes payable (dollars in thousands):


				June 30, 2023 (Unaudited)				December 31, 2022
	Recourse vs. Non-Recourse(1)	Initial Maturity	Contractual Interest Rate(2)	Principal Amount(3)		Carrying Value(3)		Principal Amount(3)		Carrying Value(3)

Aqua Portfolio
Frisco, TX(4)	Non-recourse	Feb 2026	3.0%	$	26,000	$	25,626	$	26,000	$	25,560
Milford, OH	Non-recourse	Sep 2026	LIBOR + 2.68%	18,248		18,068		18,336		18,126
Rochester Portfolio
Rochester, NY	Non-recourse	Feb 2025	4.25%	17,842		17,807		18,206		18,165
Rochester, NY(5)	Non-recourse	Aug 2027	LIBOR + 2.34%	99,786		99,241		100,651		100,042
Rochester, NY(6)	Non-recourse	Aug 2023	SOFR + 2.93%	11,242		11,239		11,336		11,315
Arbors Portfolio(7)
Various locations	Non-recourse	Feb 2025	3.99%	82,415		82,137		83,423		83,051
Winterfell Portfolio(8)
Various locations	Non-recourse	Jun 2025	4.17%	589,974		583,524		596,408		588,306
Avamere Portfolio(9)
Various locations	Non-recourse	Feb 2027	4.66%	67,346		67,072		67,995		67,683
Mortgage notes payable, net				$	912,853	$	904,714	$	922,355	$	912,248

_______________________________________

(1)Subject to non-recourse carve-outs.

(2)Floating-rate borrowings total $129.3 million of principal outstanding and reference one-month LIBOR and one-month SOFR.

(3)The difference between principal amount and carrying value of mortgage notes payable is attributable to deferred financing costs, net for all borrowings, other than the Winterfell portfolio which is attributable to below market debt intangibles.

(4)The mortgage note carries a fixed interest rate of 3.0% through February 2024, followed by one-month adjusted SOFR, plus 2.80% through the initial maturity date of February 2026.

(5)Composed of seven individual mortgage notes payable secured by seven healthcare real estate properties, cross-collateralized and subject to cross-default.

(6)In July 2023, the Company exercised an extension option to the maturity date one additional year from August 2023 to August 2024. Refer to Note 13, “Subsequent Events” for additional information regarding the extension.

(7)Composed of four individual mortgage notes payable secured by four healthcare real estate properties, cross-collateralized and subject to cross-default.

(8)Composed of 32 individual mortgage notes payable secured by 32 healthcare real estate properties, cross-collateralized and subject to cross-default.

(9)Composed of five individual mortgage notes payable secured by five healthcare real estate properties, cross-collateralized and subject to cross-default.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents future scheduled principal payments on mortgage notes payable based on initial maturity as of June 30, 2023 (dollars in thousands):


July 1 through December 31, 2023	$	20,754
Years Ending December 31:
2024	19,612
2025	669,466
2026	46,876
2027	156,145

Total	$	912,853

Beginning in February 2021, the operator of the four net lease properties in the Arbors portfolio was unable to satisfy its obligations under its leases and began remitting rent based on its available cash after satisfying property-level expenses, which resulted in a default under the mortgage notes collateralized by the properties. On March 27, 2023, with consent of the lender, the Company entered into a Forbearance Agreement relating to these defaults. During the six months ended June 30, 2023, the Company remitted contractual debt service and is in compliance with the other contractual terms under the mortgage notes collateralized by the properties.

In July 2023, the Company elected not to pay debt service on mortgage notes with an aggregate principal amount outstanding of $99.8 million as of June 30, 2023. The mortgage notes are cross-defaulted and cross-collateralized by seven properties within the Rochester portfolio that have experienced continued negative cash flow. As a result, on July 26, 2023, the Company received a notice from the lender accelerating the outstanding principal and reserving all rights and remedies under the applicable loan documents. Refer to Note 13, “Subsequent Events” for additional information.

6. Related Party Arrangements

Former Advisor

In connection with the Internalization, the advisory agreement was terminated on October 21, 2022. Prior to the Internalization, the Former Advisor was responsible for managing the Company’s affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on behalf of the Company. For such services, to the extent permitted by law and regulations, the Former Advisor received fees and reimbursements from the Company. Pursuant to the advisory agreement, the Former Advisor could defer or waive fees in its discretion.

Transition Services

In connection with the Internalization, on October 21, 2022, the Company, the Operating Partnership and the Former Advisor entered into a Transition Services Agreement (the “TSA”) to facilitate an orderly transition of the Company’s management of its operations. The TSA, as amended on March 22, 2023, provides for, among other things, the Former Advisor to provide certain services, including primarily technology and insurance, for a transition period of up to six months following the Internalization, with legal, treasury and accounts payable services to continue until the Company terminates these services or in other specified circumstances in accordance with the TSA. The Company will reimburse the Former Advisor for costs to provide the services, including the allocated cost of employee wages and compensation and incurred out-of-pocket expenses.

Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred and paid to the Former Advisor (dollars in thousands):


Reimbursements to Former Advisor Entities		Due to Related Party as of December 31, 2022		Six Months Ended June 30, 2023					Due to Related Party as of June 30, 2023 (Unaudited)
	Financial Statement Location			Incurred			Paid

Operating costs	General and administrative expenses/ Transaction costs	$	469	$	315	(1)	$	(501)	$	283

_______________________________________

(1)Represents costs incurred under the TSA during the six months ended June 30, 2023.

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(Unaudited)

Incentive Fee

The Special Unit Holder, formerly an affiliate of the Former Advisor, was entitled to receive distributions equal to 15.0% of net cash flows of the Company, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 6.75% cumulative, non-compounded annual pre-tax return on such invested capital. From inception through the date of the Sale of Minority Interests, the Special Unit Holder did not receive any incentive fees from the Company.

In connection with the Sale of Minority Interests, as of June 9, 2023, the Special Unit Holder became an indirect subsidiary of the Company, though the Special Unit Holder continues to have a contractual obligation to pay any such incentive fees to affiliates of the Former Sponsor, if ever earned.

Investments in Joint Ventures

Solstice, the manager of the Winterfell portfolio, is a joint venture between affiliates of ISL, which owns 80.0%, and the Company, which owns 20.0%. For the six months ended June 30, 2023, the Company recognized property management fee expense of $3.1 million paid to Solstice related to the Winterfell portfolio.

In June 2023, the Company completed the Sale of Minority Interests, involving the sale of its minority interests in the Diversified US/UK and Eclipse Portfolios, together with $1.1 million in cash, to its Former Sponsor, who is affiliated with the majority partner of each joint venture, for all of the Company’s equity securities held by the Former Sponsor and its affiliates. Refer to Note 4, “Investments in Unconsolidated Ventures” for further discussion of the Sale of Minority Interests.

7. Equity-Based Compensation

The Company adopted a long-term incentive plan, as amended (the “Plan”), which it may use to attract and retain qualified officers, directors, employees and consultants, as well as an independent directors compensation plan, which is a component of the Plan. Under the Plan, 2.0 million shares of restricted common stock were eligible to be issued for any equity-based awards granted under the Plan.

Pursuant to the Plan, as of June 30, 2023, the Company’s independent directors were granted a total of 159,932 shares of restricted common stock and 203,742 restricted stock units totaling $1.3 million and $0.7 million, respectively, based on the share price on the date of each grant.

The restricted common stock and restricted stock units granted generally vest quarterly over two years in equal installments and will become fully vested on the earlier occurrence of: (i) the termination of the independent director’s service as a director due to his or her death or disability; or (ii) a change in control of the Company. The restricted stock units are convertible, on a one-for-one basis, into shares of the Company’s common stock upon the earlier occurrence of: (i) the termination of the independent director’s service as a director; or (ii) a change in control of the Company.

The Company recognized equity-based compensation expense of $56,875 and $45,667 for the three months ended June 30, 2023 and 2022, respectively, and $113,750 and $93,167 for the six months ended June 30, 2023 and 2022, respectively. Equity-based compensation expense is recorded in general and administrative expenses in the consolidated statements of operations.

Unrecognized expense related to unvested restricted stock units totaled $352,500 and $211,250 as of June 30, 2023 and December 31, 2022, respectively. Unvested restricted stock units totaled 111,966 and 54,114 as of June 30, 2023 and December 31, 2022, respectively. As of December 31, 2022, the Company’s shares of restricted common stock were fully vested.

8. Stockholders’ Equity

Common Stock

The Company stopped accepting subscriptions for its Offering on December 17, 2015 and all of the shares initially registered for its Offering were issued on or before January 19, 2016. The Company issued 173.4 million shares of common stock generating gross proceeds of $1.7 billion, excluding proceeds from the DRP.

Distribution Reinvestment Plan

The Company adopted the DRP through which common stockholders were able to elect to reinvest an amount equal to the distributions declared on their shares in additional shares of the Company’s common stock in lieu of receiving cash distributions.

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(Unaudited)

Since inception, the Company issued 25.7 million shares of common stock, generating gross offering proceeds of $232.6 million pursuant to the DRP. No selling commissions or dealer manager fees were paid on shares issued pursuant to the DRP. The board of directors of the Company may amend, suspend or terminate the DRP for any reason upon ten-days’ notice to participants, except that the Company may not amend the DRP to eliminate a participant’s ability to withdraw from the DRP. In April 2022, the Company’s board of directors elected to suspend the DRP, effective April 30, 2022.

Distributions

Effective February 1, 2019, the Company’s board of directors determined to suspend recurring distributions in order to preserve capital and liquidity.

On April 20, 2022, the Company’s board of directors declared a special distribution of $0.50 per share (the “Special Distribution”) for each stockholder of record on May 2, 2022 totaling approximately $97.0 million.

In order to continue to qualify as a REIT, the Company must distribute annually dividends equal to at least 90% of its REIT taxable income (with certain adjustments). The Company did not have REIT taxable income for its taxable year ending December 31, 2022, therefore, it was not required to make distributions to its stockholders in 2022 to qualify as a REIT. The Company’s most recently filed tax return is for the year ended December 31, 2021 and includes a net operating loss carry-forward of $226.5 million.

Share Repurchase Program

The Company adopted the share repurchase program (the “Share Repurchase Program”) that enabled stockholders to sell their shares to the Company in limited circumstances. The Company is not obligated to repurchase shares under the Share Repurchase Program. The Company may amend, suspend or terminate the Share Repurchase Program at its discretion at any time, subject to certain notice requirements.

In April 2020, the Company’s board of directors determined to suspend all repurchases under the Share Repurchase Program effective April 30, 2020 in order to preserve capital and liquidity.

The Company previously funded repurchase requests with cash on hand, borrowings or other available capital.

Retirement of Shares

In connection with the Sale of Minority Interests, the Company acquired 9.7 million shares of its common stock in exchange for its minority interests in the Diversified US/UK and Eclipse Portfolios from its Former Sponsor, who is affiliated with the majority partner of each joint venture. Upon completion of the Sale of Minority Interests, the Company retired all of the shares of common stock acquired.

To account for the acquisition and retirement of the common stock, the Company estimated the value of its minority interests in the Diversified US/UK and Eclipse Portfolios based on a variety of factors, including historical and projected revenues, market lease rates, the partners’ respective rights under the joint venture agreements, independent third-party appraisals obtained by the joint ventures and other factors deemed relevant. The Company determined the estimated value of minority interests to be approximately $12.5 million at the time of transaction. The estimated value, together with the $1.1 million of cash consideration, net of closing costs, is presented on the consolidated statements of equity as retirement of common stock.

9. Non-controlling Interests

Operating Partnership

Non-controlling interests included the aggregate limited partnership interests in the Operating Partnership held by limited partners, other than the Company. Income (loss) attributable to the non-controlling interests was based on the limited partners’ ownership percentage of the Operating Partnership. As a result of the Sale of Minority Interests, the Company’s limited partnership interest in the Operating Partnership, directly or indirectly, is 100.0% as of June 30, 2023. Income (loss) allocated to the Operating Partnership non-controlling interests for the period prior to June 9, 2023 were de minimis.

Other

Other non-controlling interests represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net loss attributable to the other non-controlling interests was $1.2 million and $1.3 million for the three and six months ended June 30, 2023, respectively, and $0.2 million for the three and six months ended June 30, 2022.

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(Unaudited)

10. Fair Value

Fair Value Measurement

The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.Quoted prices for identical assets or liabilities in an active market.

Level 2.Financial assets and liabilities whose values are based on the following:

a)Quoted prices for similar assets or liabilities in active markets.

b)Quoted prices for identical or similar assets or liabilities in non-active markets.

c)Pricing models whose inputs are observable for substantially the full term of the asset or liability.

d)Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3.Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Derivative Instruments

Derivative instruments consist of interest rate contracts and foreign exchange contracts that are generally traded over-the-counter, and are valued using a third-party service provider. Quotations on over-the counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. Although credit valuation adjustments, such as the risk of default, rely on Level 3 inputs, these inputs are not significant to the overall valuation of its derivatives. As a result, derivative valuations in their entirety are classified as Level 2 of the fair value hierarchy.

Fair Value Hierarchy

Financial assets recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents financial assets that were accounted for at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 by level within the fair value hierarchy (dollars in thousands):


	June 30, 2023 (Unaudited)						December 31, 2022
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial assets:
Derivative assets - interest rate caps	$	—	$	472	$	—	$	—	$	652	$	—
Investment in Espresso joint venture(1)	—		—		3,075		—		—		—

_______________________________________

(1)The Company elected the fair value option method to account for its investment in the Espresso joint venture on June 30, 2023. As of December 31, 2022, the investment was accounted for under the equity method.

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities (dollars in thousands):


	June 30, 2023 (Unaudited)						December 31, 2022
	Principal Amount		Carrying Value		Fair Value		Principal Amount		Carrying Value		Fair Value
Financial liabilities:(1)
Mortgage notes payable, net	$	912,853	$	904,714	$	842,487	$	922,355	$	912,248	$	882,754

_______________________________________

(1)The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

Mortgage Notes Payable

The Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury and LIBOR or SOFR rates as of the end of the reporting period. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.

Nonrecurring Fair Values

The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for sale or otherwise, write-down of asset values due to impairment.

The following table summarizes the fair value and impairment losses of Level 3 assets which have been measured at fair value on a nonrecurring basis at the time of impairment during the periods presented (dollars in thousands):


	Six Months Ended				Year Ended
	June 30, 2023 (Unaudited)				December 31, 2022
	Fair Value		Impairment Losses		Fair Value		Impairment Losses
Operating real estate, net(1)	$	41,496	$	38,694	$	80,931	$	30,900
Investments in unconsolidated ventures	3,075		4,728		28,442		13,419

_______________________________________

(1)During the year ended December 31, 2022, the Company recorded impairment losses totaling $1.0 million for property damage sustained by facilities in its Winterfell and Avamere portfolios. The fair value and impairment losses of these facilities are excluded from the table.

Operating Real Estate, Net

Operating real estate that is impaired is carried at fair value at the time of impairment. Impairment was driven by various factors that impacted undiscounted future net cash flows, including declines in operating performance, market growth assumptions and expected margins to be generated by the properties. Fair value of impaired operating real estate was estimated based upon various approaches including discounted cash flow analysis using terminal capitalization rates ranging from 6.00% to 8.50% and discount rates ranging from 8.5% to 10.5%, third party appraisals and offer prices.

Investments in Unconsolidated Ventures

During the three months ended June 30, 2023, the Company recorded impairment on its investment in the Espresso joint venture, which totaled $4.7 million and reduced the carrying value of its investment to $3.1 million as of June 30, 2023. The Company’s assessment for the recoverability of its investment took into consideration the joint venture’s remaining assets and estimated future cash distributions, less transaction and wind down costs. Upon impairing its investment, the Company elected the fair value option method to account for its investment in the Espresso joint venture on June 30, 2023.

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(Unaudited)

During the year ended December 31, 2022, the Company recorded impairment on its investment in the Diversified US/UK joint venture, which totaled $13.4 million and reduced the carrying value of its investment to $28.4 million as of December 31, 2022. The Company’s assessment for the recoverability of its investment took into consideration the joint venture’s post-COVID-19 underperformance, rising interest rates and the joint venture’s ability to continue to service debt collateralized by substantially all of its domestically-located healthcare real estate. Fair value of the joint venture’s underlying operating real estate was estimated based upon various approaches including discounted cash flow analysis, using terminal capitalization rates ranging from 6.6% to 12.5% and discount rates ranging from 8.8% to 16.0%, and offer prices.

11. Segment Reporting

The Company conducts its business through the following segments, which are based on how management reviews and manages its business.

•Direct Investments - Operating - Properties operated pursuant to management agreements with healthcare managers.

•Direct Investments - Net Lease - Properties operated under net leases with an operator.

•Unconsolidated Investments - Joint ventures, including properties operated under net leases with operators or pursuant to management agreements with healthcare managers, in which the Company owns a minority interest.

•Corporate - The corporate segment includes corporate level asset management fees - related party and general and administrative expenses.

The Company primarily generates rental and resident fee income from its direct investments. Additionally, the Company reports its proportionate interest of revenues and expenses from unconsolidated investments through equity in earnings (losses) of unconsolidated ventures.

The following tables present segment reporting (dollars in thousands):


	Direct Investments
Three Months Ended June 30, 2023	Net Lease		Operating		Unconsolidated Investments		Corporate		Total
Property and other revenues	$	341	$	50,066	$	—	$	1,096	$	51,503

Property operating expenses	—		(35,026)		—		—		(35,026)
Interest expense	(880)		(10,654)		—		—		(11,534)


General and administrative expenses	—		(525)		—		(3,068)		(3,593)
Depreciation and amortization	(729)		(9,079)		—		—		(9,808)
Impairment loss	—		(38,694)		(4,728)		—		(43,422)
Other income, net	—		70		—		—		70
Realized gain (loss) on investments and other	—		(49)		(4,598)		—		(4,647)
Equity in earnings (losses) of unconsolidated ventures	—		—		(2,546)		—		(2,546)
Income tax expense	—		(11)		—		—		(11)
Net income (loss)	$	(1,268)	$	(43,902)	$	(11,872)	$	(1,972)	$	(59,014)

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(Unaudited)


	Direct Investments
Three Months Ended June 30, 2022	Net Lease		Operating		Unconsolidated Investments		Corporate(1)		Total
Property and other revenues	$	247	$	44,988	$	—	$	139	$	45,374

Property operating expenses	(11)		(33,219)		—		—		(33,230)
Interest expense	(903)		(9,651)		—		—		(10,554)

Asset management fees - related party	—		—		—		(2,457)		(2,457)
General and administrative expenses	—		(17)		—		(3,738)		(3,755)
Depreciation and amortization	(868)		(8,672)		—		—		(9,540)
Impairment loss	—		(13,002)		—		—		(13,002)
Other income, net	—		5		—		—		5
Realized gain (loss) on investments and other	(206)		(46)		—		—		(252)
Equity in earnings (losses) of unconsolidated ventures	—		—		34,053		—		34,053
Income tax expense	—		(15)		—		—		(15)
Net income (loss)	$	(1,741)	$	(19,629)	$	34,053	$	(6,056)	$	6,627


	Direct Investments
Six Months Ended June 30, 2023	Net Lease		Operating		Unconsolidated Investments		Corporate		Total
Property and other revenues	$	341	$	98,915	$	—	$	1,815	$	101,071

Property operating expenses	—		(70,103)		—		—		(70,103)
Interest expense	(1,755)		(21,138)		—		—		(22,893)
Transaction costs	—		—		—		(97)		(97)

General and administrative expenses	—		(525)		—		(6,978)		(7,503)
Depreciation and amortization	(1,458)		(17,999)		—		—		(19,457)
Impairment loss	—		(38,694)		(4,728)		—		(43,422)
Other income, net	—		202		—		—		202
Realized gain (loss) on investments and other	—		283		(4,598)		—		(4,315)
Equity in earnings (losses) of unconsolidated ventures	—		—		(6,468)		—		(6,468)
Income tax expense	—		(26)		—		—		(26)
Net income (loss)	$	(2,872)	$	(49,085)	$	(15,794)	$	(5,260)	$	(73,011)


	Direct Investments
Six Months Ended June 30, 2022	Net Lease		Operating		Unconsolidated Investments		Corporate		Total
Property and other revenues	$	496	$	88,053	$	—	$	157	$	88,706

Property operating expenses	(35)		(66,089)		—		—		(66,124)
Interest expense	(1,801)		(19,062)		—		—		(20,863)

Asset management fees - related party	—		—		—		(5,104)		(5,104)
General and administrative expenses	—		(17)		—		(7,424)		(7,441)
Depreciation and amortization	(1,731)		(17,732)		—		—		(19,463)
Impairment loss	—		(13,002)		—		—		(13,002)
Other income, net	—		77		—		—		77
Realized gain (loss) on investments and other	(206)		295		246		—		335
Equity in earnings (losses) of unconsolidated ventures	—		—		36,555		—		36,555
Income tax expense	—		(30)		—		—		(30)
Net income (loss)	$	(3,277)	$	(27,507)	$	36,801	$	(12,371)	$	(6,354)

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents total assets by segment (dollars in thousands):


	Direct Investments
Total Assets:	Net Lease		Operating		Unconsolidated Investments		Corporate(1)		Total
June 30, 2023 (Unaudited)	$	81,351	$	834,230	$	128,153	$	101,906	$	1,145,640
December 31, 2022	83,435		884,137		176,502		93,761		1,237,835

______________________________________

(1)Represents primarily corporate cash and cash equivalents balances.

The following table presents the operators and managers of the Company’s properties, excluding properties owned through unconsolidated joint ventures (dollars in thousands):


	As of June 30, 2023		Six Months Ended June 30, 2023
Operator / Manager	Properties Under Management	Units Under Management(1)	Property and Other Revenues(2)		% of Total Property and Other Revenues
Solstice Senior Living(3)	32	3,970	$	61,938	61.3	%
Watermark Retirement Communities	14	1,782	23,781		23.6	%
Avamere Health Services	5	453	10,739		10.6	%
Integral Senior Living	1	40	2,458		2.4	%
Arcadia Management(4)	4	572	341		0.3	%
Other(5)	—	—	1,814		1.8	%
Total	56	6,817	$	101,071	100.0	%

______________________________________

(1)Represents rooms for ALFs, ILFs and MCFs, based on predominant type.

(2)Includes rental income received from the Company’s net lease properties as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from the Company’s ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges.

(3)Solstice is a joint venture of which affiliates of ISL own 80%.

(4)During the six months ended June 30, 2023, the Company recorded rental income to the extent payments were received.

(5)Consists primarily of interest income earned on corporate-level cash and cash equivalents.

12. Commitments and Contingencies

As of June 30, 2023, the Company believes there are no material unrecorded contingencies that would affect its results of operations, cash flows or financial position.

Litigation and Claims

The Company may be involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, any current legal proceedings are not expected to have a material adverse effect on its financial position or results of operations.

The Company’s operators and managers may be involved in various litigation matters arising in the ordinary course of their business. The unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect such operators’ or managers’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to the Company, which, in turn, could have a material adverse effect on the Company.

As of June 30, 2023, the Company accrued a reserve of $0.6 million, inclusive of legal fees, relating to a resolution of claims against a manager of one of the Company’s direct operating investments, for which the Company has indemnification obligations under the management agreement.

Environmental Matters

The Company follows a policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its consolidated financial position, results of operations or cash flows. Further, the Company is not aware of any material environmental liability or any unasserted

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

claim or assessment with respect to an environmental liability that it believes would require additional disclosure or the recording of a loss contingency.

General Uninsured Losses

The Company obtains various types of insurance to mitigate the impact of professional liability, property, business interruption, liability, flood, windstorm, earthquake, environmental and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. Disruptions in insurance markets may increase the costs of coverage and result in the Company retaining more risk, to the extent it is more commercially reasonable to do so. In addition, there are also certain types of extraordinary losses, such as those due to acts of war or other events, that may be either uninsurable or not economically insurable.

Other

Other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business, as well as commitments to fund capital expenditures for certain net lease properties. These commitments do not have a required minimum funding and are limited by agreed upon maximum annual funding amounts.

13. Subsequent Events

The following is a discussion of material events which have occurred subsequent to June 30, 2023 through the issuance of the consolidated financial statements.

Rochester Loan Default

In July 2023, the Company did not pay debt service on the debt underlying seven properties within the Rochester portfolio, which are cross-defaulted and cross-collateralized, with an aggregate principal amount outstanding of $99.8 million as of June 30, 2023 (the “Rochester Sub-Portfolio Loan”). The Rochester Sub-Portfolio Loan is non-recourse to the Company, subject to limited customary exceptions. As a result of the payment default, on July 26, 2023, the Company received a notice of acceleration of the outstanding principal balance of the Rochester Sub-Portfolio Loan, pursuant to which the lender reserves all rights and remedies under the applicable loan documents, including a potential foreclosure and/or receivership proceeding. The Company is in an active dialogue with the lender to ensure orderly operation of the properties in the interim and to facilitate an optimal resolution for the Company, which may include a voluntary transfer of the assets in lieu of foreclosure and/or receivership, among other things.

Borrowings

In July 2023, the Company exercised its option to extend the maturity date of a mortgage note payable collateralized by a property within the Rochester portfolio from August 2023 to August 2024 and made a $0.3 million principal repayment toward the outstanding principal balance.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part I, Item 1. “Financial Statements” and the risk factors in Part II, Item 1A. “Risk Factors.” References to “we,” “us,” “our,” or “NorthStar Healthcare” refer to NorthStar Healthcare Income, Inc. and its subsidiaries unless the 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. In addition, we have investments through non-controlling interests in joint ventures in a broader spectrum of healthcare real estate, including seniors housing properties, as well as, skilled nursing facilities, or SNFs, and ancillary services businesses, 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 Internal Revenue 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 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 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 and arranged for the Former Advisor to continue to provide certain services for a transition period.

Business Update

Transaction and Financing Activities

•In June 2023, we sold our minority interests in the Healthcare GA Holdings, General Partnership, which indirectly owned 48 care homes across the United Kingdom, or the Diversified US/UK Portfolio, and the Eclipse Health, General Partnership, which indirectly owned 34 seniors housing facilities, or the Eclipse Portfolio, together with $1.1 million in cash, to our Former Sponsor, who is affiliated with the majority partner of each joint venture, for all of the equity held by the Former Sponsor and its affiliates, including 9,709,553 shares of our common stock, 100 common units in the Operating Partnership and 100 special units in the Operating Partnership, or the Sale of Minority Interests. Upon completion of the Sale of Minority Interests, we retired all of the shares of our common stock acquired. With this Sale of Minority Interests, we were able to strategically exit two minority positions in joint ventures experiencing significant distress, where we had limited ability to control outcomes and a lack of alignment with the majority partner, through a transaction that we believe creates additional value for our remaining shareholders.

•In April 2023, the Espresso joint venture completed the sale of 10 properties, the first of two scheduled sale closings for its remaining sub-portfolio, which generated net proceeds, of which our proportionate share totaled $17.3 million. The final sale is scheduled to close during the third quarter of 2023, though there can be no assurance that the transaction will close on this timeframe or at all.

•In July 2023, we determined not to pay our July debt service on cross-defaulted and cross-collateralized mortgage notes with an aggregate principal amount outstanding of $99.8 million, or the Rochester Sub-Portfolio Loan, in light of the continued negative cash flow generated by the seven collateral properties within the Rochester portfolio, or the Rochester Sub-Portfolio. The Rochester Sub-Portfolio Loan is non-recourse to us, subject to limited customary exceptions which we do not believe are applicable. As a result of the payment default, we received a notice of acceleration of the Rochester Sub-Portfolio Loan, pursuant to which the lender reserves all rights and remedies under the applicable loan documents, including a potential foreclosure and/or receivership proceeding. We are in an active dialogue with the lender to ensure orderly operation of the properties in the interim and to facilitate an optimal resolution for us, which may include a voluntary transfer of the assets in lieu of foreclosure and/or receivership, among other things.

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•In July 2023, we exercised our option to extend the maturity date of a mortgage note payable collateralized by a property within the Rochester portfolio from August 2023 to August 2024 and made a $0.3 million principal repayment toward the outstanding principal balance.

Operating Performance

Our occupancy has recovered to pre-pandemic levels, driven by supply-demand fundamentals in the industry overall and specifically by our investment of capital to enhance our facilities, which has led to increases in revenues. However, operating costs remained elevated as a result of macroeconomic trends, including increases in labor costs and historically low unemployment, inflation and rising interest rates, as well as increased health and safety measures. Increased labor costs and a shortage of available skilled and unskilled workers has, and may continue to increase the cost of staffing at our facilities. We have offset increased labor and inflation with increased rates charged to residents, but continuing to do so may result in a decline in occupancy and revenues. Increases in interest rates may help ease inflation and our operating costs, but have increased our debt service obligations on our variable rate debt and may create the possibility of slowing economic growth.

The following is a summary of the performance of our investment segments for the three months ended June 30, 2023 as compared to the three months ended March 31, 2023. For additional information on financial results, refer to “—Results of Operations.”

Direct Investments - Operating

The average quarterly occupancy of our facilities improved 0.3% to 85.1% for the second quarter of 2023, while the quarterly occupancy for the seniors housing industry averaged 83.7% for the same period. The average industry occupancy remains 3.4% below its pre-pandemic level of 87.1% in the first quarter of 2020 (source: The National Investment Centers for Seniors Housing & Care Map Top 31 Primary Metropolitan Markets).

A summary of average occupancy of our direct operating investments by property manager is as follows:


	Average Monthly Occupancy						Average Quarterly Occupancy
Manager	June 2023		March 2023		Variance		Q2 2023		Q1 2023		Variance
Solstice Senior Living	87.6	%	86.5	%	1.1	%	87.4	%	86.7	%	0.7	%
Watermark Retirement Communities	79.3	%	78.9	%	0.4	%	78.9	%	79.0	%	(0.1)	%
Avamere Health Services	88.1	%	89.8	%	(1.7)	%	88.7	%	89.8	%	(1.1)	%
Integral Senior Living	86.9	%	87.6	%	(0.7)	%	84.5	%	93.7	%	(9.2)	%
Direct Investments - Operating	85.2	%	84.6	%	0.6	%	85.1	%	84.8	%	0.3	%

The following table is a summary of the operating performance at our direct operating investments for the three months ended June 30, 2023 and March 31, 2023 (dollars in thousands):


	Three Months Ended				Increase (Decrease)
	June 30, 2023		March 31, 2023		Amount		%
Property revenues
Resident fee income	$	11,839	$	11,850	$	(11)	(0.1)	%
Rental income	38,227		36,999		1,228		3.3	%
Total property revenues	50,066		48,849		1,217		2.5	%
Property operating expenses
Salaries and wages	16,561		16,379		182		1.1	%
Utilities	2,694		3,361		(667)		(19.8)	%
Food and beverage	2,649		2,589		60		2.3	%
Repairs and maintenance	3,627		3,420		207		6.1	%
Property taxes	2,880		3,132		(252)		(8.0)	%
Property management fee	2,499		2,458		41		1.7	%
All other expenses	4,116		3,738		378		10.1	%
Total property operating expenses	35,026		35,077		(51)		(0.1)	%
Total property revenues, net of property operating expenses	$	15,040	$	13,772	$	1,268	9.2	%

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Overall, property revenues, net of property operating expenses, increased by $1.3 million for the three months ended June 30, 2023 as compared to the prior quarter. Rental and resident fee income increased by $1.2 million as a result of improved occupancy and increases in market rates for new residents and in-place rates for existing residents across our direct operating investments. Property operating expenses decreased by $0.1 million due to lower utility costs and real estate tax refunds primarily at our Winterfell portfolio, partially offset by increased marketing and advertising expenses.

Despite overall improved operating performance at our direct operating investments, certain properties continue to struggle with occupancy and rate growth and controlling expenses. In particular, the Rochester Sub-Portfolio, generated negative cash flow of approximately $4.0 million during the six months ended June 30, 2023, after payment of debt service on floating rate debt, and we do not currently expect the Rochester Sub-Portfolio to generate positive cash flow for an extended period of time. As a result, we elected to default on our debt service payments on the Rochester Sub-Portfolio in July 2023. Refer to “—Transaction and Financing Activities” for further information.

Direct Investments - Net Lease

Beginning in February 2021, the operator of the four net lease properties in our Arbors portfolio has been unable to satisfy its obligations under its leases. In accordance with a forbearance and modification agreement entered into in March 2023, or the Forbearance Agreement, the operator remits rent based on the properties’ available cash after satisfying property-level expenses.

During the three months ended June 30, 2023, we recognized rental income from our Arbors portfolio to the extent excess cash flow was received, which totaled $0.3 million. During the three months ended March 31, 2023, we did not receive any excess cash flow to be recognized as rental income. As a result, during the six months ended June 30, 2023 we have utilized cash reserves of approximately $2.3 million to fund debt service payments, including principal amortization, which is expected to continue until the cash flow and rent received from the portfolio improves from current levels.

The operator of our net lease properties continues to be impacted by sub-optimal occupancy levels and elevated operating expenses, which has resulted in limited cash flow generated by properties. Average quarterly occupancy improved 0.2% to 73.0% during the three months ended June 30, 2023 from 72.8% during the three months ended March 31, 2023.

Unconsolidated Investments

We own minority, non-controlling interests in joint ventures, which own investments in real estate properties. The following table presents the distributions received from our unconsolidated investments (dollars in thousands):


	Cash Distributions for the Three Months Ended
	June 30, 2023						March 31, 2023
Portfolio	Sales		Other		Total		Sales		Other		Total



Espresso	$	17,281	$	2,163	$	19,444	$	—	$	—	$	—
Trilogy	—		2,334		2,334		—		2,334		2,334
Total	$	17,281	$	4,497	$	21,778	$	—	$	2,334	$	2,334

During the three months ended June 30, 2023, we received distributions from our unconsolidated investments, which totaled $21.8 million as compared to $2.3 million for the three months ended March 31, 2023. Higher distributions during the three months ended June 30, 2023 were a result of sale proceeds distributed from the Espresso joint venture.

The following is a summary of operations and performance for our unconsolidated investments, excluding sold investments, for the three months ended June 30, 2023:

Trilogy

While continuing to improve from pandemic-era lows, the occupancy of the joint venture's facilities remains below historical levels, which has impacted operating revenues. Operating expenses continue to be impacted by inflationary pressures, most significantly labor-related costs, however, the joint venture has recognized COVID-19 provider relief grant income, which has partially offset the elevated expenses. In addition, the joint venture has incurred higher interest expense on its floating rate debt outstanding due to rising market interest rates.

Espresso

The joint venture received full contractual rent from the net lease operators of its remaining portfolio. As a result in April 2023, the joint venture distributed excess cash flow, of which our proportionate share totaled $2.2 million. In addition, the joint venture distributed sale proceeds from a sub-portfolio sale, of which our proportionate share totaled $17.3 million. Refer to “—Transaction and Financing Activities” for additional information.

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The following is a summary of operations and performance for our unconsolidated investments that were sold during the three months ended June 30, 2023:

Diversified US/UK

The Diversified US/UK joint venture experienced significant distress over 2022 and 2023, which ultimately resulted in a sale of 15 MOBs in February 2023 for a purchase price effectively equivalent to the outstanding debt balance and a voluntary transfer to the mezzanine lender in lieu of foreclosure on the remainder of the U.S. assets, including 91 MOBs, 47 ILFs, ALFs and MCFs, 39 SNFs and 9 specialty hospitals, in May 2023. The joint venture’s majority partner effected a lease and loan restructuring in late 2022 on the joint venture’s remaining portfolio, 48 care homes located in the United Kingdom, or the UK Portfolio, which contemplated an extended period for the UK Portfolio to reach stabilization.

Eclipse

The joint venture continued to struggle with cash flow and liquidity issues. At the time of the Sale of Minority Interests, of the remaining 34 seniors housing properties, the majority were in receivership and subject to pending foreclosure proceedings or were likely to be placed in receivership or conveyed to lenders in a voluntary transfer in lieu of foreclosure proceedings, and the remaining properties were being sold or marketed for sale.

As a result of the foregoing, and in light of our inability to exert significant influence or control over operations or transactions at the underlying joint ventures and concerns regarding potential conflicts of interest and lack of alignment of with the majority partner, we elected to sell our minority interests in both the Diversified US/UK and Eclipse joint ventures to an affiliate of the majority partner on June 9, 2023. Refer to “—Transaction and Financing Activities” above.

Our Investments

Our investments are categorized as follows:

•Direct Investments - Operating - Properties operated pursuant to management agreements with managers, in which we own a controlling interest.

•Direct Investments - Net Lease - Properties operated under net leases with an operator, in which we own a controlling interest.

•Unconsolidated Investments - Joint ventures, which include properties operated under net leases with an operator or pursuant to management agreements with managers, in which we own a minority, non-controlling interest.

Our direct investments are in seniors housing facilities, which include ILFs, ALFs and MCFs, as described in further detail below. Revenues generated by seniors housing facilities typically come from private pay sources, including private insurance, and to a much lesser extent government reimbursement programs, such as Medicaid.

•Independent living facilities. ILFs are properties with central dining facilities that provide services that include security, housekeeping, nutrition and limited 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.

•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 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. ALFs typically are comprised of studios, one and two bedroom suites equipped with private bathrooms and efficiency kitchens.

•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.

Through our unconsolidated investments, we have additional investments in seniors housing facilities, as well as in additional types of healthcare real estate, including the following:

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•Integrated Senior Health Campuses. provide a range of services, such as those described for ILFs, ALFs, MCFs, SNFs, in an integrated campus.

•Skilled Nursing Facilities. SNFs provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. A typical SNF includes mostly one and two bed units, each equipped with a private or shared bathroom and community dining facilities. Revenues generated from SNFs typically come from government reimbursement programs, including Medicare and Medicaid, as well as private pay sources, including private insurance.

For financial information regarding our reportable segments, refer to Note 11, “Segment Reporting” in our accompanying consolidated financial statements included in Part I, Item 1. “Financial Statements.”

The following table presents a summary of investments as of June 30, 2023 (dollars in thousands):


			Properties(1)
Investment Type / Portfolio	Amount(2)		ILF	ALF	MCF	SNF	Integrated Campus	Total	Primary Locations	Ownership Interest
Direct Investments - Operating
Winterfell	$	723,200	32	—	—	—	—	32	12 U.S. States	100.0%
Rochester	148,684		7	3	—	—	—	10	New York	97.0%
Avamere	93,902		—	5	—	—	—	5	Washington/Oregon	100.0%
Aqua	83,142		2	1	1	—	—	4	Texas/Ohio	97.0%
Oak Cottage	18,633		—	—	1	—	—	1	California	100.0%
Subtotal	$	1,067,561	41	9	2	—	—	52

Direct Investments - Net Lease
Arbors	$	103,915	—	4	—	—	—	4	New York	100.0%
Total Direct Investments	$	1,171,476	41	13	2	—	—	56

Unconsolidated Investments
Trilogy(3)	$	124,816	—	—	—	—	98	98	4 U.S. States	23.2%
Espresso	3,075		—	—		23	—	23	Ohio/Michigan	36.7%
Solstice(4)	262		—	—	—	—	—	—		20.0%
Total Unconsolidated Investments	$	128,153	—	—	—	23	98	121

Total Investments	$	1,299,629	41	13	2	23	98	177

_______________________________________

(1)Classification based on predominant services provided, but may include other services.

(2)For direct investments, amount represents operating real estate, before accumulated depreciation as presented in our consolidated financial statements as of June 30, 2023. For unconsolidated investments, amount represents the carrying value of our investments in unconsolidated ventures as presented in our consolidated financial statements as of June 30, 2023. For additional information, refer to “Note 3, Operating Real Estate” and “Note 4, Investments in Unconsolidated Ventures” of Part I, Item 1. “Financial Statements.”

(3)Includes institutional pharmacy, therapy businesses and lease purchase buy-out options, which are not subject to property count.

(4)Represents our investment in Solstice Senior Living, LLC, or Solstice, the manager of the Winterfell portfolio. Solstice is a joint venture between affiliates of Integral Senior Living, LLC, or ISL, a management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and us, who owns 20.0%.

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The following presents the properties of our direct and unconsolidated investments by property type and geographic location based on our proportionate share of cost as of June 30, 2023:


Real Estate Equity by Property Type(1)						Real Estate Equity by Geographic Location

_______________________________________

(1)Classification based on predominant services provided, but may include other services.

The following table presents the operators and managers of our direct investments (dollars in thousands):


	As of June 30, 2023		Six Months Ended June 30, 2023
Operator / Manager	Properties Under Management	Units Under Management(1)	Property and Other Revenues(2)		% of Total Property and Other Revenues
Solstice Senior Living(3)	32	3,970	$	61,938	61.3	%
Watermark Retirement Communities	14	1,782	23,781		23.6	%
Avamere Health Services	5	453	10,739		10.6	%
Integral Senior Living	1	40	2,458		2.4	%
Arcadia Management(4)	4	572	341		0.3	%
Other(5)	—	—	1,814		1.8	%
Total	56	6,817	$	101,071	100.0	%

_______________________________________

(1)Represents rooms for ALFs, ILFs and MCFs, based on predominant type.

(2)Includes rental income received from our net lease properties as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from our ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges.

(3)Solstice is a joint venture of which affiliates of ISL own 80%.

(4)During the six months ended June 30, 2023, we recorded rental income to the extent payments were received.

(5)Consists primarily of interest income earned on corporate-level cash and cash equivalents.

Direct Investments - Operating

We generate revenues from resident fees and rental income through our operating properties. Resident fee income is recorded by our ALFs and MCFs when services are rendered and includes resident room and care charges and other resident charges, and rental income is generated from our ILFs.

Our operating properties allow us to participate in the risks and rewards of the operations of the facilities, as compared to receiving only contractual rent under a net lease. 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

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operate our seniors housing facilities in compliance with the terms of our management agreements and all applicable laws and regulations.

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.

Watermark Retirement Communities and Solstice, together with their affiliates, manage substantially all of our operating properties. As of June 30, 2023, Watermark and Solstice or their respective affiliates collectively managed 46 of our seniors housing facilities pursuant to management agreements. For the six months ended June 30, 2023, properties managed by Watermark and Solstice represented 23.6% and 61.3% of our total property and other revenues, respectively, and 19.7% and 61.7% of our operating real estate, respectively. Through our 20.0% ownership of Solstice, we are entitled to certain rights and minority protections.

The following table presents a summary of the terms of the Watermark and Solstice management agreements:

Manager

Portfolio

Properties

Expiration Date

Management Fees

Solstice Senior Living

Winterfell

October 2025

•5% of monthly gross revenues, subject to certain exclusions

•7% of actual costs of certain capital projects

•Additional fees if net operating income exceeds annual target

•Additional fees if net operating income long-term growth is achieved

Watermark Retirement Communities(1)

Aqua

December 2023

•5% of monthly gross revenues, subject to certain exclusions

•Eligible for promote in connection with disposition

Aqua

February 2024

Rochester

August

2023

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(1)Affiliates of Watermark also own a 3% non-controlling interest in the Rochester and Aqua portfolios, which may impact various rights and economics under the management agreements.

Direct Investments - Net Lease

We generate revenues from rental income from net leases to operators through our net lease properties. A net lease will typically provide for fixed rental payments, subject to periodic increases based on certain percentages or the consumer price index, and obligate the operator to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures.

As of June 30, 2023, we had four ALF properties operated by Arcadia Management under net leases. These leases obligate Arcadia to pay a fixed rental amount and pay all property-level expenses, with a lease term that expires in August 2029. However, Arcadia has been unable to satisfy its obligations under its leases since February 2021, and instead remits rent and pays property-level expenses based on its available cash. On March 27, 2023, we entered into the Forbearance Agreement, with Arcadia, pursuant to which we are entitled to receive all cash flow in excess of permitted expenses, and are required to fund any operating deficits, through 2025, subject to the terms and conditions thereof. As a result, we participate in the risks and rewards of this portfolio similar to our operating properties. We also agreed to make available funds for capital improvements in order to stabilize and drive improved performance in this portfolio. If Arcadia performs under the Forbearance Agreement, it will be entitled to forgiveness of accrued and unpaid rent during the forbearance period and a potential incentive fee tied to disposition of the portfolio above a certain value.

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Unconsolidated Investments

For investments accounted for under the equity method, we report our proportionate interest of revenues and expenses from our unconsolidated joint ventures through equity in earnings (losses) of unconsolidated ventures on our consolidated statements of operations. For investments accounted for under the fair value option method, we will record any changes to its investment’s fair value in realized gain (loss) on investments and other in the consolidated statements of operations. As of June 30, 2023, our unconsolidated investment portfolios are as follows:

•Trilogy. Portfolio of Integrated Senior Health Campuses located in the Midwest and operated pursuant to management agreements with Trilogy Health Services. The portfolio includes ancillary services businesses, including a therapy business and a pharmacy business. American Healthcare REIT, Inc., or AHR, and management of Trilogy own the remaining 76.8% of this portfolio.

•Espresso. The joint venture is in the process of completing the second and final sale of its remaining net lease portfolio consisting of 22 SNFs located in Ohio and Michigan. An affiliate of Formation acts as the general partner and manager of this investment. Formation and Safanad Management Limited own the remaining 63.3% of this portfolio.

•Solstice. Operator platform joint venture established to manage the operations of the Winterfell portfolio. An affiliate of ISL owns the remaining 80.0%.

In connection with the Sale of Minority Interests, we sold our minority, non-controlling interests in the Diversified US/UK portfolio and Eclipse portfolios. Refer to “—Transaction and Financing Activities” for additional information.

Our Strategy

Our primary objective is to maximize value and generate liquidity for shareholders. The key elements of our strategy include:

•Grow the Operating Income Generated by Our Portfolio. Through active portfolio management, we will continue to review and implement operating strategies and initiatives that address factors impacting the industry, including inflation and other economic conditions, to enhance the performance of our existing investment portfolio.

•Deploy Strategic Capital Expenditures. 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.

•Pursue Dispositions and Opportunities for Asset Repositioning to Maximize Value. We will actively pursue dispositions of assets and portfolios where we believe the disposition will achieve a desired return and generate value for shareholders. Additionally, we will continue to assess the need for strategic repositioning of assets, joint ventures, operators and markets to position our portfolio for optimal performance.

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 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 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.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect

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the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s subjective and complex judgments, and for which the impact of changes in estimates and assumptions could have a material effect on our financial statements. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time.

For a summary of our accounting policies, refer to Note 2, “Summary of Significant Accounting Policies” in our accompanying consolidated financial statements included in Part I, Item 1. “Financial Statements.”

We believe impairment to be a critical accounting estimate based on the nature of our operations and/or require significant management judgment and assumptions. Our investments are reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of our investments may be impaired or that carrying value may not be recoverable. In conducting these reviews, we consider macroeconomic factors, including healthcare sector conditions, together with asset and market specific circumstances, among other factors. To the extent an impairment has occurred, the loss will be measured as compared to the carrying amount of the investment. Fair values can be estimated based upon the income capitalization approach, using net operating income for each property and applying indicative capitalization and discount rates or sales comparison approach, using what other purchasers and sellers in the market have agreed to as price for comparable properties.

Impairment

At this time, it is difficult to assess and estimate the lasting effects of the COVID-19 pandemic, inflation, rising interest rates, risk of recession and other economic conditions. As the future impact will depend on many factors beyond our control and knowledge, the resulting effect on impairment of our operating real estate and investments in unconsolidated ventures may materially differ from our current expectations and further impairment charges may be recorded in the future.

Direct Operating Investments

During the six months ended June 30, 2023, we recorded impairment losses on our operating real estate totaling $38.7 million, including impairment losses of $38.6 million for five facilities within the Rochester portfolio as a result of shortened hold period assumptions due to the facilities defaulting on their loan payments in July 2023. We are in an active dialogue with the lender to facilitate an optimal resolution for us, which may include a voluntary transfer of the facilities in lieu of foreclosure and/or receivership and would result in a gain recognized on the extinguishment of the debt. Refer to “—Transaction and Financing Activities” for additional discussion. Additionally, we recorded impairment losses totaling $0.1 million for a land parcel within the Rochester Portfolio as a result of lower estimated market value.

Accumulated impairment losses totaled $220.2 million for operating real estate that we continue to hold as of June 30, 2023. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and 2021 for additional information regarding impairment recorded in prior years.

Unconsolidated Investments

During the six months ended June 30, 2023, we recorded an impairment on our investment in the Espresso joint venture totaling $4.7 million, which reduced the carrying value of our investment to $3.1 million. Our assessment for the recoverability of our investment took into consideration the joint venture’s remaining assets and estimated future cash distributions, less transaction and wind down costs. Upon impairing our investment, we elected the fair value option method to account for our investment in the Espresso joint venture on June 30, 2023.

The joint ventures underlying our unconsolidated ventures assess and record impairment and reserves on their respective real estate portfolios, goodwill, and other assets, and we recognize our proportionate share through equity in earnings (losses). During the six months ended June 30, 2023, the underlying Diversified US/UK joint venture recorded impairment losses on its UK Portfolio, due to, among other things, an extended period contemplated for the UK Portfolio to reach stabilization. Our proportionate share of the impairment losses recorded by the Diversified US/UK joint venture totaled $11.4 million.

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Results of Operations

Comparison of the Three Months Ended June 30, 2023 to June 30, 2022 (dollars in thousands):


	Three Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
Property and other revenues
Resident fee income	$	11,839	$	10,958	$	881	8.0	%
Rental income	38,568		34,277		4,291		12.5	%
Other revenue	1,096		139		957		688.5	%
Total property and other revenues	51,503		45,374		6,129		13.5	%


Expenses
Property operating expenses	35,026		33,230		1,796		5.4	%
Interest expense	11,534		10,554		980		9.3	%

Asset management fees - related party	—		2,457		(2,457)		(100.0)	%
General and administrative expenses	3,593		3,755		(162)		(4.3)	%
Depreciation and amortization	9,808		9,540		268		2.8	%
Impairment loss	43,422		13,002		30,420		234.0	%
Total expenses	103,383		72,538		30,845		42.5	%
Other income, net	70		5		65		1,300.0	%
Realized gain (loss) on investments and other	(4,647)		(252)		(4,395)		1,744.0	%
Equity in earnings (losses) of unconsolidated ventures	(2,546)		34,053		(36,599)		(107.5)	%
Income tax expense	(11)		(15)		4		(26.7)	%
Net income (loss)	$	(59,014)	$	6,627	$	(65,641)	(990.5)	%

Total Property and Other Revenues

The following table presents resident fee income generated by our direct investments (dollars in thousands):


	Three Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	11,839	$	10,958	$	881	8.0	%
ILF properties	38,227		34,030		4,197		12.3	%
Net lease properties	341		247		94		38.1	%
Other revenue	1,096		139		957		688.5	%
Total resident fee income	$	51,503	$	45,374	$	6,129	13.5	%

Overall, total property and other revenues increased $6.1 million during the three months ended June 30, 2023. Revenues generated by our operating properties increased as a result of improved occupancy and higher market rates for new residents and in-place rates for existing residents. Other revenue consists of interest earned on cash and cash equivalents, which increased during the three months ended June 30, 2023 as a result of higher market interest rates.

Property Operating Expenses

The following table presents property operating expenses incurred by our direct investments (dollars in thousands):


	Three Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	9,265	$	8,677	$	588	6.8	%
ILF properties	25,761		24,542		1,219		5.0	%
Net lease properties	—		11		(11)		(100.0)	%

Total property operating expenses	$	35,026	$	33,230	$	1,796	5.4	%

Overall, total operating expenses increased $1.8 million, primarily due to inflationary pressures impacting significantly all variable operating costs, most notably wages and benefits, repairs and maintenance, insurance, and food and beverage costs. In addition, management fees increased in line with revenue growth.

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Interest Expense

The following table presents interest expense incurred on our borrowings (dollars in thousands):


	Three Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%

ALF/MCF properties	$	1,653	$	1,435	$	218	15.2	%
ILF properties	9,001		8,216		785		9.6	%
Net lease properties	880		903		(23)		(2.5)	%


Total interest expense	$	11,534	$	10,554	$	980	9.3	%

Interest expense increased $1.0 million as a result of higher interest expense on our floating rate debt. The increase was partially offset by a decrease in the average mortgage notes principal balances as compared to June 30, 2022 due to continued principal amortization.

Asset Management Fees - Related Party & General and Administrative Expenses

The advisory agreement with our Former Advisor was terminated on October 21, 2022. As a result, no asset management fees were incurred during 2023 as compared to $2.5 million incurred during the three months ended June 30, 2022.

Under our new internalized structure, we directly incur and pay all general and administrative expenses, including personnel costs related to our executive officers, which were not allocable under the former advisory agreement. General and administrative expenses decreased as compared to the three months ended June 30, 2022 primarily due to lower professional services and director compensation incurred during the three months ended June 30, 2023.

Combining asset management fees and general and administrative expenses, $2.6 million of cost savings were realized under the internalized structure during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Depreciation and Amortization

The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):


	Three Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%

ALF/MCF properties	$	1,808	$	1,815	$	(7)	(0.4)	%
ILF properties	7,271		6,857		414		6.0	%
Net lease properties	729		868		(139)		(16.0)	%

Total depreciation and amortization	$	9,808	$	9,540	$	268	2.8	%

Depreciation and amortization expense increased $0.3 million as a result of additional capital expenditures, primarily at our Winterfell portfolio. The increase was partially offset by lower depreciation at our net lease portfolio due to impairments recognized during the year ended December 31, 2022, which reduced building depreciation expense in 2023.

Impairment Loss

During the three months ended June 30, 2023, impairment losses on operating real estate totaled $38.7 million and impairment losses recorded on unconsolidated ventures investments totaled $4.7 million. Refer to “—Impairment” for additional discussion.

During the three months ended June 30, 2022, impairment losses on operating real estate totaled $13.0 million, consisting of $8.5 million and $3.9 million recognized for facilities within our Winterfell and Rochester portfolios, respectively. In addition, we recognized $0.6 million for property damage sustained by facilities within our Winterfell portfolio.

Other Income, Net

During the three months ended June 30, 2023, other income, net consisted of capital expenditure reimbursements from the state of Oregon’s Long-Term Care Capital Improvement and Emergency Preparedness Program, received and recognized by the facilities within our Avamere portfolio. Other income, net for the three months ended June 30, 2022 was de minimis.

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Realized Gain (Loss) on Investments and Other

In connection with the Sale of Minority Interests, we realized a loss totaling $1.3 million, representing the difference between the fair value and carrying value of our investments in the Diversified US/UK and Eclipse joint ventures, which was the consideration exchanged in the transaction for the acquisition of our common stock. In addition, as a result of the Sale of Minority Interests, we reclassified the accumulated foreign currency losses, totaling $3.3 million, related to the Diversified US/UK portfolio, previously recorded through other comprehensive income on the consolidated statements of equity to realized gain (loss) on investments and other. Refer to “—Transaction and Financing Activities” for additional discussion.

During the three months ended June 30, 2022, we recognized losses on investment activity, which were partially offset by a gain recognized on the Oak Cottage discounted financing payoff.

Equity in Earnings (Losses) of Unconsolidated Ventures

The following table presents the results of our unconsolidated ventures (dollars in thousands):


	Three Months Ended June 30,
	2023		2022		2023		2022		2023		2022
Portfolio	Equity in Earnings (Losses)				FFO and MFFO adjustments(1)				Equity in Earnings, after FFO and MFFO adjustments				Increase (Decrease)
Trilogy	$	909	$	2,678	$	4,651	$	4,200	$	5,560	$	6,878	$	(1,318)	(19.2)	%
Espresso	9,119		31,999		(8,818)		(30,215)		301		1,784		(1,483)		(83.1)	%
Solstice	(31)		(22)		—		—		(31)		(22)		(9)		40.9	%
Investments sold	(12,543)		(602)		12,694		1,847		151		1,245		(1,094)		(87.9)	%


Total	$	(2,546)	$	34,053	$	8,527	$	(24,168)	$	5,981	$	9,885	$	(3,904)	(39.5)	%

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(1)Represents our proportionate share of revenues and expenses excluded from the calculation of FFO and MFFO for unconsolidated investments. Refer to “—Non-GAAP Financial Measures” for additional discussion.

Excluding the investments in unconsolidated ventures sold during the period, equity in earnings decreased by $24.7 million primarily due to the gains recognized in the three months ended June 30, 2022 exceeding gains recognized in three months ended June 30, 2023 for sub-portfolio sales in the Espresso joint venture. Equity in earnings, after FFO and MFFO adjustments, decreased by $2.8 million due to lower rental income recognized by the Espresso joint venture during the three months ended June 30, 2023 as a result of the sub-portfolio sales during 2022 and 2023. In addition, Trilogy joint venture recognized lower federal and state COVID-19 provider relief grants during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

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Comparison of the Six Months Ended June 30, 2023 to June 30, 2022 (dollars in thousands)


	Six Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
Property and other revenues
Resident fee income	$	23,689	$	21,713	$	1,976	9.1	%
Rental income	75,567		66,836		8,731		13.1	%
Other revenue	1,815		157		1,658		1,056.1	%
Total property and other revenues	101,071		88,706		12,365		13.9	%


Expenses
Property operating expenses	70,103		66,124		3,979		6.0	%
Interest expense	22,893		20,863		2,030		9.7	%
Transaction costs	97		—		97		NA
Asset management fees - related party	—		5,104		(5,104)		(100.0)	%
General and administrative expenses	7,503		7,441		62		0.8	%
Depreciation and amortization	19,457		19,463		(6)		—	%
Impairment loss	43,422		13,002		30,420		234.0	%
Total expenses	163,475		131,997		31,478		23.8	%
Other income, net	202		77		125		162.3	%
Realized gain (loss) on investments and other	(4,315)		335		(4,650)		(1,388.1)	%
Equity in earnings (losses) of unconsolidated ventures	(6,468)		36,555		(43,023)		(117.7)	%
Income tax expense	(26)		(30)		4		(13.3)	%
Net income (loss)	$	(73,011)	$	(6,354)	$	(66,657)	1,049.1	%

Total Property and Other Revenues

The following table presents total property and other revenues (dollars in thousands):


	Six Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	23,689	$	21,713	$	1,976	9.1	%
ILF properties	75,226		66,340		8,886		13.4	%
Net lease properties	341		496		(155)		(31.3)	%
Other revenue	1,815		157		1,658		1,056.1	%



Total property and other revenues	$	101,071	$	88,706	$	12,365	13.9	%

Overall, total property and other revenues increased $12.4 million during the six months ended June 30, 2023. Revenues generated by our operating properties increased as a result of improved occupancy and higher market rates for new residents and in-place rates for existing residents. We recognized lower rental income from our Arbors net lease portfolio during the six months ended June 30, 2023. Other revenue consists of interest earned on cash and cash equivalents, which increased during the six months ended June 30, 2023 as a result of higher market interest rates.

Property Operating Expenses

The following table presents property operating expenses incurred by our direct investments (dollars in thousands):


	Six Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	18,408	$	17,295	$	1,113	6.4	%
ILF properties	51,695		48,794		2,901		5.9	%
Net lease properties	—		35		(35)		(100.0)	%


Total property operating expenses	$	70,103	$	66,124	$	3,979	6.0	%

Overall, total operating expenses increased $4.0 million, primarily due to inflationary pressures impacting significantly all variable operating costs, most notably wages and benefits, repairs and maintenance, insurance, utilities and food and beverage costs. In addition, management fees increased in line with revenue growth.

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Interest Expense

The following table presents interest expense incurred on our borrowings (dollars in thousands):


	Six Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	3,270	$	2,813	$	457	16.2	%
ILF properties	17,868		16,249		1,619		10.0	%
Net lease properties	1,755		1,801		(46)		(2.6)	%


Total interest expense	$	22,893	$	20,863	$	2,030	9.7	%

Interest expense increased $2.0 million as a result of higher interest expense on our floating rate debt. The increase was partially offset by a decrease in the average mortgage notes principal balances as compared to June 30, 2022 due to continued principal amortization.

Transaction Costs

Transaction costs for the six months ended June 30, 2023 consist of $0.1 million for costs associated with the Internalization and the transition of services and systems previously provided by the Former Advisor.

Asset Management Fees - Related Party & General and Administrative Expenses

The advisory agreement with our Former Advisor was terminated on October 21, 2022. As result, no asset management fees were incurred during 2023 as compared to $5.1 million incurred during the six months ended June 30, 2022.

Under our new internalized structure, we directly incur and pay all general and administrative expenses, including personnel costs related to our executive officers, which were not allocable under the former advisory agreement. General and administrative expenses increased $0.1 million as compared to the six months ended June 30, 2022.

Combining asset management fees and general and administrative expenses, $5.0 million of cost savings were realized under the internalized structure during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Depreciation and Amortization

The following table presents depreciation and amortization recognized on our direct investments (dollars in thousands):


	Six Months Ended June 30,				Increase (Decrease)
	2023		2022		Amount		%
ALF/MCF properties	$	3,649	$	3,628	$	21	0.6	%
ILF properties	14,350		14,104		246		1.7	%
Net lease properties	1,458		1,731		(273)		(15.8)	%

Total depreciation and amortization	$	19,457	$	19,463	$	(6)	—	%

Depreciation and amortization expense decreased at our net lease properties primarily as a result of impairments recognized during the year ended December 31, 2022, which reduced building depreciation expense in 2023. The decrease was offset by increased depreciation at our ALFs, MCFs and ILFs, primarily as a result of capital improvements during 2023.

Impairment Loss

During the six months ended June 30, 2023, impairment losses on operating real estate totaled $38.7 million and impairment losses recorded on unconsolidated ventures investments totaled $4.7 million. Refer to “—Impairment” for additional discussion.

During the six months ended June 30, 2022, impairment losses on operating real estate totaled $13.0 million, consisting of $8.5 million and $3.9 million recognized for facilities within our Winterfell and Rochester portfolios, respectively. In addition, we recognized $0.6 million for property damage sustained by facilities within our Winterfell portfolio.

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Other Income, Net

During the six months ended June 30, 2023, other income, net consisted of capital expenditure reimbursements from the state of Oregon’s Long-Term Care Capital Improvement and Emergency Preparedness Program received and recognized by facilities within our Avamere portfolio. During the six months ended June 30, 2022, other income, net consisted primarily of COVID-19 testing reimbursements received and recognized by our Avamere portfolio.

Realized Gain (Loss) on Investments and Other

During the six months ended June 30, 2022, we recognized gains on mortgage interest rate caps, a discounted financing payoff and a distribution that exceeded our carrying value for an unconsolidated investment. Gains were partially offset by losses recognized on investment activity.

Equity in Earnings (Losses) of Unconsolidated Ventures

The following table presents the results of our unconsolidated ventures (dollars in thousands):


	Six Months Ended June 30,
	2023		2022		2023		2022		2023		2022
Portfolio	Equity in Earnings (Losses)				FFO and MFFO adjustments(1)				Equity in Earnings, after FFO and MFFO adjustments				Increase (Decrease)
Trilogy	$	600	$	4,705	$	8,988	$	8,168	$	9,588	$	12,873	$	(3,285)	(25.5)	%
Espresso	9,228		33,953		(8,283)		(29,738)		945		4,215		(3,270)		(77.6)	%
Solstice	(60)		(58)		—		—		(60)		(58)		(2)		3.4	%
Investments sold	(16,236)		(2,045)		15,087		5,945		(1,149)		3,900		(5,049)		(129.5)	%


Total	$	(6,468)	$	36,555	$	15,792	$	(15,625)	$	9,324	$	20,930	$	(11,606)	(55.5)	%

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Excluding the investments in unconsolidated ventures sold during the period, equity in earnings (losses) decreased $28.8 million primarily due to the gains recognized in the six months ended June 30, 2022 exceeding gains recognized in the six months ended June 30, 2023 for sub-portfolio sales in the Espresso joint venture. Equity in earnings (losses), after FFO and MFFO adjustments, decreased $6.6 million primarily due to higher interest expense on floating rate debt, most significantly in the Trilogy joint venture. Additionally, prior period portfolio sales in the Espresso joint venture resulted in lower rental income during the six months ended June 30, 2023.

Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

We believe that Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO, are additional appropriate measures of the operating performance of a REIT and of us in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income (loss) (computed in accordance with U.S. GAAP), excluding gains (losses) from sales of depreciable property, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, impairment on depreciable property owned directly or indirectly and after adjustments for unconsolidated ventures.

Due to certain of the unique features of publicly-registered, non-traded REITs, the Institute for Portfolio Alternatives, or IPA, an industry trade group, standardized a performance measure known as MFFO and recommends the use of MFFO for such REITs. Management believes MFFO is a useful performance measure to evaluate our business and further believes it is important to disclose MFFO in order to be consistent with the IPA recommendation and other non-traded REITs. Neither the U.S. Securities and Exchange Commission, or SEC, nor any other regulatory body has approved the acceptability of the adjustments that we use

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to calculate MFFO. In the future, the SEC or another regulatory body may decide to standardize permitted adjustments across the non-listed REIT industry and we may need to adjust our calculation and characterization of MFFO.

We define MFFO in accordance with the concepts established by the IPA. Our computation of MFFO may not be comparable to other REITs that do not calculate MFFO using the same method MFFO is calculated using FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company’s operating performance. The IPA’s definition of MFFO excludes from FFO the following items:

•acquisition fees and expenses;

•non-cash amounts related to straight-line rent and the amortization of above or below market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting under U.S. GAAP to a cash basis of accounting);

•amortization of a premium and accretion of a discount on debt investments;

•non-recurring impairment of real estate-related investments that meet the specified criteria identified in the rules and regulations of the SEC;

•realized gains (losses) from the early extinguishment of debt;

•realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business;

•unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings;

•unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting;

•adjustments related to contingent purchase price obligations; and

•adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above.

We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is helpful to management and stockholders in assessing our future operating performance upon completion of our organization and offering, and acquisition and development stages. However, MFFO may not be a useful measure of our operating performance or as a comparable measure to other typical non-traded REITs if we do not continue to operate in a similar manner to other non-traded REITs, including if we determined not to pursue an exit strategy.

MFFO does have certain limitations. For instance, realized gains (losses) from acquisitions and dispositions and other adjustments listed above are not reported in MFFO, even though such realized gains (losses) and other adjustments could affect our operating performance and cash available for distribution. Any mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions. Investors should note that while impairment charges are excluded from the calculation of MFFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flow and the relatively limited term of a non-traded REIT’s anticipated operations, it could be difficult to recover any impairment charges through operational net revenues or cash flow prior to any liquidity event. In addition, MFFO is not a useful measure in evaluating net asset value, since impairment is taken into account in determining net asset value but not in determining MFFO.

Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by operating activities determined in accordance with U.S. GAAP and should not be construed to be more relevant or accurate than the U.S. GAAP methodology in evaluating our operating performance. Neither FFO nor MFFO is necessarily indicative of cash flow available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Furthermore, neither FFO nor MFFO should be considered as an alternative to net income (loss) as an indicator of our operating performance.

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The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO attributable to common stockholders (dollars in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Funds from operations:
Net income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders	$	(57,781)	$	6,807	$	(71,707)	$	(6,129)
Adjustments:
Depreciation and amortization	9,808		9,540		19,457		19,463
Depreciation and amortization related to non-controlling interests	(74)		(72)		(147)		(144)
Depreciation and amortization related to unconsolidated ventures	4,543		6,926		10,191		14,096
Realized (gain) loss from sales of property	—		454		(136)		425
Realized gain (loss) from sales of property related to non-controlling interests	—		(7)		4		(6)
Realized (gain) loss from sales of property related to unconsolidated ventures	(8,152)		(41,591)		(7,894)		(43,902)
Impairment losses of depreciable real estate	38,694		13,002		38,694		13,002
Impairment loss on real estate related to non-controlling interests	(1,161)		(117)		(1,161)		(117)
Impairment losses of depreciable real estate held by unconsolidated ventures	7,682		—		7,682		20
Funds from operations attributable to NorthStar Healthcare Income, Inc. common stockholders	$	(6,441)	$	(5,058)	$	(5,017)	$	(3,292)
Modified funds from operations:
Funds from operations attributable to NorthStar Healthcare Income, Inc. common stockholders	$	(6,441)	$	(5,058)	$	(5,017)	$	(3,292)
Adjustments:
Transaction costs	—		—		97		—

Amortization of premiums, discounts and fees on investments and borrowings	1,009		975		1,994		1,944
Realized (gain) loss on investments and other	4,647		(202)		4,451		(760)
Adjustments related to unconsolidated ventures(1)	4,454		10,497		5,813		14,161
Adjustments related to non-controlling interests	(4)		(3)		(1)		4
Impairment of real estate related investment	4,728		—		4,728		—
Modified funds from operations attributable to NorthStar Healthcare Income, Inc. common stockholders	$	8,393	$	6,209	$	12,065	$	12,057

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(1)Primarily represents our proportionate share of liability extinguishment gains, loan loss reserves, transaction costs and amortization of above/below market debt adjustments, straight-line rent adjustments, impairment of goodwill, debt extinguishment losses and deferred financing costs, incurred through our investments in unconsolidated ventures.

Liquidity and Capital Resources

Our current principal liquidity needs are to fund: (i) operating expenses, including corporate general and administrative expenses; (ii) principal and interest payments on our borrowings and other commitments; and (iii) capital expenditures, including capital calls in connection with our unconsolidated joint venture investments.

Our current primary sources of liquidity include the following: (i) cash on hand; (ii) proceeds from full or partial realization of investments; (iii) cash flow generated by our investments, both from our operating activities and distributions from our unconsolidated joint ventures; and (iv) secured or unsecured financings from banks and other lenders.

As of August 11, 2023, we had approximately $107.5 million of unrestricted cash and currently believe that our capital resources are sufficient to meet our capital needs for the following 12 months.

Cash From Operations

We primarily generate cash flow from operations through net operating income from our operating properties and rental income from our net lease properties. In addition, we receive distributions from our investments in unconsolidated ventures. Net cash provided by operating activities was $11.3 million for the six months ended June 30, 2023.

A substantial majority of our direct investments are operating properties whereby we are directly exposed to various operational risks. While our direct investments have not experienced any significant issues collecting rents or other fees from residents, cash flow has continued to be negatively impacted by rate pressures, cost inflation, rising interest rates and other economic market conditions. We expect that these factors will continue to materially impact our revenues, expenses and cash flow generated by the communities of our direct investments. We have utilized cash reserves generated from asset realizations to fund debt service

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payments and capital expenditures, which is expected to continue until the operating margins of our direct investments improve from current levels.

We have significant joint ventures and will not be able to control the timing of distributions, if any, from these investments. As of June 30, 2023, our unconsolidated joint ventures and consolidated joint ventures represented 9.9% and 17.8%, respectively, of our total investments, based on carrying value. Our unconsolidated joint ventures, which have been similarly impacted as our direct investments by the COVID-19 pandemic, inflation, rising interest rates and other economic market conditions, may continue to limit distributions to preserve liquidity.

Borrowings

We use asset-level financing as part of our investment strategy to leverage our investments while managing refinancing and interest rate risk. We typically finance our investments with medium to long-term, non-recourse mortgage loans, though our borrowing levels and terms vary depending upon the nature of the assets and the related financing.

During the six months ended June 30, 2023, we paid $30.4 million in recurring principal and interest payments on borrowings. As of June 30, 2023, we had $912.9 million of consolidated asset-level borrowings outstanding. Fixed-rate borrowings totaled $783.6 million with interest rates ranging from 3.0% to 4.6%. Floating-rate borrowings totaled $129.3 million and are subject to fluctuating London Interbank Offered Rate, or LIBOR, or Secured Overnight Financing Rate, or SOFR. As of June 30, 2023, effective interest rates on floating rate debt ranged from 7.53% to 8.07%.

As the impact of inflation, rising interest rates, risk of recession and other economic market conditions continue to influence our investments’ performance and market values, our ability to service or refinance our borrowings may be negatively impacted, including $590.0 million of borrowings collateralized by our Winterfell portfolio that matures in June 2025.

Our charter limits us from incurring borrowings that would exceed 300.0% of our net assets. We cannot exceed this limit unless any excess in borrowing over such level is approved by a majority of our independent directors. We would need to disclose any such approval to our stockholders in our next quarterly report along with the justification for such excess. An approximation of this leverage limitation, excluding indirect leverage held through our unconsolidated joint venture investments and any securitized mortgage obligations to third parties, is 75.0% of our assets, other than intangibles, before deducting loan loss reserves, other non-cash reserves and depreciation. As of June 30, 2023, our leverage was 55.8% of our assets, other than intangibles, before deducting non-cash reserves and depreciation. As of June 30, 2023, indirect leverage on assets, other than intangibles, before deducting non-cash reserves and depreciation, held through our unconsolidated joint ventures was 57.4%.

For additional information regarding our borrowings, including principal repayments, timing of maturities and loans currently in default, refer to Note 5, “Borrowings” in our accompanying consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Capital Expenditures Activities

We are responsible for capital expenditures for our operating properties and may also fund capital expenditures for our net lease properties. We continue to invest capital into our direct investments in order to maintain market position, functional and operating standards, increase operating income, achieve property stabilization and enhance the overall value of our assets. However, there can be no assurance that these initiatives will achieve these intended results.

The following table presents cash used for capital expenditures at our direct investments (dollars in thousands):


	Six Months Ended June 30,
	2023		2022		2023 vs. 2022 Change
ALF/MCF properties	$	1,021	$	627	$	394
ILF properties	10,069		9,782		287
Net lease properties	—		251		(251)

Total capital expenditures	$	11,090	$	10,660	$	430

Realization and Disposition of Investments

We will actively pursue dispositions of assets and portfolios where we believe the disposition will achieve a desired return, improve our liquidity position and generate value for shareholders. As the impact of inflation, rising interest rates, risk of recession and other economic market conditions continue to influence our properties’ performance, there may be a negative impact on our ability to generate desired returns on dispositions. The current state of the public and private capital markets, which have been affected by a general tightening of availability of credit (including the price, terms and conditions under which

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it can be obtained), and decreased liquidity in certain financial markets, has resulted in limited transaction activity and may limit our ability to execute on our strategy of disposing of investments.

We have made significant investments through both consolidated and unconsolidated joint ventures with third parties. We have limited ability to influence material decisions at our unconsolidated joint ventures, including the disposition of assets. Certain portfolios within our unconsolidated joint ventures have experienced loan defaults, which, in some instances, have resulted in the loss of collateral. Refer to “—Transaction and Financing Activities” for further information regarding dispositions of our unconsolidated joint ventures.

Distributions

To continue to qualify as a REIT, we are required to distribute annually dividends equal to at least 90% of our taxable income, subject to certain adjustments, to stockholders. We have generated net operating losses for tax purposes and, accordingly, are currently not required to make distributions to our stockholders to qualify as a REIT.

While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our management and board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives. Refer to “—Distributions Declared and Paid” for further information regarding our distributions.

Repurchases

We adopted a share repurchase program, or the Share Repurchase Program, effective August 7, 2012, which enabled stockholders to sell their shares to us in limited circumstances. Our board of directors may amend, suspend or terminate our Share Repurchase Program at any time, subject to certain notice requirements. In October 2018, our board of directors approved an amended and restated Share Repurchase Program, under which we only repurchased shares in connection with the death or qualifying disability of a stockholder. On April 7, 2020, our board of directors suspended all repurchases under our existing Share Repurchase Program effective April 30, 2020 in order to preserve capital and liquidity. While our primary objective is to maximize value and generate liquidity for shareholders, we do not anticipate resuming the share repurchase program in the near future.

Other Commitments

On October 21, 2022, we terminated the advisory agreement and completed the Internalization. Prior to the termination of the advisory agreement, we reimbursed the Former Advisor for direct and indirect operating costs in connection with services provided to us. Under our new internalized structure, we will directly incur and pay all general and administrative costs.

Cash Flows

The following presents a summary of our consolidated statements of cash flows (dollars in thousands):


	Six Months Ended June 30,
Cash flows provided by (used in):	2023		2022		2023 vs. 2022 Change
Operating activities	$	11,259	$	(12,102)	$	23,361
Investing activities	3,040		27,480		(24,440)
Financing activities	(10,797)		(109,239)		98,442
Net increase (decrease) in cash, cash equivalents and restricted cash	$	3,502	$	(93,861)	$	97,363

Operating Activities

Net cash provided by operating activities totaled $11.3 million for the six months ended June 30, 2023, as compared to $12.1 million net cash used in operating activities for the six months ended June 30, 2022. The change in cash flow from operating activities was a result of distributions received from our unconsolidated investment in the Espresso joint venture, a portion of which has been classified as operating cash flows. Additionally, increases in rates and occupancy at our direct operating investments, resulted in higher rent and resident fees collected during the six months ended June 30, 2023 and lower reimbursement payments made to our Former Advisor increased cash flow from operations.

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Investing Activities

Our cash flows from investing activities are primarily proceeds from investment dispositions, net of any capital expenditures. We continue to invest capital into our operating portfolios in order to maintain market position and enhance overall asset value. Net cash provided by investing activities totaled $3.0 million for the six months ended June 30, 2023 as compared to $27.5 million for the six months ended June 30, 2022. Cash flows provided by investing activities for the six months ended June 30, 2023 consisted of distributions received from our Espresso and Trilogy unconsolidated investments classified as investing cash flows, which totaled $8.8 million and $4.7 million, respectively, partially offset by capital expenditures for our direct investments. Cash flows provided by investing activities for the six months ended June 30, 2022 consisted of distributions received from our unconsolidated investments, which totaled $38.1 million, less capital expenditures for our direct investments.

Financing Activities

Cash flows used in financing activities totaled $10.8 million for the six months ended June 30, 2023 compared to $109.2 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, net cash flows used in financing activities were primarily recurring principal amortization on our mortgage notes. For the six months ended June 30, 2022, net cash flows used in financing activities were primarily attributable to the special distribution our board of directors declared of $0.50 per share for each stockholder of record on May 2, 2022, or the Special Distribution, which was paid in cash on or around May 5, 2022 and totaled approximately $97.0 million. In addition, the repayment of the financing on Oak Cottage and recurring principal amortization on our mortgage notes contributed to cash flows used in financing activities.

Off-Balance Sheet Arrangements

As of June 30, 2023, we are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in unconsolidated ventures. Refer to Note 4, “Investments in Unconsolidated Ventures” in Part I, Item 1. “Financial Statements” for a discussion of such unconsolidated ventures in our consolidated financial statements. In each case, our exposure to loss is limited to the carrying value of our investment.

Distributions Declared and Paid

From inception through June 30, 2023, we declared $530.9 million in distributions, inclusive of the Special Distribution, and generated cumulative FFO of $104.3 million. From the date of our first investment on April 5, 2013 through December 31, 2017, we declared an annualized distribution amount of $0.675 per share of our common stock. From January 1, 2018 through January 31, 2019, we declared an annualized distribution amount of $0.3375 per share of our common stock. Effective February 1, 2019, our board of directors suspended recurring distributions in order to preserve capital and liquidity. On April 20, 2022, our board of directors declared the Special Distribution of $0.50 per share for each stockholder of record on May 2, 2022 totaling approximately $97.0 million. While we do not anticipate recurring dividends in the near future, in light of the cash flow generated by our investments as compared to our capital expenditure needs and debt service obligations, our management and board of directors will evaluate special distributions in connection with asset sales and other realizations of our investments on a case-by-case basis based on, among other factors, current and projected liquidity needs, opportunities for investment in our assets (such as capital expenditure and de-levering opportunities) and other strategic initiatives.

To the extent distributions are paid from sources other than FFO, the ownership interest of our public stockholders may be diluted. Future distributions declared and paid may exceed FFO and cash flow provided by operations. FFO, as defined, may not reflect actual cash available for distributions.

Related Party Arrangements

Former Advisor

In connection with the Internalization, the advisory agreement was terminated on October 21, 2022. Prior to the Internalization, the Former Advisor was responsible for managing our affairs on a day-to-day basis and for identifying, acquiring, originating and asset managing investments on our behalf. For such services, to the extent permitted by law and regulations, the Former Advisor received fees and reimbursements from us. Pursuant to the advisory agreement, the Former Advisor could defer or waive fees in its discretion.

Transition Services

In connection with the Internalization, on October 21, 2022, we, the Operating Partnership and the Former Advisor entered into a Transition Services Agreement, or TSA, to facilitate an orderly transition of the management of our operations. The TSA, as amended on March 22, 2023, provides for, among other things, the Former Advisor to provide certain services, including primarily technology and insurance, for a transition period of up to six months following the Internalization, with legal, treasury

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and accounts payable services to continue until we terminate these services or in other specified circumstances in accordance with the TSA. We will reimburse the Former Advisor for costs to provide the services, including the allocated cost of employee wages and compensation and actually incurred out-of-pocket expenses.

Summary of Fees and Reimbursements

The following table presents the fees and reimbursements incurred and paid to the Former Advisor (dollars in thousands):


Reimbursements to Former Advisor Entities		Due to Related Party as of December 31, 2022		Six Months Ended June 30, 2023					Due to Related Party as of June 30, 2023 (Unaudited)
	Financial Statement Location			Incurred			Paid

Operating costs	General and administrative expenses/Transaction costs	$	469	$	315	(1)	$	(501)	$	283

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(1)Represents costs incurred under the TSA during the six months ended June 30, 2023.

Incentive Fee

The Special Unit Holder, an affiliate of the Former Advisor, was entitled to receive distributions equal to 15.0% of our net cash flows, whether from continuing operations, repayment of loans, disposition of assets or otherwise, but only after stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus a 6.75% cumulative, non-compounded annual pre-tax return on such invested capital. From inception through the Sale of Minority Interests, the Special Unit Holder did not receive any incentive fees.

In connection with the Sale of Minority Interests, as of June 9, 2023, the Special Unit Holder became an indirect subsidiary of us, though the Special Unit Holder continues to have a contractual obligation to pay any such incentive fees to affiliates of the Former Sponsor, if ever earned.

Investments in Joint Ventures

Solstice, the manager of the Winterfell portfolio, is a joint venture between affiliates of ISL, who own 80.0%, and us, who owns 20.0%. For the six months ended June 30, 2023, we recognized property management fee expense of $3.1 million paid to Solstice related to the Winterfell portfolio.

In June 2023, we completed the Sale of Minority Interests, involving the sale of our minority interests in the Diversified US/UK Portfolio and Eclipse Portfolio, together with $1.1 million in cash, to our Former Sponsor, who is affiliated with the majority partner of each joint venture, for all of our equity securities held by the Former Sponsor and its affiliates. Refer to “—Transaction and Financing Activities” for further discussion of the Sale of Minority Interests.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks affecting us are interest rate risk, inflation risk and credit risk. These risks are dependent on various factors beyond our control, including monetary and fiscal policies, domestic and international economic conditions and political considerations. Our market risk sensitive assets, liabilities and related derivative positions (if any) are held for investment and not for trading purposes.

Interest Rate Risk

Changes in interest rates may affect our net income as a result of changes in interest expense incurred in connection with floating-rate borrowings used to finance our equity investments. As of June 30, 2023, 14.2% of our total borrowings were floating-rate liabilities, which are related to mortgage notes payable of our direct operating investments.

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs by borrowing primarily at fixed rates. When borrowing at variable rates, we seek the lowest margins available and evaluate hedging opportunities. For our floating-rate borrowings we have entered into interest rate caps that involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The interest rate on our floating-rate liabilities is a fixed spread over an index such as LIBOR or SOFR and typically reprices every 30 days. As of June 30, 2023, a hypothetical 100 basis point increase in interest rates would increase net interest expense by $0.1 million annually, which reflects the impact of the interest rate caps in place.

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On June 30, 2023 the Financial Conduct Authority, or FCA, ceased publishing all remaining LIBOR. We are monitoring and evaluating the risks related to the discontinuation of LIBOR arising in connection with transitioning contracts to the new alternative rate, SOFR, in the third quarter of 2023. We anticipate the overall impact of the transition to on our floating-rate borrowings and interest expense to be minimal.

Inflation Risk

Many of our costs are subject to inflationary pressures. These include labor, repairs and maintenance, food costs, utilities, insurance and other operating costs. Higher rates of inflation affecting the economy may substantially affect the operating margins of our investments. While our managers have an ability to partially offset cost inflation by increasing the rates charged to residents, this ability is often limited by competitive conditions and timing may lag behind cost volatility. Therefore, there can be no assurance that cost increases can be offset by increased rates charged to residents in real time or that increased rates will not result in occupancy declines.

Credit Risk

We are subject to the credit risk of the operators of our healthcare properties. The operator of our four net lease properties failed to remit contractual monthly rent obligations and it is not probable that these obligations will be satisfied in the foreseeable future.

Risk Concentration

The following table presents the operators and managers of our properties, excluding properties owned through unconsolidated joint ventures (dollars in thousands):


	As of June 30, 2023		Six Months Ended June 30, 2023
Operator / Manager	Properties Under Management	Units Under Management(1)	Property and Other Revenues(2)		% of Total Property and Other Revenues
Solstice Senior Living(3)	32	3,970	$	61,938	61.3	%
Watermark Retirement Communities	14	1,782	23,781		23.6	%
Avamere Health Services	5	453	10,739		10.6	%
Integral Senior Living	1	40	2,458		2.4	%
Arcadia Management(4)	4	572	341		0.3	%
Other(5)	—	—	1,814		1.8	%
Total	56	6,817	$	101,071	100.0	%

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(1)Represents rooms for ALFs, ILFs and MCFs, based on predominant type.

(2)Includes rental income received from our net lease properties, as well as rental income, ancillary service fees and other related revenue earned from ILF residents and resident fee income derived from our ALFs and MCFs, which includes resident room and care charges, ancillary fees and other resident service charges.

(3)Solstice is a joint venture of which affiliates of ISL own 80%.

(4)During the six months ended June 30, 2023, we recorded rental income to the extent payments were received.

(5)Consists primarily of interest income earned on corporate-level cash and cash equivalents.

Watermark Retirement Communities and Solstice, together with their affiliates, manage substantially all of our operating properties. As a result, we are dependent upon their personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our properties efficiently and effectively. Through our 20.0% ownership of Solstice, we are entitled to certain rights and minority protections. As Solstice is a joint venture formed exclusively to operate the Winterfell portfolio, Solstice has generated, and may continue to generate, operating losses if declines in occupancy and operating revenues at our Winterfell portfolio continue.

Item 4. Controls and Procedures

Internal Control over Financial Reporting

Changes in Internal Control over Financial Reporting.

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

Our management established and maintains disclosure controls and procedures that are designed to ensure that material information relating to us and our subsidiaries required to be disclosed in reports that are filed or submitted under the Securities

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Exchange Act of 1934, as amended, or Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, management conducted an evaluation as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).

Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in the Company’s periodic reports. Our internal control framework, which includes controls over financial reporting and disclosure, continues to operate effectively.

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Part II—Other Information

Item 1. Legal Proceedings

We may be involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, any current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors

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, our book value may be negatively impacted and stockholders’ overall return may be reduced. In April 2022, our board of directors declared a special distribution to stockholders, of which approximately $97.0 million was paid in cash in May 2022, using proceeds from asset sales and not cash flow provided by operations. We did not declare any distributions during the six months ended June 30, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarizes our purchases of our common stock during the three months ended June 30, 2023:


Period	Total Number of Shares Purchased	Average Price Paid Per Share			Total Number of Shares Purchased As Part of Publicly Announced Plan or Program	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 1 to April 30	—	$	—		—	—
May 1 to May 31	—	—			—	—
June 1 to June 30	9,709,553	—		(1)	—	—
Total	9,709,553				—

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(1)On June 9, 2023, we sold our 14% interest in Healthcare GA Holdings, General Partnership, which indirectly owned the Diversified US/UK Portfolio, and our 6% interest in Eclipse Health, General Partnership, which indirectly owned the Eclipse Portfolio, together with $1.1 million in cash, to our Former Sponsor, who is affiliated with the majority partner of each joint venture, for all of the equity held by the Former Sponsor and its affiliates in us, including 9,709,553 shares of our common stock, 100 common units in the Operating Partnership and 100 special units in the Operating Partnership. Based on a variety of factors, including historical and projected revenues, market lease rates, the partners’ respective rights under the joint venture agreements, independent third-party appraisals obtained by the joint ventures and other factors deemed relevant, we estimated the value of our minority interests in both the Diversified US/UK joint venture and Eclipse joint venture to be approximately $12.5 million at the time of transaction. Based on estimated value, together with the $1.1 million of cash consideration, the average price paid per share equals $1.40. This average price per share was calculated using estimated values for the assets involved in the transaction, based on our underwriting and as determined through arms-length negotiation between third parties, and bears no relation to our book value or asset value per share, the amount that may be realized in a sale, merger or liquidation of us or our assets as a whole or an estimated value per share calculated in accordance with a different methodology using different assumptions and estimates. Refer to “—Business Update” for more information.

We adopted a Share Repurchase Program in 2012, which enabled shareholders to sell their shares to us in limited circumstances and could be amended, suspended and terminated by our board of directors at any time in their sole discretion (subject to certain notice requirements set forth in the Share Repurchase Program). On April 7, 2020, in accordance with the terms of our Share Repurchase Program, our board of directors determined to suspend all repurchases under the Share Repurchase Program effective April 30, 2020 in order to preserve capital and liquidity.

Unregistered Sales of Equity Securities

On June 21, 2023 we granted 29,010 shares of restricted stock units to each of our independent directors totaling an aggregate of 87,030 shares of restricted stock units, pursuant to our independent directors’ compensation plan. The restricted stock units are convertible, on a one-for-one-basis, into common stock on the earlier of (i) Change in Control (as defined in Section 409A of the Code) or (ii) the date of the director's "separation from service" (as defined in Section 409A of the Code).

We did not issue any shares of common stock during the six months ended June 30, 2023.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.

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EXHIBIT INDEX


Exhibit Number						Description of Exhibit
3.1						Articles of Amendment and Restatement of NorthStar Healthcare Income, Inc. (filed as Exhibit 3.1 to Pre-Effective Amendment No. 7 to the Company’s Registration Statement on Form S-11 (File No. 333-170802) and incorporated herein by reference)
3.2						Certificate of Correction of the Articles of Amendment and Restatement of NorthStar Healthcare Income, Inc. (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference)
3.3						Fourth Amended and Restated Bylaws of NorthStar Healthcare Income, Inc. (filed as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference)
4.1						Amended and Restated Distribution Reinvestment Plan (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 8, 2016 and incorporated herein by reference)
31.1*						Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2**						Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**						Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*						Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

______________________________________________________

* Filed herewith

** Furnished herewith

^ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

^^ Certain schedules and similar attachments have been omitted in reliance on Item 601(a)(5) of Regulation S-K. The Company will provide, on a supplemental basis, a copy of any omitted schedule or attachment to the SEC or its staff upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NorthStar Healthcare Income, Inc.

Date:

August 14, 2023

By:

/s/ KENDALL K. YOUNG

Name:

Kendall K. Young

Title:

Chief Executive Officer, President and Director

By:

/s/ NICHOLAS R. BALZO

Name:

Nicholas R. Balzo

Title:

Chief Financial Officer, Treasurer and Secretary