Good morning. My name is Ali, and I will be your conference operator today. At this time, I would like to welcome everyone to the Strawberry Fields REIT Third Quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, you have to press the star key followed by the number one on your telephone keypad. I would now like to turn the conference over to Jeff Bajtner, our Chief Investment Officer. Sir, please go ahead.
Thank you. Welcome to Strawberry Fields REIT's third quarter 2024 earnings call. I am the Chief Investment Officer of the company, and I focus on acquisitions of new deals, growing our operator base, and investor relations. On the call with me today are Moishe Gubin, our Chairman and CEO, and Greg Flamion, our CFO. On Friday, the company issued its 2024 third quarter results, which is available on the company's investor relations website. Our participants should be aware that this call is being recorded, and listeners are advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions, and beliefs about Strawberry Fields REIT's business and the environment in which it operates.
These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings, and may or may not reference other matters affecting the company's business or the businesses of its tenants, including factors that are beyond its control. References will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as an explanation and reconciliation of these measures to the comparable GAAP results included on the non-GAAP measure reconciliation page in our investment presentation. Now on to discussing Strawberry Fields REIT. While there are many current shareholders on the call, we also have new and prospective shareholders. I'd like to share a little bit of background about the company.
The story began 21 years ago when Mois Gubin, our Chairman and CEO, and Michael Blisko, one of our directors, purchased their first skilled nursing facility in Indiana. Once they found success with that first facility, they quickly bought a second and a third. Over the next nine years, they grew from that one facility to 33 facilities in Illinois and Indiana. In 2015, with those 33 facilities, Strawberry Fields REIT was created. The company has grown significantly since then. As of September 30th, the company owns and leases 114 facilities in nine states with over 12,800 beds. As we get closer to year-end, we look forward to growing this number. As it relates to this past quarter, I wanted to share some key highlights. The company collected 100% of contractual rents.
In July, the company filed their registration statement on Form S-3 with the Securities and Exchange Commission. In August, the SEC declared the registration statement effective, and the company established an ATM program. Through this program, the company began selling shares to the public for the first time as we initially went public through a direct listing. These shares will be sold at the company's discretion, and the ATM program is expected to provide the company with additional financing flexibility by increasing the stock's liquidity and facilitating growth. In August, the company completed the acquisition for 2 skilled nursing facilities with 254 licensed beds near San Antonio, Texas. The acquisition was for $15.25 million. The facilities are leased to the Tide Health Group, a new third-party tenant and consultant. These properties will increase the company's annual base rents by $1.525 million and include annual escalators of 3%.
In September, the company completed the acquisition of a property near Nashville, Tennessee, comprised of an 83-bed skilled nursing facility and a 23-bed assisted living facility. The acquisition was for $6.7 million. The property was added to an existing Tennessee master lease and will increase the company's annual rent by $670,000. As part of this deal, the company issued the sellers $3.1 million in Strawberry Fields REIT stock as consideration for the deal. Subsequent to quarter end, the company acquired an 86-bed skilled nursing facility in Indianapolis, Indiana, marking our 115th facility. The acquisition was for $6 million. The facility was added to an existing Indiana master lease and will increase annual rents by $600,000. The company also entered into a purchase and sale agreement to acquire 8 skilled nursing facilities with 1,111 licensed beds located in Missouri for $87.5 million.
The facilities are currently leased under a master lease agreement to a group of third-party tenants. Lastly, our board of directors authorized a cash dividend of $0.14 a share, which is an increase of $0.01 a share from the prior quarter's dividend. The dividend will be payable on December 30th, 2024, to shareholders of record on Monday, December 16th, 2024. This dividend will be our 9th consecutive quarter of paying dividends, and in that time, it will be our 4th increase. This represents a philosophy of the company to teach the market that our dividends can be relied upon. I would now like to have Greg Flamion, our Chief Financial Officer, discuss the quarterly financials.
Thank you, Jeff. Good morning, and welcome again to the Strawberry Fields third quarter earnings call. Starting off, we will discuss a quarterly comparison of the balance sheet as of September 30th, 2024, versus the balance sheet as of the prior quarter, June 30th, 2024. Total assets are $661.5 million, which is $25.7 million or 4% higher than June 30th, 2024. This increase is driven by real estate investments from the 5 properties we acquired during the quarter, as well as higher cash balances from the Series A bond raise that occurred in August 2024. This was offset by lower right of use assets as well as lower restricted cash and equivalents. Liabilities are $606.3 million, which is an increase of $21.1 million or 3.6% from the prior quarter. The increase is due to the Series A bond raise that was mentioned earlier.
The liability increase was offset by lower accounts payable and lower operating lease liabilities. Equity for the quarter was $55.2 million. This is a $4.6 million or 9.4% higher than the previous quarter. The increase is due to the higher third quarter net income and the sale of additional common stock offset by third quarter dividend distributions. Moving to our next comparison, we are reviewing an analysis of the balance sheet as of September 2024 versus September 2023. Total assets are $31.7 million or 5% higher than the prior year. This increase is due to the cash and cash equivalents, as well as higher goodwill, other intangible assets, and lease rights. The lease right increase is due to the purchase of the Indiana Master Lease 2 lease rights in February of this year. Liabilities increased $30.4 million or 5.3% from September 30, 2023.
The higher liability balance is driven by an increase of $46.6 million in net bonds, offset by lower notes payable and other debt, as well as lower accounts payable and accrued liabilities. Equity is $55.2 million as of September 2024. This is $1.3 million or 2.5% higher than September 30, 2023. The increase is driven by higher net income, a net increase in common stock. These increases were offset by higher dividend distributions and negative foreign currency related adjustments. Moving on to the next comparison. We are now discussing the quarter to date income statement comparison of Q3 2024 versus Q2 2024. The third quarter net income is $6.9 million, which is marginally lower than the net income from the prior quarter. Third quarter revenues and expenses were mostly in line with the second quarter.
The quarterly change is due to slightly higher interest expense that was offset by lower G&A expenses. Moving to the year to date P&L comparison, September 2024 year to date net income is $19.9 million, which is $5.5 million or 37.8% higher than the year to date net income in September 2023. This increase is driven by higher revenue due to new properties acquired in the trailing 12 months, offset by higher operating expenses and higher interest expenses. This concludes the review of the financial statements in the presentation. Jeff Bajtner will now discuss our current investment strategy. Jeff?
Well, actually, it's Moishe. Thank you, everybody, for joining us today. This is being our second time doing this earnings call. We're still working out our kinks. We're being [potato folks], as most of you that know us know about us. This presentation that we put on our website would have been sent out to everybody that you guys would have been following along on a screen. I just want to walk everybody through the presentation that you could find on our site. We're probably going to publish it today. The one thing to note, our financial statements are in GAAP financials, and on the GAAP financials, you're at the historical cost of the product or market, which undervalues. It doesn't put our assets at the proper value. Our enterprise value today is probably about $1.2 billion.
Like Greg said, our assets on GAAP are about 661. That's after depreciation and everything. We expect that in the fourth quarter to close on about another $110 million of assets, and that should bring us to about $1.3 billion in enterprise value. Right now we have a lot of cash, and we continue to do the ATM, and bring in more cash onto that, and that actually helps bring in more shareholders and helps the institutions get a little bit more shares. I'm thinking in the long run for managing the stock price, the ATM is going to be a useful tool for us with the help of the investing bankers that are part of our world. The next slide I want to go to is just talking about the financial statements of the revenue.
Our revenue was basically the same. That makes sense. We have straight line rents. Under straight line rents, you take the total lease for 10 years because most of our leases are 10-year leases with two five-year renewals. Under 10-year leases, you add up all the years and you divide it by the periods. It's the same number month-over-month-over-month. You can expect stability. Our current numbers could stay stable with an increase of the new assets being bought. That'll take up to about $31 million, which through four quarters, we expect that to be about $125 million next year. That's assuming we do no deals in 2025, and the likelihood of us doing no deals is very slim. Our expenses remain relatively flat. I think we're managed less expensively than most of the other REITs that are out there.
Our total overhead that we, between salaries and everybody and our total overhead for running the business, I think is less than $2 million annually. We expect that to stay relatively similar. Our expectation for net income, like I said, our top line number. It's probably about $125 million next year based on what we currently expect to close this year. With that, our FFO, which is the metric we use, should be probably closer to $75 million next year. Again, our dividend, slow and steady wins the race. We didn't want to be erratic in our dividends. So we've been keeping with being consistent. Therefore, we raised it $0.01. We kept chugging along. If you go to the page where the map is, you can see where most of our stuff is, mainly in the Midwest.
We're adding to the footprint today by buying homes in Missouri, buying homes in Kansas, and we're buying more homes in Texas and Oklahoma. Help filling the spots. Our basic investment strategy is we like to have master leases. We either add more assets to a master lease or we buy a big enough portfolio for us to add a new location. Everything that we're buying is third-party operators, unless it's an asset that fits currently into a master lease that's with an affiliate of myself. If you look at the FFO growth, there's been a 13% growth rate in our FFO. Very proud of that. Like I said, from $30 million in 2019 to $57 million in 2024. Next year we should break probably $75 million.
Our base rent also went from $72 million in 2019, now we should end up with a number around $125 million. It is quirky because we are all accountants here, Jeff, myself, Greg, your financials are in GAAP, under GAAP accounting, in a real estate company, the financials get a little wonky because you are taking depreciation and it does not look right. The reality is our assets maintain value. The tenants, they are all triple net leases. Our tenants are forced to take good care of the properties, the buildings are in great shape. They look good. We visit the properties twice a year minimally, we have good constant contact and relationships with all of our operators, the owners of the operators, as well as mid-level managers that are managing the properties.
We have not done anything crazy about the dividend, like I talked about a little bit before. I am super proud of the fact that we are only doing a 47% payout ratio, which signifies about 100% of our net income. The rest of that money is what we are using to buy new assets. That plus the ATM, we are adding debt when we need to. Our debt ratio we want to stay to about 50%. Really, our number has always been between 45 and 55. We are transforming. We are getting known to the marketplace. Even some of the new people on the call today, our analysts that I have been hounding for years get to see what understanding who we are and what we are doing. We are a very clean-ran company, we continue to do what we do.
I expect that once we get really treated like everybody else in the market, traded at a multiple that works, I could do more stock sales lower the debt load even more than where we are. Equity at the dividend rate is really our cheapest form of capital today. That being said, I will do whatever we have to do, which every action we are making is for the shareholders, that should be accretive to our stock accretive to our story and what we are doing. I am super proud of the payout ratio being below 47. Altogether, we expect the share growth is probably, we are looking at a 12% growth rate. Overall, we have a really good return for our shareholders.
I know some people just care about what the dividend is, others care they understand the stock price should go up as we make more money, the share becomes worth more money. If you look at the next slide, I might be the only one looking at this stuff, is at 10/1/2023, the stock price was $6.33, [the stock price at 10/1/2023 was $12.69. Somebody that is owning the stock, the stock has gone up. Now mind you, that is an ignored amount because that is just getting up to where our stock price should be trading.
In the long run, if the stock's trading consistently at a certain multiple, the fact that we make more money with the same amount of shares because we're using the excess cash and not necessarily diluting anybody, and we're buying more assets, it should make each share worth more, and therefore, the stock should go up. We're super proud as well of our debt, like we just talked about, where we have a bunch of our money sitting in HUD debt. 40, 45% of our debt altogether is sitting with HUD debt, which is long-term money. We have plenty of other loans that we expect in the queue to be able to move over to HUD in basic loan terms of about 35-40 years at 10-year plus 175 [straight IM]. That's a good piece of business for us.
Again, our debt today, our leverage ratio is right around 50%, and that depends on where you want to assess a cap rate on our assets. Right now that's based on a 10.25% cap rate. If you put it at an 8.5%, probably in the 40s as far as leverage. That is all from this presentation that I have. I want to thank everybody for coming. We're going to open the floor for questions.
Thank you. Ladies and gentlemen, the floor is open for questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, and you may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you. Our first question is coming from Barry Oxford with Colliers. Your line is live.
Great, guys. Thanks for taking my question. When you guys had mentioned a 10% cap rate, I was wondering if there's any spread differentially cap rates versus the region, i.e., Midwest versus the Sun Belt region. Is there a difference in cap rate or the cap rate's pretty close to each other regardless of whether it's a Midwest or Sun Belt?
Thank you, Barry. I appreciate you.
Yep.
Thanks for joining us today and appreciate the question. This is Moishe. I'll answer that. I guess one of the things that differentiates us from our peers is I'm the founder. My partner, Michael, founded the company with me 21 years ago. Because of that, I've been relatively, I wouldn't say risk averse, because we've grown consistently. We've been very regimented and disciplined on how we buy. Our 10 cap purchase, it's either feast or famine. Some years we don't do any deals; some years we do plenty of deals. Our math is the same. We're basically looking at last three years' financials, with certain add backs being that our background is nursing home operators.
No matter where the home is, whether it's in the Sun Belt or whether it's in the Rust Belt or anywhere else in the country, we're looking at the math to make sure that we're coming in day one with the tenant making a one and a quarter coverage of their rent, and where we're making 10% on our money, unlevered. We add leverage and we manage our balance sheet. Yeah, we don't see a difference because we don't do. We run this company similar to the way I run my bank, OPHC, and that is, we don't make many policy exceptions. We treat this like loan committee when we come in front of investment committee, and it's presented with 20, 30, 40 pages of material. We don't make policy exceptions.
Our policies dictate that on day one, tenant's making money and we're making our 10%, the clean deal and all the boxes are checked. We've been consistent with that. You might ask a better question, should we change it? That question was good maybe a year or two ago when their interest rates were on the rise, and where someone said to me, "You're getting squeezed." My answer was, well, I don't worry about that because we're a long game.
Even if day one, the 10% margin unlevered is what we get, and then we're not able to lever at such a great rate because of interest rates, it doesn't matter because we plan on holding that asset for minimum 10, 20, 30 years, and we should be able to get it refinanced at some point with HUD debt, and we manage our balance sheet effectively. That's what we do, and we've been consistent in how we do that.
Perfect. Appreciate the color on that. Fundamentals also within the industry seem to be fairly robust. You guys had gains in occupancy, at 70.4%. How do you see that in 2025? Can you continue to push occupancy much above this level? Look, Barry, there's a point where frictional vacancy starts to happen.
I think our portfolio, there's two sides to our portfolio. You have the big cities like the Chicago, and to a lesser extent, like Indianapolis, Louisville, Little Rock. Those homes after COVID-19, they bounced back because they had the volume of patients, and people don't want to care for people at home in the bigger cities. It's harder to find the nice wife that's willing to take care of your mother. Not to judge anybody in the world. That being said.
Right.
In our portfolio, a lot of our stuff is in farmlands, and we're in the middle of. It's beautiful, the Smoky Mountains or somewhere. That when COVID-19 came along and you had long-term people that were living in the facilities for many years and you lost that population, that has been slower to come back. If you look at our occupancy in the city, our occupancy is higher than it was before COVID-19, and that's almost near probably somewhere blended is probably 80%-90% everywhere else. Then you got farmland that's probably stuck at 60-something%, that the buildings are making money, but they're still slowly building because they don't have the amount of volume of admits and discharges. The answer is to you is yes. I think that the census occupancy, tenant operators financials are going to continue to do better.
Now with the new administration, one of the first things that happened after the president-elect became elected, CMS eliminated. They push it off, and it's going to get eliminated. A staffing mandate that was going to totally clobber the nursing home business. I mean, subject to the states giving more revenue. Yeah, I mean, occupancy totally could go up. I mean, the tailwinds are in our tenant's business are great. I mean, really great. Baby boomers and with a red government. Red government usually is not so great for social programs. From the point of regulation, the last bunch of years, the current administration has been really aggressive, and I think it's the most fines that, industry-wide, that the nursing homes have had annually, year-over-year.
The amount of fines and the amount of aggression that's been negative to the nursing homes has been the worst. I've been in this business since I graduated college as an accountant. I started as an accounts payable payroll bookkeeper literally in 1998. This is the industry that I spent all of my time on, or most of my time on, I can't say all, for the last, whatever that is, 27 years. I can tell you this past four years were probably four of the worst. I mean, with Corona and everything else, probably some of the worst years in the industry collectively. Now it's, God willing, there's a positive change that's going to be occurring. Again, from our point of view, we just want to collect our rents, and we want our tenants to take care of their residents.
That's really The more money they make, the easier it is for them to take care of their residents. When they're tight and really tight, it's harder for them, because then they have to choose between this or that when they only have X amount of dollars to spend.
Perfect. No, all of that makes sense. Going to the dividend, 47% payout, you alluded to that it's 100% of net income. Is it fair to say that going forward, you're going to have to move the dividend at basically a growth rate of the FFO or not necessarily?
No, that's exactly right. My intention, and again, we act with good governance. I'm not a dictator.
Right.
We take into consideration cash flow. We take into consideration shareholder, attracting shareholders, and what we have to do for the shareholder base, and the like. I mean, it's most likely that as our FFO increases, I mean, more than most likely, I don't know how you say. I can't say definite because you never know what's going to happen in the future. Most likely-
Right
we will see as the FFO grows, so will the dividend, at minimum. I mean, it also could be that at some point, we get large enough and the capital is that good that I could raise money at a good rate. Not debt, but equity. At that point, I could raise, and we could do similar to the other guys, and the other guys are doing a payout ratio of like 90%. I've been against that thought, I'm learning as we grow new things. I like the idea of not necessarily I separate the fact of adding shareholders because that's what I want. We want to be widely held. We want there to be liquidity in the stock price.
I separate that from the financial metrics of the business, meaning, if I could get the money from cash flow, and I don't need to sell equity and not dilute the earnings per share, I'd rather not sell the stock. The stock price is doing that well, then it makes sense to sell the stock as long as I can put the money out to use and get a good return and have it be accretive to earnings. The earnings accretion is the hardest thing to do. Everything else is accreted to book. Book, nobody cares about. That's not a metric that's used really on when you're determining to buy something.
Right.
When you're determining to buy something is on the forward-looking cash flow, if the forward-looking cash flow per share gets diluted because I sell more stock, I'm very cognizant of that, and I want to make sure that my shareholders I'm looking for adulation. I'm soft inside, and I want people to like me and think I'm doing a good job. I go out there to aim to please. That's what we're doing every day.
Well, when you look at your stock price and you look at your 10% cap rate, I mean, doesn't the math pencil out accretively?
Yeah. We're selling stock above NAV. I'm talking about in terms of EPS, accretive EPS. If I don't get that money out the door, I need to put that money out the minute I get it, either by paying down debt or buying another asset with cash for-
It's going to be a drag on earnings by definition, right?
Yeah. Exactly.
Yeah.
I want to make sure that the marketplace understands what I'm doing. I'm cognizant of it because, at the end of the day, to attract a new shareholder when they're going to see what we did, they're not necessarily. Everybody looks at stocks differently. I'd like to think that we're a lot different because of the risk factors that we have are, I think, are less than. Because we don't really suffer from economy, and interest rate risk and really economy risk because we're a business that's not a decision that you make because you want to make. You make a decision because you have to make. This is a business, people, if your mother got to the end, she needs a nursing home, you're putting her in a nursing home. You're not thinking, "Well, it's expensive." Nobody thinks that way.
They think, "I got to take care of my mother." We're in a business that the demand is going to continue to be there, and it's not like people are going to choose, "We'll keep her at home." There may be cases of that, of course, but we have a business that is always financing for relatively inexpensive costs, and there's always a social need for the product. We like to think that a shareholder that's going to listen to us is going to understand that this might be more risky from the thought process of you don't understand it, but it's not more risky when it comes to if you're putting your money in a REIT, right? Multifamily. Something can happen with the rental market. Office. Same thing like we've seen. Nursing homes, you don't see that.
The nursing homes continue to chug along, and they pay their rent. Like we said, we're collecting 100% of our rents, and we've done that year in, year out for, I don't know, 20 years. I tell people, if we had an accounts receivable person, it's the easiest job in the book because we get all of our rents wired in on the first of the month. We're not hounding people down to collect rent. They pay us, and that's the end of it. I don't remember anymore what the question was, but I think I answered you.
No, you did. You did. I appreciate the time [and] I'll go ahead and yield the floor. Thanks, guys.
Thanks, Barry.
Yep.
Thank you. Our next question is coming from Gaurav Mehta with Alliance Global Partners. Your line is live.
Yeah. Good morning. Thanks for taking my question. I wanted to ask you on the portfolio that you have under contract, just to clarify, the consultant on that portfolio is not Infinity, but another third party?
Correct. Gaurav, thanks. Thank you. Thank you for your time. Thank you for joining us today. Thank you for following us. We appreciate you. We appreciate your firm. That being said, yeah, our philosophy today is every new deal that's in new places are a completely non-related party. This is no different. This is a seasoned operator that's been running nursing homes for 30 years. He lives in Creve Coeur. Yeah, it's completely arm's length, third party, good coverage ratios day one, strong sponsor support. Yeah, it's a good deal, and it adds a new operator and a new state completely unrelated to me.
Okay. I think in your prepared remarks, you mentioned a number, $75 million of AFFO. Is that for next year, 2025, that you're expecting?
Yes.
Okay. That includes all the 4Q acquisitions that you're expecting close, right?
Yeah. Currently, we didn't announce a bunch of deals, but we have this $87.5 million deal in Missouri. We have about a $24 million deal in Kansas. We got a $5 million deal in Oklahoma. I'm not sure. I don't know if we have anything else, but we add that stuff up. We should end the year strong. The 75 is generated off of that for next year. Again, we'll probably exceed that because I'm sure we'll find something to buy next year as well.
Okay, great. Maybe last one. Earlier in your remarks, you touched upon some of the changes you're expecting from the new administration. I was hoping if you could maybe talk about your view on any impact you're expecting on Medicaid reimbursements or any other reimbursements. Any expected impact on your business?
Wow. Over the years, and as part of doing non-deal roadshows for so long that I've been doing this, I've spent a lot of time trying to educate shareholders, analysts, whoever wants to listen to me on our business. The Title XIX and Title XVIII of the Social Security Act basically has the government, under Medicaid, having to reimburse the costs of running the nursing home. Now the thing is, as time goes on, and what happened with COVID is a once in a lifetime event, hopefully never happens again in our lifetime. In that example, the reimbursement for some states are so far behind, and you saw in 2024, towards the end of the year, Kentucky finally improved, Ohio finally improved, and I think, not Tennessee, but I don't know if there was something in Texas maybe improved.
Otherwise, the cost-based reimbursement has had Indiana, Tennessee, and other states, Arkansas, increase their rates from a year later after the expenses occur. As far as Medicaid goes, really that program should always be in line to what it's doing. I don't have a thought on that. The Medicare side of things also has been relatively consistent over the last, other than a couple of hiccups in the middle when they change reimbursement here and there. We expect that to be relatively status quo, 3%-4%-5% annual increases for the nursing homes in Medicare. That's that. Again, the Medicaid is a little bit more of a story. Anyone that wants more color and they really want to hear about it, I'm glad to fill people in. I could go on and on about this. This is what's in my bones.
This is what I've done for many years. I'm not an operator for now a bunch of years, but it's still on the study of the business. If anyone wants some color afterwards, I'm glad to talk to anybody.
All right. That's all I had. Thanks for taking my questions.
Thanks, Gaurav.
Thank you. Once again, ladies and gentlemen, if you have any further questions or comments, please press star one on your telephone keypad at this time. As we have no further questions in queue at this time, I'd like to hand it back to Mr. Gubin for any closing remarks.
I appreciate everyone taking time out of their lives, certainly at the open of the market, to spend with us. In the long run, our stock will make you all proud. We're slow and steady, doing stuff consistently and continue to chugging along, making money and growing our net income and growing our AFFO per share. God willing, we'll continue to prove that quarter in, quarter out. Thank you for your time, and have a very nice day.
Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.