Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the U.S. Securities and Exchange Commission (the "SEC") March 26, 2025.

Overview

As of June 30, 2025, our ownership interests in our seven real estate properties of senior housing facilities was as follows: 100% ownership of three properties and a 95.3% interest in four properties in a consolidated joint venture, Cornerstone Healthcare Partners LLC. We also have a 10% interest in two unconsolidated equity-method investments (collectively, our "Equity-Method Investments") that hold an aggregate of 13 properties. As used in this report, the "Company," "we," "us" and "our" refer to Summit Healthcare REIT, Inc. and its consolidated subsidiaries, except where the context otherwise requires.

Our revenues are comprised largely of tenant rental income from our real estate properties, including rents reported on a straight-line basis over the initial term of each tenant lease, resident fees and services and asset management fees resulting from our Equity-Method Investments. We also receive cash distributions from our Equity-Method Investments, which are included in net cash provided by operating activities and net cash provided by investing activities in our condensed consolidated statements of cash flows. Our growth depends, in part, on our ability to continue to raise joint venture equity or other equity, acquire new healthcare properties at attractive prices, negotiate long-term tenant leases with sustainable rental rate escalation terms and control our expenses. Our operations are impacted by property-specific, market-specific, general economic, regulatory and other conditions.

We believe that continued investing in senior housing facilities is accretive to earnings and stockholder value. Senior housing facilities include independent living facilities ("IL"), skilled nursing facilities ("SNF"), assisted living facilities ("AL"), memory care facilities ("MC") and continuing care retirement communities ("CCRC"). Each of these types of facilities focuses on different segments of the senior population. We are also evaluating alternative opportunities in the seniors housing and care sector that we believe will contribute to earnings and shareholder value.

Current Market and Economic Conditions

As of mid-July 2025, the U.S. economy remains in a period of elevated uncertainty marked by persistent inflationary pressures, tight credit conditions, and ongoing geopolitical and policy-driven disruptions. The tariffs announced earlier this year by President Donald Trump have begun to impact supply chains more broadly, increasing costs across multiple industries and contributing to rising consumer prices. In response, several major trading partners have enacted retaliatory measures, further straining global trade flows.

Financial markets continue to reflect this volatility. Equity indices have experienced significant fluctuations, and gold has held near record highs. The Federal Reserve has reiterated its commitment to maintaining higher interest rates for longer, citing persistent core inflation and a resilient labor market. Borrowing costs remain at multi-decade highs, further tightening capital availability-particularly in sectors like real estate that are highly sensitive to interest rates.

Within the senior housing and care sector, these macroeconomic conditions are having tangible effects. Tariff-related cost increases continue to drive up the price of construction materials, pressuring development pipelines. At the same time, rising operating expenses-from labor and food to insurance and utilities-are compressing margins. Labor shortages remain acute, particularly in skilled nursing and assisted living settings, and proposed immigration restrictions are likely to further constrain the available workforce.

Nevertheless, the long-term fundamentals of the industry remain favorable. The aging of the baby boomer generation continues to drive steady demand growth, and occupancy rates across many markets have shown gradual improvement. Operators and capital providers alike are navigating this complex environment with a focus on cost management, workforce stabilization, and selective investment activity as they await more favorable financing conditions.

Recent Developments

We have spent the last several years evaluating the value proposition of each of our asset holdings and assessing how to best maximize their value for the benefit of our stockholders. In several cases, this has meant seeking the sale of our properties and concentrating our efforts towards the properties showing the most economic stability and potential for growth.

In March 2024, we derecognized the eight skilled nursing facilities located in Georgia (collectively, the "GA8 Properties") in connection with certain loan defaults and in December 2024, entered into Membership Interest Assignment and Release of Guaranty Agreements (the "Release Agreements") with Oxford, the holder of the second and mezzanine loans, and CIBC, the senior lender for the first priority loan. As a result of the execution of the Release Agreements, Summit transferred all of the outstanding membership interests in the GA Holdco and GA8 Properties to an unaffiliated transferee and obtained the release of all guaranties from all three loans with no further obligations. Summit also concurrently resigned as Manager of GA Holdco.

In September 2024, we sold three properties located in California (collectively, the "CA3), recorded an $11.2 million gain on sale of real estate properties and received approximately $14.9 million in cash.

With respect to our equity-method investments, in May 2024, the Fantasia III JV sold their eight properties for approximately $60.0 million. We received approximately $2.1 million in cash from the sale resulting in the winding-up of our equity-method investment and as such, as of May 2, 2024, we no longer have an equity-method interest in the Fantasia III JV. During the year ended December 31, 2024, the SUL JV sold six properties within the SUL JV and we received an aggregate of approximately $2.9 million in cash. Additionally, in May 2025, the SUL JV sold two properties within the SUL JV and we received an aggregate of approximately $0.4 million in cash. Also, in connection with Fantasia II JV's sale of its two properties in May 2025, we wrote off the equity-method investment balance of approximately $(0.3 million) and as of June 30, 2025, we no longer have an equity-method investment in the Fantasia II JV.

Summit Portfolio Properties

At June 30, 2025, five of our seven properties are 100% leased to the tenants of the related facilities. The other two properties are each 100% leased to an affiliated subsidiary (Pennington Gardens Operations LLC ("Pennington Gardens") and Sundial Operations LLC ("Sundial"), collectively, the "Operated Properties") which are operated directly and earn resident fees and service revenue.

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The following table provides summary information (excluding the 13 properties held by our unconsolidated Equity-Method Investments) regarding these properties as of June 30, 2025:

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Summit Equity-Method Investment Portfolio Properties

Our primary source of capital since 2015 has been institutional funds raised through a joint venture structure and accounted for as equity-method investments; however, in the future, we may raise additional capital through alternative methods if warranted by market conditions or other factors.

Summit Union Life Holdings, LLC

In April 2015, through our operating partnership ("Operating Partnership"), we formed Summit Union Life Holdings, LLC ("SUL JV") with Best Years, LLC ("Best Years"), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and entered into a limited liability company with Best Years with respect to the SUL JV (the "SUL LLC Agreement"). We have a 10% interest in the SUL JV which owns seven properties. The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements.

In May 2025, the SUL JV sold two of its properties for a total gain of approximately $4.0 million and for the three and six months ended June 30, 2025, we recorded our 10% of the gain on the sales of approximately $0.4 million. We received approximately $0.4 million in cash from the capital proceeds of the sales. In June 2025, the SUL JV impaired two properties due to pending sales. We recorded our 10% of the impairment charge of approximately $0.4 million in the condensed consolidated statements of operations for the three and six months ended June 30, 2025.

In March 2024, the SUL JV sold one of its properties for a total gain of approximately $7.7 million. We received approximately $1.9 million in cash in April 2024 from the capital proceeds of the sale (of which approximately $0.1 million was our 10% accrued but unpaid return plus our total contribution and approximately $1.8 million was 25% of the remaining proceeds as due to us per the SUL LLC Agreement). In May 2024, the SUL JV sold one of the properties for a total gain of approximately $0.9 million and we recorded our 10% of the gain on the sales of approximately $0.1 million. In November 2024, the SUL JV sold four properties for a gain of approximately $11.1 million. We recorded our 10% share of the gain of approximately $1.1 million.

As of June 30, 2025 and December 31, 2024, the balance of our equity-method investment related to the SUL JV was approximately $0.5 million and $0.7 million, respectively.

Equity-Method Partner - Fantasia Investment III LLC

In 2016 and 2017, through our Operating Partnership, we entered into two separate limited liability company agreements (collectively, the "Fantasia Agreements") with Fantasia Investment III LLC ("Fantasia"), an unrelated entity and a U.S.-based affiliate of Fantasia Holdings Group Co., Limited (a Chinese corporation listed on the Stock Exchange of Hong Kong (HKEX)), and formed two separate companies, and through May 30, 2025, Summit Fantasia Holdings II, LLC ("Fantasia II JV") of which we owned a 20% interest in two skilled nursing facilities located in Rhode Island, and through May 1, 2024, Summit Fantasia Holdings III, LLC ("Fantasia III JV") (collectively, the "Fantasia JVs").

The Fantasia JVs were not consolidated in our condensed consolidated financial statements and were accounted for under the equity-method in our condensed consolidated financial statements.

Through March 31, 2025, we had continued to report losses incurred in the Fantasia II JV as an equity-method investment because of our ongoing intention to fund the JV. As of April 1, 2025, we no longer intended to fund the Fantasia II JV due to its execution of an agreement to sell its two properties in May 2025 and therefore did not record any further losses incurred by the Fantasia II JV. As of May 30, 2025, we wrote off the equity-method investment balance of $(0.3 million) and as such, we no longer have an equity-method investment in the Fantasia II JV.

In May 2024, the Fantasia III JV sold their eight properties for approximately $60.0 million. We received approximately $2.1 million in cash from the sale resulting in the winding-up of our equity-method investment and as such, as of May 2, 2024, we no longer have an equity-method interest in the Fantasia III JV.

Summit Fantasy Pearl Holdings, LLC

In October 2017, through our Operating Partnership, we entered into a limited liability company agreement (the "FPH LLC Agreement") with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company ("Atlantis"), and Fantasy Pearl LLC, a Delaware limited liability company ("Fantasy"), and formed Summit Fantasy Pearl Holdings, LLC (the "FPH JV"). The FPH JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of June 30, 2025 and December 31, 2024, the balance of our equity-method investment related to the FPH JV was approximately ($0.1) million.

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Distributions from Equity-Method Investments

For the six months ended June 30, 2025 and 2024, we recorded distributions and cash received for distributions from our Equity-Method Investments as follows:

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Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024 as filed with the SEC on March 26, 2025.

Results of Operations

Our results of operations are described below:

Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024

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Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating costs include insurance and property taxes, and resident costs are related to the Operated Properties. Net operating income decreased approximately $0.4 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 primarily due to the sale of the CA3 Properties in September 2024, for which there was no revenue for these properties in the three months ended June 30, 2025.

The decrease in asset management fees of approximately $0.03 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is due primarily to the sale of the Fantasia III JV in May 2024 and also a reduction in the asset management fees from the SUL JV due to the sales of two properties in May 2025 and six properties in 2024 (see Note 5 to the accompanying Notes to Condensed Consolidated Financial Statements).

The decrease in general and administrative of approximately $0.4 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is primarily due to a decrease in legal fees of approximately $0.2 million and payroll expenses of approximately $0.1 million, and the write off of a software project of approximately $0.1 million in the three months ended June 30, 2024.

The decrease in depreciation and amortization of approximately $0.1 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is primarily due to sale of the CA3 Properties in September 2024, for which there was no depreciation expense for these properties in the three months ended June 30, 2025.

The decrease in income from equity-method investees for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 of approximately $0.9 million is primarily related to the gain recorded in May 2024 from the sale of properties in the Fantasia III JV.

The approximately $3.3 million gain on derecognition of assets associated with GA8 Properties resulted from the additional interest expenses for the GA8 Properties in the three months ended June 30, 2024. See Note 14 in the accompanying Notes to the Condensed Consolidated Financial Statements.

The increase in other income of approximately $0.2 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is primarily due to the interest received on the cash we received from the sale of the CA3 Properties and Equity-Method Investment proceeds.

The decrease in interest expense of approximately $3.7 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is primarily due to interest for the GA8 Properties and the CA3 Properties, for which there was no interest expense for these properties in the three months ended June 30, 2025.

Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024

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Total rental revenues for our properties includes rental revenues and tenant reimbursements for property taxes and insurance. Resident fees and services income are generated from the Operated Properties. Property operating costs include insurance, and property taxes, and resident costs are related to the Operated Properties. Net operating income decreased approximately $2.7 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 primarily due to a decrease in total rental revenues and property operating costs from the derecognition of the GA8 Properties as of March 11, 2024, of approximately $2.0 million and the sale of the CA3 Properties in 2024 of approximately $1.0 million offset by an increase in net operating income of approximately $0.3 million for the Operated Properties.

The decrease in asset management fees of approximately $0.1 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 is mainly due the reduction of asset management fees from the SUL JV due to the sales of properties in 2025 and 2024, no asset management fees from the Fantasia II JV due to the tenants' receivership, and none from the Fantasia III JV due to the sale of its properties in May 2024.

The decrease in depreciation and amortization of $1.2 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 is primarily due to the derecognition of the GA8 Properties and the sale of the CA3 Properties in 2024.

The decrease in income from equity-method investees of approximately $1.7 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 is mainly due to $0.8 million equity-method income recorded from the sale of the properties in the SUL JV in 2024 and $0.8 million equity-method income recorded from the sale of properties in the Fantasia III JV in May 2024.

The approximately $21.0 million gain on derecognition of assets associated with GA8 Properties resulted from the derecognition of the GA8 Properties in March 2024. See Note 14 in the accompanying Notes to the Condensed Consolidated Financial Statements.

The increase in other income of approximately $0.3 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 is primarily due to the interest received on the cash we received from the sale of the CA3 Properties and Equity-Method Investment proceeds.

The decrease in interest expense of $7.7 million for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 is primarily due to interest for the GA8 Properties and the CA3 Properties, for which there was no interest expense for these properties in the six months ended June 30, 2025.

Liquidity and Capital Resources

As of June 30, 2025, we had approximately $23.8 million in cash and cash equivalents on hand. Based on current conditions, we believe that we have sufficient capital resources to sustain operations.

Going forward, we expect our primary sources of cash to be rental revenues and equity-method investment distributions. In addition, we may increase cash through the sale of additional properties, which may result in the derecognition of properties we already own. For the foreseeable future, we expect our primary uses of cash to be for funding future acquisitions, operating expenses, interest expense on outstanding indebtedness, the repayment of principal on loans payable, and shareholder distributions. We may also incur expenditures for renovations of our existing properties, making our facilities more appealing in their market.

Seven of our loans payable obligations are long-term, fixed rate U.S. Department of Housing and Urban Development ("HUD")-insured loans that mature between 2039 and 2055.

Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties, or refinancing results in excess loan proceeds. Our liquidity will decrease as proceeds are expended in connection with our acquisitions and operation of properties. In regard to our Operated Properties, our intent is to stabilize the operations of the facilities and market them for sale due to the significantly reduced willingness of AL manager/operators to execute long-term triple-net leases.

Credit Facilities and Loan Agreements

As of June 30, 2025, we had debt obligations of approximately $42.0 million, the outstanding balance by lender is as follows:

Distributions

On April 15, 2025, the Company declared a cash dividend of $0.045 per share (approximately $1.0 million) to shareholders of record as of April 17, 2025, which was paid on April 30, 2025. No distributions were declared or paid in 2024.

Funds from Operations ("FFO")

FFO is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts ("NAREIT"). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.

Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes real estate depreciation and amortization, gains and losses from property dispositions, impairments and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.

The following is the reconciliation from net income (loss) applicable to common stockholders, the most direct comparable financial measure calculated and presented with GAAP, to FFO for the three and six months ended June 30, 2025 and 2024:

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Subsequent Events

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See Note 16 to the accompanying Notes to Condensed Consolidated Financial Statements.

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