Executive Summary / Key Takeaways

• Disciplined Niche Dominance: Strawberry Fields REIT has carved out a defensible niche as the closest pure-play skilled nursing facility REIT, targeting $20-50 million acquisitions in secondary markets where larger competitors won't compete, consistently underwriting deals to a 10% unlevered return with 1.25x rent coverage.

• Growth-Fueled Leverage Ticking Clock: The company grew assets 33% in 2025 to $880.6 million while maintaining 100% rent collection, but funded this expansion with an aggressive debt load of $779.4 million against a $729.5 million market cap, creating a debt-to-equity ratio of 12.39 that exposes shareholders to significant refinancing risk.

• Master Lease Moat with Concentration Risk: 89% of facilities under master leases provide predictable cash flows and 2.01x EBITDARM coverage, but the strategy concentrates risk in regional operators, with the top tenant relationships representing an implied 50% of revenue and Illinois operations flagged as "the biggest laggard" due to price-based Medicaid reimbursement.

• Valuation Disconnect and Dividend Trap: Management claims the stock trades at a 40% discount to NAV ($13 per share at a 10-cap), a claim contradicted by the current share price of $13.14, which is effectively at NAV, leaving minimal cushion for dividend growth or reinvestment, making the 4.58% yield vulnerable to any operational hiccup.

• The 2026 Refinancing Cliff: With $305.2 million in balloon payments beginning in 2026—including $91.4 million in Series A bonds and $74.9 million in Series C bonds—the company's ability to refinance at favorable rates will determine whether this growth story survives or becomes a cautionary tale of overleverage.

Setting the Scene: The Pure-Play SNF Operator

Strawberry Fields REIT, incorporated in Maryland in July 2019 but tracing its operational roots to a 2003 Indiana skilled nursing facility acquisition, has spent two decades building what management calls "the closest pure-play skilled nursing REIT in the market." The company makes money through a simple but effective model: acquire skilled nursing facilities in secondary markets, lease them to experienced regional operators under long-term triple-net master leases, and collect contractual rent escalators while tenants absorb all operational expenses. As of September 30, 2025, this approach generated $39.7 million in quarterly revenue across 132 properties with 15,542 licensed beds, with 91.5% of facilities dedicated to skilled nursing care.

The industry structure explains why this niche works. Skilled nursing demand is driven by non-discretionary demographics—aging baby boomers requiring post-acute care—and funded primarily by government programs (Medicare and Medicaid). This creates a recession-resistant revenue base that management describes as "relatively bulletproof" and "government paid for," making it less susceptible to inflationary pressures. The problem for large REITs like Omega Healthcare (OHI) and Sabra Health Care (SBRA) is that these smaller, regional assets don't move the needle on their $10+ billion portfolios. Strawberry Fields exploits this gap by targeting the $20-50 million deal range where it faces "less competition from larger REITs and owner-operators," allowing it to maintain disciplined 10% unlevered return thresholds that larger players have abandoned in favor of 8-8.5% cap rates.

Strawberry Fields sits in the middle of the healthcare REIT value chain, connecting capital markets to fragmented regional operators. The company's UPREIT structure, where Strawberry Fields Realty LP holds assets and the public corporation acts as general partner owning 22.7% of operating partnership units, provides tax efficiency and acquisition currency. This positioning matters because it allows the company to acquire properties using a mix of cash, debt, and OP units, preserving capital while maintaining its 10% return hurdle. The weighted average 7.3-year remaining lease term provides stability, but also means the company must constantly replenish its pipeline to maintain growth.

Strategic Differentiation: The Master Lease Machine

The company's core competitive advantage lies in its master lease structure, which covers 89% of facilities. Unlike single-property leases, master leases bundle multiple facilities under one agreement, creating tenant stickiness and cross-default provisions that protect the landlord. When Strawberry Fields acquires a new property in an existing state, it "adds new facilities to existing master leases," immediately layering incremental rent onto established relationships. For new states, management insists on "sizable portfolios of at least 500 beds" to justify creating a new master lease. This approach creates a moat because regional operators value the relationship and the ability to expand within a familiar landlord structure, while Strawberry Fields benefits from operational simplicity and rent concentration.

The triple-net lease structure, where tenants pay real estate taxes, insurance, and capital expenditures, transforms Strawberry Fields into a pure rent collector with 89.24% gross margins. This matters because it eliminates the operational volatility that plagues healthcare operators—labor cost inflation, regulatory compliance, and occupancy fluctuations—all become the tenant's problem. The company's 100% rent collection rate throughout 2024 and 2025, even as Illinois facilities "struggle" with price-based Medicaid reimbursement, validates the underwriting discipline. However, this creates a hidden risk: the company's fortunes are tied to tenant credit quality, and the 2.01x EBITDARM coverage ratio , while healthy, can deteriorate quickly if regional operators face reimbursement cuts.

Management's stated goal of moving "everything on the master leases" with a target of "four or five facilities" minimum per lease reveals the strategy's Achilles' heel. While master leases provide stability, they also create concentration risk. The Kentucky master lease restructuring in January 2025, which involved a $50.9 million note payable to the former tenant's parent, demonstrates how the company must sometimes provide vendor financing to make deals work. This blurs the line between landlord and lender, adding credit risk to the real estate model.

Financial Performance: Growth Bought with Debt

The financial results tell a story of aggressive expansion funded by increasingly expensive debt. For the nine months ended September 30, 2025, revenue jumped 33% to $114.9 million, while net income rose a more modest 23% to $24.5 million. The gap between revenue and profit growth reflects the cost of leverage: interest expense surged 54% to $37.1 million, consuming what would otherwise be substantial operating leverage. This is the "so what" behind the growth story—every acquisition must generate enough incremental rent to cover not just its purchase price but also the rising cost of debt.

The projected $72.7 million in 2025 AFFO, representing a 28.2% increase, appears impressive until examined against the capital structure. The company's dividend policy, which increased quarterly payouts from $0.12 to $0.16 per share in 2025, consumes 95% of AFFO. Management explicitly states they "argue in the boardroom" to keep the dividend low enough to fund acquisitions, but the 95% payout ratio leaves minimal retained capital for the $150-160 million annual acquisition target. This creates a dependency on external capital—either debt or equity—to fund growth.

The balance sheet reveals the true cost of the strategy. Total indebtedness of $779.4 million represents 107% of market capitalization, with floating-rate debt comprising 20.8% of the total. A 100 basis point increase in SOFR would reduce annual cash flow by $1.6 million, directly impacting AFFO and dividend coverage. The $305.2 million in balloon payments through 2029, starting with $166.3 million in 2026 alone, creates a refinancing cliff that management acknowledges but downplays. They believe "overall level of indebtedness is appropriate and typical," yet the 12.39 debt-to-equity ratio far exceeds peer averages (OHI: 0.95, SBRA: 0.92).

Outlook and Execution Risk: The Pipeline Promise

Management's guidance for 2025 and beyond rests on a pipeline exceeding $250 million, with "good volume in the first quarter '26" expected to push annual spending toward $200 million. The company's underwriting standards remain unchanged—10% unlevered returns, 1.25x day-one coverage—but the math becomes harder as interest rates rise. The Series D bonds, which carry a 9.10% interest rate and mature in September 2026, illustrate the problem: management expects to refinance these at "a rate 3 points lower," but market conditions may not cooperate.

The regulatory environment provides a potential tailwind. Management is "optimistic" about Trump 2.0, expecting "the regulatory side to be an improvement" after "four of the worst years" of aggressive enforcement. Illinois and Kentucky have increased Medicaid rates, and occupancy in city locations exceeds pre-COVID levels. This matters because it improves tenant credit quality and rent coverage, but the Illinois market remains "the biggest laggard" with farmland locations "stuck around 60-something percent" occupancy.

The company's geographic diversification strategy—no state or tenant exceeds 25% of rents—provides some protection, but the concentration in Indiana (25%), Kentucky, and Illinois creates regional exposure to Midwest economic conditions. The plan to "divest from some Illinois operations where related parties are tenants" suggests management recognizes this risk, but execution remains uncertain.

Risks and Asymmetries: When the Music Stops

The central risk to the thesis is refinancing. With $305.2 million in balloon payments over the next four years and floating-rate debt already pressuring interest expense, the company faces a potential liquidity crunch if credit markets tighten. Management's belief that "debt is cheaper than equity" works only when rates are stable and asset values appreciate. If cap rates rise from current 10% levels, the company's $1.1 billion historical cost basis could face impairment, triggering covenant violations on its commercial mortgage loans and bonds.

Tenant concentration presents another asymmetry. While the company has diversified from 10 to 40 operators, the top relationships still represent roughly half of revenue. The Kentucky master lease restructuring, which involved taking a $50.9 million note from the tenant's parent, shows how far management will go to preserve key relationships. If a major tenant defaults, the master lease structure could collapse multiple facilities simultaneously.

The Illinois market exemplifies downside risk. Despite "getting our rent" and "sufficient" coverage over 1.0x, management admits "a couple of homes are struggling" in a state with price-based Medicaid that "struggles to keep pace with rising labor costs." A reimbursement cut or regulatory change could push these marginal facilities into default, creating a domino effect across the master lease portfolio.

On the upside, successful refinancing and continued acquisition execution could drive AFFO per share toward $1.40, supporting a higher dividend and potential multiple expansion. The company's low 0.18 beta suggests the market views it as defensive, but this ignores the leverage-induced equity risk. If management can navigate the 2026 refinancing cliff and maintain its 10% return discipline, the stock could re-rate toward peer multiples.

Valuation Context: Cheap on Cash Flow, Expensive on Risk

At $13.14 per share, Strawberry Fields trades at 7.74x operating cash flow and 8.26x free cash flow, appearing cheap relative to REIT peers. The 4.58% dividend yield exceeds the 10-year Treasury by 200 basis points, offering income investors a premium for what management frames as a stable, government-backed revenue stream. Enterprise value of $1.49 billion represents 10.22x revenue and 12.14x EBITDA, reasonable multiples for a growing REIT.

However, the price-to-book ratio of 12.08x signals extreme premium to asset value, while the 95% payout ratio suggests the dividend is barely sustainable. Management's claim that NAV is "close to $13 a share" at a 10-cap implies the stock trades at fair value, not a discount, contradicting their "40% discount" narrative. The debt-to-equity ratio of 12.39x is the highest among healthcare REIT peers (OHI: 0.95x, SBRA: 0.92x, NHI: 0.92x), indicating equity investors are last in line behind $779.4 million of creditors.

Peer comparisons reveal the valuation gap. Omega Healthcare trades at 24.3x earnings with a 6.13% yield and 99.2% gross margins, while Sabra trades at 26.3x earnings with a 6.39% yield. Strawberry Fields' 21.5x P/E appears cheaper, but this reflects higher risk, not better value. The company's 52.78% ROE is inflated by leverage, while the 6.40% ROA lags peers, confirming that returns are borrowed, not earned.

Conclusion: A Compelling Story with a Ticking Clock

Strawberry Fields REIT has executed a disciplined strategy in an attractive niche, generating 33% asset growth while maintaining perfect rent collection and 2.01x coverage. The pure-play SNF focus and master lease model create a moat that larger REITs cannot replicate, while the $250 million acquisition pipeline promises continued expansion. Management's optimism about regulatory tailwinds and demographic demand supports the growth narrative.

Yet the story's success hinges entirely on navigating the 2026 refinancing cliff. With $305.2 million in balloon payments, 20.8% floating-rate exposure, and a 95% dividend payout ratio, the company has minimal margin for error. The 12.39x debt-to-equity ratio is not just high—it's potentially unsustainable if credit conditions tighten or cap rates rise from management's 10% target. Investors must monitor two critical variables: the company's ability to refinance 2026 maturities at favorable rates, and tenant credit quality in struggling markets like Illinois. If Strawberry Fields clears these hurdles, the stock could re-rate toward peer valuations. If not, the 10% yield machine may become a case study in the dangers of growth funded by excess leverage.