Attached files
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EX-32.2 - EXHIBIT 32.2 - Griffin-American Healthcare REIT II, Inc. | c07949exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Griffin-American Healthcare REIT II, Inc. | c07949exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Griffin-American Healthcare REIT II, Inc. | c07949exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Griffin-American Healthcare REIT II, Inc. | c07949exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-158111 (1933 Act)
GRUBB & ELLIS HEALTHCARE REIT II, INC.
(Exact name of registrant as specified in its charter)
Maryland | 26-4008719 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1551 N. Tustin Avenue, Suite 300, Santa Ana, California |
92705 |
|
(Address of principal executive offices) | (Zip Code) |
(714) 667-8252
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of October 31, 2010, there were 11,869,701 shares of common stock of Grubb & Ellis
Healthcare REIT II, Inc. outstanding.
Grubb & Ellis Healthcare REIT II, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
(A Maryland Corporation)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
||||||||
2 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
33 | ||||||||
45 | ||||||||
46 | ||||||||
PART II OTHER INFORMATION |
||||||||
47 | ||||||||
47 | ||||||||
51 | ||||||||
52 | ||||||||
52 | ||||||||
52 | ||||||||
52 | ||||||||
53 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2010 and December 31, 2009
(Unaudited)
As of September 30, 2010 and December 31, 2009
(Unaudited)
September 30, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Real estate investments: |
||||||||
Operating properties, net |
$ | 118,570,000 | $ | | ||||
Cash and cash equivalents |
2,954,000 | 13,773,000 | ||||||
Accounts and other receivables |
453,000 | | ||||||
Restricted cash |
2,225,000 | | ||||||
Real estate and escrow deposits |
759,000 | | ||||||
Identified intangible assets, net |
20,199,000 | | ||||||
Other assets, net |
1,857,000 | 36,000 | ||||||
Total assets |
$ | 147,017,000 | $ | 13,809,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Mortgage loan payables, net |
$ | 42,128,000 | $ | | ||||
Line of credit |
12,650,000 | | ||||||
Accounts payable and accrued liabilities |
2,324,000 | 178,000 | ||||||
Accounts payable due to affiliates |
464,000 | 347,000 | ||||||
Derivative financial instrument |
503,000 | | ||||||
Identified intangible liabilities, net |
147,000 | | ||||||
Security deposits, prepaid rent and other liabilities |
3,190,000 | | ||||||
Total liabilities |
61,406,000 | 525,000 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Equity: |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value; 200,000,000 shares authorized;
none issued and outstanding |
| | ||||||
Common stock, $0.01 par value; 1,000,000,000 shares authorized;
10,574,010 and 1,532,268 shares issued and outstanding
as of September 30, 2010 and December 31, 2009, respectively |
106,000 | 15,000 | ||||||
Additional paid-in capital |
94,226,000 | 13,549,000 | ||||||
Accumulated deficit |
(8,846,000 | ) | (281,000 | ) | ||||
Total stockholders equity |
85,486,000 | 13,283,000 | ||||||
Noncontrolling interests (Note 12) |
125,000 | 1,000 | ||||||
Total equity |
85,611,000 | 13,284,000 | ||||||
Total liabilities and equity |
$ | 147,017,000 | $ | 13,809,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
Period from | ||||||||||||||||
January 7, 2009 | ||||||||||||||||
Three Months Ended | Nine Months | (Date of Inception) | ||||||||||||||
September 30, | Ended | through | ||||||||||||||
2010 | 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 2,807,000 | $ | | $ | 4,010,000 | $ | | ||||||||
Expenses: |
||||||||||||||||
Rental expenses |
834,000 | | 1,241,000 | | ||||||||||||
General and administrative |
503,000 | 62,000 | 1,048,000 | 62,000 | ||||||||||||
Acquisition related expenses |
2,847,000 | | 5,179,000 | | ||||||||||||
Depreciation and amortization |
1,157,000 | | 1,722,000 | | ||||||||||||
Total expenses |
5,341,000 | 62,000 | 9,190,000 | 62,000 | ||||||||||||
Loss from operations |
(2,534,000 | ) | (62,000 | ) | (5,180,000 | ) | (62,000 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of deferred
financing costs and debt discount): |
||||||||||||||||
Interest expense related to mortgage
loan payables, line of credit and derivative
financial instrument |
(323,000 | ) | | (432,000 | ) | | ||||||||||
Loss in fair value of derivative financial instrument |
(74,000 | ) | | (194,000 | ) | | ||||||||||
Interest income |
1,000 | | 14,000 | | ||||||||||||
Net loss |
(2,930,000 | ) | (62,000 | ) | (5,792,000 | ) | (62,000 | ) | ||||||||
Less: Net income attributable to
noncontrolling interests |
1,000 | | 1,000 | | ||||||||||||
Net loss attributable to controlling interests |
$ | (2,931,000 | ) | $ | (62,000 | ) | $ | (5,793,000 | ) | $ | (62,000 | ) | ||||
Net loss per common share attributable to controlling
interests basic and diluted |
$ | (0.34 | ) | $ | (3.10 | ) | $ | (1.02 | ) | $ | (3.46 | ) | ||||
Weighted average number of common shares
outstanding basic and diluted |
8,745,255 | 20,000 | 5,687,117 | 17,895 | ||||||||||||
Distributions declared per common share |
$ | 0.16 | $ | | $ | 0.49 | $ | | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interests | Total Equity | ||||||||||||||||||||||
BALANCE December 31, 2009 |
1,532,268 | $ | 15,000 | $ | 13,549,000 | $ | | $ | (281,000 | ) | $ | 1,000 | $ | 13,284,000 | ||||||||||||||
Issuance of common stock |
8,930,259 | 90,000 | 89,000,000 | | | | 89,090,000 | |||||||||||||||||||||
Offering costs |
| | (9,605,000 | ) | | | | (9,605,000 | ) | |||||||||||||||||||
Issuance of vested and nonvested
restricted common stock |
7,500 | | 15,000 | | | | 15,000 | |||||||||||||||||||||
Issuance of common stock under the
DRIP |
114,983 | 1,000 | 1,091,000 | | | | 1,092,000 | |||||||||||||||||||||
Repurchase of common stock |
(11,000 | ) | | (110,000 | ) | | | | (110,000 | ) | ||||||||||||||||||
Amortization of nonvested common
stock compensation |
| | 27,000 | | | | 27,000 | |||||||||||||||||||||
Contribution from sponsor |
| | 259,000 | | | | 259,000 | |||||||||||||||||||||
Contribution from noncontrolling
interest |
| | | | | 200,000 | 200,000 | |||||||||||||||||||||
Distribution to noncontrolling
interest |
| | | | | (77,000 | ) | (77,000 | ) | |||||||||||||||||||
Distributions declared |
| | | | (2,772,000 | ) | | (2,772,000 | ) | |||||||||||||||||||
Net (loss) income |
| | | | (5,793,000 | ) | 1,000 | (5,792,000 | ) | |||||||||||||||||||
BALANCE September 30, 2010 |
10,574,010 | $ | 106,000 | $ | 94,226,000 | $ | | $ | (8,846,000 | ) | $ | 125,000 | $ | 85,611,000 | ||||||||||||||
Stockholders Equity | ||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interests | Total Equity | ||||||||||||||||||||||
BALANCE January 7, 2009 |
| $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
(Date of Inception) |
| | | | | | | |||||||||||||||||||||
Issuance of common stock |
20,000 | | 200,000 | | | | 200,000 | |||||||||||||||||||||
Contribution from noncontrolling
interest to our
operating
partnership |
| | | | | 2,000 | 2,000 | |||||||||||||||||||||
Net loss |
| | | | (62,000 | ) | | (62,000 | ) | |||||||||||||||||||
BALANCE September 30, 2009 |
20,000 | $ | | $ | 200,000 | $ | | $ | (62,000 | ) | $ | 2,000 | $ | 140,000 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
Period from | ||||||||
January 7, 2009 | ||||||||
Nine Months | (Date of Inception) | |||||||
Ended | through | |||||||
September 30, 2010 | September 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (5,792,000 | ) | $ | (62,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization (including deferred financing costs, above/below market
leases, leasehold interests, debt discount and deferred rent receivable) |
1,598,000 | | ||||||
Stock based compensation |
42,000 | | ||||||
Change in fair value of derivative financial instrument |
194,000 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts and other receivables |
(453,000 | ) | | |||||
Other assets, net |
(181,000 | ) | | |||||
Accounts payable and accrued liabilities |
1,256,000 | 25,000 | ||||||
Accounts payable due to affiliates |
120,000 | 37,000 | ||||||
Security deposits, prepaid rent and other liabilities |
(264,000 | ) | | |||||
Net cash used in operating activities |
(3,480,000 | ) | | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Acquisition of real estate operating properties |
(128,761,000 | ) | | |||||
Capital expenditures |
(18,000 | ) | | |||||
Restricted cash |
(2,225,000 | ) | | |||||
Real estate and escrow deposits |
(759,000 | ) | | |||||
Net cash used in investing activities |
(131,763,000 | ) | | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Borrowings on mortgage loan payables |
34,810,000 | | ||||||
Payments on mortgage loan payables |
(139,000 | ) | | |||||
Borrowings under the line of credit |
32,400,000 | | ||||||
Payments under the line of credit |
(19,750,000 | ) | | |||||
Proceeds from issuance of common stock |
89,090,000 | 200,000 | ||||||
Deferred financing costs |
(1,311,000 | ) | | |||||
Repurchase of common stock |
(110,000 | ) | | |||||
Contribution from sponsor |
259,000 | | ||||||
Contribution from noncontrolling interest to our operating partnership |
| 2,000 | ||||||
Distribution to noncontrolling interests |
(77,000 | ) | | |||||
Security deposits |
8,000 | | ||||||
Payment of offering costs |
(9,610,000 | ) | | |||||
Distributions paid |
(1,146,000 | ) | | |||||
Net cash provided by financing activities |
124,424,000 | 202,000 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(10,819,000 | ) | 202,000 | |||||
CASH AND CASH EQUIVALENTS Beginning of period |
13,773,000 | | ||||||
CASH AND CASH EQUIVALENTS End of period |
$ | 2,954,000 | $ | 202,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for: |
||||||||
Income taxes |
$ | | $ | | ||||
Interest |
$ | 277,000 | $ | | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
||||||||
Investing Activities: |
||||||||
Accrued capital expenditures |
$ | 22,000 | $ | | ||||
The following represents the increase in certain assets and liabilities
in connection with our acquisitions of operating properties: |
||||||||
Other assets |
$ | 124,000 | $ | | ||||
Mortgage loan payables, net |
$ | 7,439,000 | $ | | ||||
Derivative financial instrument |
$ | 310,000 | $ | | ||||
Accounts payable and accrued liabilities |
$ | 323,000 | $ | | ||||
Security deposits, prepaid rent and other liabilities |
$ | 3,446,000 | $ | | ||||
Financing Activities: |
||||||||
Issuance of common stock under the DRIP |
$ | 1,092,000 | $ | | ||||
Distributions declared but not paid |
$ | 534,000 | $ | | ||||
Accrued offering costs |
$ | 277,000 | $ | | ||||
Contribution from noncontrolling interest |
$ | 200,000 | $ | | ||||
Accrued deferred financing costs |
$ | 13,000 | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
The use of the words we, us or our refers to Grubb & Ellis Healthcare REIT II, Inc. and
its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context
otherwise requires.
1. Organization and Description of Business
Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7,
2009 and therefore we consider that our date of inception. We were initially capitalized on
February 4, 2009. We invest and intend to continue to invest in a diversified portfolio of real
estate properties, focusing primarily on medical office buildings and healthcare-related
facilities. We may also originate and acquire secured loans and real estate-related investments. We
generally seek investments that produce current income. We intend to qualify and elect to be
treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as
amended, or the Code, for federal income tax purposes for our taxable year ending December 31,
2010.
We are conducting a best efforts initial public offering, or our offering, in which we are
offering to the public up to 300,000,000 shares of our common stock for $10.00 per share in our
primary offering and 30,000,000 shares of our common stock pursuant to our distribution
reinvestment plan, or the DRIP, for $9.50 per share, for a maximum offering of up to
$3,285,000,000. The United States Securities and Exchange Commission, or the SEC, declared our
registration statement effective as of August 24, 2009. We reserve the right to reallocate the
shares of our common stock we are offering between the primary offering and the DRIP. As of
September 30, 2010, we had received and accepted subscriptions in our offering for 10,427,527
shares of our common stock, or $104,006,000, excluding shares of our common stock issued pursuant
to the DRIP.
We conduct substantially all of our operations through Grubb & Ellis Healthcare REIT II
Holdings, LP, or our operating partnership. We are externally advised by Grubb & Ellis Healthcare
REIT II Advisor, LLC, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement,
between us and our advisor that has a one year term that expires on June 1, 2011 and is subject to
successive one-year renewals upon the mutual consent of the parties. Our advisor supervises and
manages our day-to-day operations and selects the properties and real estate-related investments we
acquire, subject to the oversight and approval of our board of directors. Our advisor also provides
marketing, sales and client services on our behalf. Our advisor engages affiliated entities to
provide various services to us. Our advisor is managed by, and is a wholly owned subsidiary of,
Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is a wholly owned
subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our sponsor.
As of September 30, 2010, we had completed 10 acquisitions comprising 19 buildings and 676,000 square feet of
gross leasable area, or GLA, for an aggregate purchase price of $138,028,000.
6
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our condensed consolidated financial statements. Such condensed consolidated
financial statements and the accompanying notes thereto are the representations of our management,
who are responsible for their integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of America, or GAAP, in all material
respects, and have been consistently applied in preparing our accompanying condensed consolidated
financial statements.
Basis of Presentation
Our accompanying condensed consolidated financial statements include our accounts and those of
our operating partnership, the wholly owned subsidiaries of our operating partnership and all
non-wholly owned subsidiaries and any variable interest entities, or VIEs, as defined, in Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810,
Consolidation, or ASC Topic 810, which we have concluded should be consolidated pursuant to ASC
Topic 810. We operate and intend to continue to operate in an umbrella partnership REIT structure
in which our operating partnership, or wholly owned subsidiaries of our operating partnership, will
own substantially all of the properties acquired on our behalf. We are the sole general partner of
our operating partnership and, as of September 30, 2010 and December 31, 2009, we owned a 99.99%
general partnership interest therein. Our advisor is a limited partner and, as of September 30,
2010 and December 31, 2009, owned a 0.01% noncontrolling limited partnership interest in our
operating partnership. Because we are the sole general partner of our operating partnership and
have unilateral control over its management and major operating decisions, the accounts of our
operating partnership are consolidated in our condensed consolidated financial statements. All
significant intercompany accounts and transactions are eliminated in consolidation.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated
financial statements do not include all of the information and footnotes required by GAAP for
complete financial statements. Our accompanying condensed consolidated financial statements reflect
all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such full year results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has
evaluated subsequent events through the financial statement issuance date. We believe that although
the disclosures contained herein are adequate to prevent the information presented from being
misleading, our accompanying condensed consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and the notes thereto included in
our 2009 Annual Report on Form 10-K, as filed with the SEC on February 25, 2010.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
These estimates are made and evaluated on an on-going basis using information that is currently
available as well as various other assumptions believed to be reasonable under the circumstances.
Actual results could differ from those estimates, perhaps in material adverse ways, and those
estimates could be different under different assumptions or conditions.
7
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with a maturity of three
months or less when purchased.
Restricted Cash
Restricted cash is comprised of lender impound reserve accounts for property taxes, insurance,
capital improvements and tenant improvements.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
We recognize revenue in accordance with ASC Topic 605, Revenue Recognition, or ASC Topic 605.
ASC Topic 605 requires that all four of the following basic criteria be met before revenue is
realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2)
delivery has occurred or services have been rendered; (3) the sellers price to the buyer is fixed
and determinable; and (4) collectability is reasonably assured.
In accordance with ASC Topic 840, Leases, minimum annual rental revenue is recognized on a
straight-line basis over the term of the related lease (including rent holidays). Differences
between rental income recognized and amounts contractually due under the lease agreements are
credited or charged, as applicable, to deferred rent receivable or deferred rent liability, as
applicable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from
tenants for common area maintenance expenses and certain other recoverable expenses, is recognized
as revenue in the period in which the related expenses are incurred. Tenant reimbursements are
recognized and presented in accordance with ASC Subtopic 605-45, Revenue Recognition Principal
Agent Consideration, or ASC Subtopic 605-45. ASC Subtopic 605-45 requires that these reimbursements
be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing
goods and services from third-party suppliers, have discretion in selecting the supplier and have
credit risk. We recognize lease termination fees at such time when there is a signed termination
letter agreement, all of the conditions of such agreement have been met and the tenant is no longer
occupying the property.
Tenant receivables and unbilled deferred rent receivables are carried net of an allowance for
uncollectible current tenant receivables and unbilled deferred rent receivables. An allowance is
maintained for estimated losses resulting from the inability of certain tenants to meet the
contractual obligations under their lease agreements. We maintain an allowance for deferred rent
receivables arising from the straight line recognition of rents. Such allowance is charged to bad
debt expense which is included in general and administrative in our accompanying condensed
consolidated statements of operations. Our determination of the adequacy of these allowances is
based primarily upon evaluations of historical loss experience, the tenants financial condition,
security deposits, letters of credit, lease guarantees and current economic conditions and other
relevant factors. No allowance for uncollectible amounts as of September 30, 2010 and December 31,
2009 was determined to be necessary to reduce receivables and deferred rent receivables to our
estimate of the amount recoverable. For the three months ended September 30, 2010 and 2009, for the
nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception)
through September 30, 2009, none of our receivables or deferred rent receivables were directly
written off to bad debt expense.
Operating Properties, Net
Operating properties are carried at historical cost less accumulated depreciation. The cost of
operating properties includes the cost of land and completed buildings and related improvements.
Expenditures that increase the service life of properties are capitalized and the cost of
maintenance and repairs is charged to expense as incurred. The cost of buildings and capital
improvements is depreciated on a straight-line basis over the estimated useful lives of the
buildings and capital improvements, up to 39 years, and the cost for tenant improvements is
depreciated over the shorter of the lease term or useful life, ranging from five months to 15.1
years. When depreciable property is retired, replaced or disposed of, the related costs and
accumulated depreciation will be removed from the accounts and any gain or loss will be reflected
in earnings.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As part of the leasing process, we may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold improvements are capitalized and recorded
as tenant improvements and depreciated over the shorter of the useful life of the improvements or
the lease term. If the allowance represents a payment for a
purpose other than funding leasehold improvements, or in the event we are not considered the
owner of the improvements, the allowance is considered to be a lease inducement and is recognized
over the lease term as a reduction of rental revenue on a straight-line basis. Factors considered
during this evaluation include, among other things, who holds legal title to the improvements as
well as other controlling rights provided by the lease agreement and provisions for substantiation
of such costs (e.g. unilateral control of the tenant space during the build-out process).
Determination of the appropriate accounting for the payment of a tenant allowance is made on a
lease-by-lease basis, considering the facts and circumstances of the individual tenant lease.
Recognition of lease revenue commences when the lessee is given possession of the leased space upon
completion of tenant improvements when we are the owner of the leasehold improvements. However,
when the leasehold improvements are owned by the tenant, the lease inception date (and the date on
which recognition of lease revenue commences) is the date the tenant obtains possession of the
leased space for purposes of constructing its leasehold improvements.
An operating property is evaluated for potential impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. Impairment losses are
recorded on an operating property when indicators of impairment are present and the carrying amount
of the asset is greater than the sum of the future undiscounted cash flows expected to be generated
by that asset. We would recognize an impairment loss to the extent the carrying amount exceeded the
fair value of the property. For the three months ended September 30, 2010 and 2009, for the nine
months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009, there were no impairment losses recorded.
Property Acquisitions
In accordance with ASC Topic 805, Business Combinations, or ASC Topic 805, we, with assistance
from independent valuation specialists, measure the fair value of tangible and identified
intangible assets and liabilities based on their respective fair values for acquired properties.
The fair value of tangible assets (building and land) is based upon our determination of the value
of the property as if it were to be replaced and vacant using comparable sales, cost data and
discounted cash flow models similar to those used by independent appraisers. We also recognize the
fair value of furniture, fixtures and equipment on the premises, as well as above or below market
value of in place leases, the value of in place lease costs, tenant relationships, above or below
market debt and derivative financial instruments assumed. Factors considered by us include an
estimate of carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases.
The value of the above or below market component of the acquired in place leases is determined
based upon the present value (using a discount rate which reflects the risks associated with the
acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the
lease over its remaining term (including considering the impact of renewal options) and (2) our estimate of the amounts that would be paid using fair
market rates over the remaining term of the lease (including considering the impact of renewal options). The amounts related to above market leases are
included in identified intangible assets, net in our accompanying condensed consolidated balance
sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired
leases with each property. The amounts related to below market lease values are included in
identified intangible liabilities, net in our accompanying condensed consolidated balance sheets
and are amortized to rental income over the remaining non-cancelable lease term plus any below
market renewal options of the acquired leases with each property.
The total amount of other intangible assets acquired includes in place lease costs and the
value of tenant relationships based on managements evaluation of the specific characteristics of
the tenants lease and our overall relationship with the tenants. Characteristics considered by us
in determining these values include the nature and extent of the credit quality and expectations of
lease renewals, among other factors. The amounts related to in place lease costs are included in
identified intangible assets, net in our accompanying condensed consolidated balance sheets and are
amortized to depreciation and amortization expense over the average remaining non-cancelable lease
term of the acquired leases with each property. The amounts related to the value of tenant
relationships are included in identified intangible assets, net in our accompanying condensed
consolidated balance sheets and are amortized to depreciation and amortization expense over the
average remaining non-cancelable lease term of the acquired leases plus the market renewal lease
term.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The value of above or below market debt is determined based upon the present value of the
difference between the cash flow stream of the assumed mortgage and the cash flow stream of a
market rate mortgage at the
time of assumption. The value of above or below market debt is included in mortgage loan
payables, net in our accompanying condensed consolidated balance sheets and is amortized to
interest expense over the remaining term of the assumed mortgage.
The value of derivative financial instruments is determined in accordance with ASC Topic 820,
Fair Value Measurements and Disclosures, or ASC Topic 820. See Note 13, Fair Value of Financial
Instruments, for a further discussion.
The fair values are subject to change based on information received within one year of the
purchase related to one or more events identified at the time of purchase which confirm the value
of an asset or liability received in an acquisition of property.
Derivative Financial Instruments
We are exposed to the effect of interest rate changes in the normal course of business. We
seek to mitigate these risks by following established risk management policies and procedures which
include the occasional use of derivatives. Our primary strategy in entering into derivative
contracts is to add stability to interest expense and to manage our exposure to interest rate
movements. We utilize derivative instruments, including interest rate swaps, to effectively convert
a portion of our variable-rate debt to fixed-rate debt. We do not enter into derivative instruments
for speculative purposes.
Derivatives are recognized as either assets or liabilities in our accompanying condensed
consolidated balance sheets and are measured at fair value in accordance with ASC Topic 815,
Derivatives and Hedging, or ASC Topic 815. ASC Topic 815 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Since our derivative instruments are not designated as hedge
instruments, they do not qualify for hedge accounting under ASC Topic 815, and accordingly, changes
in fair value are included as a component of interest expense in gain (loss) in fair value of
derivative financial instrument in our accompanying condensed consolidated statements of operations
in the period of change.
Fair Value Measurements
We follow ASC Topic 820 to account for the fair value of certain assets and liabilities. ASC
Topic 820 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. ASC Topic 820 applies to reported balances that are
required or permitted to be measured at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value measurements of reported balances.
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within
Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. An active market is defined as a market in which
transactions for the assets or liabilities occur with sufficient frequency and volume to provide
pricing information on an ongoing basis. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically
based on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
See Note 13, Fair Value of Financial Instruments, for a further discussion.
Real Estate and Escrow Deposits
Real estate and escrow deposits include funds held by escrow agents and others to be applied
towards the purchase of real estate.
Other Assets, Net
Other assets, net consist primarily of deferred rent receivables, leasing commissions, prepaid
expenses, deposits and deferred financing costs. Costs incurred for property leasing have been
capitalized as deferred assets. Deferred leasing costs include leasing commissions that are
amortized using the straight-line method over the term of the related lease. Deferred financing
costs include amounts paid to lenders and others to obtain financing. Such costs are amortized
using the straight-line method over the term of the related loan, which approximates the effective
interest rate method. Amortization of deferred financing costs is included in interest expense in
our accompanying condensed consolidated statements of operations.
Stock Compensation
We follow ASC Topic 718, Compensation Stock Compensation, or ASC Topic 718, to account for
our stock compensation pursuant to the 2009 Incentive Plan, or our incentive plan. See Note 12,
Equity 2009 Incentive Plan, for a further discussion of grants under our incentive plan.
Income Taxes
We intend to qualify and elect to be taxed as a REIT, under Sections 856 through 860 of the
Code, beginning with our taxable year ending December 31, 2010. We have not yet elected to be taxed
as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90.0% of our annual taxable income,
excluding net capital gains, to stockholders. As a REIT, we generally will not be subject to
federal income tax on taxable income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income
taxes on our taxable income at regular corporate rates and will not be permitted to qualify as a
REIT for federal income tax purposes for four years following the year during which qualification
is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.
Such an event could materially adversely affect our net income and net cash available for
distribution to our stockholders. Because of our intention to elect REIT status for our taxable
year ending December 31, 2010, we will not benefit from the loss incurred for the period from
January 7, 2009 (Date of Inception) through December 31, 2009.
We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our
accompanying condensed consolidated financial statements uncertain tax positions that we have taken
or expect to take on a tax return. As of September 30, 2010 and December 31, 2009, we did not have
any liabilities for uncertain tax positions that we believe should be recognized in our
accompanying condensed consolidated financial statements.
Segment Disclosure
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and
descriptive information about a public entitys reportable segments. We have determined that we
have one reportable segment, with activities related to investing in medical office buildings,
healthcare-related facilities and commercial office properties. Our investments in real estate are
in different geographic regions, and management evaluates operating performance on an individual
asset level. However, as each of our assets has similar economic characteristics,
tenants and products and services, our assets have been aggregated into one reportable segment
for the three and nine months ended September 30, 2010.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140, or SFAS No.
166 (now contained in ASC Topic 860, Transfers and Servicing, or ASC Topic 860). SFAS No. 166
removes the concept of a qualifying special-purpose entity from SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (now contained in ASC
Topic 860), and removes the exception from applying Financial Accounting Standards Board
Interpretation, or FIN, No. 46(R), Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51, as revised, or FIN No. 46(R) (now contained in ASC Topic
810). SFAS No. 166 also clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of an entitys first fiscal year that begins after
November 15, 2009. Early adoption was prohibited. We adopted SFAS No. 166 on January 1, 2010. The
adoption of SFAS No. 166 did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (now contained in ASC Topic 810), which amends the consolidation guidance applicable
to VIEs. The amendments to the overall consolidation guidance affect all entities previously within
the scope of FIN No. 46(R), as well as qualifying special-purpose entities that were excluded from
the scope of FIN No. 46(R). Specifically, an enterprise will need to reconsider its conclusion
regarding whether an entity is a VIE, whether the enterprise is the VIEs primary beneficiary and
what type of financial statement disclosures are required. SFAS No. 167 is effective as of the
beginning of the first fiscal year that begins after November 15, 2009. Early adoption was
prohibited. We adopted SFAS No. 167 on January 1, 2010. The adoption of SFAS No. 167 did not have a
material impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, Improving
Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends ASC Topic 820 to
require additional disclosure and clarify existing disclosure requirements about fair value
measurements. ASU 2010-06 requires entities to provide fair value disclosures by each class of
assets and liabilities, which may be a subset of assets and liabilities within a line item in the
statement of financial position. The additional requirements also include disclosure regarding the
amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value
hierarchy and separate presentation of purchases, sales, issuances and settlements of items within
Level 3 of the fair value hierarchy. The guidance clarifies existing disclosure requirements
regarding the inputs and valuation techniques used to measure fair value for measurements that fall
in either Level 2 or Level 3 of the hierarchy. ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009 except for the disclosures about purchases,
sales, issuances and settlements, which disclosure requirements are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted ASU
2010-06 on January 1, 2010, which only applies to our disclosures on the fair value of financial
instruments. The adoption of ASU 2010-06 did not have a material impact on our footnote
disclosures. We have provided these disclosures in Note 13, Fair Value of Financial Instruments.
In August 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various
SEC Rules and Schedules, or ASU 2010-21. ASU 2010-21 updates various SEC paragraphs pursuant to the
issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification
of Financial Reporting Policies. The changes affect provisions relating to consolidation and
reporting requirements under conditions of majority and minority ownership positions and ownership
by both controlling and noncontrolling entities. The amendments also deal with redeemable and
non-redeemable preferred stocks and convertible preferred stocks. We adopted ASU 2010-21 upon
issuance in August 2010. The adoption of ASU 2010-21 did not have a material impact on our
consolidated financial statements.
In August 2010, the FASB issued ASU 2010-22, Accounting for Various Topics Technical
Corrections to SEC Paragraphs, or ASU 2010-22. ASU 2010-22 amends various SEC paragraphs based on
external comments received and the issuance of Staff Accounting Bulletin, or SAB, 112, which amends
or rescinds portions of certain
SAB topics. The topics affected include reporting of inventories in condensed financial
statements for Form 10-Q, debt issue costs in conjunction with a business combination, business
combinations prior to an initial public offering, accounting for divestitures, and accounting for
oil and gas exchange offers. We adopted ASU 2010-22 upon issuance in August 2010. The adoption of
ASU 2010-22 did not have a material impact on our consolidated financial statements.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
3. Real Estate Investments
Our investments in our consolidated properties consisted of the following as of September 30,
2010 and December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Land |
$ | 11,429,000 | $ | | ||||
Building and improvements |
108,043,000 | | ||||||
119,472,000 | | |||||||
Less: accumulated depreciation |
(902,000 | ) | | |||||
$ | 118,570,000 | $ | | |||||
Depreciation expense for the three months ended September 30, 2010 and 2009 was $615,000 and
$0, respectively, and for the nine months ended September 30, 2010 and for the period from January
7, 2009 (Date of Inception) through September 30, 2009 was $902,000 and $0, respectively.
Acquisitions in 2010
During the nine months ended September 30, 2010, we completed 10 acquisitions comprising 19 buildings from unaffiliated
parties. The aggregate purchase price of these properties was $138,028,000 and we paid $3,808,000
in acquisition fees to our advisor or its affiliates in connection with these acquisitions.
Acquisition Fee | |||||||||||||||||||||||
Date | Ownership | Mortgage Loan | to our Advisor or | ||||||||||||||||||||
Property | Property Location | Acquired | Percentage | Purchase Price | Payables (1) | Line of Credit (2) | its Affiliate (3) | ||||||||||||||||
Lacombe Medical Office Building |
Lacombe, LA | 03/05/10 | 100 | % | $ | 6,970,000 | $ | | $ | | $ | 192,000 | |||||||||||
Center for Neurosurgery and Spine |
Sartell, MN | 03/31/10 | 100 | % | 6,500,000 | 3,341,000 | | 179,000 | |||||||||||||||
Parkway Medical Center
|
Beachwood, OH | 04/12/10 | 100 | % | 10,900,000 | | | 300,000 | |||||||||||||||
Highlands Ranch Medical Pavilion |
Highlands Ranch, CO | 04/30/10 | 100 | % | 8,400,000 | 4,443,000 | | 231,000 | |||||||||||||||
Muskogee Long-Term Acute Care Hospital |
Muskogee, OK | 05/27/10 | 100 | % | 11,000,000 | | | 303,000 | |||||||||||||||
St. Vincent Medical
Office Building
|
Cleveland, OH | 06/25/10 | 100 | % | 10,100,000 | | | 278,000 | |||||||||||||||
Livingston Medical Arts Pavilion |
Livingston, TX | 06/28/10 | 100 | % | 6,350,000 | | | 175,000 | |||||||||||||||
Pocatello East Medical Office Building |
Pocatello, ID | 07/27/10 | 98.75 | % | 15,800,000 | | 5,000,000 | 435,000 | |||||||||||||||
Monument Long-Term Acute Care Hospital Portfolio (4) |
Cape Girardeau and Joplin, MO | Various | 100 | % | 17,008,000 | | 14,500,000 | 477,000 | |||||||||||||||
Virginia Skilled Nursing Facility Portfolio |
Charlottesville, Bastian, Lebanon, Fincastle, Low Moor, Midlothian and Hot Springs, VA | 09/16/10 | 100 | % | 45,000,000 | 26,810,000 | 12,900,000 | 1,238,000 | |||||||||||||||
Total: | $ | 138,028,000 | $ | 34,594,000 | $ | 32,400,000 | $ | 3,808,000 | |||||||||||||||
(1) | Represents the balance of the mortgage loan payables assumed by us or newly placed on the property at the time of acquisition. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
(2) | Represents borrowings under our secured revolving line of credit with Bank of America, N.A., or Bank of America, at the time of acquisition. We periodically pay down our secured revolving line of credit with Bank of America using cash on hand and advance funds as needed. See Note 8, Line of Credit, for a further discussion. | |
(3) | Our advisor or its affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.75% of the contract purchase price for each property acquired. | |
(4) | The Monument Long-Term Acute Care Hospital Portfolio, or the Monument LTACH Portfolio, consists of four separate long-term acute care hospitals. As of September 30, 2010, we have acquired two of the four hospitals. The difference in the purchase price of $17,008,000 noted above and the contract purchase price of $17,344,000 is due to the allocation of $336,000 to real estate and escrow deposits as such payments are related to the proposed purchase of the two additional hospitals of the Monument LTACH Portfolio. |
We reimburse our advisor or its affiliates for acquisition expenses related to selecting,
evaluating, acquiring and investing in properties. The reimbursement of acquisition expenses,
acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not
exceed, in the aggregate, 6.0% of the purchase price or total development costs, unless fees in
excess of such limits are approved by a majority of our disinterested independent directors. As of
September 30, 2010, such fees and expenses did not exceed 6.0% of the purchase price of our
acquisitions.
Proposed Acquisition
In August 2010, we entered into an agreement, as amended or assigned, to purchase the Monument
LTACH Portfolio which consists of four separate long-term acute care hospitals: Cape Girardeau
Long-Term Acute Care Hospital located in Cape Girardeau, Missouri, or the Cape property, Joplin
Long-Term Acute Care Hospital located in Joplin, Missouri, or the Joplin property, Columbia
Long-Term Acute Care Hospital located in Columbia, Missouri or the Columbia property, and Athens
Long-Term Acute Care Hospital located in Athens, Georgia, or the Athens property. As of September
30, 2010, we have acquired the Cape and Joplin properties. On October 29, 2010, we acquired the
Athens property from an unaffiliated third party for a contract purchase price of $12,142,000, plus
closing costs. In connection with the acquisition, we paid an acquisition fee of $334,000, or 2.75%
of the contract purchase price, to Grubb & Ellis Equity Advisors. See Note 17, Subsequent Events,
for a further discussion.
We anticipate acquiring the Columbia property during 2011 for a contract
purchase price of $12,209,000, plus closing costs. We also anticipate paying an acquisition fee of
2.75% of the contract purchase price to Grubb & Ellis Equity Advisors in connection with the
acquisition. However, we cannot provide any assurance that we will be able to acquire the Columbia
property within the anticipated timeframe, or at all.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
4. Identified Intangible Assets, Net
Identified intangible assets, net consisted of the following as of September 30, 2010 and
December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
In place leases, net of accumulated amortization of $554,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 9.8 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
$ | 9,193,000 | $ | | ||||
Above market leases, net of accumulated amortization of $73,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 7.2 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
958,000 | | ||||||
Tenant relationships, net of accumulated amortization of $210,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 20.4 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
9,483,000 | | ||||||
Leasehold interest, net of accumulated amortization of $1,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 71.2 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
148,000 | | ||||||
Master lease, net of accumulated amortization of $38,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 1.8 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
417,000 | | ||||||
$ | 20,199,000 | $ | | |||||
Amortization expense for the three months ended September 30, 2010 and 2009 was $590,000 and
$0, respectively, which included $47,000 and $0, respectively, of amortization recorded against
rental income for above market leases and $1,000 and $0, respectively, of amortization recorded
against rental expenses for leasehold interest in our accompanying condensed consolidated
statements of operations.
Amortization expense for the nine months ended September 30, 2010 and for the period from
January 7, 2009 (Date of Inception) through September 30, 2009 was $894,000 and $0, respectively,
which included $73,000 and $0, respectively, of amortization recorded against rental income for
above market leases and $1,000 and $0, respectively, of amortization recorded against rental
expenses for leasehold interest in our accompanying condensed consolidated statements of
operations.
Estimated amortization expense on the identified intangible assets as of September 30, 2010,
for the three months ending December 31, 2010 and each of the next four years ending December 31
and thereafter is as follows:
Year | Amount | |||
2010 |
$ | 712,000 | ||
2011 |
$ | 2,498,000 | ||
2012 |
$ | 2,119,000 | ||
2013 |
$ | 1,748,000 | ||
2014 |
$ | 1,635,000 | ||
Thereafter |
$ | 11,487,000 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
5. Other Assets, Net
Other assets, net consisted of the following as of September 30, 2010 and December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Deferred financing costs, net of accumulated amortization of $49,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively |
$ | 1,275,000 | $ | | ||||
Lease commissions, net of accumulated amortization of $0 as of
September 30, 2010 and December 31, 2009 |
53,000 | | ||||||
Deferred rent receivable |
241,000 | | ||||||
Prepaid expenses and deposits |
288,000 | 36,000 | ||||||
$ | 1,857,000 | $ | 36,000 | |||||
Amortization expense on deferred financing costs and lease commissions for the three months
ended September 30, 2010 and 2009 was $44,000 and $0, respectively, of which $44,000 and $0,
respectively, of amortization was recorded as interest expense for deferred financing costs in our
accompanying condensed consolidated statements of operations.
Amortization expense on deferred financing costs and lease commissions for the nine months
ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009 was $49,000 and $0, respectively, of which $49,000 and $0, respectively, of
amortization was recorded as interest expense for deferred financing costs in our accompanying
condensed consolidated statements of operations.
Estimated amortization expense on deferred financing costs and lease commissions as of
September 30, 2010, for the three months ending December 31, 2010 and each of the next four years
ending December 31 and thereafter is as follows:
Year | Amount | |||
2010 |
$ | 166,000 | ||
2011 |
$ | 668,000 | ||
2012 |
$ | 294,000 | ||
2013 |
$ | 35,000 | ||
2014 |
$ | 30,000 | ||
Thereafter |
$ | 135,000 |
6. Mortgage Loan Payables, Net
Mortgage loan payables were $42,454,000 ($42,128,000, net of discount) and $0 as of September
30, 2010 and December 31, 2009, respectively. As of September 30, 2010, we had two fixed rate and
two variable rate mortgage loan payables with effective interest rates ranging from 1.36% to 6.00%
per annum and a weighted average effective interest rate of 5.32% per annum. As of September 30,
2010, we had $12,406,000 ($12,382,000, net of discount) of fixed rate debt, or 29.2% of mortgage
loan payables, at a weighted average effective interest rate of 5.96% per annum and $30,048,000
($29,746,000, net of discount) of variable rate debt, or 70.8% of mortgage loan payables, at a
weighted average effective interest rate of 5.05% per annum.
Most of the mortgage loan payables may be prepaid and in some cases subject to a prepayment
premium. We are required by the terms of certain loan documents to meet certain covenants, such as
occupancy ratios, leverage ratios, net worth ratios, debt service coverage ratios and reporting
requirements. As of September 30, 2010, we were in compliance with all such requirements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Mortgage loan payables, net consisted of the following as of September 30, 2010 and December
31, 2009:
Interest | ||||||||||||||
Property | Rate(1) | Maturity Date | September 30, 2010 | December 31, 2009 | ||||||||||
Fixed Rate Debt: |
||||||||||||||
Highlands Ranch Medical Pavilion |
5.88 | % | 11/11/12 | $ | 4,406,000 | $ | | |||||||
Pocatello East Medical Office Building |
6.00 | % | 10/01/20 | 8,000,000 | | |||||||||
12,406,000 | | |||||||||||||
Variable Rate Debt: |
||||||||||||||
Center for Neurosurgery and Spine (2) |
1.36 | % | 08/15/21 (callable) | 3,238,000 | | |||||||||
Virginia Skilled Nursing Facility Portfolio (3) |
5.50 | % | 03/14/12 | 26,810,000 | | |||||||||
30,048,000 | | |||||||||||||
Total fixed and variable rate debt |
42,454,000 | | ||||||||||||
Less: discount |
(326,000 | ) | | |||||||||||
Mortgage loan payables, net |
$ | 42,128,000 | $ | | ||||||||||
(1) | Represents the per annum interest rate in effect as of September 30, 2010. | |
(2) | As of September 30, 2010, we had a fixed rate interest rate swap of 6.00% per annum on such variable rate mortgage loan payable, thereby effectively fixing our interest rate over the term of the mortgage loan payable. See Note 7, Derivative Financial Instrument, for a further discussion. The mortgage loan payable requires monthly principal and interest payments and is due August 15, 2021; however, the principal balance is immediately due upon written request from the seller confirming that the seller agrees to pay any interest rate swap termination amount, if any. Additionally, the seller guarantors agreed to retain their guaranty obligations with respect to the mortgage loan payable and the interest rate swap agreement. We, the seller and the seller guarantors have also agreed to indemnify the other parties for any liability caused by a partys breach or nonperformance of obligations under the loan. | |
(3) | Represents a bridge loan we secured from KeyBank National Association which matures on March 14, 2012 or until such time that we are able to pay such bridge loan in full by obtaining a Federal Housing Association Mortgage loan. The maturity date may be extended by one six-month period subject to satisfaction of certain conditions. |
The principal payments due on our mortgage loan payables as of September 30, 2010, for the
three months ending December 31, 2010 and for each of the next four years ending December 31 and
thereafter, is as follows:
Year | Amount | |||
2010 |
$ | 3,303,000 | ||
2011 |
$ | 263,000 | ||
2012 |
$ | 31,268,000 | ||
2013 |
$ | 169,000 | ||
2014 |
$ | 169,000 | ||
Thereafter |
$ | 7,282,000 |
7. Derivative Financial Instrument
ASC Topic 815 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities.
We utilize derivatives such as fixed interest rate swaps to add stability to interest expense and
to manage our exposure to interest rate movements. Consistent with ASC Topic 815, we record
derivative financial instruments in our accompanying condensed consolidated balance sheets as
either an asset or a liability measured at fair value. ASC Topic 815 permits special hedge
accounting if certain requirements are met. Hedge accounting allows for gains and losses on
derivatives designated as hedges to be offset by the change in value of the hedged item(s) or to be
deferred in other comprehensive income.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of September 30, 2010, no derivatives were designated as fair value hedges or cash flow
hedges. Derivatives not designated as hedges are not speculative and are used to manage our
exposure to interest rate
movements, but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes
in the fair value of derivative financial instruments are recorded as a component of interest
expense in gain (loss) in fair value of derivative financial instrument in our accompanying
condensed consolidated statements of operations. For the three months ended September 30, 2010 and
2009, we recorded $74,000 and $0, respectively, as an increase to interest expense in our
accompanying condensed consolidated statements of operations related to the change in the fair
value of our derivative financial instrument, and for the nine months ended September 30, 2010 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we recorded
$194,000 and $0, respectively, as an increase to interest expense in our accompanying condensed
consolidated statements of operations related to the change in the fair value of our derivative
financial instrument.
The following table lists the derivative financial instrument held by us as of September 30,
2010:
Interest | Maturity | |||||||||||||||||||
Notional Amount | Index | Rate | Fair Value | Instrument | Date | |||||||||||||||
$ | 3,238,000 | one month LIBOR |
6.00 | % | $ | (503,000 | ) | Swap |
08/15/21 |
We did not have any derivative financial instruments as of December 31, 2009.
See Note 13, Fair Value of Financial Instruments, for a further discussion of the fair value
of our derivative financial instrument.
8. Line of Credit
On July 19, 2010, we entered into a loan agreement with Bank of America, or the Bank of
America Loan Agreement, to obtain a secured revolving credit facility with an aggregate maximum
principal amount of $25,000,000, or the line of credit. The actual amount of credit available under
the line of credit at any given time is a function of, and is subject to, certain loan to cost,
loan to value and debt service coverage ratios contained in the Bank of America Loan Agreement. The
line of credit matures on July 19, 2012 and may be extended by one 12 month period subject to
satisfaction of certain conditions, including payment of an extension fee.
Any loan made under the Bank of America Loan Agreement shall bear interest at per annum rates
equal to either: (a) the daily floating London Interbank Offered Rate, or LIBOR, plus 3.75%,
subject to a minimum interest rate floor of 5.00%; (b) or if the daily floating LIBOR rate is not
available, a base rate which means, for any day, a fluctuating rate per annum equal to the highest
of: (i) the prime rate for such day plus 3.75% or (ii) the one-month LIBOR rate for such day, if
available, plus 3.75%, in either case, subject to a minimum interest rate floor of 5.00%.
The Bank of America Loan Agreement contains various affirmative and negative covenants that
are customary for credit facilities and transactions of this type, including limitations on the
incurrence of debt and limitations on distributions by properties that serve as collateral for the
line of credit. The Bank of America Loan Agreement also provides that an event of default under any
other unsecured or recourse debt that we have in excess of $5,000,000 shall constitute an event of
default under the Bank of America Loan Agreement. The Bank of America Loan Agreement also imposes
the following financial covenants: (a) minimum liquidity thresholds; (b) a minimum ratio of
operating cash flow to fixed charges; (c) a maximum ratio of liabilities to asset value; (d) a
maximum distribution covenant; and (e) a minimum tangible net worth covenant. As of September 30,
2010, we were in compliance with all such covenants and requirements.
As of September 30, 2010 and December 31, 2009, borrowings under the line of credit totaled
$12,650,000 and $0, respectively. The weighted-average interest rate of borrowings as of September
30, 2010 was 5.00% per annum. Additionally, our borrowing capacity under the line of credit was
$17,150,000, which is secured by Lacombe Medical Office Building, Parkway Medical Center,
Livingston Medical Arts Pavilion and St. Vincent Medical Office Building as of September 30, 2010.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
9. Identified Intangible Liabilities, Net
Identified intangible liabilities, net consisted of the following as of September 30, 2010 and
December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Below market leases, net of accumulated amortization of $24,000 and $0 as of
September 30, 2010 and December 31, 2009, respectively (with a
weighted average remaining life of 2.2 years and 0 years as of
September 30, 2010 and December 31, 2009, respectively) |
$ | 147,000 | $ | |
Amortization expense on below market leases for the three months ended September 30, 2010 and
2009 was $19,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the
period from January 7, 2009 (Date of Inception) through September 30, 2009 was $24,000 and $0,
respectively. Amortization expense on below market leases is recorded to rental income in our
accompanying condensed consolidated statements of operations.
Estimated amortization expense on below market leases as of September 30, 2010, for the three
months ending December 31, 2010 and each of the next four years ending December 31 and thereafter
is as follows:
Year | Amount | |||
2010 |
$ | 19,000 | ||
2011 |
$ | 65,000 | ||
2012 |
$ | 55,000 | ||
2013 |
$ | 8,000 | ||
2014 |
$ | | ||
Thereafter |
$ | |
10. Commitments and Contingencies
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against us, which if determined unfavorably to us, would have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental Matters
We follow a policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist
at our properties, we are not currently aware of any environmental liability with respect to our
properties that would have a material effect on our consolidated financial position, results of
operations or cash flows. Further, we are not aware of any material environmental liability or any
unasserted claim or assessment with respect to an environmental liability that we believe would
require additional disclosure or the recording of a loss contingency.
Other Organizational and Offering Expenses
Our organizational and offering expenses, other than selling commissions and the dealer
manager fee, are being paid by our advisor or its affiliates on our behalf. Other organizational
and offering expenses include all expenses (other than selling commissions and the dealer manager
fee which generally represent 7.0% and 3.0%, respectively, of the gross proceeds of our offering)
to be paid by us in connection with our offering. These other organizational and offering expenses
will only become our liability to the extent other organizational and offering expenses do not
exceed 1.0% of the gross proceeds from the sale of shares of our common stock in our offering,
other than shares of our common stock sold pursuant to the DRIP. As of September 30, 2010 and
December 31, 2009, our advisor or its affiliates had incurred cumulative expenses on our behalf of
$2,665,000 and $1,956,000,
respectively, in excess of 1.0% of the gross proceeds of our offering, and therefore, these
expenses are not recorded in our accompanying condensed consolidated financial statements as of
September 30, 2010 and December 31, 2009. To the extent we raise additional funds from our
offering, these amounts may become our liability.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
When recorded by us, other organizational expenses will be expensed as incurred, and offering
expenses are charged to stockholders equity as such amounts are reimbursed to our advisor or its
affiliates from the gross proceeds of our offering. See Note 11, Related Party Transactions
Offering Stage, for a further discussion of other organizational and offering expenses.
Other
Our other commitments and contingencies include the usual obligations of real estate owners
and operators in the normal course of business. In our view, these matters are not expected to have
a material adverse effect on our consolidated financial position, results of operations or cash
flows.
11. Related Party Transactions
Fees and Expenses Paid to Affiliates
All of our executive officers and our non-independent directors are also executive officers
and employees and/or holders of a direct or indirect interest in our advisor, our sponsor, Grubb &
Ellis Equity Advisors or other affiliated entities. We entered into the Advisory Agreement with our
advisor and a dealer manager agreement with Grubb & Ellis Securities, Inc., or Grubb & Ellis
Securities, or our dealer manager. These agreements entitle our advisor, our dealer manager and
their affiliates to specified compensation for certain services, as well as, reimbursement of
certain expenses. In the aggregate, for the three months ended September 30, 2010 and 2009, we
incurred $6,206,000 and $0, respectively, and for the nine months ended September 30, 2010 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred
$14,050,000 and $0, respectively, in compensation and expense reimbursements to our advisor or its
affiliates as detailed below.
Offering Stage
Selling Commissions
Our dealer manager receives selling commissions of up to 7.0% of the gross offering proceeds
from the sale of shares of our common stock in our offering, other than shares of our common stock
sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to
participating broker-dealers. For the three months ended September 30, 2010 and 2009, we incurred
$2,278,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the
period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $6,041,000
and $0, respectively, in selling commissions to our dealer manager. Such commissions are charged to
stockholders equity as such amounts are reimbursed to our dealer manager from the gross proceeds
of our offering.
Dealer Manager Fee
Our dealer manager receives a dealer manager fee of up to 3.0% of the gross offering proceeds
from the sale of shares of our common stock in our offering, other than shares of our common stock
sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to
participating broker-dealers. For the three months ended September 30, 2010 and 2009, we incurred
$1,016,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the
period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $2,671,000
and $0, respectively, in dealer manager fees to our dealer manager. Such fees and reimbursements
are charged to stockholders equity as such amounts are reimbursed to our dealer manager or its
affiliates from the gross proceeds of our offering.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Other Organizational and Offering Expenses
Our organizational and offering expenses are paid by our advisor or Grubb & Ellis Equity
Advisors on our behalf. Our advisor or Grubb & Ellis Equity Advisors are reimbursed for actual
expenses incurred up to 1.0% of the gross offering proceeds from the sale of shares of our common
stock in our offering, other than shares of our common stock sold pursuant to the DRIP. For the
three months ended September 30, 2010 and 2009, we incurred $337,000 and $0, respectively, and for
the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we incurred $893,000 and $0, respectively, in offering
expenses to our advisor or Grubb & Ellis Equity Advisors. Other organizational expenses are
expensed as incurred, and offering expenses are charged to stockholders equity as such amounts are
reimbursed to our advisor or Grubb & Ellis Equity Advisors from the gross proceeds of our offering.
Acquisition and Development Stage
Acquisition Fee
Our advisor or its affiliates receive an acquisition fee of 2.75% of the contract purchase
price for each property we acquire or 2.0% of the origination or acquisition price for any real
estate-related investment we originate or acquire. Our advisor or its affiliates will be entitled
to receive these acquisition fees for properties and real estate-related investments we acquire
with funds raised in our offering, including acquisitions completed after the termination of the
Advisory Agreement, or funded with net proceeds from the sale of a property or real estate-related
investment, subject to certain conditions.
For the three months ended September 30, 2010 and 2009, we incurred $2,150,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $3,808,000 and $0, respectively,
in acquisition fees to our advisor or its affiliates. Acquisition fees in connection with the
acquisition of properties are expensed as incurred in accordance with ASC Topic 805 and are
included in acquisition related expenses in our accompanying condensed consolidated statements of
operations.
Development Fee
Our advisor or its affiliates will receive, in the event our advisor or its affiliates provide
development-related services, a development fee in an amount that is usual and customary for
comparable services rendered for similar projects in the geographic market where the services are
provided; provided, however, that we will not pay a development fee to our advisor or its
affiliates if our advisor elects to receive an acquisition fee based on the cost of such
development.
For the three months ended September 30, 2010 and 2009, for the nine months ended September
30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we
did not incur any development fees to our advisor or its affiliates.
Reimbursement of Acquisition Expenses
Our advisor or its affiliates are reimbursed for acquisition expenses related to selecting,
evaluating and acquiring assets, which are reimbursed regardless of whether an asset is acquired.
The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other
fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase price or
total development costs, unless fees in excess of such limits are approved by a majority of our
disinterested independent directors. As of September 30, 2010 and December 31, 2009, such fees and
expenses did not exceed 6.0% of the purchase price of our acquisitions.
For the three months ended September 30, 2010 and 2009, we incurred $13,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $24,000 and $0, respectively, in
acquisition expenses to our advisor or its affiliates. Reimbursement of acquisition expenses are
expensed as incurred in accordance with ASC Topic 805 and are included in acquisition related
expenses in our accompanying condensed consolidated statements of operations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Operational Stage
Asset Management Fee
Our advisor or its affiliates are paid a monthly fee for services rendered in connection with
the management of our assets equal to one-twelfth of 0.85% of average invested assets, subject to
our stockholders receiving distributions in an amount equal to 5.0% per annum, cumulative,
non-compounded, of invested capital. For such purposes, average invested assets means the average
of the aggregate book value of our assets invested in real estate properties and real
estate-related investments, before deducting depreciation, amortization, bad debt and other similar
non-cash reserves, computed by taking the average of such values at the end of each month during
the period of calculation; and invested capital means, for a specified period, the aggregate issue
price of shares of our common stock purchased by our stockholders, reduced by distributions of net
sales proceeds by us to our stockholders and by any amounts paid by us to repurchase shares of our
common stock pursuant to our share repurchase plan.
For the three months ended September 30, 2010 and 2009, we incurred $189,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $274,000 and $0, respectively, in
asset management fees to our advisor or its affiliates, which is included in general and
administrative in our accompanying condensed consolidated statements of operations.
Property Management Fee
Our advisor or its affiliates are paid a monthly property management fee of up to 4.0% of the
gross monthly cash receipts from each property managed by our advisor or its affiliates. Our
advisor or its affiliates may sub-contract its duties to any third-party, including for fees less
than the property management fees payable to our advisor or its affiliates. In addition to the
above property management fee, for each property managed directly by entities other than our
advisor or its affiliates, we will pay our advisor or its affiliates a monthly oversight fee of up
to 1.0% of the gross cash receipts from the property; provided, however, that in no event will we
pay both a property management fee and an oversight fee to our advisor or its affiliates with
respect to the same building.
For the three months ended September 30, 2010 and 2009, we incurred $83,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $127,000 and $0, respectively, in
property management fees and oversight fees to our advisor or its affiliates, which is included in
rental expenses in our accompanying condensed consolidated statements of operations.
On-site Personnel and Engineering Payroll
We reimburse our advisor or its affiliates for on-site personnel and engineering incurred on
our behalf. For the three months ended September 30, 2010 and 2009, we incurred $21,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $23,000 and $0, respectively, in
payroll for on-site personnel and engineering to our advisor or its affiliates, which is included
in rental expenses in our accompanying condensed consolidated statements of operations.
Lease Fees
We may pay our advisor or its affiliates a separate fee for any leasing activities in an
amount not to exceed the fee customarily charged in arms-length transactions by others rendering
similar services in the same geographic area for similar properties as determined by a survey of
brokers and agents in such area. Such fee is generally expected to range from 3.0% to 8.0% of the
gross revenues generated during the initial term of the lease.
For the three months ended September 30, 2010 and 2009, we incurred $53,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $53,000 and $0, respectively, in
lease fees to our advisor or its affiliates, which is
capitalized as lease commissions and included in other assets, net in our accompanying
condensed consolidated balance sheets.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Construction Management Fee
In the event that our advisor or its affiliates assist with planning and coordinating the
construction of any capital or tenant improvements, our advisor or its affiliates will be paid a
construction management fee of up to 5.0% of the cost of such improvements. For the three months
ended September 30, 2010 and 2009, we incurred $2,000 and $0, respectively, in construction
management fees to our advisor or its affiliates. For the nine months ended September 30, 2010 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred
$2,000 and $0, respectively, in construction management fees to our advisor or its affiliates.
Construction management fees are capitalized as part of the associated asset and included in
operating properties, net on our accompanying condensed consolidated balance sheets.
Operating Expenses
We reimburse our advisor or its affiliates for operating expenses incurred in rendering
services to us, subject to certain limitations. However, we cannot reimburse our advisor or its
affiliates at the end of any fiscal quarter for total operating expenses that, in the four
consecutive fiscal quarters then ended, exceed the greater of: (i) 2.0% of our average invested
assets, as defined in the Advisory Agreement, or (ii) 25.0% of our net income, as defined in the
Advisory Agreement, unless our independent directors determine that such excess expenses are
justified based on unusual and non-recurring factors. For the 12 months ended September 30, 2010,
our operating expenses exceeded this limitation by $481,000. Our operating expenses as a percentage
of average invested assets and as a percentage of net income were 3.3% and (29.8)%, respectively,
for the 12 months ended September 30, 2010. We raised the minimum offering and had funds held in
escrow released to us to commence real estate operations in October 2009. We purchased our first
property in March 2010. At this early stage of our operations, our general and administrative
expenses are relatively high compared with our funds from operations and our average invested
assets. Our board of directors determined that the relationship of our general and administrative
expenses to our funds from operations and our average invested assets was justified for the 12
months ended September 30, 2010 given the costs of operating a public company and the early stage
of our operations.
For the three months ended September 30, 2010 and 2009, Grubb & Ellis Equity Advisors incurred
operating expenses on our behalf of $8,000 and $0, respectively, and for the nine months ended
September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September
30, 2009, Grubb & Ellis Equity Advisors incurred operating expenses on our behalf of $22,000 and
$0, respectively, which is included in general and administrative in our accompanying condensed
consolidated statements of operations.
Related Party Services Agreement
We entered into a services agreement, effective September 21, 2009, or the Transfer Agent
Services Agreement, with Grubb & Ellis Equity Advisors, Transfer Agent, LLC, formerly known as
Grubb & Ellis Investor Solutions, LLC, or our transfer agent, for transfer agent and investor
services. The Transfer Agent Services Agreement has an initial one-year term and shall thereafter
automatically be renewed for successive one-year terms. Since our transfer agent is an affiliate of
our advisor, the terms of this agreement were approved and determined by a majority of our
directors, including a majority of our independent directors, as fair and reasonable to us and at
fees which are no greater than that which would be paid to an unaffiliated party for similar
services. The Transfer Agent Services Agreement requires our transfer agent to provide us with a
180 day advance written notice for any termination, while we have the right to terminate upon 60
days advance written notice.
For the three months ended September 30, 2010 and 2009, we incurred $30,000 and $0,
respectively, and for the nine months ended September 30, 2010 and for the period from January 7,
2009 (Date of Inception) through September 30, 2009, we incurred $73,000 and $0, respectively, for
investor services that our transfer agent provided to us, which is included in general and
administrative in our accompanying condensed consolidated statements of operations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three months ended September 30, 2010 and 2009, Grubb & Ellis Equity Advisors incurred
expenses of $14,000 and $0, respectively, and for the nine months ended September 30, 2010 and for
the period from January
7, 2009 (Date of Inception) through September 30, 2009, Grubb & Ellis Equity Advisors incurred
expenses of $37,000 and $0, respectively, in subscription agreement processing services that our
transfer agent provided to us. As an other organizational and offering expense, these subscription
agreement processing expenses will only become our liability to the extent cumulative other
organizational and offering expenses do not exceed 1.0% of the gross proceeds from the sale of
shares of our common stock in our offering, other than shares of our common stock sold pursuant to
the DRIP.
Compensation for Additional Services
Our advisor or its affiliates are paid for services performed for us other than those required
to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of
compensation for these services must be approved by a majority of our board of directors, including
a majority of our independent directors, and cannot exceed an amount that would be paid to
unaffiliated parties for similar services. For the three months ended September 30, 2010 and 2009,
we incurred $26,000 and $0, respectively, and for the nine months ended September 30, 2010 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $39,000
and $0, respectively, for internal controls compliance services our advisor or its affiliates
provided to us.
Liquidity Stage
Disposition Fees
For services relating to the sale of one or more properties, our advisor or its affiliates
will be paid a disposition fee up to the lesser of 2.0% of the contract sales price or 50.0% of a
customary competitive real estate commission given the circumstances surrounding the sale, in each
case as determined by our board of directors, including a majority of our independent directors,
upon the provision of a substantial amount of the services in the sales effort. The amount of
disposition fees paid, when added to the real estate commissions paid to unaffiliated parties, will
not exceed the lesser of the customary competitive real estate commission or an amount equal to
6.0% of the contract sales price. For the three months ended September 30, 2010 and 2009, for the
nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception)
through September 30, 2009, we did not incur any disposition fees to our advisor or its affiliates.
Subordinated Participation Interest
Subordinated Distribution of Net Sales Proceeds
In the event of liquidation, our advisor will be paid a subordinated distribution of net sales
proceeds. The distribution will be equal to 15.0% of the net proceeds from the sales of properties,
after distributions to our stockholders, in the aggregate, of (1) a full return of capital raised
from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share
repurchase plan) plus (2) an annual 8.0% cumulative, non-compounded return on the gross proceeds
from the sale of shares of our common stock, as adjusted for distributions of net sale proceeds.
Actual amounts to be received depend on the sale prices of properties upon liquidation. For the
three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not
incur any such distributions to our advisor.
Subordinated Distribution upon Listing
Upon the listing of shares of our common stock on a national securities exchange, our advisor
will be paid a distribution equal to 15.0% of the amount by which (1) the market value of our
outstanding common stock at listing plus distributions paid prior to listing exceeds (2) the sum of
the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our
common stock pursuant to our share repurchase plan) and the amount of cash that, if distributed to
stockholders as of the date of listing would have provided them an annual 8.0% cumulative,
non-compounded return on the gross proceeds from the sale of shares of our common stock through the
date of listing. Actual amounts to be received depend upon the market value of our outstanding
stock at the time of listing among other factors. For the three months ended September 30, 2010 and
2009, for the nine months ended
September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009, we did not incur any such distributions to our advisor.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Subordinated Distribution Upon Termination
Upon termination or non-renewal of the Advisory Agreement, our advisor will be entitled to a
subordinated distribution from our operating partnership equal to 15.0% of the amount, if any, by
which (1) the appraised value of our assets on the termination date, less any indebtedness secured
by such assets, plus total distributions paid through the termination date, exceeds (2) the sum of
the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our
common stock pursuant to our share repurchase plan) and the total amount of cash that, if
distributed to them as of the termination date, would have provided them an annual 8.0% cumulative,
non-compounded return on the gross proceeds from the sale of shares of our common stock through the
termination date. In addition, our advisor may elect to defer its right to receive a subordinated
distribution upon termination until either a listing or other liquidity event, including a
liquidation, sale of substantially all of our assets or merger in which our stockholders receive,
in exchange for their shares of our common stock, shares of a company that are traded on a national
securities exchange.
As of September 30, 2010 and December 31, 2009, we had not recorded any charges to earnings
related to the subordinated distribution upon termination.
Fees Payable Upon Internalization of the Advisor
Prior
to June 1, 2010, to the extent that our board of directors determined that it was in
the best interests of our stockholders to internalize (acquire from our advisor) any management
functions provided by our advisor, the compensation payable to our advisor for such specific
internalization would be negotiated and agreed upon by our independent directors and our advisor.
Effective June 1, 2010, we amended the Advisory Agreement to eliminate any compensation or
remuneration payable by us or our operating partnership to our advisor or any of its affiliates in
connection with any internalization in the future. However, this amendment is not intended to limit
any other compensation or distributions that we or our operating partnership may pay our advisor in
accordance with the Advisory Agreement or any other agreement, including but not limited to the
agreement of limited partnership of our operating partnership.
Accounts Payable Due to Affiliates
The following amounts were outstanding to affiliates as of September 30, 2010 and December 31,
2009:
Fee | September 30, 2010 | December 31, 2009 | ||||||
Operating Expenses | $ | 26,000 | $ | 65,000 | ||||
Construction Management Fees | 2,000 | | ||||||
Offering Costs | 50,000 | 150,000 | ||||||
Acquisition Related Expenses | 9,000 | | ||||||
Asset and Property Management Fees | 121,000 | | ||||||
Lease Commissions | 11,000 | | ||||||
On-site Personnel and Engineering Payroll | 18,000 | | ||||||
Selling Commissions and Dealer Manager Fees | 227,000 | 132,000 | ||||||
$ | 464,000 | $ | 347,000 | |||||
12. Equity
Preferred Stock
Our charter authorizes us to issue 200,000,000 shares of our preferred stock, par value $0.01
per share. As of September 30, 2010 and December 31, 2009, no shares of preferred stock were issued
and outstanding.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Common Stock
We are offering and selling to the public up to 300,000,000 shares of our common stock, par
value $0.01 per share, for $10.00 per share and up to 30,000,000 shares of our common stock, par
value $0.01 per share, to be issued pursuant to the DRIP for $9.50 per share. Our charter
authorizes us to issue 1,000,000,000 shares of our common stock.
On February 4, 2009, our advisor purchased 20,000 shares of common stock for total cash
consideration of $200,000 and was admitted as our initial stockholder. We used the proceeds from
the sale of shares of our common stock to our advisor to make an initial capital contribution to
our operating partnership.
On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock
to our independent directors. On June 8, 2010, in connection with their re-election, we granted an
aggregate of 7,500 shares of our restricted common stock to our independent directors. Through
September 30, 2010, we issued 10,427,527 shares of our common stock in connection with our offering
and 114,983 shares of our common stock pursuant to the DRIP, and we had also repurchased 11,000
shares of our common stock under our share repurchase plan. As of September 30, 2010 and December
31, 2009, we had 10,574,010 and 1,532,268 shares of our common stock issued and outstanding.
Noncontrolling Interests
On February 4, 2009, our advisor made an initial capital contribution of $2,000 to our
operating partnership in exchange for 200 partnership units.
As of September 30, 2010 and December 31, 2009, we owned a 99.99% general partnership interest
in our operating partnership and our advisor owned a 0.01% limited partnership interest in our
operating partnership. As such, 0.01% of the earnings of our operating partnership are allocated to
noncontrolling interests, subject to certain limitations.
In addition, as of September 30, 2010, we owned a 98.75% interest in the consolidated limited
liability company that owns Pocatello East Medical Office Building, or the Pocatello East MOB
property, that was purchased on July 27, 2010. As such, 1.25% of the earnings of the Pocatello East
MOB property are allocated to noncontrolling interests. As of September 30, 2010, the balance was
comprised of the noncontrolling interests initial contribution, distributions and 1.25% of the
earnings at the Pocatello East MOB property.
Distribution Reinvestment Plan
We adopted the DRIP, which allows stockholders to purchase additional shares of our common
stock through the reinvestment of distributions, subject to certain conditions. We registered and
reserved 30,000,000 shares of our common stock for sale pursuant to the DRIP in our offering. For
the three months ended September 30, 2010 and 2009, $590,000 and $0, respectively, in distributions
were reinvested and 62,098 and 0 shares of our common stock, respectively, were issued pursuant to
the DRIP. For the nine months ended September 30, 2010 and for the period from January 7, 2009
(Date of Inception) through September 30, 2009, $1,092,000 and $0, respectively, in distributions
were reinvested and 114,983 and 0 shares of our common stock, respectively, were issued pursuant to
the DRIP. As of September 30, 2010 and December 31, 2009, a total of $1,092,000 and $0,
respectively, in distributions were reinvested and 114,983 and 0 shares of our common stock,
respectively, were issued pursuant to the DRIP.
Share Repurchase Plan
Our board of directors has approved a share repurchase plan. Our share repurchase plan allows
for repurchases of shares of our common stock by us when certain criteria are met. Share
repurchases will be made at the sole discretion of our board of directors. All repurchases are
subject to a one-year holding period, except for repurchases made in connection with a
stockholders death or qualifying disability, as defined in our share repurchase plan. Subject to
the availability of the funds for share repurchases, we will limit the number of shares of
our common stock repurchased during any calendar year to 5.0% of the weighted average number
of shares of our common stock outstanding during the prior calendar year; provided, however, that
shares subject to a repurchase requested upon the death of a stockholder will not be subject to
this cap. Funds for the repurchase of shares of our common stock will come exclusively from the
cumulative proceeds we receive from the sale of shares of our common stock pursuant to the DRIP.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The prices per share at which we will repurchase shares of our common stock will range,
depending on the length of time the stockholder held such shares, from 92.5% to 100%, of the price
paid per share to acquire such shares from us. However, if shares of our common stock are to be
repurchased in connection with a stockholders death or qualifying disability, the repurchase price
will be no less than 100% of the price paid to acquire the shares of our common stock from us.
For the three months ended September 30, 2010 and 2009, we repurchased 11,000 shares of our
common stock for an aggregate of $110,000 and 0 shares of our common stock for an aggregate of $0,
respectively. For the nine months ended September 30, 2010 and for the period from January 7, 2009
(Date of Inception) through September 30, 2009, we repurchased 11,000 shares of our common stock
for an aggregate of $110,000 and 0 shares of our common stock for an aggregate of $0, respectively.
As of September 30, 2010 and December 31, 2009, we had repurchased 11,000 shares of our common
stock for an aggregate amount of $110,000 and 0 shares of our common stock for an aggregate amount
of $0, respectively.
2009 Incentive Plan
We adopted our incentive plan, pursuant to which our board of directors or a committee of our
independent directors may make grants of options, restricted common stock awards, stock purchase
rights, stock appreciation rights or other awards to our independent directors, employees and
consultants. The maximum number of shares of our common stock that may be issued pursuant to our
incentive plan is 2,000,000.
On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock,
as defined in our incentive plan, to our independent directors in connection with their initial
election to our board of directors, of which 20.0% vested on the date of grant and 20.0% will vest
on each of the first four anniversaries of the date of grant. On June 8, 2010, in connection with
their re-election, we granted an aggregate of 7,500 shares of our restricted common stock, as
defined in our incentive plan, to our independent directors, which will vest over the same period
described above. The fair value of each share of our restricted common stock was estimated at the
date of grant at $10.00 per share, the per share price of shares of our common stock in our
offering, and with respect to the initial 20.0% of shares that vested on the date of grant,
expensed as compensation immediately, and with respect to the remaining shares, amortized on a
straight-line basis over the vesting period. Shares of our restricted common stock may not be sold,
transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions
expire upon vesting. Shares of our restricted common stock have full voting rights and rights to
dividends. For the three months ended September 30, 2010 and 2009, we recognized compensation
expense of $11,000 and $0, respectively, and for the nine months ended September 30, 2010 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009, we recognized
compensation expense of $42,000 and $0, respectively, related to the restricted common stock grants
ultimately expected to vest. ASC Topic 718 requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. For the three months ended September 30, 2010 and 2009, for the nine months ended
September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September
30, 2009, we did not assume any forfeitures. Stock compensation expense is included in general and
administrative in our accompanying condensed consolidated statements of operations.
As of September 30, 2010 and December 31, 2009, there was $147,000 and $115,000, respectively,
of total unrecognized compensation expense related to the nonvested shares of our restricted common
stock. This expense is expected to be recognized over a remaining weighted average period of 3.27
years.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of September 30, 2010 and December 31, 2009, the fair value of the nonvested shares of our
restricted common stock was $180,000 and $120,000, respectively. A summary of the status of the
nonvested shares of our restricted common stock as of September 30, 2010 and December 31, 2009, and
the changes for the nine months ended September 30, 2010, is presented below:
Weighted | ||||||||
Number of Nonvested | Average Grant | |||||||
Shares of Our Restricted | Date Fair | |||||||
Common Stock | Value | |||||||
Balance December 31, 2009 |
12,000 | $ | 10.00 | |||||
Granted |
7,500 | 10.00 | ||||||
Vested |
(1,500 | ) | 10.00 | |||||
Forfeited |
| | ||||||
Balance September 30, 2010 |
18,000 | $ | 10.00 | |||||
Expected to vest September 30, 2010 |
18,000 | $ | 10.00 | |||||
13. Fair Value of Financial Instruments
Financial Instruments Reported at Fair Value
Derivative Financial Instrument
We use interest rate swaps to manage interest rate risk associated with floating rate debt.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves, foreign exchange rates and
implied volatilities. The fair values of interest rate swaps are determined using the market
standard methodology of netting the discounted future fixed cash payments and the discounted
expected variable cash receipts. The variable cash receipts are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of ASC Topic 820, we incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the respective counterpartys
nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative
contracts for the effect of nonperformance risk, we have considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, mutual puts and
guarantees.
Although we have determined that the majority of the inputs used to value our interest rate
swap fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated
with this instrument utilize Level 3 inputs, such as estimates of current credit spreads to
evaluate the likelihood of default by us and our counterparty. However, as of September 30, 2010,
we have assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of our derivative position and have determined that the credit valuation adjustments are
not significant to the overall valuation of our interest rate swap. As a result, we have determined
that our interest rate swap valuation in its entirety is classified in Level 2 of the fair value
hierarchy.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Assets and liabilities at fair value
The table below presents our assets and liabilities measured at fair value on a recurring
basis as of September 30, 2010, aggregated by the level in the fair value hierarchy within which
those measurements fall.
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical Assets | Significant Other | Unobservable | ||||||||||||||
and Liabilities | Observable Inputs | Inputs | ||||||||||||||
(Level 1 ) | (Level 2) | (Level 3) | Total | |||||||||||||
Liabilities: |
||||||||||||||||
Derivative financial instrument |
$ | | $ | (503,000 | ) | $ | | $ | (503,000 | ) | ||||||
Total liabilities at fair value |
$ | | $ | (503,000 | ) | $ | | $ | (503,000 | ) | ||||||
We did not have any fair value measurements using significant unobservable inputs (Level 3) as
of September 30, 2010.
Financial Instruments Disclosed at Fair Value
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial
instruments, whether or not recognized on the face of the balance sheet. Fair value is defined
under ASC Topic 820.
Our condensed consolidated balance sheets include the following financial instruments: cash
and cash equivalents, restricted cash, real estate and escrow deposits, accounts and other
receivables, accounts payable and accrued liabilities, accounts payable due to affiliates, mortgage
loan payables, net and borrowings under the line of credit.
We consider the carrying values of cash and cash equivalents, restricted cash, real estate and
escrow deposits, accounts and other receivables and accounts payable and accrued liabilities to
approximate fair value for these financial instruments because of the short period of time between
origination of the instruments and their expected realization. The fair value of accounts payable
due to affiliates is not determinable due to the related party nature of the accounts payable.
The fair value of the mortgage loan payables is estimated using borrowing rates available to
us for debt instruments with similar terms and maturities. As of September 30, 2010, the fair value
of the mortgage loan payables were $42,144,000 compared to the carrying value of $42,128,000. The
fair value of the line of credit as of September 30, 2010 was $12,644,000, compared to a carrying
value of $12,650,000. We did not have any mortgage loan payables or the line of credit as of
December 31, 2009.
14. Business Combinations
For the nine months ended September 30, 2010, we completed 10 acquisitions
comprising 19 buildings and 676,000 square feet of GLA. The aggregate purchase price was
$138,028,000, plus closing costs and acquisition fees of $4,794,000, which are included in
acquisition related expenses in our accompanying condensed consolidated statements of operations.
See Note 3, Real Estate Investments, for a listing of the properties acquired, the dates of
acquisition and the amount of financing initially incurred or assumed in connection with such
acquisition.
Results of operations for the property acquisitions are reflected in our accompanying
condensed consolidated statements of operations for the nine months ended September 30, 2010 for
the periods subsequent to the acquisition dates. For the period from the acquisition date through
September 30, 2010, we recognized the following amounts of
revenues and net income (loss) for the property
acquisitions:
Monument | ||||||||||||||||||||||||||||||||||||||||
Long-Term | ||||||||||||||||||||||||||||||||||||||||
Lacombe | Center for | Highlands | Muskogee Long- | St. Vincent | Livingston | Pocatello East | Acute Care | |||||||||||||||||||||||||||||||||
Medical Office | Neurosurgery | Parkway | Ranch Medical | Term Acute | Medical Office | Medical Arts | Medical Office | Hospital | Virginia SNF | |||||||||||||||||||||||||||||||
Building | and Spine | Medical Center | Pavilion | Care Hospital | Building | Pavilion | Building | Portfolio | Portfolio | |||||||||||||||||||||||||||||||
Revenues |
$ | 470,000 | $ | 414,000 | $ | 829,000 | $ | 506,000 | $ | 376,000 | $ | 417,000 | $ | 236,000 | $ | 348,000 | $ | 226,000 | $ | 188,000 | ||||||||||||||||||||
Net income (loss) |
$ | 142,000 | $ | (307,000 | ) | $ | 19,000 | $ | (40,000 | ) | $ | 194,000 | $ | 32,000 | $ | 73,000 | $ | 106,000 | $ | 99,000 | $ | 88,000 |
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The fair value of our 10 acquisitions at the time of acquisition is
shown below:
Monument | ||||||||||||||||||||||||||||||||||||||||
Long-Term | ||||||||||||||||||||||||||||||||||||||||
Lacombe | Center for | Highlands | Muskogee Long- | St. Vincent | Livingston | Pocatello East | Acute Care | |||||||||||||||||||||||||||||||||
Medical Office | Neurosurgery | Parkway | Ranch Medical | Term Acute | Medical Office | Medical Arts | Medical Office | Hospital | Virginia SNF | |||||||||||||||||||||||||||||||
Building | and Spine | Medical Center | Pavilion | Care Hospital | Building | Pavilion | Building | Portfolio | Portfolio | |||||||||||||||||||||||||||||||
Land |
$ | 409,000 | $ | 319,000 | $ | 1,320,000 | $ | 1,234,000 | $ | 379,000 | $ | 1,568,000 | $ | | $ | | $ | 1,795,000 | $ | 4,405,000 | ||||||||||||||||||||
Building and improvements |
5,438,000 | 4,688,000 | 7,192,000 | 5,444,000 | 8,314,000 | 6,746,000 | 4,976,000 | 14,140,000 | 13,176,000 | 37,709,000 | ||||||||||||||||||||||||||||||
In place leases |
512,000 | 575,000 | 969,000 | 668,000 | 897,000 | 741,000 | 519,000 | 663,000 | 1,377,000 | 2,837,000 | ||||||||||||||||||||||||||||||
Tenant relationships |
458,000 | 585,000 | 1,318,000 | 999,000 | 1,395,000 | 963,000 | 313,000 | 547,000 | 660,000 | 2,449,000 | ||||||||||||||||||||||||||||||
Leasehold interest |
| | | | | | 149,000 | | | | ||||||||||||||||||||||||||||||
Master lease |
| | | | | | | 450,000 | | | ||||||||||||||||||||||||||||||
Above market leases |
| 327,000 | 97,000 | 27,000 | | 107,000 | 473,000 | | | | ||||||||||||||||||||||||||||||
Total assets acquired |
6,817,000 | 6,494,000 | 10,896,000 | 8,372,000 | 10,985,000 | 10,125,000 | 6,430,000 | 15,800,000 | 17,008,000 | 47,400,000 | ||||||||||||||||||||||||||||||
Mortgage loan payables, net |
| (3,025,000 | ) | | (4,414,000 | ) | | | | | | | ||||||||||||||||||||||||||||
Below market leases |
| | (41,000 | ) | | | (50,000 | ) | (80,000 | ) | | | | |||||||||||||||||||||||||||
Derivative financial
instrument |
| (310,000 | ) | | | | | | | | | |||||||||||||||||||||||||||||
Other liabilities |
| | | | | | | | | (2,400,000 | ) | |||||||||||||||||||||||||||||
Total liabilities assumed |
| (3,335,000 | ) | (41,000 | ) | (4,414,000 | ) | | (50,000 | ) | (80,000 | ) | | | (2,400,000 | ) | ||||||||||||||||||||||||
Net assets acquired |
$ | 6,817,000 | $ | 3,159,000 | $ | 10,855,000 | $ | 3,958,000 | $ | 10,985,000 | $ | 10,075,000 | $ | 6,350,000 | $ | 15,800,000 | $ | 17,008,000 | $ | 45,000,000 | ||||||||||||||||||||
Assuming the property acquisitions discussed above had occurred on January 1, 2010, for the
three and nine months ended September 30, 2010, pro forma revenues, net loss, net loss attributable
to controlling interests and net loss per common share attributable to controlling interests
basic and diluted would have been as follows:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2010 | September 30, 2010 | |||||||
Revenues |
$ | 4,089,000 | $ | 12,151,000 | ||||
Net loss |
$ | (147,000 | ) | $ | (5,052,000 | ) | ||
Net loss attributable to controlling interests |
$ | (145,000 | ) | $ | (5,051,000 | ) | ||
Net loss per common share
attributable to controlling interests
basic and diluted |
$ | (0.01 | ) | $ | (0.44 | ) |
Assuming the property acquisitions discussed above had occurred on January 7, 2009, for the
three months ended September 30, 2009 and for the period from January 7, 2009 (Date of Inception)
through September 30, 2009, pro forma revenues, net loss, net income (loss) attributable to
controlling interests and net income (loss) per common share attributable to controlling interest basic
and diluted would have been as follows:
Period from | ||||||||
January 7, 2009 | ||||||||
Three Months | (Date of Inception) | |||||||
Ended | through | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Revenues |
$ | 4,111,000 | $ | 11,929,000 | ||||
Net income (loss) |
$ | 315,000 | $ | (4,169,000 | ) | |||
Net income (loss) attributable to controlling interests |
$ | 315,000 | $ | (4,167,000 | ) | |||
Net income (loss) per common share
attributable to controlling interests basic and
diluted |
$ | 0.03 | $ | (0.36 | ) |
The pro forma results are not necessarily indicative of the operating results that would have
been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
15. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash and cash equivalents, escrow deposits, restricted cash and accounts and other
receivables. Cash is generally invested in investment-grade, short-term instruments with a maturity
of three months or less when purchased. We have cash in financial institutions that is insured by
the Federal Deposit Insurance Corporation, or FDIC. As of September 30, 2010 and December 31, 2009,
we had cash and cash equivalents, escrow deposits and restricted cash accounts in excess of FDIC
insured limits. We believe this risk is not significant. Concentration of credit risk with respect
to accounts receivable from tenants is limited. We perform credit evaluations of prospective
tenants, and security deposits are obtained upon lease execution.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of September 30, 2010, we owned properties in four states for which each state accounted
for 10.0% or more of our total revenues for the nine months ended September 30, 2010.
The properties in Ohio, Colorado, Louisiana and Minnesota accounted for 31.1%, 12.6%, 11.7% and 10.3%,
respectively, of our total revenues for the nine months ended September 30, 2010. Accordingly,
there is a geographic concentration of risk subject to fluctuations in each states economy.
For
the nine months ended September 30, 2010, three of our tenants at our consolidated
properties accounted for 10.0% or more of our aggregate annual rental income, as follows:
Percentage of | GLA | |||||||||||||||
2010 Annual Base | 2010 Annual | (Square | Lease Expiration | |||||||||||||
Tenant | Rent* | Base Rent | Property | Feet) | Date | |||||||||||
Kissito Healthcare |
$ | 2,250,000 | 16.8 | % | Virginia Skilled Nursing Facility Portfolio | 144,000 | 01/31/25 | |||||||||
Laurel Health Care Company |
$ | 2,034,000 | 15.2 | % | Virginia Skilled Nursing Facility Portfolio | 88,000 | various - 2016 to 2025 | |||||||||
Landmark Real Estate Holdings, LLC |
$ | 1,522,000 | 11.3 | % | Monument LTACH Portfolio | 53,000 | 08/31/25 |
* | Annualized rental income is based on contractual base rent from leases in effect as of September 30, 2010. The loss of any of these tenants or their inability to pay rent could have a material adverse effect on our business and results of operations. |
For the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not
own any properties.
16. Per Share Data
We report earnings (loss) per share pursuant to ASC Topic 260, Earnings per Share. Basic
earnings (loss) per share attributable for all periods presented are computed by dividing net
income (loss) attributable to controlling interest by the weighted average number of shares of our
common stock outstanding during the period. Diluted earnings (loss) per share are computed based on
the weighted average number of shares of our common stock and all potentially dilutive securities,
if any. Nonvested shares of our restricted common stock give rise to potentially dilutive shares of
our common stock. As of September 30, 2010 and 2009, there were 18,000 shares and 0 shares,
respectively, of nonvested shares of our restricted common stock outstanding, but such shares were
excluded from the computation of diluted earnings per share because such shares were anti-dilutive
during these periods.
17. Subsequent Events
Status of our Offering
As of October 31, 2010, we had received and accepted subscriptions in our offering for
11,706,054 shares of our common stock, or $116,756,000, excluding shares of our common stock issued
pursuant to the DRIP.
Share Repurchases
In October 2010, we repurchased 10,000 shares of our common stock, for an aggregate amount of
$100,000, under our share repurchase plan.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Property Acquisition
On October 29, 2010, we acquired the Athens property, the third of four properties comprising
the Monument LTACH Portfolio, for a contract purchase price of $12,142,000, plus closing costs. The Athens
property is a one-story long-term acute care hospital facility
comprising approximately 31,000
square feet of GLA. We financed the purchase price of the Athens property using $12,300,000 in
borrowings under the line of credit and proceeds from our offering. In connection with the
acquisition, we paid an acquisition fee of $334,000, or 2.75% of the contract purchase price, to
Grubb & Ellis Equity Advisors.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The use of the words we, us or our refers to Grubb & Ellis Healthcare REIT II, Inc. and
its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context
otherwise requires.
The following discussion should be read in conjunction with our accompanying condensed
consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on
Form 10-Q. Such condensed consolidated financial statements and information have been prepared to
reflect our financial position as of September 30, 2010 and December 31, 2009, together with our
results of operations for the three months ended September 30, 2010 and 2009, and for the nine
months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009 and cash flows for the nine months ended September 30, 2010 and for the period
from January 7, 2009 (Date of Inception) through September 30, 2009.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended. Actual results may
differ materially from those included in the forward-looking statements. We intend those
forward-looking statements to be covered by the safe-harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995, and we are including
this statement for purposes of complying with those safe-harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans, strategies and
expectations, are generally identifiable by use of the words expect, project, may, will,
should, could, would, intend, plan, anticipate, estimate, believe, continue,
predict, potential or the negative of such terms and other comparable terminology. Our ability
to predict results or the actual effect of future plans or strategies is inherently uncertain.
Factors which could have a material adverse effect on our operations and future prospects on a
consolidated basis include, but are not limited to: changes in economic conditions generally and
the real estate market specifically; legislative and regulatory changes, including changes to laws
governing the taxation of real estate investment trusts, or REITs; the availability of capital;
changes in interest rates; competition in the real estate industry; the supply and demand for
operating properties in our proposed market areas; changes in accounting principles generally
accepted in the United States of America, or GAAP, policies and guidelines applicable to REITs; the
success of our best efforts initial public offering; the availability of properties to acquire; the
availability of financing; and our ongoing relationship with Grubb & Ellis Company, or Grubb &
Ellis, or our sponsor, and its affiliates. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on such statements.
Additional information concerning us and our business, including additional factors that could
materially affect our financial results, is included herein and in our other filings with the
United States Securities and Exchange Commission, or the SEC.
Overview and Background
Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7,
2009 and therefore we consider that our date of inception. We were initially capitalized on
February 4, 2009. We invest and intend to continue to invest in a diversified portfolio of real
estate properties, focusing primarily on medical office buildings and healthcare-related
facilities. We may also originate and acquire secured loans and other real estate-related
investments. We generally seek investments that produce current income. We intend to qualify and
elect to be treated as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, for
federal income tax purposes for our taxable year ending December 31, 2010.
We are conducting a best efforts initial public offering, or our offering, in which we are
offering to the public up to 300,000,000 shares of our common stock for $10.00 per share in our
primary offering and 30,000,000 shares of our common stock pursuant to our distribution
reinvestment plan, or the DRIP, for $9.50 per share, for a maximum offering of up to
$3,285,000,000. The SEC declared our registration statement effective as of August 24, 2009. We
reserve the right to reallocate the shares of our common stock we are offering between the primary
offering and the DRIP. As of September 30, 2010, we had received and accepted subscriptions in our
offering for 10,427,527 shares of our common stock, or $104,006,000, excluding shares of our common
stock issued pursuant to the DRIP.
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We conduct substantially all of our operations through Grubb & Ellis Healthcare REIT II
Holdings, LP, or our operating partnership. We are externally advised by Grubb & Ellis Healthcare
REIT II Advisor, LLC, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement,
between us and our advisor that has a one-year term that expires on June 1, 2011 and is subject to
successive one-year renewals upon the mutual consent of the parties. Our advisor supervises and
manages our day-to-day operations and selects the properties and real estate-related investments we
acquire, subject to the oversight and approval of our board of directors. Our advisor also provides
marketing, sales and client services on our behalf. Our advisor engages affiliated entities to
provide various services to us. Our advisor is managed by, and is a wholly owned subsidiary of,
Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is a wholly owned
subsidiary of our sponsor.
As
of September 30, 2010, we had completed 10 acquisitions comprising
19 buildings and 676,000 square feet of
gross leasable area, or GLA, for an aggregate purchase price of $138,028,000.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2009
Annual Report on Form 10-K, as filed with the SEC on February 25, 2010, and there have been no
material changes to our Critical Accounting Policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated
financial statements do not include all of the information and footnotes required by GAAP for
complete financial statements. Our accompanying condensed consolidated financial statements reflect
all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such full year results may be less favorable. Our accompanying condensed
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in our 2009 Annual Report on Form 10-K, as
filed with the SEC on February 25, 2010.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Summary of
Significant Accounting Policies Recently Issued Accounting Pronouncements, to our accompanying
condensed consolidated financial statements.
Acquisitions in 2010
For a discussion of our acquisitions for the nine months ended September 30, 2010, see Note 3,
Real Estate Investments Acquisitions in 2010, to our accompanying condensed consolidated
financial statements.
Proposed Acquisition
For a discussion of our proposed acquisition as of September 30, 2010, see Note 3, Real Estate
Investments Proposed Acquisition, to our accompanying condensed consolidated financial
statements.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the acquisition, management and
operation of properties other than those listed in Part II,
Item 1A. Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously
disclosed in our 2009 Annual Report on Form 10-K, as filed with the SEC on February 25, 2010.
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Rental Income
The amount of rental income generated by our properties depends principally on our
ability to maintain the occupancy rates of currently leased space and to lease currently available
space and space available from lease terminations at the then existing rental rates. Negative
trends in one or more of these factors could adversely affect our rental income in future periods.
Offering Proceeds
If we fail to raise substantially more proceeds from the sale of shares of our common stock in
our offering than the amount we have raised to date, we will have limited diversification in terms
of the number of investments owned, the geographic regions in which our investments are located and
the types of investments that we make. As a result, our real estate portfolio would be concentrated
in a small number of properties, which would increase exposure to local and regional economic
downturns and the poor performance of one or more of our properties, whereby our stockholders would
be exposed to increased risk. In addition, many of our expenses are fixed regardless of the size of
our real estate portfolio. Therefore, depending on the amount of proceeds we raise from our
offering, we would expend a larger portion of our income on operating expenses. This would reduce
our profitability and, in turn, the amount of net income available for distribution to our
stockholders.
Scheduled Lease Expirations
As of September 30, 2010, our consolidated properties were 97.8% occupied. During the
remainder of 2010, leases associated with 0.2% of the occupied GLA will expire. Our leasing
strategy for 2010 focuses on negotiating renewals for leases scheduled to expire during the
remainder of the year. In the future, if we are unable to negotiate renewals, we will try to
identify new tenants or collaborate with existing tenants who are seeking additional space to
occupy.
As of September 30, 2010, our remaining weighted average lease term is 9.4 years.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies have increased the costs of compliance with corporate governance, reporting and
disclosure practices. These costs may have a material adverse effect on our results of operations
and could impact our ability to pay distributions at current rates to our stockholders.
Furthermore, we expect that these costs will increase in the future due to our continuing
implementation of compliance programs mandated by these requirements. Any increased costs may
affect our ability to distribute funds to our stockholders. As part of our compliance with the
Sarbanes-Oxley Act, we will provide managements assessment of our internal control over financial
reporting as of December 31, 2010.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in the event of
non-compliance, thereby increasing the risks of liability and potential sanctions against us. We
expect that our efforts to comply with these laws and regulations will continue to involve
significant and potentially increasing costs, and that our failure to comply with these laws could
result in fees, fines, penalties or administrative remedies against us.
Results of Operations
We had limited results of operations for the period from January 7, 2009 (Date of Inception)
through September 30, 2009, and therefore our results of operations for the three months ended
September 30, 2010 and 2009 and for the nine months ended September 30, 2010 and for the period
from January 7, 2009 (Date of Inception) through September 30, 2009 are not comparable. We expect
all amounts to increase in the future based on a full year of operations as well as increased
activity as we acquire additional real estate investments. Our results of operations are not
indicative of those expected in future periods.
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Our operating results for the three and nine months ended September 30, 2010 are primarily
comprised of income derived from our portfolio of properties and acquisition related expenses in
connection with such acquisitions.
Except where otherwise noted, the change in our results of operations is primarily due to
our property acquisitions as of September 30, 2010, as compared to not owning any properties as of
September 30, 2009.
Rental Income
For the three months ended September 30, 2010 and 2009, rental income was $2,807,000 and $0,
respectively, and was primarily comprised of base rent of $2,133,000 and $0, respectively, and
expense recoveries of $520,000 and $0, respectively.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, rental income was $4,010,000 and $0, respectively, and was
primarily comprised of base rent of $3,008,000 and $0, respectively, and expense recoveries of
$762,000 and $0, respectively.
The aggregate occupancy for our properties was 97.8% as of September 30, 2010. We did not own
any properties as of September 30, 2009.
Rental Expenses
For the three months ended September 30, 2010 and 2009, rental expenses were $834,000 and $0,
respectively. For the three months ended September 30, 2010,
rental expenses primarily consisted of real
estate taxes of $292,000, repairs and maintenance of $204,000, utilities of $187,000 and property
management fees of $83,000.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, rental expenses were $1,241,000 and $0, respectively. For
the nine months ended September 30, 2010, rental expenses primarily consisted of real estate taxes
of $454,000, repairs and maintenance of $307,000, utilities of $263,000 and property management
fees of $127,000.
As a percentage of revenue, operating expenses remained materially consistent. Rental expenses
as a percentage of revenue were 29.7% and 0%, respectively, for the three months ended September
30, 2010 and 2009.
Rental expenses as a percentage of revenue were 30.9% and 0%, respectively, for the nine months
ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009.
General and Administrative
For the three months ended September 30, 2010 and 2009, general and administrative was
$503,000 and $62,000, respectively, and for the nine months ended September 30, 2010 and for the
period from January 7, 2009 (Date of Inception) through September 30, 2009, general and
administrative was $1,048,000 and $62,000, respectively. General and
administrative consisted of the following for the periods then ended:
Period from | ||||||||||||||||
January 7, 2009 | ||||||||||||||||
Three Months Ended | (Date of Inception) | |||||||||||||||
September 30, | Nine Months Ended | through | ||||||||||||||
2010 | 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Professional and legal fees |
$ | 147,000 | $ | 17,000 | $ | 315,000 | $ | 17,000 | ||||||||
Asset management fees |
189,000 | | 274,000 | | ||||||||||||
Directors and officers liability insurance |
44,000 | 19,000 | 133,000 | 19,000 | ||||||||||||
Board of directors fees |
46,000 | 23,000 | 125,000 | 23,000 | ||||||||||||
Transfer agent services |
30,000 | | 73,000 | | ||||||||||||
Restricted stock compensation |
11,000 | | 42,000 | | ||||||||||||
Other |
36,000 | 3,000 | 86,000 | 3,000 | ||||||||||||
$ | 503,000 | $ | 62,000 | $ | 1,048,000 | $ | 62,000 | |||||||||
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The increase in general and administrative is primarily the result of purchasing
properties in 2010 and thus incurring asset management fees, incurring legal and professional fees
in connection with our SEC reporting requirements, where such requirements did not exist until our
offering was declared effective on August 24, 2009, and incurring directors and officers
liability insurance and board of directors fees for a full nine months in 2010 versus one month in
2009.
Acquisition Related Expenses
For the three months ended September 30, 2010 and 2009, we incurred acquisition related
expenses of $2,847,000 and $0, respectively. For the three months ended September 30, 2010,
acquisition related expenses related primarily to expenses associated with the purchase of
Pocatello East Medical Office Building, the Monument Long-Term Acute Care Hospital Portfolio and
the Virginia Skilled Nursing Facility Portfolio, including acquisition fees of $2,150,000, incurred
to our advisor or its affiliates.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we incurred acquisition related expenses of $5,179,000 and
$0, respectively. For the nine months ended September 30, 2010, acquisition related expenses
related primarily to expenses associated with our 10 acquisitions, including
acquisition fees of $3,808,000 incurred to our advisor or its affiliates.
Depreciation and Amortization
For the three months ended September 30, 2010 and 2009, depreciation and amortization was
$1,157,000 and $0, respectively, and consisted of depreciation on our operating properties of
$615,000 and $0, respectively, and amortization on our identified intangible assets of $542,000 and
$0, respectively.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, depreciation and amortization was $1,722,000 and $0,
respectively, and consisted of depreciation on our operating properties of $902,000 and $0,
respectively, and amortization on our identified intangible assets of $820,000 and $0,
respectively.
Interest Expense
For the three months ended September 30, 2010 and 2009, interest expense
including loss in fair value of derivative financial instrument was $397,000 and $0,
respectively. For the three months ended September 30, 2010, interest expense was comprised of
$198,000 related to interest expense on our mortgage loan payables and derivative financial
instrument, $72,000 related to interest expense on our secured revolving credit facility with Bank
of America, N.A., or the line of credit, $74,000 related to loss in fair value of our derivative
financial instrument, $37,000 related to amortization of deferred financing costs associated with
the line of credit, $7,000 related to amortization of deferred financing costs associated with our
mortgage loan payables and $9,000 related to amortization of debt discount.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, interest expense including loss in fair value of derivative financial instrument was $626,000 and $0, respectively. For the
nine months ended September 30, 2010, interest expense was comprised of $293,000 related to
interest expense on our mortgage loan payables and derivative financial instrument, $72,000 related
to interest expense on the line of credit, $194,000 related to loss in fair value of our derivative
financial instrument, $37,000 related to amortization of deferred financing costs associated with
the line of credit, $12,000 related to amortization of deferred financing costs associated with our
mortgage loan payables and $18,000 related to amortization of debt discount.
Interest Income
For the three months ended September 30, 2010 and 2009, we had interest income of $1,000 and
$0, respectively, related to interest earned on funds held in cash accounts.
For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we had interest income of $14,000 and $0, respectively,
related to interest earned on funds held in cash accounts.
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Liquidity and Capital Resources
We are dependent upon the net proceeds from our offering to provide the capital required
to acquire real estate and real estate-related investments, net of any indebtedness that we may
incur. Our ability to raise funds through our offering is dependent on general economic conditions,
general market conditions for REITs and our operating performance. The capital required to purchase
real estate and real estate-related investments is obtained primarily from our offering and from
any indebtedness that we may incur.
We expect to experience a relative increase in liquidity as additional subscriptions for
shares of our common stock are received and a relative decrease in liquidity as net offering
proceeds are expended in connection with the acquisition, management and operation of our real
estate and real estate-related investments.
Our sources of funds will primarily be the net proceeds of our offering, operating cash flows
and borrowings. We believe that these cash resources will be sufficient to satisfy our cash
requirements for the foreseeable future, and we do not anticipate a need to raise funds from other
than these sources within the next 12 months.
Our principal demands for funds are for acquisitions of real estate and real estate-related
investments, to pay operating expenses and interest on our current and future indebtedness and to
pay distributions to our stockholders. In addition, we require resources to make certain payments
to our advisor and Grubb & Ellis Securities, Inc., or our dealer manager, which, during our
offering, include payments to our advisor and its affiliates for reimbursement of other
organizational and offering expenses and to our dealer manager and its affiliates for selling
commissions and dealer manager fees.
Generally, cash needs for items other than acquisitions of real estate and real estate-related
investments are met from operations, borrowings and the net proceeds of our offering. However,
there may be a delay between the sale of shares of our common stock and our investments in real
estate and real estate-related investments, which could result in a delay in the benefits to our
stockholders, if any, of returns generated from our investment operations.
Our advisor evaluates potential additional investments and engages in negotiations with
real estate sellers, developers, brokers, investment managers, lenders and others on our behalf.
Until we invest the majority of the net proceeds of our offering in real estate and real
estate-related investments, we may invest in short-term, highly liquid or other authorized
investments. Such short-term investments will not earn significant returns, and we cannot predict
how long it will take to fully invest the proceeds from our offering in real estate and real
estate-related investments. The number of properties we may acquire and other investments we will
make will depend upon the number of shares of our common stock sold in our offering and the
resulting amount of net proceeds available for investment.
When we acquire a property, our advisor prepares a capital plan that contemplates the
estimated capital needs of that investment. In addition to operating expenses, capital needs may
also include costs of refurbishment, tenant improvements or other major capital expenditures. The
capital plan also sets forth the anticipated sources of the necessary capital, which may include a
line of credit or other loans established with respect to the investment, operating cash generated
by the investment, additional equity investments from us or joint venture partners or, when
necessary, capital reserves. Any capital reserve would be established from the net proceeds of our
offering, proceeds from sales of other investments, operating cash generated by other investments
or other cash on hand. In some cases, a lender may require us to establish capital reserves for a
particular investment. The capital plan for each investment will be adjusted through ongoing,
regular reviews of our portfolio or as necessary to respond to unanticipated additional capital
needs.
Other Liquidity Needs
In the event that there is a shortfall in net cash available due to various factors,
including, without limitation, the timing of distributions or the timing of the collection of
receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured
debt financing through one or more third parties, or our advisor or its affiliates. There are
currently no limits or restrictions on the use of proceeds from our advisor or its affiliates which
would prohibit us from making the proceeds available for distribution. We may also pay
distributions from cash from capital transactions, including, without limitation, the sale of one
or more of our properties.
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Based on the properties owned as of September 30, 2010, we estimate that our expenditures for
capital improvements will require up to $307,000 for the remaining three months of 2010. As of
September 30, 2010, we had $2,038,000 of restricted cash in loan impounds and reserve accounts for
such capital expenditures. We cannot provide assurance, however, that we will not exceed these
estimated expenditure and distribution levels or be able to obtain additional sources of financing
on commercially favorable terms or at all.
If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of
asset sales, or increased capital expenditures and leasing costs compared to historical levels due
to competitive market conditions for new and renewal leases, the effect would be a reduction of net
cash provided by operating activities. If such a reduction of net cash provided by operating
activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net
cash available is based on various assumptions which are difficult to predict, including the levels
of leasing activity and related leasing costs. Any changes in these assumptions could impact our
financial results and our ability to fund working capital and unanticipated cash needs.
Cash Flows
Cash flows used in operating activities for the nine months ended September 30, 2010 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009, were $3,480,000 and
$0, respectively. For the nine months ended September 30, 2010, cash flows used in operating
activities primarily related to the payment of acquisition related expenses and general and
administrative expenses. We anticipate cash flows from operating activities to increase as we
purchase additional properties and have a full year of operations.
Cash flows used in investing activities for the nine months ended September 30, 2010 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009, were $131,763,000
and $0, respectively. For the nine months ended September 30, 2010, cash flows used in investing
activities related primarily to the acquisition of our properties in the amount of $128,761,000,
restricted cash in the amount of $2,225,000 and the payment of $759,000 in real estate and escrow deposits for
the purchase of real estate. Cash flows used in investing activities are heavily dependent upon the
investment of our offering proceeds in properties and real estate assets.
Cash flows provided by financing activities for the nine months ended September 30, 2010 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, were
$124,424,000 and $202,000, respectively. For the nine months ended September 30, 2010, such cash
flows related primarily to funds raised from investors in our offering in the amount of
$89,090,000, borrowings on our mortgage loan payables in the amount of $34,810,000, and net borrowings
under the line of credit in the amount of $12,650,000, partially offset by the payment of offering
costs of $9,610,000 and distributions of $1,146,000. Additional cash outflows related to deferred
financing costs of $1,311,000 in connection with the debt financing for our acquisitions. For the
period from January 7, 2009 (Date of Inception) through September 30, 2009, such cash flows related
to $200,000 received from our advisor for the purchase of 20,000 shares of our common stock and an
initial capital contribution of $2,000 from our advisor into our operating partnership. We
anticipate cash flows from financing activities to increase in the future as we raise additional
funds from investors and incur debt to purchase properties.
Distributions
Our board of directors authorized a daily distribution to our stockholders of record as of the
close of business on each day of the period commencing on January 1, 2010 and ending on June
30, 2010, as a result of our sponsor, Grubb & Ellis, advising us that it intended to fund these
distributions until we acquired our first property. We acquired our first property, Lacombe Medical
Office Building, on March 5, 2010. Our sponsor did not receive any additional shares of our common
stock or other consideration for funding these distributions, and we will not repay the funds
provided by our sponsor for these distributions. Our sponsor is not obligated to contribute monies
to fund any subsequent distributions. Effective as of June 25, 2010, our board of directors
authorized a daily distribution to our stockholders of record as of the close of business on each
day of the period commencing on July 1, 2010 and ending on September 30, 2010.
Effective as of September 22, 2010, our board of directors authorized a daily distribution to our
stockholders of record as of the close of business on each day of the period commencing on October
1, 2010 and ending on December 31, 2010. The distributions declared for each record date in the
October
2010, November 2010 and December 2010 periods will be paid in November 2010, December 2010 and
January 2011, respectively, only from legally available funds.
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The distributions are calculated based on 365 days in the calendar year and are equal to
$0.0017808 per day per share of common stock, which is equal to an annualized distribution rate of
6.5%, assuming a purchase price of $10.00 per share. These distributions are aggregated and paid in
cash or shares of our common stock pursuant to the DRIP shares monthly in arrears.
The amount of the distributions to our stockholders is determined quarterly by our board of
directors and is
dependent on a number of factors, including funds available for payment of distributions, our
financial condition,
capital expenditure requirements and annual distribution requirements needed to qualify as a REIT
under the Code. We have not established any limit on the amount of offering proceeds that may be
used to fund distributions, except that, in accordance with our organizational documents and
Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts
as they become due in the usual course of business; (2) cause our total assets to be less than the
sum of our total liabilities plus senior liquidation preferences; or (3) jeopardize our ability to
maintain our qualification as a REIT.
For the nine months ended September 30, 2010, we paid distributions of $2,238,000 ($1,146,000
in cash and $1,092,000 in shares of our common stock pursuant to the DRIP), none of which were paid
from cash flows from operations of $(3,480,000). $259,000, or 11.6% of the distributions, were paid
using funds from our sponsor. The distributions in excess of funds from our sponsor were paid from
offering proceeds. Under GAAP, acquisition related expenses are expensed and therefore subtracted
from cash flows from operations. However, these expenses are paid from offering proceeds. Cash
flows from operations of $(3,480,000) adding back acquisition related expenses of $5,179,000 for
the nine months ended September 30, 2010 are $1,699,000, or 75.9% of distributions paid.
Our distributions of amounts in excess of our current and accumulated earnings and profits
have resulted in a return of capital to our stockholders. We have not established any limit on the
amount of offering proceeds that may be used to fund distributions other than those limits imposed
by our organizational documents and Maryland law. Therefore, all or any portion of a distribution
to our stockholders may be paid from offering proceeds. The payment of distributions from our
offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively
impact the amount of income available for future distributions.
For the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not
pay any distributions.
As of September 30, 2010, we had an amount payable of $185,000 to our advisor or its
affiliates for operating expenses, acquisition related expenses, asset and property management
fees, lease commissions and on-site personnel and engineering payroll, which will be paid from cash
flows from operations in the future as they become due and payable by us in the ordinary course of
business consistent with our past practice.
As of September 30, 2010, no amounts due to our advisor or its affiliates have been deferred,
waived or forgiven. Our advisor and its affiliates have no obligations to defer, waive or forgive
amounts due to them. In the future, if our advisor or its affiliates do not defer, waive or forgive
amounts due to them, this would negatively affect our cash flows from operations, which could
result in us paying distributions, or a portion thereof, with net proceeds from our offering, funds
from our sponsor or borrowed funds. As a result, the amount of proceeds available for investment
and operations would be reduced, or we may incur additional interest expense as a result of
borrowed funds.
For the nine months ended September 30, 2010, our funds from operations, or FFO, was
$(4,073,000). For the nine months ended September 30, 2010, we paid distributions of $259,000, or
11.6%, using funds from our sponsor and $1,979,000, or 88.4%, from proceeds from our offering. The
payment of distributions from sources other than FFO may reduce the amount of proceeds available
for investment and operations or cause us to incur additional interest expense as a result of
borrowed funds. For a further discussion of FFO, see Funds from Operations and Modified Funds from
Operations below.
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Financing
We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed 60.0%
of all of our properties and other real estate-related assets combined fair market values, as
defined, as determined at the end of each calendar year beginning with our first full year of
operations. For these purposes, the fair market value of each asset will be equal to the purchase
price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then
the fair market value will be equal to the value reported in the most recent independent appraisal
of the asset. Our policies do not limit the amount we may borrow with respect to any individual
investment. As of September 30, 2010, our borrowings were 39.9% of our properties combined fair
market values, as defined.
Under our charter, we have a limitation on borrowing that precludes us from borrowing in
excess of 300.0% of our net assets, without the approval of a majority of our independent
directors. Net assets for purposes of this calculation are defined to be our total assets (other
than intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other
non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to
approximate 75.0% of the aggregate cost of our real estate and real estate-related investments
before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we
may incur mortgage debt and pledge some or all of our real properties as security for that debt to
obtain funds to acquire additional real estate or for working capital. We may also borrow funds to
satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual
taxable income, excluding net capital gains, to our stockholders. Furthermore, we may borrow if we
otherwise deem it necessary or advisable to ensure that we qualify, or maintain our qualification,
as a REIT for federal income tax purposes. As of November 9, 2010 and September 30, 2010, our
leverage did not exceed 300.0% of the value of our net assets.
Mortgage Loan Payables, Net
For a discussion of our mortgage loan payables, net, see Note 6, Mortgage Loan Payables, Net,
to our accompanying condensed consolidated financial statements.
Line of Credit
For a discussion of the line of credit, see Note 8, Line of Credit, to our accompanying
condensed consolidated financial statements.
REIT Requirements
In order to qualify as a REIT for federal income tax purposes, we are required to make
distributions to our stockholders of at least 90.0% of our annual taxable income, excluding net
capital gains. In the event that there is a shortfall in net cash available due to factors
including, without limitation, the timing of such distributions or the timing of the collection of
receivables, we may seek to obtain capital to pay distributions by means of secured debt financing
through one or more third parties. We may also pay distributions from cash from capital
transactions including, without limitation, the sale of one or more of our properties or from the
proceeds of our offering.
Commitments and Contingencies
For a discussion of our commitments and contingencies, see Note 10, Commitments and
Contingencies, to our accompanying condensed consolidated financial statements.
Debt Service Requirements
Our principal liquidity need is the payment of principal and interest on outstanding
indebtedness. As of September 30, 2010, we had $12,406,000 ($12,382,000, net of discount) of fixed
rate debt and $30,048,000 ($29,746,000, net of discount) of variable rate debt outstanding secured
by our properties. In addition, we had $12,650,000 outstanding under the line of credit.
We are required by the terms of certain loan documents to meet certain covenants, such as
occupancy ratios, leverage ratios, net worth ratios, debt service coverage ratios, liquidity
ratios, operating cash flow to fixed charges ratios, distribution ratios and reporting
requirements. As of September 30, 2010, we were in compliance with all such covenants and
requirements on our mortgage loan payables and the line of credit and we expect to remain in
compliance with all such requirements for the next 12 months. As of September 30, 2010, the
weighted average effective interest rate on our outstanding debt, factoring in our fixed rate
interest rate swap, was 5.52% per annum.
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Contractual Obligations
The following table provides information with respect to the maturity and scheduled principal
repayment of our secured mortgage loan payables and the line of credit as of September 30, 2010:
Payments Due by Period | ||||||||||||||||||||
Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||
(2010) | (2011-2012) | (2013-2014) | (after 2014) | Total | ||||||||||||||||
Principal payments fixed rate debt |
$ | 65,000 | $ | 4,721,000 | $ | 338,000 | $ | 7,282,000 | $ | 12,406,000 | ||||||||||
Interest payments fixed rate debt |
187,000 | 1,466,000 | 974,000 | 2,801,000 | 5,428,000 | |||||||||||||||
Principal payments variable rate debt |
3,238,000 | (1) | 39,460,000 | | | 42,698,000 | ||||||||||||||
Interest payments variable rate debt
(based on rates in effect as of
September 30, 2010) |
527,000 | 2,903,000 | | | 3,430,000 | |||||||||||||||
Total |
$ | 4,017,000 | $ | 48,550,000 | $ | 1,312,000 | $ | 10,083,000 | $ | 63,962,000 | ||||||||||
(1) | Our variable rate mortgage loan payable in the outstanding principal amount of $3,238,000 ($2,936,000, net of discount) secured by Center for Neurosurgery and Spine as of September 30, 2010, had a fixed rate interest rate swap, thereby effectively fixing our interest rate on this mortgage loan payable to an effective interest rate of 6.00% per annum. This mortgage loan payable is due August 15, 2021; however, the principal balance is immediately due upon written request from the seller confirming that the seller agrees to pay any interest rate swap termination amount, if any. Assuming the seller does not exercise such right, interest payments, using the 6.00% per annum effective interest rate, would be $48,000, $351,000, $281,000 and $414,000 in 2010, 2011-2012, 2013-2014 and thereafter, respectively. |
Off-Balance Sheet Arrangements
As of September 30, 2010, we had no off-balance sheet transactions nor do we currently have
any such arrangements or obligations.
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated
by our operations. Due to certain unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has
promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to
reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as
a supplemental performance measure. FFO is not equivalent to our net income or loss as determined
under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White
Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the
White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP,
excluding gains or losses from sales of property but including asset impairment writedowns, plus
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect
FFO. Our FFO calculation complies with NAREITs policy described above.
The historical accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values historically rise and fall with market
conditions, presentations of operating results for a REIT, using historical accounting for
depreciation, we believe, may be less informative. As a result, we believe that the use of FFO,
which excludes the impact of real estate related depreciation and amortization, provides a more
complete understanding of our performance to investors and to our management, and when compared
year over year, reflects the impact on our operations from trends in occupancy rates, rental rates,
operating costs, general and administrative expenses, and interest costs, which is not immediately
apparent from net income.
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However, changes in the accounting and reporting rules under GAAP (for acquisition fees and
expenses from a capitalization/depreciation model to an expensed-as-incurred model) that have been
put into effect since the establishment of NAREITs definition of FFO have prompted an increase in
the non-cash and non-operating items included in FFO. In addition, fair
value adjustments of derivatives and amortization of above and below market leases, are sanctioned non-cash
adjustments to FFO in calculating adjusted funds from operations, or AFFO, as discussed in the
applicable White Papers approved by the Board of Governors of NAREIT,
and the non-GAAP financial
measure AFFO is considered by NAREIT to be a valuation/cash flow metric. As such, in addition to FFO, we
use modified funds from operations, or MFFO, to further evaluate our
operating performance. In calculating MFFO, we exclude acquisition
related expenses fair value adjustments of derivatives and
amortization of above and below market leases.
Neither
the SEC, NAREIT or any other regulatory body or trade association has passed judgment on the
acceptability of the exclusions used by us to calculate MFFO. In the future, the SEC, NAREIT or
another regulatory body or trade association may standardize the allowable exclusions for REITs,
and if so, we will adjust the calculation and characterization of our non-GAAP financial measures
accordingly.
We believe that the use of MFFO is useful for investors and our management as a measure of our
operating performance because it excludes non-cash and non-operating items as well as charges that
we consider more reflective of investing activities or non-operating valuation changes. However,
acquisition expenses and fees are considered part of operating income under GAAP and adjustments to
fair value for derivatives and amortization of above and below market leases are considered
non-cash adjustments to net income in determining cash flows from operations in accordance with
GAAP. By providing FFO and MFFO, we present information that assists investors in aligning their
analysis with managements analysis of long-term operating activities. We believe fluctuations in
MFFO are indicative of changes in operating activities and provide comparability in evaluating our
performance over time and our performance as compared to other real estate companies that may not
be affected by acquisition activities, fair value adjustments of derivatives or above and below
market leases. As explained below, our evaluation of our operating performance excludes the items
considered in the calculation of MFFO based on the following economic considerations:
| Acquisition related expenses: In accordance with GAAP, prior to 2009, acquisition expenses were capitalized; however as a result of a change in GAAP, beginning in 2009, acquisition expenses are now expensed. These acquisition related expenses have been and will continue to be funded from proceeds from our offering and not from our operations. We believe by excluding acquisition related expenses, MFFO provides useful supplemental information that is consistent with our analysis of the operating performance of our properties. | ||
| Adjustments to the fair value for derivatives not qualifying for hedge accounting: We use derivatives in the management of our interest rate exposure. We do not use derivatives for speculative purposes and accordingly period-to-period changes in derivative valuations are not primary factors in our decision-making process. In addition, we do not intend to terminate the derivative financial instrument early, which would require settlement in cash. We believe by excluding the gains or losses from these derivatives, MFFO provides useful supplemental information on the realized economic impact of the hedges independent of short-term market fluctuations. | ||
| Amortization of above and below market leases: Above and below market leases are intangible assets and liabilities that are acquired in connection with the purchase of a property. Such intangibles are amortized to revenue, similar to depreciation and amortization expense on our other assets and intangibles. We believe by excluding the non-cash amortization of above and below market leases, MFFO provides useful supplemental information that is consistent with our analysis of the operating performance of our properties. |
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Presentation of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs calculate FFO and
MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO
are not necessarily indicative of cash flow available to fund cash needs and should not be
considered as alternatives to net income as an indication of our performance, as an indication of
our liquidity or indicative of funds available to fund our cash needs, including our ability to
make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other
measurements as an indication of our performance.
The following is a reconciliation of net loss, which is the most directly comparable GAAP
financial measure, to FFO and MFFO for the three months ended September 30, 2010 and 2009, for the
nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception)
through September 30, 2009:
Period from | ||||||||||||||||
January 7, 2009 | ||||||||||||||||
Three Months Ended | (Date of Inception) | |||||||||||||||
September 30, | Nine Months Ended | through | ||||||||||||||
2010 | 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Net loss |
$ | (2,930,000 | ) | $ | (62,000 | ) | $ | (5,792,000 | ) | $ | (62,000 | ) | ||||
Add: |
||||||||||||||||
Depreciation and amortization
consolidated properties |
1,157,000 | | 1,722,000 | | ||||||||||||
Less: |
||||||||||||||||
Net income attributable to
noncontrolling interests |
(1,000 | ) | | (1,000 | ) | | ||||||||||
Depreciation and amortization related to
noncontrolling interests |
(2,000 | ) | | (2,000 | ) | | ||||||||||
FFO |
$ | (1,776,000 | ) | $ | (62,000 | ) | $ | (4,073,000 | ) | $ | (62,000 | ) | ||||
Add: |
||||||||||||||||
Acquisition related expenses |
2,847,000 | | 5,179,000 | | ||||||||||||
Loss in fair value of derivative financial instrument |
74,000 | | 194,000 | | ||||||||||||
Amortization of above and below market leases |
28,000 | | 49,000 | | ||||||||||||
MFFO |
$ | 1,173,000 | $ | (62,000 | ) | $ | 1,349,000 | $ | (62,000 | ) | ||||||
Weighted average common shares
outstanding basic and diluted |
8,745,255 | 20,000 | 5,687,117 | 17,895 | ||||||||||||
FFO per common share basic and diluted |
$ | (0.20 | ) | $ | (3.10 | ) | $ | (0.72 | ) | $ | (3.46 | ) | ||||
MFFO per common share basic and diluted |
$ | 0.13 | $ | (3.10 | ) | $ | 0.24 | $ | (3.46 | ) | ||||||
Net Operating Income
Net operating income is a non-GAAP financial measure that is defined as net income (loss),
computed in accordance with GAAP, generated from properties before general and administrative
expenses, acquisition related expenses, depreciation and amortization, interest expense and
interest income. We believe that net operating income is useful for investors as it provides an
accurate measure of the operating performance of our operating assets because net operating income
excludes certain items that are not associated with the management of the properties. Additionally,
we believe that net operating income is a widely accepted measure of comparative operating
performance in the real estate community. However, our use of the term net operating income may not
be comparable to that of other real estate companies as they may have different methodologies for
computing this amount.
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The following is a reconciliation of net loss, which is the most directly comparable GAAP
financial measure,
to net operating income for the three months ended September 30, 2010 and 2009, for the nine months
ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009:
Period from | ||||||||||||||||
January 7, 2009 | ||||||||||||||||
Three Months Ended | (Date of Inception) | |||||||||||||||
September 30, | Nine Months Ended | through | ||||||||||||||
2010 | 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Net loss |
$ | (2,930,000 | ) | $ | (62,000 | ) | $ | (5,792,000 | ) | $ | (62,000 | ) | ||||
Add: |
||||||||||||||||
General and administrative |
503,000 | 62,000 | 1,048,000 | 62,000 | ||||||||||||
Acquisition related expenses |
2,847,000 | | 5,179,000 | | ||||||||||||
Depreciation and amortization |
1,157,000 | | 1,722,000 | | ||||||||||||
Interest expense |
397,000 | | 626,000 | | ||||||||||||
Less: |
||||||||||||||||
Interest income |
(1,000 | ) | | (14,000 | ) | | ||||||||||
Net operating income |
$ | 1,973,000 | $ | | $ | 2,769,000 | $ | | ||||||||
Subsequent Events
For a discussion of subsequent events, see Note 17, Subsequent Events, to our accompanying
condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, the primary market risk to which we are
exposed is interest rate risk.
We are exposed to the effects of interest rate changes primarily as a result of long-term debt
used to acquire properties and other permitted investments. Our interest rate risk is monitored
using a variety of techniques. 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 while taking into account variable interest rate risk. To achieve our objectives,
we may borrow at fixed rates or may borrow at variable rates.
We also may enter into derivative financial instruments such as interest rate swaps in order
to mitigate our interest rate risk on a related financial instrument. To the extent we do, we are
exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform
under the terms of the derivative contract. When the fair value of a derivative contract is
positive, the counterparty owes us, which creates credit risk for us. When the fair value of a
derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit
risk. It is our policy to enter into these transactions with the same party providing the
underlying financing. In the alternative, we will seek to minimize the credit risk associated with
derivative instruments by entering into transactions with what we believe are high-quality
counterparties. We believe the likelihood of realized losses from counterparty non-performance is
remote. Market risk is the adverse effect on the value of a financial instrument that results from
a change in interest rates. We manage the market risk associated with interest rate contracts by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken. We do not enter into derivative or interest rate transactions for speculative purposes.
We have entered into, and may continue in the future to enter into, derivative instruments for
which we have not and may not elect hedge accounting treatment. Because we have not elected to
apply hedge accounting treatment to these derivatives, the gains or losses resulting from their
mark-to-market at the end of each reporting period are recognized as an increase or decrease in
interest expense in our accompanying condensed consolidated statements of operations.
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The table below presents, as of September 30, 2010, the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes.
Expected Maturity Date | ||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Fixed rate debt principal payments |
$ | 65,000 | $ | 263,000 | $ | 4,458,000 | $ | 169,000 | $ | 169,000 | $ | 7,282,000 | $ | 12,406,000 | $ | 12,424,000 | ||||||||||||||||
Weighted average interest rate on maturing debt |
5.96 | % | 5.96 | % | 5.88 | % | 6.00 | % | 6.00 | % | 6.00 | % | 5.96 | % | | |||||||||||||||||
Variable rate debt principal payments |
$ | 3,238,000 | $ | | $ | 39,460,000 | $ | | $ | | $ | | $ | 42,698,000 | $ | 42,364,000 | ||||||||||||||||
Weighted average interest rate on maturing
debt (based on rates in effect as of September
30, 2010) |
1.36 | % | | % | 5.34 | % | | % | | % | | % | 5.04 | % | |
Mortgage loan payables were $42,454,000 ($42,128,000, net of discount) as of
September 30, 2010. As of September 30, 2010, we had two fixed rate and two variable rate mortgage
loan payables with effective interest rates ranging from 1.36% to 6.00% per annum and a weighted
average effective interest rate of 5.32% per annum. As of September 30, 2010, we had $12,406,000
($12,382,000, net of discount) of fixed rate debt, or 29.2% of mortgage loan payables, at a
weighted average effective interest rate of 5.96% per annum and $30,048,000 ($29,746,000, net of
discount) of variable rate debt, or 70.8% of mortgage loan payables, at a weighted average
effective interest rate of 5.05% per annum. In addition, as of September 30, 2010, we had
$12,650,000 outstanding under the line of credit, at a weighted-average interest rate of 5.00% per
annum.
As of September 30, 2010,
we had a fixed rate interest rate swap on a $3,238,000 variable rate mortgage
loan payable, thereby effectively fixing our interest rate on this mortgage loan payable to an
effective interest rate of 6.00% per annum. The variable rate mortgage loan payable is due August
15, 2021; however, the principal balance is immediately due upon written request from the seller
confirming that the seller agrees to pay any interest rate swap termination amount, if any.
An increase in the variable interest rate on the line of credit and our variable rate mortgage
loan payables constitutes a market risk. As of September 30, 2010, a 0.50% increase in the London
Interbank Offered Rate, or LIBOR, would have no effect on our overall annual interest expense as
either (1) we have a fixed rate interest rate swap on the variable rate mortgage loan payable or
(2) we are paying the minimum interest rates under the applicable agreements whereby a 0.50%
increase would still be below the minimum interest rate.
In addition to changes in interest rates, the value of our future investments is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms, and that such
information is accumulated and communicated to us, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2010 was conducted under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures, as of September 30, 2010, were effective.
(b) Changes in internal control over financial reporting. This quarterly report does not
include disclosure of changes in internal control over financial reporting due to a transition
period established by rules of the SEC for newly public companies.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
There were no material changes from the risk factors previously disclosed in our 2009 Annual
Report on Form 10-K, as filed with the United States, or U.S., Securities and Exchange Commission,
or the SEC, on February 25, 2010, except as noted below and the following: our sponsor and its
affiliates have entered into a settlement agreement with Healthcare Trust of America, Inc.
(formerly Grubb & Ellis Healthcare REIT, Inc.) whereby the two parties resolved all outstanding
issues, including the termination of any previous obligation of Grubb & Ellis Realty Investors,
LLC, an affiliate of our advisor, Grubb & Ellis Healthcare REIT II Advisor, LLC, to present
qualified investment opportunities pursuant to a right of first refusal to Healthcare Trust of
America, Inc. Therefore, the right of first refusal is no longer a consideration for our advisors
or its affiliates identification of suitable investment opportunities for us. Accordingly, the
risk factor in the 2009 Annual Report on Form 10-K entitled, We will rely on our advisor and its
affiliates as a source for all or a portion of our investment opportunities. Grubb & Ellis Realty
Investors, an affiliate of our advisor, has entered into an agreement with Healthcare Trust of
America, Inc. (formerly Grubb & Ellis Healthcare REIT, Inc.) pursuant to which Healthcare Trust of
America, Inc. will have a right of first refusal with respect to certain investment opportunities
identified by Grubb & Ellis Realty Investors is hereby deleted in its entirety.
We may not have sufficient cash available from operations to pay distributions, and, therefore, we
have paid and may continue to pay distributions from the net proceeds of our offering, from
borrowings in anticipation of future cash flows or from other sources, such as our sponsor. Any
such distributions may reduce the amount of capital we ultimately invest in assets and negatively
impact the value of our stockholders investment.
Distributions payable to our stockholders may include a return of capital, rather than a
return on capital. We have not established any limit on the amount of proceeds from our offering
that may be used to fund distributions, except that, in accordance with our organizational
documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to
pay our debts as they become due in the usual course of business; (2) cause our total assets to be
less than the sum of our total liabilities plus senior liquidation preferences; or (3) jeopardize
our ability to qualify or maintain our qualification as a real estate investment trust, or REIT.
The actual amount and timing of distributions are determined by our board of directors in its sole
discretion and typically will depend on the amount of funds available for distribution, which will
depend on items such as our financial condition, current and projected capital expenditure
requirements, tax considerations and annual distribution requirements needed to qualify as a REIT.
As a result, our distribution rate and payment frequency may vary from time to time. We expect to
have little cash flows from operations available for distributions until we make substantial
investments. Therefore, we have used, and in the future may use, the net proceeds from our
offering, borrowed funds, or other sources, such as our sponsor, to pay cash distributions to our
stockholders in order to qualify or maintain our qualification as a REIT, which may reduce the
amount of proceeds available for investment and operations or cause us to incur additional interest
expense as a result of borrowed funds. As a result, the amount of net proceeds available for
investment and operations would be reduced, or we may incur additional interest expense as a result
of borrowed funds. Further, if the aggregate amount of cash distributed in any given year exceeds
the amount of our current and accumulated earnings and profits, the excess amount will be deemed a
return of capital.
Our board of directors authorized a daily distribution to our stockholders of record as of the
close of business on each day of the period commencing on January 1, 2010 and ending on June 30,
2010, as a result of Grubb & Ellis Company, or our sponsor, advising us that it intended to fund
these distributions until we acquired our first property. We acquired our first property, Lacombe
Medical Office Building, on March 5, 2010. Our sponsor did not receive any additional shares of our
common stock or other consideration for funding these distributions, and we will not repay the
funds provided by our sponsor for these distributions. Our sponsor is not obligated to contribute
monies to fund any subsequent distributions. In June 2010, our board of directors authorized a
daily distribution to our stockholders of record as of the close of business on each day of the
period commencing on July 1, 2010 and ending on September 30, 2010. Effective as of September 22, 2010, our board of directors authorized a daily
distribution to our stockholders of record as of the close of business on each day of the period
commencing on October 1, 2010 and ending on December 31, 2010. The distributions declared for each record date in
the October 2010, November 2010 and December 2010 periods will be paid in November 2010, December
2010 and January 2011, respectively, only from legally available funds.
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The distributions are calculated based on 365 days in the calendar year and are equal to
$0.0017808 per day per share of common stock, which is equal to an annualized distribution rate of
6.5%, assuming a purchase price of $10.00 per share. These distributions are aggregated and paid in cash
or shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, monthly in arrears.
We can provide no assurance that we will be
able to continue this distribution rate or pay any subsequent distributions to our stockholders.
For the nine months ended September 30, 2010, we paid distributions of $2,238,000 ($1,146,000
in cash and $1,092,000 in shares of our common stock pursuant to
the DRIP), none of which were paid from cash flows from operations of $(3,480,000).
$259,000, or 11.6% of the distributions, were paid using funds from our sponsor. The distributions
in excess of our cash flows from operations and funds from our sponsor were paid from offering
proceeds. Under accounting principles generally accepted in the United States of America,
acquisition related expenses are expensed and therefore subtracted from cash flows from operations.
However, these expenses are paid from offering proceeds. Cash flows from operations of $(3,480,000)
adding back acquisition related expenses of $5,179,000 for the nine months ended September 30, 2010
are $1,699,000, or 75.9% of distributions paid.
For a further discussion of distributions, see Part I, Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources
Distributions.
As of September 30, 2010, we had an amount payable of $185,000 to our advisor or its
affiliates for operating expenses, acquisition related expenses, asset and property management
fees, lease commissions and on-site personnel and engineering payroll, which will be paid from cash
flows from operations in the future as they become due and payable by us in the ordinary course of
business consistent with our past practice.
As of September 30, 2010, no amounts due to our advisor or its affiliates have been deferred,
waived or forgiven. Our advisor and its affiliates have no obligations to defer, waive or forgive
amounts due to them. In the future, if our advisor or its affiliates do not defer, waive or forgive
amounts due to them, this would negatively affect our cash flows from operations, which could
result in us paying distributions, or a portion thereof, with net proceeds from our offering, funds
from our sponsor or borrowed funds. As a result, the amount of proceeds available for investment
and operations would be reduced, or we may incur additional interest expense as a result of
borrowed funds.
For the nine months ended September 30, 2010, our funds from operations, or FFO, was
$(4,073,000). For the nine months ended September 30, 2010, we paid distributions of $259,000, or
11.6%, using funds from our sponsor and $1,979,000, or 88.4%, from proceeds from our offering. The
payment of distributions from sources other than FFO may reduce the amount of proceeds available
for investment and operations or cause us to incur additional interest expense as a result of
borrowed funds. For a further discussion of FFO, see Part I, Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations Funds from Operations and Modified
Funds from Operations.
We have experienced losses in the past, and we may experience additional losses in the future.
Historically, we have experienced net losses and we may not be profitable or realize
growth in the value of our investments. Many of our losses can be attributed to start-up costs and
operating costs incurred prior to purchasing properties or making other investments that generate
revenue. Please see the Managements Discussion and Analysis of Financial Condition and Results of
Operations section and our consolidated financial statements and the notes thereto in our 2009
Annual Report on Form 10-K, as filed with the SEC on February 25, 2010, and this Quarterly Report
on Form 10-Q, for a discussion of our operational history and the factors for our losses.
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Recently enacted comprehensive healthcare reform legislation, the effects of which are not yet
known, could materially adversely affect our business, financial condition and results of
operations and our ability to pay distributions to our stockholders.
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care
Act of 2010, or the Patient Protection and Affordable Care Act, and on March 30, 2010, the
President signed into law the Health Care and Education Reconciliation Act of 2010, or the
Reconciliation Act, which in part modified the Patient Protection and Affordable Care Act.
Together, the two acts will serve as the primary vehicle for comprehensive healthcare reform in the
U.S. The acts are intended to reduce the number of individuals in the U.S. without health insurance
and effect significant other changes to the ways in which healthcare is organized, delivered and
reimbursed. The legislation will become effective through a phased approach, beginning in 2010 and
concluding in 2018. At this time, the effects of healthcare reform and its impact on our properties
are not yet known but could materially adversely affect our business, financial condition, results
of operations and ability to pay distributions to our stockholders.
Legislative or regulatory action with respect to taxes could adversely affect the returns to our
investors.
In recent years, numerous legislative, judicial and administrative changes have been made in
the provisions of the federal and state income tax laws applicable to investments similar to an
investment in shares of our common stock. On March 30, 2010, the President signed into law the
Reconciliation Act. The Reconciliation Act will require certain U.S. stockholders who are
individuals, estates or trusts to pay a 3.8% Medicare tax on, among other things, dividends on and
capital gains from the sale or other disposition of stock, subject to certain exceptions. This
additional tax will apply broadly to essentially all dividends and all gains from dispositions of
stock, including dividends from REITs and gains from dispositions of REIT shares, such as our
common stock. As enacted, the tax will apply for taxable years beginning after December 31, 2012.
Additional changes to the tax laws are likely to continue to occur, and we cannot assure our
stockholders that any such changes will not adversely affect the taxation of a stockholder. Any
such changes could have an adverse effect on an investment in our stock or on the market value or
the resale potential of our assets. Our stockholders are urged to consult with their own tax
advisor with respect to the impact of recent legislation on their investment in shares of our
common stock and the status of legislative, regulatory or administrative developments and proposals
and their potential effect on an investment in shares of our common stock.
Congress passed major federal tax legislation in 2003, with modifications to that legislation
in 2005. One of the changes effected by that legislation generally reduced the tax rate on
dividends paid by companies to individuals to a maximum of 15.0% prior to 2011. REIT distributions
generally do not qualify for this reduced rate. The tax changes did not, however, reduce the
corporate tax rates. Therefore, the maximum corporate tax rate of 35.0% has not been affected.
However, as a REIT, we generally would not be subject to federal or state corporate income taxes on
that portion of our ordinary income or capital gain that we distribute to our stockholders, and we
thus expect to avoid the double taxation to which other companies are typically subject.
Although REITs continue to receive substantially better tax treatment than entities taxed as
corporations, it is possible that future legislation would result in a REIT having fewer tax
advantages, and it could become more advantageous for a company that invests in real estate to
elect to be taxed for federal income tax purposes as a corporation. As a result, our charter
provides our board of directors with the power, under certain circumstances, to revoke or otherwise
terminate our REIT election and cause us to be taxed as a corporation, without the vote of our
stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only
cause such changes in our tax treatment if it determines in good faith that such changes are in our
stockholders best interest.
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Our advisor may be entitled to receive significant compensation in the event of our liquidation or
in connection with a termination of the Advisory Agreement.
We are externally advised by our advisor pursuant to an advisory agreement between us and our
advisor, or the Advisory Agreement, which has a one-year term that expires August 24, 2010 and is
subject to successive one-year renewals upon the mutual consent of the parties. In the event of a
partial or full liquidation of our assets, our advisor will be entitled to receive an incentive
distribution equal to 15.0% of the net proceeds of the liquidation,
after we have received and paid to our stockholders the sum of the gross proceeds from the
sale of shares of our common stock and any shortfall in an annual 8.0% cumulative, non-compounded
return to stockholders in the aggregate. In the event of a termination of the Advisory Agreement in
connection with the listing of our common stock, the Advisory Agreement provides that our advisor
will receive an incentive distribution equal to 15.0% of the amount, if any, by which (1) the
market value of our outstanding common stock plus distributions paid by us prior to listing,
exceeds (2) the sum of the gross proceeds from the sale of shares of our common stock plus an
annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our
common stock. Upon our advisors receipt of the incentive distribution upon listing, our advisors
limited partnership units will be redeemed and our advisor will not be entitled to receive any
further incentive distributions upon sales of our properties. Further, in connection with the
termination of the Advisory Agreement other than due to a listing of the shares of our common stock
on a national securities exchange, our advisor shall be entitled to receive a distribution equal to
the amount that would be payable as an incentive distribution upon sales of properties, which
equals 15.0% of the net proceeds if we liquidated all of our assets at fair market value, after we
have received and paid to our stockholders the sum of the gross proceeds from the sale of shares of
our common stock and any shortfall in the annual 8.0% cumulative, non-compounded return to our
stockholders in the aggregate. Upon our advisors receipt of this distribution, our advisors
limited partnership units will be redeemed and our advisor will not be entitled to receive any
further incentive distributions upon sales of our properties. Any amounts to be paid to our advisor
in connection with the termination of the Advisory Agreement cannot be determined at the present
time, but such amounts, if paid, will reduce cash available for distribution to our stockholders.
Our advisor may terminate the Advisory Agreement, which could require us to pay substantial fees
and may require us to find a new advisor.
Either we or our advisor can terminate the Advisory Agreement upon 60 days written notice to
the other party. However, if the Advisory Agreement is terminated in connection with the listing of
shares of our common stock on a national securities exchange, our advisor will receive an incentive
distribution equal to 15.0% of the amount, if any, by which (1) the market value of the outstanding
shares of our common stock plus distributions paid by us prior to listing, exceeds (2) the sum of
the gross proceeds from the sale of shares of our common stock plus an annual 8.0% cumulative,
non-compounded return on the gross proceeds from the sale of shares of our common stock. Upon our
advisors receipt of the incentive distribution upon listing, our advisors limited partnership
units will be redeemed and our advisor will not be entitled to receive any further incentive
distributions upon sales of our properties. Further, in connection with the termination of the
Advisory Agreement other than due to a listing of the shares of our common stock on a national
securities exchange, our advisor shall be entitled to receive a distribution equal to the amount
that would be payable to our advisor pursuant to the incentive distribution upon sales if we
liquidated all of our assets for their fair market value. Upon our advisors receipt of this
distribution, our advisors limited partnership units will be redeemed and our advisor will not be
entitled to receive any further incentive distributions upon sales of our properties. Any amounts
to be paid to our advisor upon termination of the Advisory Agreement cannot be determined at the
present time.
If our advisor was to terminate the Advisory Agreement, we would need to find another advisor
to provide us with day-to-day management services or have employees to provide these services
directly to us. There can be no assurances that we would be able to find a new advisor or employees
or enter into agreements for such services on acceptable terms.
If we internalize our management functions, we could incur significant costs associated with being
self-managed.
Our strategy may involve internalizing our management functions. If we internalize our
management functions, we would no longer bear the costs of the various fees and expenses we expect
to pay to our advisor under the Advisory Agreement; however our direct expenses would include
general and administrative costs, including legal, accounting, and other expenses related to
corporate governance, SEC reporting and compliance. We would also incur the compensation and
benefits costs of our officers and other employees and consultants that are now paid by our advisor
or its affiliates. In addition, we may issue equity awards to officers, employees and consultants,
which awards would decrease net income and FFO and may further dilute our stockholders investment.
We cannot reasonably estimate the amount of fees to our advisor we would save and the costs we
would incur if we became self-managed. If the expenses we assume as a result of an internalization
are higher than the expenses we no longer pay to our advisor, our net income per share and FFO per
share may be lower as a result of the internalization than
they otherwise would have been, potentially decreasing the amount of funds available to
distribute to our stockholders.
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As currently organized, we do not directly have any employees. If we elect to internalize our
operations, we would employ personnel and would be subject to potential liabilities commonly faced
by employers, such as workers disability and compensation claims, potential labor disputes and
other employee-related liabilities and grievances. Upon any internalization of our advisor, certain
key personnel of our advisor may not be employed by us, but instead may remain employees of our
sponsor or its affiliates.
If we internalize our management functions, we could have difficulty integrating these
functions as a stand-alone entity. Currently, our advisor and its affiliates perform asset
management and general and administrative functions, including accounting and financial reporting,
for multiple entities. They have a great deal of know-how and can experience economies of scale. We
may fail to properly identify the appropriate mix of personnel and capital needs to operate as a
stand-alone entity. An inability to manage an internalization transaction effectively could,
therefore, result in us incurring additional costs and/or experiencing deficiencies in our
disclosure controls and procedures or our internal control over financial reporting. Such
deficiencies could cause us to incur additional costs, and our managements attention could be
diverted from most effectively managing our properties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Public Offering Proceeds
Our Registration Statement on Form S-11 (File No. 333-158111), registering a public offering
of up to 330,000,000 shares of our common stock, was declared effective under the Securities Act of
1933, as amended, or the Securities Act, on August 24, 2009. Grubb & Ellis Securities, Inc., or our
dealer manager, is the dealer manager of our offering. We are offering to the public up to
300,000,000 shares of our common stock for $10.00 per share in our primary offering and
30,000,000 shares of our common stock pursuant to the DRIP for $9.50 per share, for a maximum
offering of up to $3,285,000,000.
As of September 30, 2010, we had received and accepted subscriptions in our offering for
10,427,527 shares of our common stock, or $104,006,000, excluding shares of our common stock issued
pursuant to the DRIP. As of September 30, 2010, a total of $1,092,000 in distributions were
reinvested and 114,983 shares of our common stock were issued pursuant to the DRIP.
As of September 30, 2010, we had incurred selling commissions of $7,040,000 and dealer manager
fees of $3,112,000 in connection with our offering. We had also incurred other offering expenses of
$1,043,000 as of such date. Such fees and reimbursements were incurred to our affiliates and are
charged to stockholders equity as such amounts are reimbursed from the gross proceeds of our
offering. The cost of raising funds in our offering as a percentage of gross proceeds received in
our primary offering will not exceed 11.0%. As of September 30, 2010, net offering proceeds were
$93,903,000, including proceeds from the DRIP and after deducting offering expenses.
As of September 30, 2010, $277,000 remained payable to our dealer manager, our advisor or its
affiliates for offering related costs.
As of September 30, 2010, we had used $81,301,000 in proceeds from our offering to purchase
properties from unaffiliated parties, $1,311,000 for deferred financing costs, $2,225,000 for
lender required restricted cash accounts, $3,823,000 to pay acquisition related expenses to
affiliated parties, $1,144,000 to pay acquisition related expenses to unaffiliated parties,
$139,000 to repay borrowings from unaffiliated parties incurred in connection with previous
property acquisitions and $759,000 to pay real estate deposits for proposed future acquisitions to
unaffiliated parties.
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Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Our share repurchase plan allows for repurchases of shares of our common stock by us when
certain criteria are met. Share repurchases will be made at the sole discretion of our board of
directors. All repurchases are subject to a one-year holding period, except for repurchases made in
connection with a stockholders death or qualifying
disability, as defined in our share repurchase plan. Subject to the availability of the funds
for share repurchases, we will limit the number of shares of our common stock repurchased during
any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding
during the prior calendar year; provided, however, that shares subject to a repurchase requested
upon the death of a stockholder will not be subject to this cap. Funds for the repurchase of shares
of our common stock will come exclusively from the cumulative proceeds we receive from the sale of
shares of our common stock pursuant to the DRIP.
The prices per share at which we will repurchase shares of our common stock will range,
depending on the length of time the stockholder held such shares, from 92.5% to 100%, of the price
paid per share to acquire such shares from us. However, if shares of our common stock are to be
repurchased in connection with a stockholders death or qualifying disability, the repurchase price
will be no less than 100% of the price paid to acquire the shares of our common stock from us.
During the three months ended September 30, 2010, we repurchased shares of our common stock as
follows:
(d) | ||||||||||||||||
Maximum Approximate | ||||||||||||||||
(c) | Dollar Value | |||||||||||||||
Total Number of Shares | of Shares that May | |||||||||||||||
(a) | (b) | Purchased As Part of | Yet Be Purchased | |||||||||||||
Total Number of | Average Price | Publicly Announced | Under the | |||||||||||||
Period | Shares Purchased | Paid per Share | Plan or Program(1) | Plans or Programs | ||||||||||||
July 1, 2010 to July 31, 2010 |
11,000 | $ | 10.00 | 11,000 | (2 | ) | ||||||||||
August 1, 2010 to August 31, 2010 |
| $ | | | (2 | ) | ||||||||||
September 1, 2010 to September 30, 2010 |
| $ | | | (2 | ) | ||||||||||
Total |
11,000 | 11,000 | ||||||||||||||
(1) | Our board of directors adopted a share repurchase plan effective August 24, 2009. | |
(2) | Subject to funds being available, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided however, shares of our common stock subject to a repurchase requested upon the death of a stockholder will not be subject to this cap. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved.]
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included, or incorporated by reference, in this Quarterly Report on Form
10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Grubb & Ellis Healthcare REIT II, Inc. | ||||||
(Registrant) | ||||||
November 9, 2010
|
By: | /s/ Jeffrey T. Hanson
|
||||
Chief Executive Officer and Chairman of the Board of Directors |
||||||
(principal executive officer) | ||||||
November 9, 2010
|
By: | /s/ Shannon K S Johnson
|
||||
Chief Financial Officer | ||||||
(principal financial officer and | ||||||
principal accounting officer) |
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2010 (and are numbered in accordance with Item 601 of
Regulation S-K).
3.1 | Second Articles of Amendment and Restatement of Grubb & Ellis Healthcare REIT II, Inc. dated July 30, 2009 (included as Exhibit 3.1 to Pre-Effective Amendment No. 3 to our Registration Statement on Form S-11 (File No. 333-158111) filed August 5, 2009 and incorporated herein by reference) | |
3.2 | Articles of Amendment to the Second Articles of Amendment and Restatement of Grubb & Ellis Healthcare REIT II, Inc. dated September 1, 2009 (included as Exhibit 3.1 of our Current Report on Form 8-K filed September 3, 2009 and incorporated herein by reference) | |
3.3 | Second Articles of Amendment to the Second Articles of Amendment and Restatement of Grubb & Ellis Healthcare REIT II, Inc. dated September 18, 2009 (included as Exhibit 3.1 of our Current Report on Form 8-K filed September 21, 2009 and incorporated herein by reference) | |
3.4 | Bylaws of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit 3.2 to our Registration Statement on Form S-11 (File No. 333-158111) filed March 19, 2009 and incorporated herein by reference) | |
4.1 | Second Amended and Restated Escrow Agreement between Grubb & Ellis Healthcare REIT II, Inc., Grubb & Ellis Securities, Inc. and CommerceWest Bank, N.A., dated October 26, 2009 (included as Exhibit 4.1 of our Current Report on Form 8-K filed October 30, 2009 and incorporated herein by reference) | |
4.2 | Form of Subscription Agreement of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit B to Supplement No. 5 to our Prospectus dated May 5, 2010, contained in Post-Effective Amendment No. 6 to our Registration Statement on Form S-11 (File No. 333-158111) filed September 2, 2010 and incorporated herein by reference) | |
4.3 | Distribution Reinvestment Plan of Grubb & Ellis Healthcare REIT II, Inc. effective as of August 24, 2009 (included as Exhibit C to our Prospectus dated May 5, 2010, contained in Post-Effective Amendment No. 6 to our Registration Statement on Form S-11 (File No. 333-158111) filed September 2, 2010 and incorporated herein by reference) | |
4.4 | Share Repurchase Plan of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit D to our Prospectus dated May 5, 2010, contained in Post-Effective Amendment No. 6 to our Registration Statement on Form S-11 (File No. 333-158111) filed September 2, 2010 and incorporated herein by reference) | |
10.1 | Promissory Note between Grubb & Ellis Healthcare REIT II Holdings, LP, G&E HC REIT II Lacombe MOB, LLC, G&E HC REIT II Parkway Medical Center, LLC and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.2 | Credit Agreement between Grubb & Ellis Healthcare REIT II Holdings, LP, G&E HC REIT II Lacombe MOB, LLC, G&E HC REIT II Parkway Medical Center, LLC and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.3 | Guaranty Agreement between Grubb & Ellis Healthcare REIT II, Inc. and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.3 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.4 | Ownership Interests Pledge and Security Agreement by Grubb & Ellis Healthcare REIT II Holdings, LP in favor of Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.4 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.5 | Environmental Indemnity Agreement between Grubb & Ellis Healthcare REIT II Holdings, LP, G&E HC REIT II Lacombe MOB, LLC, G&E HC REIT II Parkway Medical Center, LLC, Grubb & Ellis Healthcare REIT II, Inc. and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.5 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.6 | Collateral Assignment of Management Contract between G&E HC REIT II Lacombe MOB, LLC, Grubb & Ellis Equity Advisors, Property Management, Inc., Property One, Inc. and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.6 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) |
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10.7 | Collateral Assignment of Management Contract between G&E HC REIT II Parkway Medical Center, LLC, Grubb & Ellis Equity Advisors, Property Management, Inc., The King Group Realty, Inc. and Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.7 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.8 | Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing by G&E HC REIT II Parkway Medical Center, LLC in favor of Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.8 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.9 | Multiple Indebtedness Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing by G&E HC REIT II Lacombe MOB, LLC in favor of Bank of America, N.A., dated July 19, 2010 (included as Exhibit 10.9 of our Current Report on Form 8-K filed July 23, 2010 and incorporated herein by reference) | |
10.10 | Third Amendment to Agreement for the Purchase and Sale of Real Property between G&E HC REIT II Pocatello MOB, LLC and CBL Retirement DAS Pocatello ID, LP, dated July 27, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed August 2, 2010 and incorporated herein by reference) | |
10.11 | Amended and Restated Limited Liability Company Agreement of G&E HC REIT II Pocatello MOB JV, LLC between Pocatello Medical Office Partners, LLC and Grubb & Ellis Healthcare REIT II Holdings, LP, dated July 27, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed August 2, 2010 and incorporated herein by reference) | |
10.12 | Agreement for Purchase and Sale of Real Property by and between Grubb & Ellis Equity Advisors, LLC and White Oaks Real Estate Investments of Cape Girardeau, LLC, White Oaks Real Estate Investments of Joplin, LLC, White Oaks Real Estate Investments of Columbia, LLC and White Oaks Real Estate Investments of Georgia, LLC, dated June 18, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed August 18, 2010 and incorporated herein by reference) | |
10.13 | First Amendment to Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC and White Oaks Real Estate Investments, LLC, White Oaks Real Estate Investments of Joplin, LLC, White Oaks Real Estate Investments of Columbia, LLC and White Oaks Real Estate Investments of Georgia, LLC, dated July 22, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed August 18, 2010 and incorporated herein by reference) | |
10.14 | Second Amendment to Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC and White Oaks Real Estate Investments, LLC, White Oaks Real Estate Investments of Joplin, LLC, White Oaks Real Estate Investments of Columbia, LLC and White Oaks Real Estate Investments of Georgia, LLC, dated July 28, 2010 (included as Exhibit 10.3 of our Current Report on Form 8-K filed August 18, 2010 and incorporated herein by reference) | |
10.15 | Assignment and Assumption of Purchase Agreement by and between Grubb & Ellis Equity Advisors, LLC and G&E HC REIT II Monument LTACH Portfolio, LLC, dated August 12, 2010 (included as Exhibit 10.4 of our Current Report on Form 8-K filed August 18, 2010 and incorporated herein by reference) | |
10.16 | Assignment and Assumption of Purchase Agreement by and between G&E HC REIT II Monument LTACH Portfolio, LLC and G&E HC REIT II Cape Girardeau LTACH, LLC, dated August 12, 2010 (included as Exhibit 10.5 of our Current Report on Form 8-K filed August 18, 2010 and incorporated herein by reference) | |
10.17 | Assignment and Assumption of Purchase Agreement by and between G&E HC REIT II Monument LTACH Portfolio, LLC and G&E HC REIT II Joplin LTACH, LLC, dated August 31, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed September 7, 2010 and incorporated herein by reference) | |
10.18 | Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC, CLC RE, LLC, Alembarle Health Investors, LLC, James R. Smith and James R. Pietrzak, dated June 28, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.19 | First Amendment to Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC, CLC RE, LLC, Alembarle Health Investors, LLC, James R. Smith and James R. Pietrzak, dated July 21, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.20 | Second Amendment to Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC, CLC RE, LLC, Alembarle Health Investors, LLC, James R. Smith and James R. Pietrzak, dated July 28, 2010 (included as Exhibit 10.3 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) |
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10.21 | Third Amendment to Purchase and Sale Agreement by and between Grubb & Ellis Equity Advisors, LLC, CLC RE, LLC, Alembarle Health Investors, LLC, James R. Smith and James R. Pietrzak, dated August 27, 2010 (included as Exhibit 10.4 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.22 | Form of Assignment and Assumption of Purchase Agreement by and between Grubb & Ellis Equity Advisors, LLC and G&E HC REIT II Bastian SNF, LLC, dated September 16, 2010 (included as Exhibit 10.5 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.23 | Promissory Note by and between Grubb & Ellis Healthcare REIT II, Inc., G&E HC REIT II Charlottesville SNF, LLC, G&E HC REIT II Bastian SNF, LLC, G&E HC REIT II Lebanon SNF, LLC, G&E HC REIT II Midlothian SNF, LLC, G&E HC REIT II Low Moor SNF, LLC, G&E HC REIT II Fincastle SNF, LLC, G&E HC REIT II Hot Springs SNF, LLC and KeyBank National Association, dated September 16, 2010 (included as Exhibit 10.6 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.24 | Loan Agreement by and between Grubb & Ellis Healthcare REIT II, Inc., G&E HC REIT II Charlottesville SNF, LLC, G&E HC REIT II Bastian SNF, LLC, G&E HC REIT II Lebanon SNF, LLC, G&E HC REIT II Midlothian SNF, LLC, G&E HC REIT II Low Moor SNF, LLC, G&E HC REIT II Fincastle SNF, LLC, G&E HC REIT II Hot Springs SNF, LLC and KeyBank National Association, dated September 16, 2010 (included as Exhibit 10.7 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.25 | Environmental and Hazardous Substances Indemnity Agreement by and between Grubb & Ellis Healthcare REIT II, Inc., G&E HC REIT II Charlottesville SNF, LLC, G&E HC REIT II Bastian SNF, LLC, G&E HC REIT II Lebanon SNF, LLC, G&E HC REIT II Midlothian SNF, LLC, G&E HC REIT II Low Moor SNF, LLC, G&E HC REIT II Fincastle SNF, LLC, G&E HC REIT II Hot Springs SNF, LLC and KeyBank National Association, dated September 16, 2010 (included as Exhibit 10.8 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.26 | Form of Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing by G&E HC REIT II Bastian SNF, LLC in favor of KeyBank National Association, dated September 16, 2010 (included as Exhibit 10.9 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.27 | Form of Assignment of Rents and Leases by and between G&E HC REIT II Bastian SNF, LLC and KeyBank National Association, dated September 16, 2010 (included as Exhibit 10.10 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.28 | Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement by G&E HC REIT II Livingston MOB, LLC in favor of Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.29 | Open-End Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing by G&E HC REIT II St. Vincent Cleveland MOB, LLC in favor of Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.30 | Collateral Assignment of Management Contract between G&E HC REIT II Livingston MOB, LLC, Grubb & Ellis Equity Advisors, Property Management, Inc., Promed Management Services, Inc. and Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.3 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.31 | Collateral Assignment of Management Contract between G&E HC REIT II St. Vincent Cleveland MOB, LLC, Grubb & Ellis Equity Advisors, Property Management, Inc. and Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.4 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.32 | Joinder to Promissory Note between Grubb & Ellis Healthcare REIT II Holdings, LP, G&E HC REIT II Lacombe MOB, LLC, G&E HC REIT II Parkway Medical Center, LLC, G&E HC REIT II Livingston MOB, LLC, G&E HC REIT II St. Vincent Cleveland MOB, LLC and Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.5 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) |
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10.33 | Joinder to Credit Agreement and Other Loan Documents between Grubb & Ellis Healthcare REIT II Holdings, LP, G&E HC REIT II Lacombe MOB, LLC, G&E HC REIT II Parkway Medical Center, LLC, G&E HC REIT II Livingston MOB, LLC, G&E HC REIT II St. Vincent Cleveland MOB, LLC and Bank of America, N.A., dated September 15, 2010 (included as Exhibit 10.6 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.34 | Promissory Note by G&E HC REIT II Pocatello MOB, LLC, in favor of Sun Life Assurance Company of Canada, dated September 16, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.35 | Environmental Indemnity Agreement by and between G&E HC REIT II Pocatello MOB, LLC and Sun Life Assurance Company of Canada, dated September 16, 2010 (included as Exhibit 10.2 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.36 | Guaranty of Non-Recourse Carve Outs by Grubb & Ellis Healthcare REIT II, Inc. in favor of Sun Life Assurance Company of Canada, dated September 16, 2010 (included as Exhibit 10.3 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.37 | Escrow and Pledge Agreement by and between G&E HC REIT II Pocatello MOB, LLC, Sun Life Assurance Company of Canada and Westcap Corporation, dated September 16, 2010 (included as Exhibit 10.4 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.38 | Assignment of Leases and Rents by Grubb & Ellis Healthcare REIT II, Inc. in favor of Sun Life Assurance Company of Canada, dated September 16, 2010 (included as Exhibit 10.5 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
10.39 | Leasehold Deed of Trust, Security Agreement and Fixture Filing by Grubb & Ellis Healthcare REIT II, Inc. in favor of Sun Life Assurance Company of Canada, dated September 16, 2010 (included as Exhibit 10.6 of our Current Report on Form 8-K filed September 20, 2010 and incorporated herein by reference) | |
31.1* | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1** | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2** | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
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