Attached files
file | filename |
---|---|
EX-32.2 - EXHIBIT 32.2 - Griffin-American Healthcare REIT II, Inc. | c16920exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Griffin-American Healthcare REIT II, Inc. | c16920exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Griffin-American Healthcare REIT II, Inc. | c16920exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Griffin-American Healthcare REIT II, Inc. | c16920exv31w2.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 March 31, 2011
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: 000-54371
GRUBB & ELLIS HEALTHCARE REIT II, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
26-4008719 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, | ||
Suite 300, Santa Ana, California (Address of principal executive offices) |
92705 (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 April 30, 2011, there were 24,083,002 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
2 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
32 | ||||||||
45 | ||||||||
46 | ||||||||
47 | ||||||||
47 | ||||||||
49 | ||||||||
50 | ||||||||
50 | ||||||||
51 | ||||||||
51 | ||||||||
52 | ||||||||
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 March 31, 2011 and December 31, 2010
(Unaudited)
March 31, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Real estate investments: |
||||||||
Operating properties, net |
$ | 194,098,000 | $ | 163,335,000 | ||||
Cash and cash equivalents |
6,706,000 | 6,018,000 | ||||||
Accounts and other receivables, net |
479,000 | 241,000 | ||||||
Restricted cash |
3,158,000 | 2,816,000 | ||||||
Real estate and escrow deposits |
1,100,000 | 649,000 | ||||||
Identified intangible assets, net |
33,299,000 | 28,568,000 | ||||||
Other assets, net |
2,982,000 | 2,369,000 | ||||||
Total assets |
$ | 241,822,000 | $ | 203,996,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Mortgage loans payable, net |
$ | 49,175,000 | $ | 58,331,000 | ||||
Line of credit |
7,400,000 | 11,800,000 | ||||||
Accounts payable and accrued liabilities |
3,586,000 | 3,356,000 | ||||||
Accounts payable due to affiliates |
1,173,000 | 840,000 | ||||||
Derivative financial instruments |
379,000 | 453,000 | ||||||
Identified intangible liabilities, net |
481,000 | 502,000 | ||||||
Security deposits, prepaid rent and other liabilities |
3,437,000 | 3,352,000 | ||||||
Total liabilities |
65,631,000 | 78,634,000 | ||||||
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;
21,579,624 and 15,452,668
shares issued and outstanding
as of March 31, 2011 and
December 31, 2010, respectively |
216,000 | 154,000 | ||||||
Additional paid-in capital |
192,221,000 | 137,657,000 | ||||||
Accumulated deficit |
(16,367,000 | ) | (12,571,000 | ) | ||||
Total stockholders equity |
176,070,000 | 125,240,000 | ||||||
Noncontrolling interests (Note 12) |
121,000 | 122,000 | ||||||
Total equity |
176,191,000 | 125,362,000 | ||||||
Total liabilities and equity |
$ | 241,822,000 | $ | 203,996,000 | ||||
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 March 31, 2011 and 2010
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
Rental income |
$ | 6,007,000 | $ | 61,000 | ||||
Expenses: |
||||||||
Rental expenses |
1,203,000 | 17,000 | ||||||
General and administrative |
921,000 | 185,000 | ||||||
Acquisition related expenses |
1,549,000 | 637,000 | ||||||
Depreciation and amortization |
2,202,000 | 29,000 | ||||||
Total expenses |
5,875,000 | 868,000 | ||||||
Income (loss) from operations |
132,000 | (807,000 | ) | |||||
Other income (expense): |
||||||||
Interest expense (including amortization of deferred
financing costs and debt discount): |
||||||||
Interest expense |
(1,095,000 | ) | (1,000 | ) | ||||
Gain in fair value of derivative
financial instruments |
74,000 | | ||||||
Interest income |
4,000 | 5,000 | ||||||
Net loss |
(885,000 | ) | (803,000 | ) | ||||
Less: net (income) loss attributable to
noncontrolling interests |
| | ||||||
Net loss attributable to controlling interest |
$ | (885,000 | ) | $ | (803,000 | ) | ||
Net loss per common share attributable to controlling
interest basic and diluted |
$ | (0.05 | ) | $ | (0.30 | ) | ||
Weighted average number of common shares
outstanding basic and diluted |
18,144,696 | 2,690,794 | ||||||
Distributions declared per common share |
$ | 0.16 | $ | 0.16 | ||||
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 Three Months Ended March 31, 2011 and 2010
(Unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interests | Total Equity | ||||||||||||||||||||||
BALANCE December 31, 2010 |
15,452,668 | $ | 154,000 | $ | 137,657,000 | $ | | $ | (12,571,000 | ) | $ | 122,000 | $ | 125,362,000 | ||||||||||||||
Issuance of common stock |
5,999,895 | 61,000 | 59,809,000 | | | | 59,870,000 | |||||||||||||||||||||
Offering costs |
| | (6,465,000 | ) | | | | (6,465,000 | ) | |||||||||||||||||||
Issuance of common stock under the
DRIP |
135,561 | 1,000 | 1,287,000 | | | | 1,288,000 | |||||||||||||||||||||
Repurchase of common stock |
(8,500 | ) | | (78,000 | ) | | | | (78,000 | ) | ||||||||||||||||||
Amortization of nonvested common
stock compensation |
| | 11,000 | | | | 11,000 | |||||||||||||||||||||
Distribution to noncontrolling
interests |
| | | | | (1,000 | ) | (1,000 | ) | |||||||||||||||||||
Distributions declared |
| | | | (2,911,000 | ) | | (2,911,000 | ) | |||||||||||||||||||
Net loss |
| | | | (885,000 | ) | | (885,000 | ) | |||||||||||||||||||
BALANCE March 31, 2011 |
21,579,624 | $ | 216,000 | $ | 192,221,000 | $ | | $ | (16,367,000 | ) | $ | 121,000 | $ | 176,191,000 | ||||||||||||||
Stockholders Equity | ||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interest | 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 |
2,469,928 | 25,000 | 24,627,000 | | | | 24,652,000 | |||||||||||||||||||||
Offering costs |
| | (2,673,000 | ) | | | | (2,673,000 | ) | |||||||||||||||||||
Issuance of common stock under the
DRIP |
13,214 | | 126,000 | | | | 126,000 | |||||||||||||||||||||
Amortization of nonvested common
stock compensation |
| | 8,000 | | | | 8,000 | |||||||||||||||||||||
Contribution from sponsor |
| | 259,000 | | | | 259,000 | |||||||||||||||||||||
Distributions declared |
| | | | (433,000 | ) | | (433,000 | ) | |||||||||||||||||||
Net loss |
| | | | (803,000 | ) | | (803,000 | ) | |||||||||||||||||||
BALANCE March 31, 2010 |
4,015,410 | $ | 40,000 | $ | 35,896,000 | $ | | $ | (1,517,000 | ) | $ | 1,000 | $ | 34,420,000 | ||||||||||||||
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 Three Months Ended March 31, 2011 and 2010
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (885,000 | ) | $ | (803,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization (including deferred financing costs,
above/below market leases, leasehold interests, debt discount
and deferred rent receivable) |
2,060,000 | 18,000 | ||||||
Stock based compensation |
11,000 | 8,000 | ||||||
Bad debt expense |
14,000 | | ||||||
Changes in fair value of derivative financial instruments |
(74,000 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts and other receivables, net |
(77,000 | ) | | |||||
Other assets, net |
(309,000 | ) | (70,000 | ) | ||||
Accounts payable and accrued liabilities |
82,000 | 234,000 | ||||||
Accounts payable due to affiliates |
321,000 | (29,000 | ) | |||||
Security deposits, prepaid rent and other liabilities |
(42,000 | ) | (22,000 | ) | ||||
Net cash provided by (used in) operating activities |
1,101,000 | (664,000 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Acquisition of real estate operating properties |
(37,636,000 | ) | (9,915,000 | ) | ||||
Capital expenditures |
(388,000 | ) | | |||||
Restricted cash |
(342,000 | ) | (38,000 | ) | ||||
Real estate and escrow deposits |
(451,000 | ) | (500,000 | ) | ||||
Net cash used in investing activities |
(38,817,000 | ) | (10,453,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Payments on mortgage loans payable |
(9,165,000 | ) | | |||||
Borrowings under the line of credit |
19,700,000 | | ||||||
Payments under the line of credit |
(24,100,000 | ) | | |||||
Proceeds from issuance of common stock |
59,870,000 | 24,652,000 | ||||||
Deferred financing costs |
(84,000 | ) | (19,000 | ) | ||||
Repurchase of common stock |
(78,000 | ) | | |||||
Contribution from sponsor |
| 236,000 | ||||||
Distribution to noncontrolling interests |
(1,000 | ) | | |||||
Security deposits |
(1,000 | ) | | |||||
Payment of offering costs |
(6,437,000 | ) | (2,826,000 | ) | ||||
Distributions paid |
(1,300,000 | ) | (110,000 | ) | ||||
Net cash provided by financing activities |
38,404,000 | 21,933,000 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
688,000 | 10,816,000 | ||||||
CASH AND CASH EQUIVALENTS Beginning of period |
6,018,000 | 13,773,000 | ||||||
CASH AND CASH EQUIVALENTS End of period |
$ | 6,706,000 | $ | 24,589,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for: |
||||||||
Interest |
$ | 1,032,000 | $ | | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
||||||||
Investing Activities: |
||||||||
Accrued capital expenditures |
$ | 412,000 | $ | | ||||
The following represents the increase in certain assets and liabilities
in connection with our acquisitions of operating properties: |
||||||||
Other receivables |
$ | 174,000 | $ | 118,000 | ||||
Other assets |
$ | 42,000 | $ | 7,000 | ||||
Mortgage loans payable, net |
$ | | $ | 3,025,000 | ||||
Derivative financial instrument |
$ | | $ | 310,000 | ||||
Accounts payable and accrued liabilities |
$ | 60,000 | $ | 107,000 | ||||
Security deposits, prepaid rent and other liabilities |
$ | 127,000 | $ | 81,000 | ||||
Financing Activities: |
||||||||
Issuance of common stock under the DRIP |
$ | 1,288,000 | $ | 126,000 | ||||
Contribution receivable from sponsor |
$ | | $ | 23,000 | ||||
Distributions declared but not paid |
$ | 1,117,000 | $ | 197,000 | ||||
Accrued offering costs |
$ | 653,000 | $ | 129,000 | ||||
Accrued deferred financing costs |
$ | 5,000 | $ | 7,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
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 intend 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 will seek
investments that produce current income. We intend to 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 ended 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 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 March 31, 2011, we had received
and accepted subscriptions in our offering for 21,222,108 shares of our common stock, or
$211,732,000, 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 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.
We currently operate through three reportable business segments medical office
buildings, hospitals and skilled nursing facilities. As of March 31, 2011, we had completed 16
acquisitions comprising 30 buildings and approximately 995,000 square feet of gross leasable area,
or GLA, for an aggregate purchase price of $230,815,000.
6
Table of Contents
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 March 31, 2011 and December 31, 2010 own a 99.99% general
partnership interest therein. Our advisor is a limited partner and as of March 31, 2011 and
December 31, 2010 owns 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 2010 Annual Report on Form 10-K, as filed with the SEC on March 10, 2011.
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
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Allowance for Uncollectible Accounts
Tenant receivables and unbilled deferred rent receivables are carried net of an allowance for
uncollectible amounts. 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. As of March 31, 2011 and December 31, 2010, we had $19,000
and $5,000, respectively, in allowance for uncollectible accounts which was determined necessary to
reduce receivables to our estimate of the amount recoverable. For the three months ended March 31,
2011 and 2010, none of our receivables or deferred rent receivables were directly written off to
bad debt expense.
Segment Disclosure
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and
descriptive information about a public entitys reportable segments. As of March 31, 2011, we
operate through three reportable business segments medical office buildings, hospitals and
skilled nursing facilities. With the continued expansion of our portfolio, we believe segregation
of our operations into three reporting segments would be useful in assessing the performance of our
business in the same way that management intends to review our performance and make operating
decisions. Prior to this we operated through one reportable segment. See Note 15, Segment
Reporting, for a further discussion.
Recently Issued Accounting Pronouncements
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, Fair
Value Measurements and Disclosures, or 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 and January 1, 2011,
as applicable, 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 the applicable disclosures in Note 13, Fair Value of Financial Instruments.
8
Table of Contents
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 March 31, 2011
and December 31, 2010:
March 31, 2011 | December 31, 2010 | |||||||
Land |
$ | 17,395,000 | $ | 14,592,000 | ||||
Building and improvements |
180,208,000 | 150,813,000 | ||||||
197,603,000 | 165,405,000 | |||||||
Less: accumulated depreciation |
(3,505,000 | ) | (2,070,000 | ) | ||||
$ | 194,098,000 | $ | 163,335,000 | |||||
Depreciation expense for the three months ended March 31, 2011 and 2010 was
$1,444,000 and $16,000, respectively. In addition to the property acquisitions discussed below, for
the three months ended March 31, 2011 and 2010 we had capital expenditures of $393,000 and $0,
respectively, on our medical office buildings.
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
March 31, 2011, such fees and expenses did not exceed 6.0% of the purchase price of our
acquisitions.
Acquisitions in 2011
During the three months ended March 31, 2011, we completed three acquisitions comprising five
buildings from unaffiliated parties. The aggregate purchase price of these properties was
$37,373,000 and we paid $1,023,000 in acquisition fees to our advisor or its affiliates in
connection with these acquisitions. The following is a summary of our acquisitions for the three
months ended March 31, 2011:
Acquisition Fee | ||||||||||||||||||||||
Ownership | Purchase | Line of | to our Advisor | |||||||||||||||||||
Property | Location | Type | Date Acquired | Percentage | Price | Credit(1) | or its Affiliates(2) | |||||||||||||||
Columbia Long-Term
Acute Care Hospital(3) |
Columbia, MO | Hospital | 01/31/11 | 100 | % | $ | 12,423,000 | $ | 11,000,000 | $ | 336,000 | |||||||||||
St. Anthony North
Medical Office
Building |
Westminster, CO | Medical Office | 03/29/11 | 100 | % | 11,950,000 | | 329,000 | ||||||||||||||
Loma Linda Pediatric
Specialty Hospital |
Loma Linda, CA | Skilled Nursing | 03/31/11 | 100 | % | 13,000,000 | 8,700,000 | 358,000 | ||||||||||||||
Total |
$ | 37,373,000 | $ | 19,700,000 | $ | 1,023,000 | ||||||||||||||||
(1) | Represents borrowings under our secured revolving line of credit with Bank of America, N.A., or Bank of America, as defined in Note 8, at the time of acquisition. We periodically advance funds and pay down our secured revolving line of credit with Bank of America as needed. See Note 8, Line of Credit, for a further discussion. | |
(2) | 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. | |
(3) | On January 31, 2011, we purchased the Columbia Long-Term Acute Care Hospital, which is the fourth hospital comprising the Monument LTACH Portfolio. |
9
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Acquisitions in 2010
During the three months ended March 31, 2010, we completed two acquisitions comprising three
buildings from unaffiliated parties. The aggregate purchase price of these properties was
$13,470,000 and we paid $371,000 in acquisition fees to our advisor or its affiliates in connection
with these acquisitions. The following is a summary of our acquisitions for the three months ended
March 31, 2010:
Mortgage | Acquisition Fee | |||||||||||||||||||||||||||
Date | Ownership | Purchase | Loans | to our Advisor | ||||||||||||||||||||||||
Property | Location | Type | Acquired | Percentage | Price | Payable(1) | or its Affiliates(2) | |||||||||||||||||||||
Lacombe Medical
Office Building |
Lacombe, LA | Medical Office | 03/05/10 | 100 | % | $ | 6,970,000 | $ | | $ | 192,000 | |||||||||||||||||
Center for
Neurosurgery
and Spine |
Sartell, MN | Medical Office | 03/31/10 | 100 | % | 6,500,000 | 3,341,000 | 179,000 | ||||||||||||||||||||
Total |
$ | 13,470,000 | $ | 3,341,000 | $ | 371,000 | ||||||||||||||||||||||
(1) | Represents the balance of the mortgage loans payable assumed by us or newly placed on the property at the time of acquisition. | |
(2) | 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. Identified Intangible Assets, Net
Identified intangible assets, net consisted of the following as of March 31, 2011 and December
31, 2010:
March 31, 2011 | December 31, 2010 | |||||||
In place leases, net of accumulated amortization of $1,360,000 and $1,028,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 11.5 years and 11.3 years
as of March 31, 2011 and December 31, 2010, respectively) |
$ | 15,769,000 | $ | 13,245,000 | ||||
Above market leases, net of accumulated amortization of $178,000 and $121,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 9.5 years and 9.6 years
as of March 31, 2011 and December 31, 2010, respectively) |
1,729,000 | 1,795,000 | ||||||
Tenant relationships, net of accumulated amortization of $565,000 and $377,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 22.0 years and 21.8 years
as of March 31, 2011 and December 31, 2010, respectively) |
13,609,000 | 11,912,000 | ||||||
Leasehold interests, net of accumulated amortization of $7,000 and $2,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 65.7 years and 62.4 years
as of March 31, 2011 and December 31, 2010, respectively) |
1,888,000 | 1,256,000 | ||||||
Master lease, net of accumulated amortization of $152,000 and $95,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 1.3 years and 1.6 years
as of March 31, 2011 and December 31, 2010, respectively) |
304,000 | 360,000 | ||||||
$ | 33,299,000 | $ | 28,568,000 | |||||
Amortization expense for the three months ended March 31, 2011 and 2010 was $827,000 and
$13,000, respectively, which included $66,000 and $0, respectively, of amortization recorded
against rental income for above
market leases and $5,000 and $0, respectively, of amortization recorded against rental
expenses for leasehold interests in our accompanying condensed consolidated statements of
operations.
10
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The aggregated weighted average remaining life of the identified intangible assets is 18.7
years and 17.7 years as of March 31, 2011 and December 31, 2010, respectively. Estimated
amortization expense on the identified intangible assets as of March 31, 2011, for the nine months
ending December 31, 2011 and for each of the next four years ending December 31 and thereafter, is
as follows:
Year | Amount | |||
2011 |
$ | 2,495,000 | ||
2012 |
3,019,000 | |||
2013 |
2,648,000 | |||
2014 |
2,511,000 | |||
2015 |
2,304,000 | |||
Thereafter |
20,322,000 | |||
$ | 33,299,000 | |||
5. Other Assets, Net
Other assets, net consisted of the following as of March 31, 2011 and December 31, 2010:
March 31, 2011 | December 31, 2010 | |||||||
Deferred financing costs, net of accumulated amortization of $408,000 and $225,000
as of March 31, 2011 and December 31, 2010, respectively |
$ | 1,205,000 | $ | 1,390,000 | ||||
Lease commissions, net of accumulated amortization of $3,000 and $1,000 as of
as of March 31, 2011 and December 31, 2010, respectively |
304,000 | 58,000 | ||||||
Deferred rent receivable |
1,025,000 | 576,000 | ||||||
Prepaid expenses and deposits |
448,000 | 345,000 | ||||||
$ | 2,982,000 | $ | 2,369,000 | |||||
Amortization expense on deferred financing costs and lease commissions for the
three months ended March 31, 2011 and 2010 was $249,000 and $0, respectively, of which $247,000 and
$0, respectively, of amortization was recorded as interest expense for deferred financing costs in
our accompanying condensed consolidated statements of operations. $42,000 of the $247,000 was
related to the write-off of deferred financing costs due to the early extinguishment of a mortgage
loan payable on Surgical Hospital of Humble. See Note 6, Mortgage Loans Payable, Net, for a further
discussion.
Estimated amortization expense on deferred financing costs and lease commissions as of March
31, 2011, for the nine months ending December 31, 2011 and for each of the next four years ending
December 31 and thereafter, is as follows:
Year | Amount | |||
2011 |
$ | 594,000 | ||
2012 |
392,000 | |||
2013 |
89,000 | |||
2014 |
84,000 | |||
2015 |
84,000 | |||
Thereafter |
266,000 | |||
$ | 1,509,000 | |||
6. Mortgage Loans Payable, Net
Mortgage loans payable were $49,483,000 ($49,175,000, net of discount) and $58,648,000
($58,331,000, net of discount) as of March 31, 2011 and December 31, 2010, respectively.
As of March 31, 2011, we had two fixed rate and three variable rate mortgage loans payable
with effective interest rates ranging from 1.35% to 6.00% per annum and a weighted average
effective interest rate of 5.01% per annum. As of March 31, 2011, we had $12,286,000 ($12,266,000,
net of discount) of fixed rate debt, or 24.8% of mortgage loans payable, at a weighted average
effective interest rate of 5.96% per annum and $37,197,000 ($36,909,000, net of discount) of
variable rate debt, or 75.2% of mortgage loans payable, at a weighted average effective interest
rate of 4.70% per annum.
11
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of December 31, 2010, we had two fixed rate and four variable rate mortgage loans payable
with effective interest rates ranging from 1.36% to 6.00% per annum and a weighted average
effective interest rate of 5.12% per annum. As of December 31, 2010, we had $12,354,000
($12,332,000, net of discount) of fixed rate debt, or 21.1% of mortgage loans payable, at a
weighted average effective interest rate of 5.96% per annum and $46,294,000 ($45,999,000, net of
discount) of variable rate debt, or 78.9% of mortgage loans payable, at a weighted average
effective interest rate of 4.90% per annum.
Most of the mortgage loans payable 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, liquidity
ratios, operating cash flow to fixed charges ratios, distribution ratios and reporting
requirements. As of March 31, 2011 and December 31, 2010, we were in compliance with all such
requirements.
Mortgage loans payable, net consisted of the following as of March 31, 2011 and December 31,
2010:
Interest | ||||||||||||||
Property | Rate(1) | Maturity Date | March 31, 2011 | December 31, 2010 | ||||||||||
Fixed Rate Debt: |
||||||||||||||
Highlands Ranch Medical Pavilion |
5.88 | % | 11/11/12 | $ | 4,360,000 | $ | 4,383,000 | |||||||
Pocatello East Medical Office Building |
6.00 | % | 10/01/20 | 7,926,000 | 7,971,000 | |||||||||
12,286,000 | 12,354,000 | |||||||||||||
Variable Rate Debt: |
||||||||||||||
Center for Neurosurgery and Spine(2) |
1.35 | % | 08/15/21 (callable) | 3,130,000 | 3,184,000 | |||||||||
Virginia Skilled Nursing Facility Portfolio(3) |
5.50 | % | 03/14/12 | 26,810,000 | 26,810,000 | |||||||||
Surgical Hospital of Humble(4) |
5.75 | % | 12/09/11 | | 9,000,000 | |||||||||
Lawton Medical Office Building Portfolio |
3.16 | % | 01/01/16 | 7,257,000 | 7,300,000 | |||||||||
37,197,000 | 46,294,000 | |||||||||||||
Total fixed and variable rate debt |
49,483,000 | 58,648,000 | ||||||||||||
Less: discount |
(308,000 | ) | (317,000 | ) | ||||||||||
Mortgage loans payable, net |
$ | 49,175,000 | $ | 58,331,000 | ||||||||||
(1) | Represents the per annum interest rate in effect as of March 31, 2011. | |
(2) | 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 the interest rate swap termination amount, if any. Additionally, the seller guarantors agreed to retain their guaranty obligations with respect to the mortgage loan 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. | |
(4) | As of December 31, 2010, we had an outstanding mortgage loan payable balance of $9,000,000, which was subsequently paid in full in March 2011 with no prepayment penalties assessed per the terms of the mortgage agreement. In connection with the early extinguishment we wrote off $42,000 in deferred financing costs, which is included in interest expense in our accompanying condensed consolidated statements of operations. |
12
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The principal payments due on our mortgage loans payable as of March 31, 2011, for the nine
months ending December 31, 2011 and for each of the next four years ending December 31 and
thereafter, is as follows:
Year | Amount | |||
2011 |
$ | 3,440,000 | ||
2012 |
31,439,000 | |||
2013 |
341,000 | |||
2014 |
341,000 | |||
2015 |
341,000 | |||
Thereafter |
13,581,000 | |||
$ | 49,483,000 | |||
7. Derivative Financial Instrument
ASC Topic 815, Derivatives and Hedging, or 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.
As of March 31, 2011, 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 instruments in our
accompanying condensed consolidated statements of operations. For the three months ended March 31,
2011 and 2010, we recorded $74,000 and $0, respectively, as a decrease to interest expense in our
accompanying condensed consolidated statements of operations related to the change in the fair
value of our derivative financial instruments.
The following table lists the derivative financial instruments held by us as of March 31,
2011:
Interest | Maturity | |||||||||||||||||
Notional Amount | Index | Rate | Fair Value | Instrument | Date | |||||||||||||
$ | 3,130,000 | one month LIBOR |
6.00 | % | $ | (330,000 | ) | Swap | 08/15/21 | |||||||||
7,257,000 | one month LIBOR |
4.41 | % | (49,000 | ) | Swap | 01/01/14 | |||||||||||
$ | 10,387,000 | $ | (379,000 | ) | ||||||||||||||
The following table lists the derivative financial instruments held by us as
of December 31, 2010:
Interest | Maturity | |||||||||||||||||
Notional Amount | Index | Rate | Fair Value | Instrument | Date | |||||||||||||
$ | 3,184,000 | one month LIBOR |
6.00 | % | $ | (372,000 | ) | Swap | 08/15/21 | |||||||||
7,300,000 | one month LIBOR |
4.41 | % | (81,000 | ) | Swap | 01/01/14 | |||||||||||
$ | 10,484,000 | $ | (453,000 | ) | ||||||||||||||
See Note 13, Fair Value of Financial Instruments, for a further discussion of
the fair value of our derivative financial instruments.
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.
13
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Any loan made under the line of credit shall bear interest at per annum rates equal to either:
(i) the daily floating London Interbank Offered Rate, or LIBOR, plus 3.75%, subject to a minimum
interest rate floor of 5.00% per annum, or (ii) 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 prime
rate for such day plus 3.75%, subject to a minimum interest rate floor of 5.00% per annum.
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 in the event of default. 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: (i) minimum liquidity thresholds;
(ii) a minimum ratio of operating cash flow to fixed charges; (iii) a maximum ratio of liabilities
to asset value; (iv) a maximum distribution covenant; and (v) a minimum tangible net worth
covenant. In the event of default, Bank of America has the right to terminate its obligations under
the Bank of America Loan Agreement, including the funding of future loans and to accelerate the
payment on any unpaid principal amount of all outstanding loans and interest thereon and may seek
foreclosure on any properties securing the line of credit. As of March 31, 2011 and December 31,
2010, we were in compliance with all such covenants and requirements.
As of March 31, 2011 and December 31, 2010, our aggregate borrowing capacity under the line of
credit was $25,000,000 and $22,600,000, respectively, and borrowings under the line of credit
totaled $7,400,000 and $11,800,000, respectively. As of March 31, 2011 and December 31, 2010,
$17,600,000 and $10,800,000, respectively, remained available under the line of credit. The
weighted-average interest rate of borrowings as of March 31, 2011 and December 31, 2010 was 5.00%
per annum. The line of credit is secured by Lacombe Medical
Office Building, Parkway Medical Center, Livingston Medical Arts Pavilion, St. Vincent Medical
Office Building, Sylva Medical Office Building and Ennis Medical Office Building as of March 31,
2011.
On May 4, 2011, we entered into an agreement with Bank of America to modify the line of
credit. For a further discussion of the modification of the line of credit, see Note 18, Subsequent
Events Line of Credit Modification.
9. Identified Intangible Liabilities, Net
Identified intangible liabilities, net consisted of the following as of March 31, 2011 and
December 31, 2010:
March 31, 2011 | December 31, 2010 | |||||||
Below market leases, net of accumulated amortization of $55,000 and $42,000
as of March 31, 2011 and December 31, 2010, respectively (with a
weighted average remaining life of 17.1 years and 16.9 years as of
March 31, 2011 and December 31, 2010, respectively) |
$ | 481,000 | $ | 502,000 |
Amortization expense on below market leases for the three months ended March 31, 2011 and 2010
was $21,000 and $0, respectively. Amortization expense on below market leases is recorded to rental
income in our accompanying condensed consolidated statements of operations.
14
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Estimated amortization expense on below market leases as of March 31, 2011, for the nine
months ending December 31, 2011 and for each of the next four years ending December 31 and
thereafter, is as follows:
Year | Amount | |||
2011 |
$ | 61,000 | ||
2012 |
72,000 | |||
2013 |
25,000 | |||
2014 |
17,000 | |||
2015 |
17,000 | |||
Thereafter |
289,000 | |||
$ | 481,000 | |||
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 our gross offering proceeds) to be
paid by us in connection with our offering. These other organizational and offering expenses will
only become our liability to the extent they 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 March 31, 2011 and December 31, 2010, our advisor and its affiliates had
incurred expenses on our behalf of $2,737,000 and $2,701,000, 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 March 31, 2011 and December 31,
2010. To the extent we raise additional funds from our offering, these amounts may become our
liability.
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.
15
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
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. Effective as of April 19, 2011, the dealer manager agreement
with Grubb & Ellis Securities was assigned to, and assumed by, Grubb & Ellis Capital Corporation, a
wholly owned subsidiary of our sponsor. 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 March 31, 2011 and 2010, we incurred
$8,393,000 and $3,082,000, respectively, 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 March 31, 2011 and 2010, we
incurred $4,069,000 and $1,686,000, 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 March 31, 2011 and 2010, we incurred
$1,796,000 and $740,000, respectively, in dealer manager fees to our dealer manager or its
affiliates. 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.
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 March 31, 2011 and 2010, we incurred $600,000 and $247,000, 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 up to 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 are 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 March 31, 2011 and 2010, we incurred $1,023,000 and $371,000,
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,
Business Combinations, or ASC Topic 805, and are included in acquisition related expenses in our
accompanying condensed consolidated statements of operations.
16
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Development Fee
Our advisor or its affiliates 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; however, 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 March 31, 2011 and 2010, 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 will be 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 March 31, 2011, such fees and expenses did not
exceed 6.0% of the purchase price or total development costs.
For the three months ended March 31, 2011 and 2010, we incurred $8,000 and $8,000,
respectively, in acquisition expenses to our advisor or its affiliates. Reimbursements 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.
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 average 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 average 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 March 31, 2011 and 2010, we incurred $440,000 and $5,000,
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 property.
17
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three months ended March 31, 2011 and 2010, we incurred $120,000 and $2,000,
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
For the three months ended March 31, 2011 and 2010, our advisor or its affiliates
incurred on our behalf $24,000 and $0, respectively, in payroll for on-site personnel and
engineering, 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 March 31, 2011 and 2010, we incurred $248,000 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.
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 March 31, 2011 and 2010, we did not incur any 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 nonrecurring factors. For the 12 months ended March 31, 2011, our
operating expenses did not exceed this limitation. Our operating expenses as a percentage of
average invested assets and as a percentage of net income were 1.7% and 141.0%, respectively, for
the 12 months ended March 31, 2011.
For the three months ended March 31, 2011 and 2010, Grubb & Ellis Equity Advisors incurred
operating expenses on our behalf of $9,000 and $9,000, 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 the Transfer Agent Services 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
third 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.
18
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three months ended March 31, 2011 and 2010, we incurred expenses of $49,000 and
$14,000, 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.
For the three months ended March 31, 2011 and 2010, Grubb & Ellis Equity Advisors incurred
expenses of $20,000 and $10,000, respectively, for 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 third parties for similar services. For the three months ended March 31, 2011 and
2010, we incurred expenses of $7,000 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 March 31, 2011 and 2010, 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 (i) 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 (ii) 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 March 31, 2011 and 2010, 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 (i) the market value of our
outstanding common stock at listing plus distributions paid prior to listing exceeds (ii) 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 March 31, 2011 and
2010, we did not incur any such distributions to our advisor.
19
Table of Contents
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 (i) 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 (ii) 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 March 31, 2011 and December 31, 2010, we had not recorded any charges to earnings
related to the subordinated distribution upon termination.
Accounts Payable Due to Affiliates
The following amounts were outstanding to affiliates as of March 31, 2011 and December 31,
2010:
Fee | March 31, 2011 | December 31, 2010 | ||||||
Selling commissions and dealer manager fees |
$ | 545,000 | $ | 539,000 | ||||
Lease commissions |
236,000 | 5,000 | ||||||
Asset and property management fees |
202,000 | 166,000 | ||||||
Offering costs |
108,000 | 86,000 | ||||||
Operating expenses |
60,000 | 16,000 | ||||||
On-site personnel and engineering payroll |
9,000 | 7,000 | ||||||
Acquisition expenses |
8,000 | | ||||||
Construction management fees |
5,000 | 21,000 | ||||||
$ | 1,173,000 | $ | 840,000 | |||||
12. Equity
Preferred Stock
Our charter authorizes us to issue 200,000,000 shares of our $0.01 par value preferred stock.
As of March 31, 2011 and December 31, 2010, no shares of preferred stock were issued and
outstanding.
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.
20
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
On February 4, 2009, our advisor purchased 20,000 shares of common stock for total cash
consideration of $200,000 and was admitted as the 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
March 31, 2011, we had issued 21,222,108 shares of our common stock in connection with our offering
and 344,516 shares of our common stock pursuant to the DRIP, and we had also repurchased 29,500
shares of our common stock under our share repurchase plan. As of March 31, 2011 and December 31,
2010, we had 21,579,624 and 15,452,668 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 March 31, 2011 and December 31, 2010, 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 March 31, 2011 and December 31, 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.
Distribution Reinvestment Plan
We adopted the DRIP that allows stockholders to purchase additional shares of our common stock
through the reinvestment of distributions, subject to certain conditions. We have registered and
reserved 30,000,000 shares of our common stock for sale in our offering pursuant to the DRIP. For
the three months ended March 31, 2011 and 2010, $1,288,000 and $126,000, respectively, in
distributions were reinvested and 135,561 and 13,214 shares of our common stock, respectively, were
issued pursuant to the DRIP. As of March 31, 2011 and December 31, 2010, a total of $3,273,000 and
$1,985,000, respectively, in distributions were reinvested and 344,516 and 208,955 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.
Under our share repurchase plan, repurchase prices range from $9.25, or 92.5% of the price
paid per share, following a one year holding period to an amount not less than 100% of the price
paid per share following a four year holding period. 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. In order to effect the repurchase of shares of our common stock held for less than one year due
to the death of a stockholder or a stockholder with a qualifying disability, we must receive
written notice within one year after the death of the stockholder or the stockholders qualifying
disability, as applicable. Furthermore, our share repurchase plan provides that if there are
insufficient funds to honor all repurchase requests, pending requests will be honored among all
requests for repurchase in any given repurchase period, as follows: first, pro rata as to
repurchases sought upon a stockholders death; next, pro rata as to repurchases sought by
stockholders with a qualifying disability; and, finally, pro rata as to other repurchase requests.
21
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three months ended March 31, 2011, we received share repurchase requests and
repurchased 8,500 shares of our common stock for an aggregate of $78,000 at an average repurchase
price of $9.25 per share, using proceeds we received from the sale of shares of our common stock
pursuant to the DRIP. We did not receive any share repurchase requests for the three months ended
March 31, 2010. As of March 31, 2011 and December 31, 2010, we had received share repurchase
requests and had repurchased 29,500 shares of our common stock for an aggregate of $288,000
at an average price of $9.78 per share and 21,000 shares of our common stock for an aggregate
of $210,000 at an average price of $10.00 per share, respectively, using proceeds we
received from the sale of shares of our common stock pursuant to the DRIP.
2009 Incentive Plan
We adopted the 2009 Incentive Plan, or our incentive plan, pursuant to which our board of
directors or a committee of our independent directors may make grants of options, restricted shares
of common stock, 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 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 grant date 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 restricted common stock was estimated at the date
of grant at $10.00 per share, the per share price of shares in our offering, and with respect to
the initial 20.0% of shares that vested on the grant date, expensed as compensation immediately,
and with respect to the remaining shares, amortized on a straight-line basis over the vesting
period. Shares of restricted common stock may not be sold, transferred, exchanged, assigned,
pledged, hypothecated or otherwise encumbered. Such restrictions expire upon vesting. Shares of
restricted common stock have full voting rights and rights to dividends. For the three months ended
March 31, 2011 and 2010, we recognized compensation expense of $11,000 and $8,000, respectively,
related to the restricted common stock grants ultimately expected to vest. ASC Topic 718,
Compensation Stock Compensation, 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 March 31, 2011 and 2010, 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 March 31, 2011 and December 31, 2010, there was $125,000 and $136,000, respectively, of
total unrecognized compensation expense, net of estimated forfeitures, related to nonvested shares
of our restricted common stock. This expense is expected to be recognized over a remaining weighted
average period of 2.81 years.
22
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of March 31, 2011 and December 31, 2010, the fair value of the nonvested shares of
restricted common stock was $150,000. A summary of the status of the nonvested shares of our
restricted common stock as of March 31, 2011 and December 31, 2010, and the changes for the three
months ended March 31, 2011, is presented below:
Weighted | ||||||||
Average Grant | ||||||||
Number of Nonvested Shares of | Date Fair | |||||||
our Restricted Common Stock | Value | |||||||
Balance December 31, 2010 |
15,000 | $ | 10.00 | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Balance March 31, 2011 |
15,000 | $ | 10.00 | |||||
Expected to vest March 31,
2011 |
15,000 | $ | 10.00 | |||||
13. Fair Value of Financial Instruments
Financial Instruments Reported at Fair Value
Derivative Financial Instruments
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 a 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 swaps 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 March 31, 2011, 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 swaps. As a result, we have
determined that our interest rate swaps valuation in its entirety is classified in Level 2 of the
fair value hierarchy.
23
Table of Contents
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 March 31, 2011, 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
instruments |
$ | | $ | 379,000 | $ | | $ | 379,000 | ||||||||
Total liabilities at fair value |
$ | | $ | 379,000 | $ | | $ | 379,000 | ||||||||
The table below presents our assets and liabilities measured at fair value on a recurring
basis as of December 31, 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
instruments |
$ | | $ | 453,000 | $ | | $ | 453,000 | ||||||||
Total liabilities at fair value |
$ | | $ | 453,000 | $ | | $ | 453,000 | ||||||||
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 sheets. Fair value is defined
under ASC Topic 820.
Our accompanying condensed consolidated balance sheets include the following financial
instruments: cash and cash equivalents, restricted cash, real estate and escrow deposits, accounts
and other receivables, net, accounts payable and accrued liabilities, accounts payable due to
affiliates, mortgage loans payable, 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, net 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 loans payable and the line of credit is estimated using a
discounted cash flow analysis using borrowing rates available to us for debt instruments with
similar terms and maturities. As of March 31, 2011 and December 31, 2010, the fair value of the
mortgage loans payable were $49,351,000 and $59,246,000, respectively, compared to the carrying
value of $49,175,000 and $58,331,000, respectively. The fair value of the line of credit as of
March 31, 2011 and December 31, 2010 was $7,499,000 and $12,070,000, respectively, compared to a
carrying value of $7,400,000 and $11,800,000, respectively.
14. Business Combinations
2011
For the three months ended March 31, 2011, we completed three acquisitions comprising five
buildings and 125,000 square feet of GLA. The aggregate purchase price was $37,373,000, plus
closing costs and acquisition fees of $1,164,000, 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, acquisition dates and the amount of
financing initially incurred or assumed in connection with such acquisitions.
24
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Results of operations for the property acquisitions are reflected in our accompanying
condensed consolidated statements of operations for the three months ended March 31, 2011 for the
periods subsequent to the acquisition dates. For the period from the acquisition date through March
31, 2011, we recognized the following amounts of revenues and net income (loss) for the property
acquisitions:
Property | Revenues | Net Income | ||||||
Columbia Long-Term Acute Care Hospital |
$ | 248,000 | $ | 155,000 | ||||
St. Anthony North Denver Medical Office Building |
$ | 17,000 | $ | 7,000 | ||||
Loma Linda Pediatric Specialty Hospital |
$ | 4,000 | $ | |
The fair value of our three properties at the time of acquisition is shown below:
Columbia Long-Term | St. Anthony North Denver | Loma Linda Pediatric | ||||||||||
Acute Care Hospital | Medical Office Building | Specialty Hospital | ||||||||||
Land |
$ | 1,433,000 | $ | | $ | 1,370,000 | ||||||
Building and
improvements |
9,607,000 | 9,543,000 | 9,862,000 | |||||||||
In-place leases |
967,000 | 905,000 | 1,164,000 | |||||||||
Tenant relationships |
416,000 | 864,000 | 604,000 | |||||||||
Leasehold interest |
| 638,000 | | |||||||||
Total assets acquired |
12,423,000 | 11,950,000 | 13,000,000 | |||||||||
Total liabilities
assumed |
| | | |||||||||
Net assets acquired |
$ | 12,423,000 | $ | 11,950,000 | $ | 13,000,000 | ||||||
Assuming the property acquisitions in 2011 discussed above had occurred on
January 1, 2010, for the three months ended March 31, 2011 and 2010, pro forma revenues, net income
(loss), net income (loss) attributable to
controlling interest and net income (loss) per common share attributable to controlling interest
basic and diluted would have been as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
$ | 6,957,000 | $ | 1,280,000 | ||||
Net income (loss) |
$ | 542,000 | $ | (399,000 | ) | |||
Net income (loss) attributable to controlling interest |
$ | 542,000 | $ | (399,000 | ) | |||
Net income (loss) per common share attributable to controlling interest basic and diluted |
$ | 0.02 | $ | (0.07 | ) |
The pro forma adjustments assume that the offering proceeds, at a price of $10.00 per share,
net of offering costs were raised as of January 1, 2010. In addition, as acquisition related
expenses related to the acquisitions are not expected to have a continuing impact, they have been
excluded from the pro forma results. 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.
25
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
2010
For the three months ended March 31, 2010, we completed two acquisitions comprising three
buildings and 71,000 square feet of GLA. The aggregate purchase price was $13,470,000, plus closing
costs and acquisition fees of $505,000, 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 acquisition dates and the amount of financing
initially incurred or assumed in connection with such acquisitions.
Results of operations for the property acquisitions are reflected in our accompanying
condensed consolidated statements of operations for the three months ended March 31, 2010 for the
periods subsequent to the acquisition dates. For the period from the acquisition date through March
31, 2010, we recognized the following amounts of revenues and net income (loss) for the property
acquisitions:
Property | Revenues | Net Income (Loss) | ||||||
Lacombe Medical Office Building |
$ | 60,000 | $ | 15,000 | ||||
Center for Neurosurgery and Spine |
$ | 1,000 | $ | (1,000 | ) |
The fair value of our two properties at the time of acquisition is shown below:
Lacombe Medical Office | Center for | |||||||
Building | Neurosurgery and Spine | |||||||
Land |
$ | 409,000 | $ | 319,000 | ||||
Building and improvements |
5,438,000 | 4,689,000 | ||||||
In-place leases |
512,000 | 575,000 | ||||||
Tenant relationships |
458,000 | 585,000 | ||||||
Above market leases |
| 327,000 | ||||||
Total assets acquired |
6,817,000 | 6,495,000 | ||||||
Mortgage loan payables, net |
| (3,025,000 | ) | |||||
Derivative financial
instrument |
| (310,000 | ) | |||||
Total liabilities assumed |
| (3,335,000 | ) | |||||
Net assets acquired |
$ | 6,817,000 | $ | 3,160,000 | ||||
Assuming the property acquisitions in 2010 discussed above had occurred on January 1, 2010,
for the three months ended March 31, 2010, pro forma revenues, net loss, net loss attributable to
controlling interest and net loss per common share attributable to controlling interest basic
and diluted would have been as follows:
Three Months Ended | ||||
March 31, 2010 | ||||
Revenues |
$ | 319,000 | ||
Net loss |
$ | (876,000 | ) | |
Net loss attributable to controlling interest |
$ | (876,000 | ) | |
Net loss per common share attributable to controlling interest basic and diluted |
$ | (0.33 | ) |
The pro forma adjustments assume that the debt proceeds and the offering proceeds, at a price
of $10.00 per share, net of offering costs were raised as of January 1, 2010. In addition, as
acquisition related expenses related to the acquisitions are not expected to have a continuing
impact, they have been excluded from the pro forma results. 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.
26
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
15. Segment Reporting
As of March 31, 2011, we evaluated our business and made resource allocations based on three
business segments medical office buildings, hospitals and skilled nursing facilities. Our
medical office buildings are typically leased to multiple tenants under separate leases in each
building, thus requiring active management and responsibility for many of the associated operating
expenses (although many of these are, or can effectively be, passed through to the tenants). Our
hospital investments are primarily single tenant properties which lease the facilities to
unaffiliated tenants under triple-net and generally master leases that transfer the obligation
for all facility operating costs (including maintenance, repairs, taxes, insurance and capital
expenditures) to the tenant. Our skilled nursing facilities are acquired and similarly structured
as our hospital investments. The accounting policies of these segments are the same as those
described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial
Statements in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 10, 2011. There
are no intersegment sales or transfers.
We evaluate performance based upon net operating income of the combined properties in each
segment. We define net operating income, a non-GAAP financial measure, as total revenues, less
rental expenses. We believe that net income (loss), as defined by GAAP, is the most appropriate
earnings measurement. However, we believe that segment profit serves as a useful supplement to net
income (loss) because it allows investors and our management to measure unlevered property-level
operating results and to compare our operating results to the operating results of other real
estate companies and between periods on a consistent basis. Segment profit should not be considered
as an alternative to net income (loss) determined in accordance with GAAP as an indicator of our
financial performance, and, accordingly, we believe that in order to facilitate a clear
understanding of our consolidated historical operating results, segment profit should be examined
in conjunction with net income (loss) as presented in our Consolidated Financial Statements and
data included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, depreciation and amortization and other expenses not attributable to
individual properties are not allocated to individual segments for purposes of assessing segment
performance.
Non-segment assets primarily consist of corporate assets including cash and cash equivalents,
real estate and escrow deposits, deferred financing costs and other assets not attributable to
individual properties.
27
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Summary information for the reportable segments during the three months ended March 31, 2011
and 2010 is as follows:
Medical Office | Skilled Nursing | Three Months Ended | ||||||||||||||
Buildings | Hospitals | Facilities | March 31, 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 3,124,000 | $ | 1,708,000 | $ | 1,175,000 | $ | 6,007,000 | ||||||||
Expenses: |
||||||||||||||||
Rental expenses |
1,000,000 | 136,000 | 67,000 | 1,203,000 | ||||||||||||
Segment net operating income(1) |
$ | 2,124,000 | $ | 1,572,000 | $ | 1,108,000 | $ | 4,804,000 | ||||||||
Expenses: |
||||||||||||||||
General and administrative |
921,000 | |||||||||||||||
Acquisition related expenses |
1,549,000 | |||||||||||||||
Depreciation and amortization |
2,202,000 | |||||||||||||||
Income from operations |
132,000 | |||||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of
deferred financing costs and debt discount): |
||||||||||||||||
Interest expense |
(1,095,000 | ) | ||||||||||||||
Gain in fair value of derivative financial
instruments |
74,000 | |||||||||||||||
Interest income |
4,000 | |||||||||||||||
Net loss |
$ | (885,000 | ) | |||||||||||||
Medical Office | Skilled Nursing | Three Months Ended | ||||||||||||||
Buildings | Hospitals | Facilities | March 31, 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 61,000 | $ | | $ | | $ | 61,000 | ||||||||
Expenses: |
||||||||||||||||
Rental expenses |
17,000 | | | 17,000 | ||||||||||||
Segment net operating income(1) |
$ | 44,000 | $ | | $ | | $ | 44,000 | ||||||||
Expenses: |
||||||||||||||||
General and administrative |
185,000 | |||||||||||||||
Acquisition related expenses |
637,000 | |||||||||||||||
Depreciation and amortization |
29,000 | |||||||||||||||
Loss from operations |
(807,000 | ) | ||||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of
deferred financing
costs and debt
discount) |
(1,000 | ) | ||||||||||||||
Interest income |
5,000 | |||||||||||||||
Net loss |
$ | (803,000 | ) | |||||||||||||
(1) | Net operating income is used to evaluate the operating performance of our properties. We define net operating income, a non-GAAP financial measure, as total revenues, including tenant reimbursements, less property level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments and interest expense. We believe net operating income provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use net operating income to make decisions about resource allocations and to assess the property level performance of our properties. |
28
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Assets by reportable segments as of March 31, 2011 and December 31, 2010 are as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Medical office buildings |
$ | 108,983,000 | $ | 97,157,000 | ||||
Hospitals |
65,336,000 | 53,313,000 | ||||||
Skilled nursing facilities |
60,147,000 | 47,610,000 | ||||||
All other |
7,356,000 | 5,916,000 | ||||||
Total assets |
$ | 241,822,000 | $ | 203,996,000 | ||||
16. 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 March 31, 2011 and December 31, 2010, 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.
Based on leases in effect as of March 31, 2011, we owned properties in four states for which
each state accounted for 10.0% or more of our annualized base rent. Virginia accounted for 20.0% of
annualized base rent, Ohio accounted for 13.4% of annualized base rent, Missouri accounted for
12.0% of annualized base rent and Texas accounted for 11.0% of annualize base rent. Accordingly,
there is a geographic concentration of risk subject to fluctuations in each states economy.
Based on leases in effect as of March 31, 2011, our three reportable business segments,
medical office buildings, hospitals and skilled nursing facilities, accounted for 46.8%, 27.2% and
26.0%, respectively, of annualized base rent. As of March 31, 2011, two of our tenants at our
consolidated properties accounted for 10.0% or more of our annualized base rent, as follows:
Percentage of | GLA | Lease | ||||||||||||||||
2011 Annual Base | 2011 Annual | (Square | Expiration | |||||||||||||||
Tenant | Rent(1) | Base Rent | Property | Feet) | Date | |||||||||||||
Landmark Real
Estate Holdings,
LLC |
$ | 3,717,000 | 17.1 | % | Monument Long-Term Acute Care Hospital Portfolio | 115,000 | 01/31/26 | |||||||||||
Kissitto Healthcare |
$ | 2,286,000 | 10.5 | % | Virginia Skilled Nursing Facility Portfolio | 144,000 | 01/31/25 |
(1) | Annualized base rent is based on contractual base rent from leases in effect as of March 31, 2011. 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. |
17. 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 March 31, 2011 and 2010, there were 15,000 shares and 12,000 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.
29
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
18. Subsequent Events
Status of our Offering
As of April 30, 2011, we had received and accepted subscriptions in our offering for
23,711,721 shares of our common stock, or $236,583,000, excluding shares of our common stock issued
pursuant to the DRIP.
Share Repurchases
In April 2011, we repurchased 45,000 shares of our common stock, for an aggregate amount of
$423,000, under our share repurchase plan.
Executive Stock Purchase Plan
On April 7, 2011, our Chairman of the Board of Directors and Chief Executive Officer, Jeffrey
T. Hanson, and our President and Chief Operating Officer, Danny Prosky, each executed an executive
stock purchase plan, or the Plan, whereby each executive has irrevocably agreed to invest all or a
portion of their after-tax cash compensation as employees of our sponsor directly into our company
by purchasing shares of our common stock on a regular basis, corresponding to regular payroll
periods and the payment of any other cash compensation, including bonuses. Pursuant to the Plans,
Mr. Hanson and Mr. Prosky have agreed to invest 100% and 50.0%, respectively, of all of their
after-tax cash compensation beginning with their regularly scheduled payroll payment on April 29,
2011 and terminating on the earlier of (i) December 31, 2011, (ii) the termination of our offering,
(iii) any suspension of our offering by our board of directors or regulatory body, or (iv) the date
upon which the number of shares of our common stock owned by Mr. Hanson or Mr. Prosky, when
combined with all their other investments in our common stock, exceeds the ownership limits set
forth in our charter. The shares will be purchased pursuant to our offering at a price of $9.00 per
share, reflecting the elimination of selling commissions and the dealer manager fee in connection
with such transactions.
Mortgage Loan Payable and Interest Rate Swap
On April 8, 2011, we entered into a loan agreement with Capital One, N.A., or Capital One, to
obtain a loan in the principal amount of $7,200,000, or the Capital One Loan, in connection with
our previous acquisition of Muskogee Long-Term Acute Care Hospital, which was acquired on May 27,
2010. The Capital One Loan matures on April 8, 2018 and bears interest at an interest rate equal to
the lesser of the maximum interest rate permitted under applicable law or 2.40% per annum plus (i)
the greater of the one-month LIBOR or 1.50%, or (ii) the one-month LIBOR so long as an interest
rate swap is in effect.
On April 12, 2011, we entered into an interest rate swap agreement with Capital One. As a
result of the interest rate swap agreement, the Capital One Loan bears interest at an effective
fixed rate of 4.28% per annum from May 2, 2011 through May 1, 2014.
Property Acquisitions
Subsequent
to March 31, 2011, we completed four acquisitions comprising 11 buildings and 295,000
square feet of GLA from
unaffiliated parties. The aggregate purchase price of these properties was $61,620,000 and we paid
$1,695,000 in acquisition fees to our advisor or its affiliates in connection with these
acquisitions. We have not yet measured the fair value of the tangible and identified intangible
assets and liabilities of the properties. The following is a summary of our acquisitions subsequent
to March 31, 2011:
Acquisition Fee | ||||||||||||||||||||||||||||||||
Date | Ownership | Purchase | Mortgage Loans | Line of | to our Advisor | |||||||||||||||||||||||||||
Property | Location | Type | Acquired | Percentage | Price | Payable(1) | Credit(2) | or its Affiliates(3) | ||||||||||||||||||||||||
Yuma Skilled Nursing
Facility |
Yuma, AZ | Skilled Nursing | 04/13/11 | 100 | % | $ | 11,000,000 | $ | | $ | 9,000,000 | $ | 303,000 | |||||||||||||||||||
Hardy Oak Medical
Office Building |
San Antonio, TX | Medical Office | 04/14/11 | 100 | % | 8,070,000 | 5,253,000 | | 222,000 | |||||||||||||||||||||||
Lakewood Ranch Medical
Office Building(4) |
Bradenton, FL | Medical Office | 04/15/11 | 100 | % | 12,500,000 | | 13,800,000 | 344,000 | |||||||||||||||||||||||
Dixie-Lobo Medical Office Building Portfolio |
Alice, Lufkin, Victoria and Wharton, TX, Calsbad and Hobbs, NM, Hope, AK and Lake Charles, LA | Medical Office | 5/12/11 | 100 | % | 30,050,000 | 23,239,000 | 5,000,000 | 826,000 | |||||||||||||||||||||||
Total |
$ | 61,620,000 | $ | 28,492,000 | $ | 27,800,000 | $ | 1,695,000 | ||||||||||||||||||||||||
(1) | Represents the balance of the mortgage loans payable assumed by us or newly placed on the property at the time of acquisition. |
30
Table of Contents
Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
(2) | Represents borrowing under our line of credit at the time of acquisition. | |
(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) | We paid a loan defeasance fee of approximately $1,223,000, or the loan defeasance fee, related to the repayment of a loan that the seller of Lakewood Ranch Medical Office Building, or the Lakewood Ranch property, had received from Lincoln Financial Group or its affiliates, or the Lakewood Ranch Sellers Loan, prior to its maturity date. The Lakewood Ranch Sellers Loan was secured by the Lakewood Ranch property and had an outstanding principal balance of approximately $7,561,000 at the time of our repayment. As a result of the loan defeasance fee, the fees and expenses associated with the Lakewood Ranch property acquisition exceeded 6.0% of the contract purchase price of the Lakewood Ranch property, whereby pursuant to our charter, prior to the acquisition of the Lakewood Ranch property, our directors, including a majority of our independent directors, not otherwise interested in the transaction, approved the fees and expenses associated with the acquisition of the Lakewood Ranch property in excess of the 6.0% limit and determined that such fees and expenses were commercially competitive, fair and reasonable to us. |
Line of Credit Modification
On May 4, 2011, we modified our line of credit to (i) increase the aggregate maximum
principal amount from $25,000,000 to $45,000,000, subject to certain borrowing base conditions,
(ii) reduce the interest rate to an interest rate equal to LIBOR plus 3.50% or in the event the
daily LIBOR rate is not available then Bank of America, N.A.s prime rate for such day plus 3.50%,
which was decreased from LIBOR or the Bank of America, N.A.s prime rate, plus 3.75%, and (iii) remove the
requirement of an interest rate floor of 5.00%. 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, as amended. As a result
of the modification to the line of credit, as of May 4, 2011, our aggregate borrowing capacity is $31,115,000,
based on the value of the properties securing the line of credit.
Dealer Manager Agreement
Effective as of April 19, 2011, the dealer manager agreement with Grubb & Ellis Securities was
assigned to, and assumed by, Grubb & Ellis Capital Corporation, a wholly owned subsidiary of our
sponsor.
31
Table of Contents
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 March 31, 2011 and December 31, 2010, together with our
results of operations for the three months ended March 31, 2011 and 2010, and cash flows for the
three months ended March 31, 2011 and 2010.
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 ended 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 March 31, 2011, we had received and accepted subscriptions in our
offering for 21,222,108 shares of our common stock, or $211,732,000, excluding shares of our common
stock issued pursuant to the DRIP.
32
Table of Contents
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.
We currently operate through three reportable business segments medical office buildings,
hospitals and skilled nursing facilities. As of March 31, 2011, we had completed 16 acquisitions
comprising 30 buildings and 995,000 square feet of gross leasable area, or GLA, for an aggregate
purchase price of $230,815,000.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2010
Annual Report on Form 10-K, as filed with the SEC on March 10, 2011, 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 2010 Annual Report on Form 10-K, as
filed with the SEC on March 10, 2011.
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 2011 and 2010
For a discussion of our acquisitions for the three months ended March 31, 2011 and 2010, see
Note 3, Real Estate Investments, to our accompanying condensed consolidated financial statements.
For a discussion of our acquisitions subsequent to March 31, 2011, see Note 18, Subsequent Events
Property Acquisitions, 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 2010 Annual Report
on Form 10-K, as filed with the SEC on March 10, 2011.
33
Table of Contents
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 March 31, 2011, our consolidated properties were 97.4% leased. During the remainder of
2011, leases associated with 3.1% of the leased GLA will expire. Our leasing strategy for 2011
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 March 31, 2011, our remaining weighted average lease term is 10.0 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 have provided managements assessment of our internal control over financial
reporting as of December 31, 2010 and will continue to comply with such regulations.
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 purchased our first property on March 5, 2010, and therefore, had limited results of
operations for the three months ended March 31, 2010. Therefore, our results of operations for the
three months ended March 31, 2011 and 2010 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.
As of March 31, 2011, we operate through three reportable business segments medical office
buildings, hospitals and skilled nursing facilities. With the continued expansion of our portfolio,
we believe segregation of our operations into three reporting segments would be useful in assessing
the performance of our business in the same way that management intends to review our performance
and make operating decisions. Prior to this we operated
through one reportable segment.
34
Table of Contents
Except where otherwise noted, the change in our results of operations is primarily due to our
16 property acquisitions as of March 31, 2011, as compared to two property acquisitions as of March
31, 2010. As of March 31, 2011 and 2010 we owned the following types of properties:
As of March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Number of | Aggregate | Leased | Number of | Aggregate | Leased | |||||||||||||||||||
Acquisitions | Purchase Price | % | Acquisitions | Purchase Price | % | |||||||||||||||||||
Medical office buildings |
11 | $ | 107,020,000 | 95.3 | % | 2 | $ | 13,470,000 | 100 | % | ||||||||||||||
Hospitals |
3 | 65,795,000 | 100 | % | | | | % | ||||||||||||||||
Skilled nursing facilities |
2 | 58,000,000 | 100 | % | | | | % | ||||||||||||||||
Total/Weighted
Average |
16 | $ | 230,815,000 | 97.4 | % | 2 | $ | 13,470,000 | 100 | % | ||||||||||||||
Rental Income
For the three months ended March 31, 2011 and 2010, rental income was $6,007,000 and $61,000,
respectively, and was primarily comprised of base rent of $4,761,000 and $35,000, respectively, and
expense recoveries of $798,000 and $15,000, respectively. Rental income by operating segment
consisted of the following for the periods then ended:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Medical office buildings |
$ | 3,124,000 | $ | 61,000 | ||||
Hospitals |
1,708,000 | | ||||||
Skilled nursing facilities |
1,175,000 | | ||||||
Total |
$ | 6,007,000 | $ | 61,000 | ||||
Rental Expenses
For the three months ended March 31, 2011 and 2010, rental expenses were $1,203,000 and
$17,000, respectively. Rental expenses consisted of the following for the periods then ended:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Real estate taxes |
$ | 490,000 | $ | 11,000 | ||||
Building maintenance |
269,000 | 1,000 | ||||||
Utilities |
196,000 | 1,000 | ||||||
Property management fees |
120,000 | 2,000 | ||||||
Administration |
64,000 | | ||||||
Insurance |
21,000 | 1,000 | ||||||
Other |
43,000 | 1,000 | ||||||
Total |
$ | 1,203,000 | $ | 17,000 | ||||
35
Table of Contents
Rental expenses and rental expenses as a percentage of revenue by operating segment consisted
of the following for the periods then ended:
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Medical office buildings |
$ | 1,000,000 | 32.0 | % | $ | 17,000 | 27.9 | % | ||||||||
Hospitals |
136,000 | 8.0 | % | | | |||||||||||
Skilled nursing facilities |
67,000 | 5.7 | % | | | |||||||||||
Total/Weighted Average |
$ | 1,203,000 | 20.0 | % | $ | 17,000 | 27.9 | % | ||||||||
General and Administrative
For the three months ended March 31, 2011 and 2010, general and administrative was $921,000
and $185,000, respectively. General and administrative consisted of the following for the periods
then ended:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Asset management fees |
$ | 440,000 | $ | 5,000 | ||||
Professional and legal fees |
211,000 | 64,000 | ||||||
Board of directors fees |
60,000 | 42,000 | ||||||
Franchise taxes |
55,000 | | ||||||
Transfer agent services |
49,000 | 14,000 | ||||||
Directors and officers liability insurance |
44,000 | 44,000 | ||||||
Bank charges |
18,000 | | ||||||
Restricted stock compensation |
11,000 | 8,000 | ||||||
Other |
33,000 | 8,000 | ||||||
Total |
$ | 921,000 | $ | 185,000 | ||||
The increase in general and administrative is primarily the result of purchasing properties in
2010 and thus incurring asset management fees, as well as incurring higher professional and legal
fees as a result of our increase in assets.
Acquisition Related Expenses
For the three months ended March 31, 2011 and 2010, we incurred acquisition related expenses
of $1,549,000 and $637,000, respectively. For the three months ended March 31, 2011, acquisition
related expenses related primarily to expenses associated with the acquisition of Columbia
Long-Term Acute Care Hospital, St. Anthony North Medical Office Building and Loma Linda Pediatric
Specialty Hospital, including acquisition fees of $1,023,000, incurred to our advisor or its
affiliates. For the three months ended March 31, 2010, acquisition related expenses related
primarily to expenses associated with the acquisition of Lacombe Medical Office Building and Center
for Neurosurgery and Spine, including acquisition fees of $371,000 incurred to our advisor or its
affiliates.
Depreciation and Amortization
For the three months ended March 31, 2011 and 2010, depreciation and amortization was
$2,202,000 and $29,000, respectively, and consisted primarily of depreciation on our operating
properties of $1,444,000 and $16,000, respectively, and amortization on our identified intangible
assets of $756,000 and $13,000, respectively.
36
Table of Contents
Interest Expense
For the three months ended March 31, 2011 and 2010, interest expense including gain in fair
value of derivative financial instruments was $1,021,000 and $1,000, respectively. Interest expense
consisted of the following for the periods then ended:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Interest expense mortgage loans payable and derivative financial instruments |
$ | 778,000 | $ | 1,000 | ||||
Amortization of deferred financing costs mortgage loans payable |
127,000 | | ||||||
Loss on extinguishment of debt write-off of deferred financing costs |
42,000 | | ||||||
Amortization of debt discount |
9,000 | | ||||||
Interest expense line of credit |
61,000 | | ||||||
Amortization of deferred financing costs line of credit |
78,000 | | ||||||
Gain in fair value of our derivative financial instrument |
(74,000 | ) | | |||||
Total |
$ | 1,021,000 | $ | 1,000 | ||||
Interest Income
For the three months ended March 31, 2011 and 2010, we had interest income of $4,000 and
$5,000, respectively, related to interest earned on funds held in cash accounts.
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 its affiliates, which during our offering includes payments for reimbursement of
other organizational and offering expenses, 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.
37
Table of Contents
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.
Based on the properties owned as of March 31, 2011, we estimate that our expenditures for
capital improvements and tenant improvements will require up to $2,190,000 for the remaining nine
months of 2011. As of March 31, 2011, we had $2,963,000 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 provided by (used in) operating activities for the three months ended March 31,
2011 and 2010, were $1,101,000 and $(664,000), respectively. For the three months ended March 31,
2011, cash flows provided by operating activities primarily related to the cash flows from our
property acquisitions, partially offset by the payment of acquisition related expenses and general
and administrative expenses. For the three months ended March 31, 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.
Cash flows used in investing activities for the three months ended March 31, 2011 and 2010,
were $38,817,000 and $10,453,000, respectively. For the three months ended March 31, 2011, cash
flows used in investing activities related primarily to the acquisition of our properties in the
amount of $37,636,000, capital expenditures of $388,000, increase in restricted cash in the amount
of $342,000 and the payment of $451,000 in real estate and escrow deposits for the purchase of real
estate. For the three months ended March 31, 2010, cash flows used in investing activities related
primarily to the acquisition of our properties in the amount of $9,915,000, increase in restricted
cash in the amount of $38,000 and the payment of $500,000 in real estate and escrow deposits for
the purchase of real estate. We anticipate cash flows used in investing activities to increase as
we purchase additional properties.
Cash flows provided by financing activities for the three months ended March 31, 2011 and
2010, were $38,404,000 and $21,933,000, respectively. For the three months ended March 31, 2011,
such cash flows related primarily to funds raised from investors in our offering in the amount of
$59,870,000, principal payments on our
mortgage loans payable in the amount of $9,165,000, net borrowings under our secured revolving
credit facility with Bank of America, N.A., or the line of credit, in the amount of $4,400,000,
partially offset by the payment of offering costs of $6,437,000 and distributions of $1,300,000.
Additional cash outflows related to deferred financing costs of $84,000 in connection with the debt
financing for our acquisitions. $7,500,000 of the $9,165,000 in payments on our mortgage loans
payable reflect the early extinguishment of a mortgage loan payable on Surgical Hospital of Humble.
For the three months ended March 31, 2010, such cash flows related primarily to funds raised from
investors in our offering in the amount of $24,652,000, partially offset by the payment of offering
costs of $2,826,000 and distributions of $110,000. 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.
38
Table of Contents
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. Subsequently, our board of directors authorized, on a
quarterly basis, a daily distribution to our stockholders of record as of the close of business on
each day of the quarterly periods commencing on July 1, 2010 and ending on June 30, 2011.
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: (i) cause us to be unable to pay our debts
as they become due in the usual course of business; (ii) cause our total assets to be less than the
sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability
to maintain our qualification as a REIT.
For the three months ended March 31, 2011, we paid distributions of $2,588,000 ($1,300,000 in
cash and $1,288,000 in shares of our common stock pursuant to the DRIP). $1,101,000, or 42.5%, of
distributions were paid from cash flows from operations and $1,487,000, or 57.5%, of distributions
were paid from our offering proceeds. For the three months ended March 31, 2010, we paid
distributions of $236,000 ($110,000 in cash and $126,000 in shares of our common stock pursuant to
the DRIP), none of which were paid from cash flows from operations of $(664,000). The distributions
were paid from funds from our sponsor. Under GAAP, acquisition related expenses are expensed, and
therefore, subtracted from cash flows from operations. However, these expenses are paid from
offering proceeds.
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.
As of March 31, 2011, we had an amount payable of $515,000 to our advisor or its affiliates
for lease commissions, asset and property management fees, operating expenses, on-site personnel
payroll and acquisition
related expenses, 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.
39
Table of Contents
As of March 31, 2011, 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 three months ended March 31, 2011 and 2010, our funds from operations, or FFO, were
$1,315,000 and $(774,000), respectively. For the three months ended March 31, 2011, we paid
distributions of $1,315,000, or 50.8% of the distributions, from FFO and $1,273,000, or 49.2% of
the distributions paid, from proceeds from our offering. For the three months ended March 31, 2010,
the distributions were paid from funds from our sponsor. 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.
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 March 31, 2011, our borrowings were 24.7% 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 May 10, 2011 and March 31, 2011, our leverage did
not exceed 300.0% of the value of our net assets.
Mortgage Loans Payable, Net
For a discussion of our mortgage loans payable, net, see Note 6, Mortgage Loans Payable, 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.
40
Table of Contents
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 March 31, 2011, we had $12,286,000 ($12,266,000, net of discount) of fixed rate
debt and $37,197,000 ($36,909,000, net of discount) of variable rate debt outstanding secured by
our properties. In addition, we had $7,400,000 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 March 31, 2011, we were in compliance with all such covenants and requirements
on our mortgage loans payable and the line of credit and we expect to remain in compliance with all
such requirements for the next 12 months. As of March 31, 2011, the weighted average effective
interest rate on our outstanding debt, factoring in our fixed rate interest rate swaps, was 5.42%
per annum.
Contractual Obligations
The following table provides information with respect to the maturity and scheduled principal
repayment of our secured mortgage loans payable and the line of credit, as well as interest
payments on our mortgage loans payable, line of credit and fixed rate interest rate swaps and
obligations under our ground leases, as of March 31, 2011:
Payments Due by Period | ||||||||||||||||||||
Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||
(2011) | (2012-2013) | (2014-2015) | (after 2016) | Total | ||||||||||||||||
Principal payments
fixed rate debt |
$ | 195,000 | $ | 4,626,000 | $ | 338,000 | $ | 7,127,000 | $ | 12,286,000 | ||||||||||
Interest payments
fixed rate debt |
561,000 | 1,207,000 | 974,000 | 2,355,000 | 5,097,000 | |||||||||||||||
Principal payments
variable rate debt |
3,245,000 | (1) | 34,554,000 | 344,000 | 6,454,000 | 44,597,000 | ||||||||||||||
Interest payments
variable rate debt (based
on rates in effect as of
March 31, 2011) |
1,604,000 | 1,248,000 | 593,000 | 25,000 | 3,470,000 | |||||||||||||||
Interest payments
fixed rate interest rate swap
(based on rates in effect as of
March 31, 2011) |
69,000 | 177,000 | 168,000 | 7,000 | 421,000 | |||||||||||||||
Ground lease obligations |
52,000 | 122,000 | 125,000 | 5,001,000 | 5,300,000 | |||||||||||||||
Total |
$ | 5,726,000 | $ | 41,934,000 | $ | 2,542,000 | $ | 20,969,000 | $ | 71,171,000 | ||||||||||
(1) | Our variable rate mortgage loan payable in the outstanding principal amount of $3,130,000 ($2,842,000, net of discount) secured by Center for Neurosurgery and Spine as of March 31, 2011, 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 $139,000, $322,000, $252,000 and $312,000 in 2011, 2012-2013, 2014-2015 and thereafter, respectively. |
41
Table of Contents
Off-Balance Sheet Arrangements
As of March 31, 2011, 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
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 or loss.
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, we view fair value adjustments
of derivatives, and impairment charges and gains and losses from dispositions of assets as items
which are typically adjusted for when assessing operating performance. Lastly, publicly registered,
non-listed REITs typically have a significant amount of acquisition activity and are substantially
more dynamic during their initial years of investment and operation and therefore require
additional adjustments to FFO in evaluating performance. Due to these and other unique features of
publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry
trade group, has standardized a measure known as modified funds from operations, or MFFO, which we
believe to be another appropriate supplemental measure to reflect the operating performance of a
REIT. The use of MFFO is recommended by the IPA as a supplemental performance measure for publicly
registered, non-listed REITs. MFFO is a metric used by management to evaluate sustainable
performance and distribution policy. In evaluating the performance of our portfolio over time,
management employs business models and analyses that differentiate the costs to acquire investments
from the investments revenues and expenses. Management believes that excluding acquisition costs
from MFFO provides investors with supplemental performance information that is consistent with the
performance models and analysis used by management, and provides investors a view of the
performance of our portfolio over time, including after the time we cease to acquire properties on
a frequent and regular basis. MFFO may provide investors with a useful indication of our future
performance, particularly after our acquisition stage, and of the sustainability of our current
distribution policy. However, because MFFO excludes acquisition expenses, which are
an important component in an analysis of historical performance, MFFO should not be construed
as a historic performance measure. MFFO is not equivalent to our net income or loss as determined
under GAAP.
42
Table of Contents
We define MFFO, a non-GAAP measure, consistent with the IPAs Guideline 2010-01, Supplemental
Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or
the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as
FFO further adjusted for the following items included in the determination of GAAP net income
(loss): acquisition fees and expenses; amounts relating to deferred rent receivables and
amortization of above and below market leases and liabilities; accretion of discounts and
amortization of premiums on debt investments; nonrecurring impairments of real estate-related
investments; mark-to-market adjustments included in net income; nonrecurring gains or losses
included in net income from the extinguishment or sale of debt, hedges, foreign exchange,
derivatives or securities holdings where trading of such holdings is not a fundamental attribute of
the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation
to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and
joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO
calculation complies with the IPAs Practice Guideline described above. In calculating MFFO, we
exclude acquisition related expenses, amortization of above and below market leases, fair value
adjustments of derivative financial instruments, gains or losses from the extinguishment of debt,
deferred rent receivables and the adjustments of such items related to noncontrolling interests.
The other adjustments included in the IPAs Practice Guideline are not applicable to us for the
three months ended March 31, 2011 and 2010.
Presentation of this information is intended to assist 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 an
alternative to net income (loss) 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.
43
Table of Contents
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 March 31, 2011 and 2010:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (885,000 | ) | $ | (803,000 | ) | ||
Add: |
||||||||
Depreciation and amortization
consolidated properties |
2,202,000 | 29,000 | ||||||
Less: |
||||||||
Net (income) loss attributable to
noncontrolling interests |
| | ||||||
Depreciation and amortization related to
noncontrolling interests |
(2,000 | ) | | |||||
FFO |
$ | 1,315,000 | $ | (774,000 | ) | |||
Add: |
||||||||
Acquisition related expenses |
$ | 1,549,000 | $ | 637,000 | ||||
Amortization of above and below market leases |
45,000 | | ||||||
Loss on extinguishment of debt |
42,000 | | ||||||
Deferred rent receivables related to noncontrolling
interests |
1,000 | | ||||||
Less: |
||||||||
Gain in fair value of derivative financial instrument |
(74,000 | ) | | |||||
Deferred rent receivables |
(449,000 | ) | (11,000 | ) | ||||
MFFO |
$ | 2,429,000 | $ | (148,000 | ) | |||
Weighted average common shares
outstanding basic and diluted |
18,144,696 | 2,690,794 | ||||||
Net loss per common share basic and diluted |
$ | (0.05 | ) | $ | (0.30 | ) | ||
FFO per common share basic and diluted |
$ | 0.07 | $ | (0.29 | ) | |||
MFFO per common share basic and diluted |
$ | 0.13 | $ | (0.06 | ) | |||
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.
44
Table of Contents
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 March 31, 2011 and 2010:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (885,000 | ) | $ | (803,000 | ) | ||
Add: |
||||||||
General and administrative |
921,000 | 185,000 | ||||||
Acquisition related expenses |
1,549,000 | 637,000 | ||||||
Depreciation and amortization |
2,202,000 | 29,000 | ||||||
Interest expense |
1,021,000 | 1,000 | ||||||
Less: |
||||||||
Interest income |
(4,000 | ) | (5,000 | ) | ||||
Net operating income |
$ | 4,804,000 | $ | 44,000 | ||||
Subsequent Events
For a discussion of subsequent events, see Note 18, Subsequent Events, to our accompanying
condensed consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There were no material changes in the information regarding market risk, or in the methods we
use to manage market risk, that was provided in our 2010 Annual Report on Form 10-K, as filed with
the SEC on March 10, 2011.
The table below presents, as of March 31, 2011, 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 | ||||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Fixed rate debt principal
payments |
$ | 195,000 | $ | 4,457,000 | $ | 169,000 | $ | 169,000 | $ | 169,000 | $ | 7,127,000 | $ | 12,286,000 | $ | 12,285,000 | ||||||||||||||||
Weighted average interest
rate on maturing debt |
5.96 | % | 5.88 | % | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | 5.96 | % | | |||||||||||||||||
Variable rate debt
principal payments |
$ | 3,245,000 | $ | 34,382,000 | $ | 172,000 | $ | 172,000 | $ | 172,000 | $ | 6,454,000 | $ | 44,597,000 | $ | 44,565,000 | ||||||||||||||||
Weighted average interest
rate on maturing debt
(based on rates in
effect as of March 31, 2011) |
1.43 | % | 5.38 | % | 3.16 | % | 3.16 | % | 3.16 | % | 3.16 | % | 4.75 | % | |
Mortgage loans payable were $49,483,000 ($49,175,000, net of discount) as of March 31,
2011. As of March 31, 2011, we had two fixed rate and three variable rate mortgage loans payable
with effective interest rates ranging from 1.35% to 6.00% per annum and a weighted average
effective interest rate of 5.01% per annum. As of March 31, 2011, we had $12,286,000 ($12,266,000,
net of discount) of fixed rate debt, or 24.8% of mortgage loans payable, at a weighted average
effective interest rate of 5.96% per annum and $37,197,000 ($36,909,000, net of discount) of
variable rate debt, or 75.2% of mortgage loans payable, at a weighted average effective interest
rate of 4.70% per annum. In addition, as of March 31, 2011, we had $7,400,000 outstanding under the
line of credit, at a weighted-average interest rate of 5.00% per annum.
As of March 31, 2011, the weighted average effective interest rate on our outstanding debt,
factoring in our fixed rate interest rate swaps, was 5.42% per annum. $3,130,000 of our variable
rate mortgage loans 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 the interest rate
swap termination amount, if any, and as such, the $3,130,000 principal balance is reflected in the
2011 column above.
An increase in the variable interest rate on the line of credit and our variable rate mortgage
loans payable constitutes a market risk. As of March 31, 2011, a 0.50% increase in the London
Interbank Offered Rate, or LIBOR, would have no effect on our overall annual interest expense as
either: (i) we have a fixed rate interest rate swap on the variable rate mortgage loan payable; or
(ii) we are paying the minimum interest rates under the applicable agreements whereby a 0.50%
increase would still be below the minimum interest rate.
45
Table of Contents
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 March
31, 2011 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 March 31, 2011, were effective.
(b) Changes in internal control over financial reporting. There were no changes in internal
control over financial reporting that occurred during the three months ended March 31, 2011 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
46
Table of Contents
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 2010 Annual
Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the
SEC, on March 10, 2011, except as noted below.
We have not had
sufficient cash available from operations to pay distributions, and therefore, we have paid 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: (i) cause us to be unable to
pay our debts as they become due in the usual course of business; (ii) cause our total assets to be
less than the sum of our total liabilities plus senior liquidation preferences; or (iii) 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 or maintain
our qualification as a REIT. As a result, our distribution rate and payment frequency vary from
time to time.
We have used, and in the future may use, the net proceeds from our offering, borrowed funds,
or other sources, such as Grubb & Ellis Company, or Grubb & Ellis, or 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 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. Subsequently, our board of directors authorized, on a
quarterly basis, a daily distribution to our stockholders of record as of the close of business on
each day of the quarterly periods commencing on July 1, 2010 and ending on June 30, 2011.
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 distribution reinvestment plan, or DRIP, monthly
in arrears. The distributions declared for each record date are paid only from legally available
funds. We can provide no assurance that we will be able to continue this distribution rate or pay
any subsequent distributions.
47
Table of Contents
For the three months ended March 31, 2011, we paid distributions of $2,588,000 ($1,300,000 in
cash and $1,288,000 in shares of our common stock pursuant to the DRIP). $1,101,000, or 42.5% of
the distributions, were paid from cash flows from operations and $1,487,000, or 57.5% of the
distributions, were paid from our offering proceeds. For the three months ended March 31, 2010, we
paid distributions of $236,000 ($110,000 in cash and $126,000 in shares of our common stock
pursuant to the DRIP), none of which were paid from cash flows from operations of $(664,000). The
distributions were paid from funds from our sponsor. Under accounting principles generally accepted
in the United States of America, or GAAP, acquisition related expenses are expensed, and therefore,
subtracted from cash flows from operations. However, these expenses are paid from offering
proceeds.
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 March 31, 2011, we had an amount payable of $515,000 to our advisor or its affiliates
for lease commissions, asset and property management fees, operating expenses, on-site personnel
payroll and acquisition related expenses, 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 March 31, 2011, 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 the 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 three months ended March 31, 2011 and 2010, our funds from operations, or FFO, were
$1,315,000 and $(774,000), respectively. For the three months ended March 31, 2011, we paid
distributions of $1,315,000, or 50.8% of the distributions, from FFO and $1,273,000, or 49.2% of
the distributions paid, using proceeds from our offering. For the three months ended March 31,
2010, the distributions were paid from funds from our sponsor. 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, which includes a reconciliation of our GAAP net loss to 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.
Our success is dependent on the performance of our sponsor.
Our ability to achieve our investment objectives and to conduct our operations is
dependent upon the performance of our advisor, which is a subsidiary of our sponsor. Our sponsors
business is sensitive to trends in the general economy, as well as the commercial real estate and
credit markets. The current macroeconomic environment and accompanying credit crisis has negatively
impacted the value of commercial real estate assets, contributing to a general slow-down in our
sponsors industry. A prolonged and pronounced recession could continue or accelerate the reduction
in overall transaction volume and size of sales and leasing activities that our sponsor has already
experienced and would continue to put downward pressure on our sponsors revenues and operating
results. To the extent that any decline in our sponsors revenues and operating results impacts the
performance of our advisor, our results of operations and financial condition could also suffer.
In addition, our sponsor has announced, among other things, that it has retained JMP
Securities LLC as an advisor to explore strategic alternatives for Grubb & Ellis, including a
potential merger or sale transaction. Our sponsor disclosed in its Form 10-K for the year ended
December 31, 2010 that it entered into a commitment letter and exclusivity agreement with Colony
Capital Acquisitions, LLC, pursuant to which (i) Colony Capital Acquisitions, LLC and one or more
of its affiliates, or collectively, Colony, agreed to provide an $18,000,000 senior secured term
loan credit facility, or the Senior Secured Credit Facility, and (ii) Colony obtained the exclusive
right for 60 days, commencing on March 30, 2011, to negotiate a strategic transaction with our
sponsor. On April 18, 2011, our sponsor announced that it had closed the $18,000,000 Senior Secured
Credit Facility and had drawn the
initial $9,000,000 tranche under such facility. There can be no assurance, however, that any
strategic transaction with Colony, or with any other strategic partner, will be completed. If our
sponsor does not complete a strategic transaction with Colony, or with any other strategic partner,
such result could have a material adverse effect on our sponsors revenues, which could negatively
impact the performance of our advisor and could cause our results of operations and financial
condition to suffer. Similarly, if our sponsor enters into a merger or sale transaction, the effect
of such a transaction is unknown, but could have a material adverse effect on the performance of
our advisor, which could cause our results of operations and financial condition to suffer.
48
Table of Contents
Our stockholders may be unable to sell their shares of our common stock because their ability to
have their shares of our common stock repurchased pursuant to our share repurchase plan is subject
to significant restrictions and limitations.
Our share repurchase plan includes significant restrictions and limitations. Except in
cases of death or qualifying disability, our stockholders must hold their shares of our common
stock for at least one year. Requesting stockholders must present at least 25.0% of their shares of
our common stock for repurchase and until they have held their shares of our common stock for at
least four years, repurchases will be made for less than our stockholders paid for their shares of
our common stock. Shares of our common stock may be repurchased quarterly, at our discretion, on a
pro rata basis, and are limited 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 of our common stock 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. In addition, our board of directors may reject share repurchase requests in
its sole discretion and reserves the right to amend, suspend or terminate our share repurchase plan
at any time upon 30 days written notice. Therefore, in making a decision to purchase shares of our
common stock, our stockholders should not assume that they will be able to sell any of their shares
of our common stock back to us pursuant to our share repurchase plan and they also should
understand that the repurchase price will not necessarily correlate to the value of our real estate
holdings or other assets. If our board of directors terminates our share repurchase plan, our
stockholders may not be able to sell their shares of our common stock even if our stockholders deem
it necessary or desirable to do so.
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. Until April 18, 2011, Grubb & Ellis
Securities, Inc., or Grubb & Ellis Securities, served as the dealer manager of our offering.
Effective as of April 19, 2011, the dealer manager agreement with Grubb & Ellis Securities was
assigned to, and assumed by, Grubb & Ellis Capital Corporation, a wholly owned subsidiary of our
sponsor. 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 March 31, 2011, we had received and accepted subscriptions in our offering for
21,222,108 shares of our common stock, or $211,732,000, excluding shares of our common stock issued
pursuant to the DRIP. As of March 31, 2011, a total of $3,273,000 in distributions were reinvested
and 344,516 shares of our common stock were issued pursuant to the DRIP.
As of March 31, 2011, we had incurred selling commissions of $14,373,000 and dealer manager
fees of $6,344,000 in connection with our offering. We had also incurred other offering expenses of
$2,122,000 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 was 10.8% as of March 31, 2011 and will not exceed 11.0% in the aggregate. As
of March 31, 2011, net offering proceeds were $192,166,000, including proceeds from the DRIP and
after deducting offering expenses.
49
Table of Contents
As of March 31, 2011, $653,000 remained payable to our dealer manager, our advisor or its
affiliates for offering related costs.
As of March 31, 2011, we had used $161,944,000 in proceeds from our offering to purchase
properties from unaffiliated parties, $6,381,000 to pay acquisition related expenses to affiliated
parties, $3,158,000 for lender required restricted cash accounts to unaffiliated parties,
$1,671,000 for deferred financing costs to unaffiliated parties, $1,879,000 to pay acquisition
related expenses to unaffiliated parties, $9,410,000 to repay borrowings from unaffiliated parties
incurred in connection with previous property acquisitions and $1,100,000 to pay real estate
deposits for proposed future acquisitions to unaffiliated parties.
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 March 31, 2011, 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 | ||||||||||||
January 1, 2011 to January 31, 2011 |
8,500 | $ | 9.25 | 8,500 | (2 | ) | ||||||||||
February 1, 2011 to February 28, 2011 |
| $ | | | (2 | ) | ||||||||||
March 1, 2011 to March 31, 2011 |
| $ | | | (2 | ) | ||||||||||
Total/Weighted Average |
8,500 | $ | 9.25 | 8,500 | ||||||||||||
(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.] |
50
Table of Contents
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.
51
Table of Contents
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) | ||||||
May 12, 2011 |
By: | /s/ Jeffrey T. Hanson
|
||||
Chief Executive Officer and Chairman of the | ||||||
Board of Directors | ||||||
(principal executive officer) | ||||||
May 12, 2011 |
By: | /s/ Shannon K S Johnson
|
||||
Chief Financial Officer | ||||||
(principal financial officer and | ||||||
principal accounting officer) |
52
Table of Contents
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 March 31, 2011 (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 to 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 to 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 | Form of Subscription Agreement of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit
B to our Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-158111) filed April 29,
2011 and incorporated herein by reference) |
|||
4.2 | Distribution Reinvestment Plan of Grubb & Ellis Healthcare REIT II, Inc. effective as of
August 24, 2009 (included as Exhibit C to our Prospectus filed pursuant to Rule 424(b)(3)
(File No. 333-158111) filed April 29, 2011 and incorporated herein by reference) |
|||
4.3 | Share Repurchase Plan of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit D to our
Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-158111) filed April 29, 2011 and
incorporated herein by reference) |
|||
10.1 | Assignment and Assumption of Purchase Agreement by and between G&E HC REIT II Monument LTACH
Portfolio, LLC and G&E HC REIT II Columbia LTACH, LLC, dated January 31, 2011 (included as
Exhibit 10.1 to our Current Report on Form 8-K filed February 3, 2011 and incorporated herein
by reference) |
|||
10.2 | Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and
Financing Statement by G&E HC REIT II Ennis MOB, LLC in favor of Bank of America, N.A., dated
January 28, 2011 (included as Exhibit 10.2 to our Current Report on Form 8-K filed February 3,
2011 and incorporated herein by reference) |
|||
10.3 | Collateral Assignment of Management Contract by and between G&E HC REIT II Ennis MOB, LLC,
Grubb & Ellis Equity Advisors, Property Management, Inc., The Cirrus Group, LLC and Bank of
America, N.A., dated January 28, 2011 (included as Exhibit 10.3 to our Current Report on Form
8-K filed February 3, 2011 and incorporated herein by reference) |
|||
10.4 | 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, G&E HC REIT II Sylva MOB, LLC G&E HC
REIT II Ennis MOB, LLC and Bank of America, N.A., dated January 28, 2011 (included as Exhibit
10.4 to our Current Report on Form 8-K filed February 3, 2011 and incorporated herein by
reference) |
|||
10.5 | 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, G&E HC REIT II
Sylva MOB, LLC, G&E HC REIT II Ennis MOB, LLC and Bank of America, N.A., dated January 28,
2011 (included as Exhibit 10.5 to our Current Report on Form 8-K filed February 3, 2011 and
incorporated herein by reference) |
|||
10.6 | Purchase and Sale Agreement by and between G&E HC REIT II Dixie-Lobo MOB Portfolio, LLC and
TMB-Alice, L.P., Carlsbad-TMB, LLC, Hobbs-TMB, LLC, Hope-TMB, LLC, TMB-Lake Charles, L.P.,
TMB-Lufkin, L.P., Victoria-TMB, L.P. and TMB I, L.P., dated March 21, 2011 (included as
Exhibit 10.1 to our Current Report on Form 8-K filed March 25, 2011 and incorporated herein by
reference) |
53
Table of Contents
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. |
54