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EX-31 - EX-31 - Sentio Healthcare Properties Inc | a59506exv31.htm |
EX-32 - EX-32 - Sentio Healthcare Properties Inc | a59506exv32.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 000-53969
CORNERSTONE HEALTHCARE PLUS REIT, INC.
(Exact name of registrant as specified in its charter)
MARYLAND | 20-5721212 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1920 MAIN STREET, SUITE 400, IRVINE, CA | 92614 | |
(Address of principal executive offices) | (Zip Code) |
949-852-1007
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(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 section 13 or 15(d) of the 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 (Sec.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 definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
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 May 10, 2011, there were 13,079,203 shares of common stock of Cornerstone Healthcare Plus
REIT, Inc. outstanding.
PART I FINANCIAL INFORMATION
FORM 10-Q
Cornerstone Healthcare Plus REIT, Inc.
TABLE OF CONTENTS
FORM 10-Q
Cornerstone Healthcare Plus REIT, Inc.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements: |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
22 | ||||||||
28 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
31 | ||||||||
35 | ||||||||
36 | ||||||||
EX-31 | ||||||||
EX-32 |
2
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 37,937,000 | $ | 29,819,000 | ||||
Investments in real estate |
||||||||
Land |
20,269,000 | 18,949,000 | ||||||
Buildings and improvements, net |
109,468,000 | 87,933,000 | ||||||
Furniture, fixtures and equipment, net |
2,617,000 | 2,410,000 | ||||||
Development costs and construction in progress |
288,000 | 13,669,000 | ||||||
Intangible lease assets, net |
7,718,000 | 5,907,000 | ||||||
140,360,000 | 128,868,000 | |||||||
Deferred financing costs, net |
1,266,000 | 1,382,000 | ||||||
Tenant and other receivables |
1,629,000 | 1,462,000 | ||||||
Receivable from related parties, net (Note 13) |
| | ||||||
Deferred costs and other assets |
1,562,000 | 554,000 | ||||||
Restricted cash |
2,824,000 | 2,942,000 | ||||||
Goodwill |
5,606,000 | 5,329,000 | ||||||
Total assets |
$ | 191,184,000 | $ | 170,356,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Notes payable |
$ | 90,885,000 | $ | 80,792,000 | ||||
Accounts payable and accrued liabilities |
8,525,000 | 4,886,000 | ||||||
Payable to related parties |
1,000 | 65,000 | ||||||
Prepaid rent and security deposits |
1,403,000 | 1,127,000 | ||||||
Distributions payable |
807,000 | 722,000 | ||||||
Total liabilities |
101,621,000 | 87,592,000 | ||||||
Commitments and contingencies (Note 14) |
||||||||
Equity: |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, $0.01 par value per share;
20,000,000 shares authorized; no shares were
issued or outstanding at March 31, 2011 and
December 31, 2010 |
| | ||||||
Common stock, $0.01 par value per share;
580,000,000 shares authorized; 12,827,244 and
11,592,883 shares issued and outstanding at
March 31, 2011 and December 31, 2010,
respectively |
128,000 | 116,000 | ||||||
Additional paid-in capital |
100,046,000 | 91,588,000 | ||||||
Accumulated deficit |
(13,315,000 | ) | (11,722,000 | ) | ||||
Total stockholders equity |
86,859,000 | 79,982,000 | ||||||
Noncontrolling interests |
2,704,000 | 2,782,000 | ||||||
Total equity |
89,563,000 | 82,764,000 | ||||||
Total liabilities and equity |
$ | 191,184,000 | $ | 170,356,000 | ||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Rental revenues |
$ | 7,560,000 | $ | 2,437,000 | ||||
Resident services and fee income |
1,702,000 | 495,000 | ||||||
Tenant reimbursements and other income |
323,000 | 110,000 | ||||||
9,585,000 | 3,042,000 | |||||||
Expenses: |
||||||||
Property operating and maintenance expenses |
5,688,000 | 1,860,000 | ||||||
General and administrative expenses |
664,000 | 528,000 | ||||||
Asset management fees and expenses |
431,000 | 165,000 | ||||||
Real estate acquisition costs and earn out costs |
1,127,000 | 458,000 | ||||||
Depreciation and amortization |
1,861,000 | 640,000 | ||||||
9,771,000 | 3,651,000 | |||||||
Loss from operations |
(186,000 | ) | (609,000 | ) | ||||
Other income (expense): |
||||||||
Interest income |
4,000 | 3,000 | ||||||
Interest expense |
(1,476,000 | ) | (337,000 | ) | ||||
Net loss |
(1,658,000 | ) | (943,000 | ) | ||||
Less: Net (loss) income attributable to the noncontrolling interests |
(65,000 | ) | 4,000 | |||||
Net loss attributable to common stockholders |
$ | (1,593,000 | ) | $ | (947,000 | ) | ||
Basic and diluted net loss per common share attributable to common stockholders |
$ | (0.13 | ) | $ | (0.17 | ) | ||
Weighted average number of common shares |
12,207,623 | 5,414,179 | ||||||
Distribution declared, per common share |
$ | 0.19 | $ | 0.19 | ||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
4
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Number of | Stock Par | Paid-In | Accumulated | Stockholders | Noncontrolling | |||||||||||||||||||||||
Shares | Value | Capital | Deficit | Equity | Interests | Total Equity | ||||||||||||||||||||||
Balance December 31, 2010 |
11,592,883 | $ | 116,000 | $ | 91,588,000 | $ | (11,722,000 | ) | $ | 79,982,000 | $ | 2,782,000 | $ | 82,764,000 | ||||||||||||||
Issuance of common stock |
1,278,151 | 13,000 | 12,682,000 | | 12,695,000 | | 12,695,000 | |||||||||||||||||||||
Redeemed shares |
(43,790 | ) | (1,000 | ) | (409,000 | ) | | (410,000 | ) | | (410,000 | ) | ||||||||||||||||
Noncontrolling interest contribution |
| | | | | | | |||||||||||||||||||||
Offering costs |
| | (1,539,000 | ) | | (1,539,000 | ) | | (1.539,000 | ) | ||||||||||||||||||
Distributions |
| | (2,276,000 | ) | | (2,276,000 | ) | (13,000 | ) | (2,289,000 | ) | |||||||||||||||||
Net (loss) income |
| | | (1,593,000 | ) | (1,593,000 | ) | (65,000 | ) | (1,658,000 | ) | |||||||||||||||||
Balance March 31, 2011 |
12,827,244 | $ | 128,000 | $ | 100,046,000 | $ | (13,315,000 | ) | $ | 86,859,000 | $ | 2,704,000 | $ | 89,563,000 | ||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Number of | Stock Par | Paid-In | Accumulated | Stockholders | Noncontrolling | |||||||||||||||||||||||
Shares | Value | Capital | Deficit | Equity | Interests | Total Equity | ||||||||||||||||||||||
Balance December 31, 2009 |
4,993,751 | $ | 50,000 | $ | 39,551,000 | $ | (5,403,000 | ) | $ | 34,198,000 | $ | | $ | 34,198,000 | ||||||||||||||
Issuance of common stock |
1,403,524 | 14,000 | 13,997,000 | | 14,011,000 | | 14,011,000 | |||||||||||||||||||||
Redeemed shares |
(10,209 | ) | | (98,000 | ) | | (98,000 | ) | | (98,000 | ) | |||||||||||||||||
Noncontrolling interest contribution |
| | | | | 886,000 | 886,000 | |||||||||||||||||||||
Offering costs |
| | (1,546,000 | ) | | (1,546,000 | ) | | (1,546,000 | ) | ||||||||||||||||||
Distributions |
| | (1,031,000 | ) | | (1,031,000 | ) | (4,000 | ) | (1,035,000 | ) | |||||||||||||||||
Net (loss) income |
| | | (947,000 | ) | (947,000 | ) | 4,000 | (943,000 | ) | ||||||||||||||||||
Balance March 31, 2010 |
6,387,066 | $ | 64,000 | $ | 50,873,000 | $ | (6,350,000 | ) | $ | 44,587,000 | $ | 886,000 | $ | 45,473,000 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
5
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,658,000 | ) | $ | (943,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities (net of acquisitions): |
||||||||
Amortization of deferred financing costs |
154,000 | 9,000 | ||||||
Depreciation and amortization |
1,861,000 | 640,000 | ||||||
Straight-line rent amortization |
(200,000 | ) | (73,000 | |||||
Real estate earn out costs |
521,000 | | ||||||
Bad debt expense |
1,630,000 | | ||||||
Change in operating assets and liabilities: |
||||||||
Tenant and other receivables |
34,000 | 240,000 | ||||||
Deferred costs and deposits |
| (69,000 | ) | |||||
Prepaid expenses and other assets |
(731,000 | ) | 44,000 | |||||
Restricted cash |
264,000 | |||||||
Prepaid rent and tenant security deposits |
276,000 | 56,000 | ||||||
Payable to related parties |
(38,000 | ) | (206,000 | ) | ||||
Receivable from related parties |
(1,630,000 | ) | | |||||
Accounts payable and accrued liabilities |
1,100,000 | 350,000 | ||||||
Net cash provided by operating activities |
1,583,000 | 48,000 | ||||||
Cash flows from investing activities: |
||||||||
Real estate acquisitions |
(10,750,000 | ) | | |||||
Additions to real estate |
(179,000 | ) | (7,000 | ) | ||||
Restricted cash |
(146,000 | ) | (750,000 | ) | ||||
Development of real estate |
(779,000 | ) | (2,243,000 | ) | ||||
Acquisition deposits |
(170,000 | ) | (535,000 | ) | ||||
Net cash used in investing activities |
(12,024,000 | ) | (3,535,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
11,609,000 | 13,545,000 | ||||||
Redeemed shares |
(410,000 | ) | (98,000 | ) | ||||
Repayment of note payable |
(209,000 | ) | (46,000 | ) | ||||
Proceeds from notes payable |
10,302,000 | 1,000 | ||||||
Offering costs |
(1,565,000 | ) | (1,692,000 | ) | ||||
Deferred financing costs |
(50,000 | ) | (10,000 | ) | ||||
Noncontrolling interest contribution |
| 886,000 | ||||||
Distributions paid to stockholders |
(1,105,000 | ) | (484,000 | ) | ||||
Distributions paid to noncontrolling interests |
(13,000 | ) | (4,000 | ) | ||||
Net cash provided by financing activities |
18,559,000 | 12,098,000 | ||||||
Net increase in cash and cash equivalents |
8,118,000 | 8,611,000 | ||||||
Cash and cash equivalents beginning of period |
29,819,000 | 14,900,000 | ||||||
Cash and cash equivalents end of period |
$ | 37,937,000 | $ | 23,511,000 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 1,260,000 | $ | 219,000 | ||||
Supplemental disclosure of non-cash financing and investing activities: |
||||||||
Distributions declared not paid |
$ | 807,000 | $ | 386,000 | ||||
Distribution reinvested |
$ | 1,086,000 | $ | 466,000 | ||||
Capitalized interest |
$ | 19,000 | $ | | ||||
Payable to related parties |
$ | | $ | 104,000 | ||||
Accrued acquisition fees |
$ | | $ | 30,000 | ||||
Accrued promote monetization liability |
$ | 2,018,000 | $ | | ||||
Deferred financing amortization capitalized to real estate development |
$ | 12,000 | $ | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
6
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(UNAUDITED)
1. Organization
Cornerstone Healthcare Plus REIT, Inc. (formerly known as Cornerstone Growth & Income REIT, Inc.),
a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law
for the purpose of engaging in the business of investing in and owning commercial real estate. As
used in this report, the Company, we, us and our refer to Cornerstone Healthcare Plus REIT,
Inc. and its consolidated subsidiaries, except where context otherwise requires. We are recently
formed and are subject to the general risks associated with a start-up enterprise, including the
risk of business failure. Subject to certain restrictions and limitations, our business is managed
by an affiliate, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited liability company
that was formed on October 16, 2006 (the Advisor), pursuant to an advisory agreement.
Cornerstone Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the
Operating Partnership), was formed on October 17, 2006. At March 31, 2011, we owned
approximately a 99.8% general partner interest in the Operating Partnership while the Advisor owned
approximately a 0.2% limited partnership interest. In addition, the Advisor owned approximately a
0.9% limited partnership interest in CGI Healthcare Operating Partnership, L.P., a subsidiary of
the Operating Partnership. We anticipate that we will conduct all or a portion of our operations
through the Operating Partnership. Our financial statements and the financial statements of the
Operating Partnership are consolidated in the accompanying condensed consolidated financial
statements. All intercompany accounts and transactions have been eliminated in consolidation.
For federal income tax purposes, we have elected to be taxed as a real estate investment trust
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code),
beginning with our taxable year ended December 31, 2008. REIT status imposes limitations related
to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly
operate assisted-living facilities. However, such facilities may generally be operated by a taxable
REIT subsidiary (TRS) pursuant to a lease with the Company. Therefore, we have formed Master HC
TRS, LLC (Master TRS), a wholly owned subsidiary of CGI Healthcare Operating Partnership, LP, to
lease any assisted-living properties we acquire and to operate the assisted-living properties
pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made
the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the
management companies will have direct control of the daily operations of these assisted-living
properties.
2. Public Offering
On November 14, 2006, Terry G. Roussel purchased 100 shares of common stock for $1,000 and became
our initial stockholder. Our charter authorizes the issuance of up to 580,000,000 shares of common
stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value
of $0.01 per share.
On June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common
stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000
shares for sale pursuant to our distribution reinvestment plan. We stopped making offers under our
initial public offering on February 3, 2011 after raising gross offering proceeds of approximately
$123.9 million from the sale of approximately 12.4 million shares, including shares sold under the
distribution reinvestment plan.
On February 4, 2011, the Securities and Exchange Commission (SEC) declared the registration
statement for our follow-on offering effective and we commenced a follow-on offering of up to
55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a
primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan.
As of March 31, 2011, we had sold a total of approximately 12.5 million shares of our common stock
for aggregate gross proceeds of approximately $124.5 million. We intend to use the net proceeds of
our offerings to invest in real estate including healthcare, multi-tenant industrial, net-leased
retail properties and other real estate investments where we believe there are opportunities to
enhance cash flow and value.
7
Table of Contents
On April 29, 2011 we informed our stockholders that our Independent Directors Committee had
directed us to suspend our follow-on offering, our dividend reinvestment program and our stock
repurchase program (except repurchases due to death) because of the uncertainty associated with our
Independent Directors Committee consideration of various strategic alternatives to enhance our
stockholders value. One of the alternatives under consideration is the hiring of a new dealer
manager for our follow-on offering; however, the Independent Directors Committee has made no
determination regarding whether or when our follow-on offering may be recommenced. In addition, the
Independent Directors Committee is continuing to evaluate possible changes to our advisory
relationships.
3. Summary of Significant Accounting Policies
For more information regarding our critical accounting policies and estimates, please refer to
Summary of Significant Accounting Policies contained in our Annual Report on Form 10-K for the
year ended December 31, 2010.
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on
various assumptions that we believe to be reasonable under the circumstances, and these estimates
form the basis for our judgments concerning the carrying values of assets and liabilities that are
not readily apparent from other sources. We periodically evaluate these estimates and judgments
based on available information and experience. Actual results could differ from our estimates under
different assumptions and conditions. If actual results significantly differ from our estimates,
our financial condition and results of operations could be materially impacted.
Interim Financial Information
The accompanying interim condensed consolidated financial statements have been prepared by our
management in accordance with accounting principles generally accepted in the United States of
America (GAAP) and in conjunction with the rules and regulations of the SEC. Certain information
and note disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial
statements do not include all of the information and notes required by GAAP for complete financial
statements. The accompanying financial information reflects all adjustments which are, in the
opinion of our management, of a normal recurring nature and necessary for a fair presentation of
our financial position, results of operations and cash flows for the interim periods. Operating
results for the three months ended March 31, 2011 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2011. Our accompanying interim condensed
consolidated financial statements should be read in conjunction with our audited condensed
consolidated financial statements and the notes thereto included on our 2010 Annual Report on Form
10-K, as filed with the SEC.
Fair Value of Financial Instruments
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) FASB ASC
825-10, Financial Instruments, requires the disclosure of fair value information about financial
instruments, whether or not recognized on the face of the balance sheet, for which it is practical
to estimate that value.
We generally determine or calculate the fair value of financial instruments using quoted market
prices in active markets when such information is available or using appropriate present value or
other valuation techniques, such as discounted cash flow analyses, incorporating available market
discount rate information for similar types of instruments and our estimates for non-performance
and liquidity risk. These techniques are significantly affected by the assumptions used, including
the discount rate, credit spreads, and estimates of future cash flow.
Our balance sheets include the following financial instruments: cash and cash equivalents, tenant
and other receivables, restricted cash, deferred costs and other assets, prepaid rent and security
deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. With
the exception of notes payable discussed below, we consider the carrying values of our financial
instruments to approximate fair value because of the short period of time between origination of
the instruments and their expected payment.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of March 31, 2011 and 2010, the fair value of
notes payable was approximately $91.9 million and $20.2 million, compared to the carrying value of
approximately $90.9 million and $20.2 million, respectively.
8
Table of Contents
4. Investment in Real Estate
The following table provides summary information regarding our current property portfolio.
March 31, | March 31, | |||||||||||||||||||||
Date | Gross Square | Purchase | 2011 | 2011 | ||||||||||||||||||
Property | Location | Purchased | Feet | Price | Debt | % Occupancy | ||||||||||||||||
Caruth Haven Court |
Highland Park, TX | 01/22/09 | 74,647 | $ | 20,500,000 | $ | 9,875,000 | 95.60 | % | |||||||||||||
The Oaks Bradenton |
Bradenton, FL | 05/01/09 | 18,172 | $ | 4,500,000 | $ | 2,728,000 | 100.00 | % | |||||||||||||
GreenTree at Westwood (1) |
Columbus, IN | 12/30/09 | 50,249 | $ | 5,150,000 | $ | 2,832,000 | 94.83 | % | |||||||||||||
Mesa Vista Inn Health Center |
San Antonio, TX | 12/31/09 | 55,525 | $ | 13,000,000 | $ | 7,282,000 | 100.00 | % | |||||||||||||
Rome LTACH Project |
Rome, GA | 01/12/10 | 53,000 | (2 | ) | $ | 10,122,000 | 100.00 | % | |||||||||||||
Oakleaf Village Portfolio |
$ | 17,794,000 | ||||||||||||||||||||
Oakleaf Village at Lexington |
Lexington, SC | 04/30/10 | 67,000 | $ | 14,512,000 | $ | | 86.20 | % | |||||||||||||
Oakleaf Village at Greenville |
Greer, SC | 04/30/10 | 65,000 | $ | 12,488,000 | $ | | 73.10 | % | |||||||||||||
Global Rehab Inpatient Rehab Facility |
Dallas, TX | 08/19/10 | 40,000 | $ | 14,800,000 | $ | 7,506,000 | 100.00 | % | |||||||||||||
Terrace at Mountain Creek (3) |
Chattanooga, TN | 09/03/10 | 109,643 | $ | 8,500,000 | $ | 5,700,000 | 88.89 | % | |||||||||||||
Littleton Specialty Rehabilitation Facility |
Littleton, CO | 12/16/10 | 26,808 | (4) | (5 | ) | $ | 1,000 | | |||||||||||||
Carriage Court of Hilliard |
Hilliard, OH | 12/22/10 | 69,184 | $ | 17,500,000 | $ | 13,550,000 | 80.95 | % | |||||||||||||
Hedgcoxe Health Plaza |
Plano, TX | 12/22/10 | 32,109 | $ | 9,094,000 | $ | 5,060,000 | 94.90 | % | |||||||||||||
Rivers Edge of Yardley |
Yardley, PA | 12/22/10 | 26,146 | $ | 4,500,000 | $ | 2,500,000 | 97.96 | % | |||||||||||||
Forestview Manor |
Meredith, NH | 01/14/11 | 34,270 | $ | 10,750,000 | $ | 5,935,000 | 92.00 | % |
(1) | The earn-out agreement associated with this acquisition was estimated to have a fair value of $0.7 million and $0.4 million as of March 31, 2011 and 2010, respectively. For the three months ended March 31, 2011, the expense of approximately $0.3 million related to the increased liability has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs. | |
(2) | Rome LTACH Project was completed in February 2011 and its first tenant moved in on February 1, 2011. As of March 31, 2011 we had recorded approximately $16.1 million in real estate assets. For the three months ended March 31, 2011, the expense related to the promote feature was approximately $0.2 million, which has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs. | |
(3) | The earn-out agreement associated with this acquisition was estimated to have a fair value of $1.0 million as of March 31, 2011. During the first quarter of 2011, we received the earn-out request from seller and we expect to pay the earn-out in the amount of $1.0 million during the second quarter of 2011. | |
(4) | Represents estimated gross square footage upon completion of development. | |
(5) | As of March 31, 2011, a total of approximately $0.8 million of equity had been invested in this project. |
As of March 31, 2011, cost and accumulated depreciation and amortization related to real estate
assets and related lease intangibles were as follows:
Development | ||||||||||||||||||||
costs and | ||||||||||||||||||||
Buildings and | Furniture, fixtures | construction in | Intangible lease | |||||||||||||||||
Land | improvements | and equipment | progress | assets | ||||||||||||||||
Cost |
$ | 20,269,000 | $ | 112,025,000 | $ | 3,140,000 | $ | 288,000 | $ | 11,937,000 | ||||||||||
Accumulated depreciation and amortization |
| (2,557,000 | ) | (523,000 | ) | | (4,219,000 | ) | ||||||||||||
Net |
$ | 20,269,000 | $ | 109,468,000 | $ | 2,617,000 | $ | 288,000 | $ | 7,718,000 | ||||||||||
As of December 31, 2010, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
Development | ||||||||||||||||||||
costs and | ||||||||||||||||||||
Buildings and | Furniture, fixtures | construction in | Intangible lease | |||||||||||||||||
Land | improvements | and equipment | progress | assets | ||||||||||||||||
Cost |
$ | 18,949,000 | $ | 89,719,000 | $ | 2,780,000 | $ | 13,669,000 | $ | 9,187,000 | ||||||||||
Accumulated depreciation and amortization |
| (1,786,000 | ) | (370,000 | ) | | (3,280,000 | ) | ||||||||||||
Net |
$ | 18,949,000 | $ | 87,933,000 | $ | 2,410,000 | $ | 13,669,000 | $ | 5,907,000 | ||||||||||
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Depreciation expense associated with buildings and improvements, site improvements and furniture
and fixtures for the three months ended March 31, 2011 and 2010 was approximately $0.9 million and
$0.2 million, respectively.
Amortization associated with the intangible assets for the three months ended March 31, 2011 and
2010 was $0.9 million and $0.4 million, respectively.
Estimated amortization for April 1, 2011 through December 31, 2011 and each of the subsequent years
is as follows:
Intangible | ||||
assets | ||||
April 2011 December 2011 |
$ | 1,845,000 | ||
2012 |
$ | 836,000 | ||
2013 |
$ | 468,000 | ||
2014 |
$ | 408,000 | ||
2015 |
$ | 408,000 | ||
2016 |
$ | 408,000 | ||
2017 and thereafter |
$ | 3,345,000 |
The estimated useful lives for intangible assets range from approximately one to twenty years. As
of March 31, 2011, the weighted-average amortization period for intangible assets was 7.0 years.
5. Investments in Joint Ventures
Oakleaf Joint Venture
On April 30, 2010, we invested approximately $21.6 million to acquire 80% equity interests in Royal
Cornerstone South Carolina Portfolio, LLC (Portfolio LLC) and Royal Cornerstone South Carolina
Tenant Portfolio, LLC (Tenant LLC) (collectively, we refer to the Portfolio LLC and the Tenant
LLC as the Oakleaf Joint Venture). The Oakleaf Joint Venture owns and operates two
assisted-living properties located in Lexington and Greenville, South Carolina. As of March 31,
2011, total net assets related to Oakleaf Joint Venture were approximately $26.8 million, which
includes approximately $25.3 million of real estate assets and total liabilities were approximately
$18.3 million, which includes an approximately $17.8 million of secured mortgage debt. We may be
required to fund additional capital contributions, including funding of any capital expenditures
deemed necessary to continue to operate the entity, and any operating cash shortfalls that the
entity may experience.
Rome LTACH Project
On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus
Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the
campus of the Floyd Medical Center in Rome, Georgia. We contributed approximately $2.7 million of
capital to acquire a 75.0% limited partnership interest in Rome LTH Partners, LP. Cornerstone
Private Equity Fund Operating Partnership, LP, an affiliate of our sponsor, contributed
approximately $0.5 million of capital to acquire a 15.0% limited partnership interest in Rome LTH
Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.3
million to acquire an aggregate 9.5% limited partnership interest in the Rome LTH Partners, LP. A
fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5%
interest in the Rome LTH Partners LP. As of both March 31, 2011 and December 31, 2010, we owned a
75.0% of limited partnership interest in Rome LTH Partners, LP.
Under the terms of this joint venture, we may be obligated to monetize a portion of our partners
interest in the appreciation of value in the joint venture property. These obligations may be
exercised by our partners at their sole discretion between years two and four of the joint
ventures. At March 31, 2011, the construction of the free-standing medical facility on the campus
of the Floyd Medical Center in Rome, Georgia was completed. As of March 31, 2011, we believe that
payments under these obligations are probable; accordingly, we have recorded approximately $2.2
million with respect to the monetization feature which had been included in accounts payable and
accrued liabilities on our condensed consolidated balance sheet. The amount to be paid upon
monetization is based on a number of factors, including the value of the property, net income
earned by the property and payment of preferred returns on equity. Of the $2.2 million, we
capitalized approximately $1.8 million and $0.2 million incurred
during the construction period which are included in the intangible
lease assets and building and improvements, respectively, of our
condensed consolidated balance sheet and expensed post construction
period approximately $0.2 million which had been
included in real estate acquisition costs and earn out costs of our condensed consolidated
statement of operations. We determined the fair value of this obligation using discounted cash flow
analysis, incorporating market discount rate information for similar types of obligations,
projected net income earned by the property and preferred return payments. As of March 31, 2011,
total assets related to this project were approximately
10
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$16.6 million, which includes approximately $16.1 million of real estate assets and total
liabilities were approximately $13.2 million, which includes an approximately $10.1 million of
secured mortgage debt.
ASC 820-10 establishes a three-tiered fair value hierarchy that prioritizes valuation technique
input. Level 1 inputs (observable inputs) are quoted prices in active markets for identical
assets or liabilities and are given the highest priority. Level 2 inputs (other observable
input) are either observable directly or through corroborative with observable market data. Level
3 inputs (unobservable inputs) are unobservable in the market, such as internally developed
valuation models. As of December 31, 2010, we had not recorded a
liability with respect to the monetization
feature of this joint venture. As of March 31, 2011, we measured the payments with respect to the
monetization feature at approximately $2.2 million on a recurring basis using Level 3 inputs.
Littleton Specialty Rehabilitation Facility
On December 16, 2010, we funded an investment in a joint venture with affiliates of The Cirrus
Group, an unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in
Littleton, CO. We agreed to contribute approximately $1.6 million of capital to acquire a 90%
limited partnership interest in Littleton Med Partners, LP. Three affiliates of The Cirrus Group
contributed an aggregate of approximately $0.2 million to acquire an aggregate 9.5% limited
partnership interest in the Littleton Med Partners, LP. A fourth affiliate of the Cirrus Group acts
as the general partner and holds the remaining 0.5% interest in the Littleton Med Partners, LP. As
of both March 31, 2011 and December 31, 2010, we owned a 90.0% of limited partnership interest in
Littleton Med Partners, LP.
Under the terms of this joint venture, we may be obligated to monetize a portion of our partners
interest in the appreciation of value in the joint venture property. These obligations may be
exercised by our partners at their sole discretion between years two and four of the joint
ventures. The amount that would be paid upon monetization is subject to change based on a number of
factors, including the value of the property, net income earned by the property and payment of
preferred returns on equities. At March 31, 2011, the specialty rehabilitation facility in
Littleton, CO has not started construction and we have determined that sufficient uncertainty
exists with respect to exercise of the monetization features that the probability of payment under
the monetization obligation is not determinable; accordingly, we have not recognized the obligation
in our March 31, 2011 condensed consolidated financial statements. As of the date of this report,
the amount of contingent liability with respect to the monetization feature with regards to the
development in Littleton, CO is inestimable.
6. Allowance for Doubtful Accounts
As of both March 31, 2011 and December 31, 2010, we had recorded $35,000 as an allowance for
tenants and other receivables doubtful accounts and have fully reserved for a receivable from
related parties.
7. Concentration of Risks
Financial instruments that potentially subject the Company to a concentration of credit risk are
primarily cash investments; cash is generally invested in investment-grade short-term instruments.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act that includes provisions that made permanent the $250,000 limit for federal deposit
insurance and increase the cash limit of Securities Investor Protection Corporation protection from
$100,000 to $250,000, and provide unlimited federal deposit insurance until January 1, 2013 for
non-interest bearing demand transaction accounts at all insured depository institutions. As of
March 31, 2011, we had cash accounts in excess of Federal Deposit Insurance Corporation insured
limits. We believe this risk is not significant.
Concentrations of credit risks arise when a number of operators, tenants or obligors related to our
investments are engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet contractual
obligations, including those to the Company, to be similarly affected by changes in economic
conditions. We regularly monitor various segments of our portfolio to assess potential
concentrations of risks. Management believes the current portfolio is reasonably diversified across
healthcare related real estate and does not contain any other significant concentration of credit
risks, except as disclosed herein.
Our senior living operations segment accounted for approximately 83.6% and 84.0% of total revenues
for the three months ended March 31, 2011 and 2010, respectively. The following table provides
information about our senior living operation segment concentration for the three months ended
March 31, 2011:
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Percentage of | Percentage of | |||||||
Operators | Segment Revenues | Total Revenues | ||||||
Good Neighbor Care |
24.6 | % | 20.6 | % | ||||
Royal Senior Care |
21.6 | % | 18.0 | % | ||||
Woodbine Senior Living |
21.4 | % | 17.9 | % | ||||
12 Oaks Senior Living |
21.1 | % | 17.6 | % | ||||
Provision Living |
5.9 | % | 5.0 | % | ||||
Legend Senior Living |
5.4 | % | 4.5 | % | ||||
100.0 | % | 83.6 | % |
Our triple-net leased segment accounted for approximately 13.7% and 16.0% of total revenues for the
three months ended March 31, 2011 and 2010, respectively. The following table provides information
about our triple-net leased segment for the year ended March 31, 2011:
Percentage of | Percentage of | |||||||
Tenant | Segment Revenues | Total Revenues | ||||||
Babcock PM Management |
37.4 | % | 5.1 | % | ||||
Global Rehab Hospitals |
32.7 | % | 4.5 | % | ||||
The Specialty Hospital |
27.1 | % | 3.7 | % | ||||
Floyd Healthcare Management |
2.8 | % | 0.4 | % | ||||
100.0 | % | 13.7 | % |
Our medical office building segment accounted for approximately 2.7% and 0% of total revenues for
the three months ended March 31, 2011 and 2010, respectively.
As of March 31, 2011, we owned 14 properties, geographically located in ten states. The following
table provides information about our geographic risks by operating segment for the three months
ended March 31, 2011:
Percentage of | Percentage of | |||||||
State | Segment Revenues | Total Revenues | ||||||
Senior living operations |
||||||||
South Carolina |
21.6 | % | 18.0 | % | ||||
Texas |
21.1 | % | 17.6 | % | ||||
Ohio |
14.3 | % | 12.0 | % | ||||
Pennsylvania |
10.9 | % | 9.1 | % | ||||
New Hampshire |
10.5 | % | 8.8 | % | ||||
Tennessee |
10.3 | % | 8.6 | % | ||||
Indiana |
5.9 | % | 5.0 | % | ||||
Florida |
5.4 | % | 4.5 | % | ||||
Triple net leased properties |
||||||||
Texas |
70.1 | % | 9.6 | % | ||||
Georgia |
29.9 | % | 4.1 | % | ||||
Colorado (1) |
| % | | % | ||||
Medical office building |
||||||||
Texas |
100.0 | % | 2.7 | % |
(1) | Under construction as of March 31, 2011 |
8. Income Taxes
For federal income tax purposes, we have elected to be taxed as a REIT, under Sections 856 through
860 of the Code beginning with our taxable year ended December 31, 2008, which imposes limitations
related to operating assisted-living properties. As of March 31, 2011, we had acquired nine
assisted-living facilities and formed nine wholly owned taxable REIT subsidiaries, or TRSs, which
includes a Master TRS that consolidates our wholly owned TRSs.
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Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities.
We record net deferred tax assets to the extent we believe these assets will more likely than not
be realized. In making such determination, we consider all available positive and negative
evidence, including future reversals of existing taxable temporary differences, projected future
taxable income, tax planning strategies and recent financial operations. In the event we were to
determine that we would not be able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would establish a valuation allowance which would reduce
the provision for income taxes.
The consolidated income tax benefit for the three months ended March 31, 2011 and 2010 was
approximately $0.2 million and $0 million, respectively, which has been included in general and
administrative expenses of our condensed consolidated financial statements,. Realization of a
deferred tax benefit is dependent in part upon generating sufficient taxable income in future
periods. Our net operating loss carryforwards were utilized in 2010 with respect to the TRS
entities. Net deferred tax assets related to the TRS entities totaled approximately $0.6 million
and $0 million at March 31, 2011 and December 31, 2010, respectively, related primarily to book and
tax basis differences for straight-line rent and accrued liabilities. These deferred tax assets
are included in deferred costs and other assets of our condensed consolidated balance sheets.
9. Payable to Related Parties
Payable to related parties at March 31, 2011 and December 31, 2010 was $1,000 and $65,000,
respectively, which consists of offering costs, acquisition fees, expense reimbursement payable,
sales commissions and dealer manager fees to our Advisor and PCC.
10. Segment Reporting
As of March 31, 2011, we operated in three reportable business segments: senior living operations,
triple-net leased properties, and medical office building (MOB) properties. Our senior living
operations segment primarily consists of investments in senior housing communities located in the
United States for which we engage independent third-party managers. Our triple-net leased
properties segment consists of investments in skilled nursing and hospital facilities in the United
States. These facilities are leased to healthcare operating companies under long-term triple-net
or absolute-net leases, which require the tenants to pay all property-related expenses. Our
medical office building operations segment primarily consists of investing in medical office
buildings and leasing those properties to healthcare providers under long-term leases, which may
require tenants to pay property-related expenses.
On December 22, 2010, we completed the purchase of Hedgcoxe Health Plaza, a multi-tenant medical
office building in Plano, TX. With the addition of Hedgcoxe Health Plaza, we determined that
segregating our MOB operations into its own reporting segment would be useful in assessing the
performance of this portion of our business as a business segment consistent with managements
focus in assessing performance and operating decisions. Prior to the Hedgcoxe Health Plaza
acquisition, we operated in two reportable segments: senior living operations and triple-net leased
properties.
We evaluate performance of the combined properties in each segment based on net operating income.
Net operating income is defined as total revenue less property operating and maintenance expenses.
There are no intersegment sales or transfers. We use net operating income to evaluate the operating
performance of our real estate investments and to make decisions concerning the operation of the
property. We believe that net operating income is useful to investors in understanding the value
of income-producing real estate. Net income is the GAAP measure that is most directly comparable
to net operating income; however, net operating income should not be considered as an alternative
to net income as the primary indicator of operating performance as it excludes certain items such
as depreciation and amortization, asset management fees and expenses, real estate acquisition
costs, interest expense and corporate general and administrative expenses. Additionally, net
operating income as we define it may not be comparable to net operating income as defined by other
REITs or companies.
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The following tables reconcile the segment activity to consolidated net income for the three months
ended March 31, 2011 and 2010:
For the three months ended March 31, 2011 | ||||||||||||||||
Senior living | Triple-net leased | Medical office | ||||||||||||||
operations | properties | building | Consolidated | |||||||||||||
Rental revenues |
$ | 6,200,000 | $ | 1,159,000 | $ | 201,000 | $ | 7,560,000 | ||||||||
Resident services and fee income |
1,702,000 | | | 1,702,000 | ||||||||||||
Tenant reimbursements and other income |
110,000 | 158,000 | 55,000 | 323,000 | ||||||||||||
$ | 8,012,000 | $ | 1,317,000 | $ | 256,000 | $ | 9,585,000 | |||||||||
Property operating and maintenance expenses |
5,445,000 | 173,000 | 70,000 | 5,688,000 | ||||||||||||
Net operating income |
$ | 2,567,000 | $ | 1,144,000 | $ | 186,000 | $ | 3,897,000 | ||||||||
General and administrative expenses |
664,000 | |||||||||||||||
Asset management fees and expenses |
431,000 | |||||||||||||||
Real estate acquisition costs and earn out costs |
1,127,000 | |||||||||||||||
Depreciation and amortization |
1,861,000 | |||||||||||||||
Interest income |
(4,000 | ) | ||||||||||||||
Interest expense |
1,476,000 | |||||||||||||||
Net loss |
$ | (1,658,000 | ) | |||||||||||||
Net loss attributable to the noncontrolling interests |
(65,000 | ) | ||||||||||||||
Net loss attributable to common stockholders |
$ | (1,593,000 | ) | |||||||||||||
For the three months ended March 31, 2010 | ||||||||||||||||
Senior living | Triple-net leased | Medical office | ||||||||||||||
operations | properties | building | Consolidated | |||||||||||||
Rental revenues |
$ | 1,990,000 | $ | 447,000 | $ | | $ | 2,437,000 | ||||||||
Resident services and fee income |
495,000 | | | 495,000 | ||||||||||||
Tenant reimbursements and other income |
70,000 | 40,000 | | 110,000 | ||||||||||||
$ | 2,555,000 | $ | 487,000 | $ | | $ | 3,042,000 | |||||||||
Property operating and maintenance expenses |
1,820,000 | 40,000 | | 1,860,000 | ||||||||||||
Net operating income |
$ | 735,000 | $ | 447,000 | $ | | $ | 1,182,000 | ||||||||
General and administrative expenses |
528,000 | |||||||||||||||
Asset management fees and expenses |
165,000 | |||||||||||||||
Real estate acquisition costs and earn out costs |
458,000 | |||||||||||||||
Depreciation and amortization |
640,000 | |||||||||||||||
Interest income |
(3,000 | ) | ||||||||||||||
Interest expense |
337,000 | |||||||||||||||
Net loss |
$ | (943,000 | ) | |||||||||||||
Net income attributable to the noncontrolling interests |
4,000 | |||||||||||||||
Net loss attributable to common stockholders |
$ | (947,000 | ) | |||||||||||||
The following table reconciles the segment activity to consolidated financial position as of March
31, 2011 and December 31, 2010.
March 31, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Investment in real estate: |
||||||||
Senior living operations |
$ | 87,811,000 | $ | 78,722,000 | ||||
Triple-net leased properties |
43,911,000 | 41,433,000 | ||||||
Medical office building |
8,638,000 | 8,713,000 | ||||||
Total reportable segments |
$ | 140,360,000 | $ | 128,868,000 | ||||
Reconciliation to consolidated assets: |
||||||||
Cash and cash equivalents |
37,937,000 | 29,819,000 | ||||||
Deferred financing costs, net |
1,266,000 | 1,382,000 | ||||||
Tenant and other receivables, net |
1,629,000 | 1,462,000 | ||||||
Deferred costs and other assets |
1,562,000 | 554,000 | ||||||
Restricted cash |
2,824,000 | 2,942,000 | ||||||
Goodwill |
5,606,000 | 5,329,000 | ||||||
Total assets |
$ | 191,184,000 | $ | 170,356,000 | ||||
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As of March 31, 2011 and December 31, 2010, goodwill had a balance of approximately $5.6 million
and $5.3 million, respectively, all related to senior living operations segment. During the first
quarter of 2011, due to an acquisition in our senior living operations segment, we recorded
approximately $0.3 million of goodwill.
11. Notes Payable
Notes payable were approximately $90.9 million and $80.8 million as of March 31, 2011 and December
31, 2010, respectively. As of March 31, 2011, we had fixed and variable rate secured mortgage loans
with effective interest rates ranging from 2.5% to 6.5% per annum and a weighted average effective
interest rate of 6.08% per annum. As of March 31, 2011, we had $40.6 million of fixed rate debt, or
approximately 45% of notes payable, at a weighted average interest rate of 4.90% per annum and
$50.3 million of variable rate debt, or approximately 55% of notes payable, at a weighted average
interest rate of 5.99% per annum. As of December 31, 2010, we had fixed and variable rate mortgage
loans with effective interest rates ranging from 2.50% to 6.50% per annum and a weighted average
effective interest rate of 6.09% per annum.
We are required by the terms of the applicable loan documents to meet certain financial covenants,
such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of March
31, 2011, we were in compliance with all such covenants and requirements.
Outstanding | Outstanding | |||||||||||||||||
Principal Balance | Principal Balance | |||||||||||||||||
Interest | as of March 31, | as of December 31, | ||||||||||||||||
Property Name | Payment Type | Rate | 2011(1) | 2010(1) | Maturity Date | |||||||||||||
Carriage Court of
Hilliard
|
Principal and interest at a 35-year amortization rate | 5.40% fixed | $ | 13,550,000 | $ | 13,586,000 | August 1, 2044 | |||||||||||
Caruth Haven Court
|
Principal and interest at a 30-year amortization rate | 6.43% fixed | $ | 9,875,000 | $ | 9,904,000 | December 16, 2019 | |||||||||||
Greentree
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,832,000 | | November 18, 2012 | ||||||||||||
Forestview Manor
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,935,000 | | November 18, 2012 | ||||||||||||
Global Rehab Inpatient Rehab Facility
|
Principal and interest at a 30-year amortization rate | 6.25% fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR + 3.25% | $ | 7,506,000 | $ | 7,530,000 | December 22, 2016 | |||||||||||
Hedgcoxe Health Plaza
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,060,000 | $ | 5,060,000 | November 18, 2012 | |||||||||||
Mesa Vista Inn Health Center
|
Principal and interest at a 20-year amortization rate | 6.50% fixed | $ | 7,282,000 | $ | 7,336,000 | January 5, 2015 | |||||||||||
Oakleaf Village Portfolio
|
(2) | (2) | $ | 17,794,000 | $ | 17,849,000 | April 30, 2015 | |||||||||||
Oakleaf Village at Lexington
|
| | | | | |||||||||||||
Oakleaf Village at Greenville
|
| | | | | |||||||||||||
Rivers Edge of Yardley
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,500,000 | $ | 2,500,000 | November 18, 2012 | |||||||||||
Rome LTACH Project (3)
|
Month 1-24 Interest-only Month 25 on Principal and interest at a 25-year amortization rate | 1Mo LIBOR + 3.00% with a 6.15% floor | $ | 10,122,000 | $ | 8,588,000 | December 18, 2012 | |||||||||||
Littleton Specialty
Rehabilitation Facility (4) |
Month 1-18 Interest-only Month 19 on Principal and interest at a 20-year amortization rate | 6.0% fixed | $ | 1,000 | $ | 1,000 | December 22, 2015 | |||||||||||
The Oaks Bradenton
|
(5) | (5) | $ | 2,728,000 | $ | 2,738,000 | May 1, 2014 | |||||||||||
Terrace at Mountain Creek
|
Month 1-24 interest only. Month 25 to 36 Principal and interests at a 25-year amortization rate | 3Mo LIBOR + 3.50% with a 5.5% floor | $ | 5,700,000 | $ | 5,700,000 | September 1, 2013 | |||||||||||
$ | 90,885,000 | $ | 80,792,000 | |||||||||||||||
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(1) | As of March 31, 2011 and December 31, 2010, all notes payable are secured by the underlying real estate. | |
(2) | The aggregate loan amount is composed of a restatement date balance of approximately $12.9 million outstanding with respect to a prior loan (the Initial Loan), and an additional amount of approximately $5.1 million disbursed on the closing date (the Restatement Date Loan). From June 1, 2010 through the maturity date, payments on the Restatement Date Loan are due monthly and based upon a 30-year amortization schedule. From June 1, 2010 through January 10, 2011, payments on the Initial Loan were due monthly based upon a 25-year amortization schedule, thereafter through maturity, payments on the Initial Loan are due monthly based upon a 30-year amortization schedule. The Restatement Date Loan bears interest at a variable rate equal to 5.45% per annum plus the greater of 1.0% or the 3-month LIBOR rate (the Contract Rate). The outstanding balance of the Initial Loan bore interest at a rate of 6.62% per annum until January 10, 2011 and thereafter bears interest at the Contract Rate. In connection with our Oakleaf Village Portfolio financing, we incurred financing costs of $3,000 for the year ended December 31, 2010. | |
(3) | For the three months ended March 31, 2011 and 2010 we had incurred approximately $0.1 million and $0 of interest expense related to the Rome LTACH Project. For the three months ended March 31, 2010, interest expense and deferred financing fees of $19,000 and $5,000, respectively, were capitalized. | |
(4) | For the three months ended March 31, 2011 and 2010 we had not incurred any interest expense related to the Littleton Specialty Rehabilitation Facility. For the three months ended March 31, 2010, deferred financing fees of $8,000 was capitalized. | |
(5) | Of the total loan amount, $2.4 million bears a fixed interest rate of 6.25% per annum. The remaining $0.4 million bears a variable interest rate equivalent to the prevailing market certificate of deposit rate plus a 1.5% margin. Monthly payments for the first twelve months will be interest-only. Monthly payments beginning the thirteenth month will include interest and principal based on a 25-year amortization period. |
In November 2010, we entered into an agreement with KeyBank National Association, an
unaffiliated financial institution, to obtain a $25,000,000 revolving credit facility. The credit
facility may be increased in the future in incremental amounts of at least $25.0 million at our
request subject to attaining certain portfolio size targets. The initial term of the credit
facility is 24 months, maturing on November 18, 2012, and may be extended by six months subject to
satisfaction of certain conditions, including payment of an extension fee. The actual amount of
credit available under the credit facility is a function of certain loan to cost, loan to value and
debt service coverage ratios contained in the credit facility. The credit facility will be secured
by first priority liens on our eligible real property assets that make up the borrowing base (as
such term is defined) for the credit facility. The interest rate for this credit facility is
one-month LIBOR plus a margin of 400 basis points, with a floor of 200 basis points for one-month
LIBOR. The credit facility also requires payment of a fee of up to 25 basis points related to
unused credit available to us under the credit facility. We are entitled to prepay the obligations
at any time without penalty. The facility includes a financial covenant requiring us to raise at
least $20 million in our public offering in the six-month period ending June 30, 2011, and to raise
an additional $20 million in net offering proceeds during each six-month calendar period
thereafter. Because we suspended our public offering on April 29, 2011, we will be not be able to
satisfy this covenant; however, we expect to negotiate a waiver of the covenant with the lender or
to pay off the outstanding balance under the credit facility using currently available cash. As of
March 31, 2011, the credit facility had a balance of approximately $16.3 million and we were in
compliance with the covenants of the credit agreement.
The principal payments due on our notes payable for April 1, 2011 to December 31, 2011 and each of
the subsequent years is as follows:
Principal | ||||
Year | amount | |||
April 1, 2011 to December 31, 2011 |
$ | 588,000 | ||
2012 |
$ | 27,298,000 | ||
2013 |
$ | 6,572000 | ||
2014 |
$ | 3,499,000 | ||
2015 |
$ | 23,852,000 | ||
2016 and thereafter |
$ | 29,076,000 |
Interest Expense and Deferred Financing Cost
The following table sets forth our gross interest expense and deferred financing cost amortization
for the three months ended March 31, 2011 and 2010. The capitalized amount is a cost of development
and increases the carrying value of construction in progress.
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Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Gross interest expense and deferred financing cost amortization |
$ | 1,508,000 | $ | 370,000 | ||||
Capitalized interest expense and deferred financing cost amortization |
(32,000 | ) | (33,000 | ) | ||||
Interest expense |
$ | 1,476,000 | $ | 337,000 | ||||
As of March 31,2011 and December 31, 2010, our net deferred financing costs were approximately
$1.3 million and $1.4 million, respectively. All deferred amortized financing costs are
capitalized and amortized over the life of the agreements.
12. Stockholders Equity
Common Stock
Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01
per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of
March 31, 2011, including distributions reinvested, we had issued approximately 13.0 million shares
of common stock for a total of approximately $129.3 million of gross proceeds in our initial and
follow-on public offering. As of March 31, 2010, including distributions reinvested, we had issued
approximately 6.4 million shares of common stock for total gross proceeds of approximately $64.0
million in our initial public offering.
Distributions
We have adopted a distribution reinvestment plan that allows our stockholders to have dividends and
other distributions otherwise distributable to them invested in additional shares of our common
stock at their election. We have registered 10,000,000 shares of our common stock for sale
pursuant to the distribution reinvestment plan. The purchase price per share is 95% of the price
paid by the purchaser for our common stock, but not less than $9.50 per share. As of March 31,
2011 and December 31, 2010, approximately 509,000 and 394,000 shares, respectively, had been issued
under the distribution reinvestment plan.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had
directed us to suspend our offering, our dividend reinvestment plan and our stock repurchase
program (except repurchases due to death) because of the uncertainty associated with our
Independent Directors Committee consideration of various strategic alternatives to enhance our
stockholders value. As a result, we suspended our distribution reinvestment plan effective as of
May 10, 2011.
The following are the distributions declared during the three months ended March 31, 2011 and 2010:
Distribution Declared | ||||||||||||
Period | Cash | Reinvested | Total | |||||||||
First quarter 2010 (1) |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | ||||||
First quarter 2011 |
$ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 |
(1) | Distributions declared represented a return of capital for tax purposes. In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our stockholders each taxable year equal to at least 90% of our net ordinary taxable income. Some of our distributions have been paid from sources other than operating cash flow, such as offering proceeds. Until proceeds from our offering are fully invested and generating operating cash flow sufficient to fully cover distributions to stockholders, we intend to pay all or a portion of our distributions from the proceeds of our offering or from borrowings in anticipation of future cash flow. |
The declaration of distributions is at the discretion of our board of directors and our board will
determine the amount of distributions on a regular basis. The amount of distributions will depend
on our funds from operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other factors our board of
directors deems relevant.
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From our inception in October 2006 through March 31, 2011, we declared aggregate distributions of
$10.5 million and our cumulative net loss during the same period was $13.3 million.
Stock Repurchase Program
We adopted a stock repurchase program for investors who have held their shares for at least one
year, unless the shares are being repurchased in connection with a stockholders death. Under our
stock repurchase program, the repurchase price varies depending on the purchase price paid by the
stockholder and the number of years the shares are held. Our board of directors may amend, suspend
or terminate the program at any time on 30 days prior notice to stockholders. We have no obligation
to repurchase our stockholders shares. Our board of directors waived the one-year holding period
in the event of the death of a stockholder and adjusted the repurchase price to 100% of such
stockholders purchase price if the stockholder held the shares for less than three years. Our board
of directors reserves the right in its sole discretion at any time and from time to time, upon 30
days prior notice to our stockholders, to adjust the repurchase price for our shares of stock, or
suspend or terminate our stock repurchase program.
During the three months ended March 31, 2011, we repurchased shares pursuant to our stock
repurchase program as follows:
Total Number | Average | |||||||
of Shares | Price Paid | |||||||
Period | Redeemed | per Share | ||||||
January |
1,194 | $ | 9.88 | |||||
February |
17,379 | $ | 9.42 | |||||
March |
25,217 | $ | 9.29 | |||||
43,790 | ||||||||
During the three months ended March 31, 2010, we repurchased 10,209 shares pursuant to our stock
repurchase program.
During the three months ended March 31, 2011, we received requests to have an aggregate of 89,261
shares repurchased pursuant to our stock repurchase program. Of these requests 1,525 shares were
not able to be repurchased due to the limitations contained in the terms of our stock repurchase
program.
Our board of directors may modify our stock repurchase program so that we can repurchase stock
using the proceeds from the sale of our real estate investments or other sources. On April 29,
2011, we informed our stockholders that our Independent Directors Committee had directed us to
suspend our offering, our dividend reinvestment program and our stock repurchase program (except
repurchases due to death) because of the uncertainty associated with our Independent Directors
Committee consideration of various strategic alternatives to enhance our stockholder value. As a
result, we suspended our stock repurchase program effective as of May 29, 2011.
13. Related Party Transactions
The Company has no employees. Our Advisor is primarily responsible for managing our business
affairs and carrying out the policies established by our board of directors. We have an advisory
agreement with the Advisor and dealer manager agreements with Pacific Cornerstone Capital, Inc.
(PCC) related to our initial and follow-on public offerings, which entitle the Advisor and PCC to
specified fees upon the provision of certain services to us, as well as reimbursement for
organizational and offering costs incurred by the Advisor and PCC on our behalf and reimbursement
of certain costs and expenses incurred by the Advisor in providing services to us.
Advisory Agreement
Under the terms of the advisory agreement, the Advisor is required to use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and suitable investment
program consistent with the investment policies and objectives adopted by our board of directors.
The advisory agreement calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of directors, and to
perform other duties.
The fees and expense reimbursements payable to the Advisor under the advisory agreement are
described below.
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Organizational and Offering Costs. Organizational and offering costs of our offerings
paid by the Advisor on our behalf are being reimbursed to the Advisor from the proceeds of our
offerings. Organizational and offering costs consist of all expenses (other than sales commissions
and the dealer manager fee) to be paid by us in connection with our offerings, including our legal,
accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable
offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all
marketing related costs and expenses such as salaries and direct expenses of employees of the
Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology
costs associated with the offering of our shares; (iii) our costs of conducting our training and
education meetings; (iv) our costs of attending retail seminars conducted by participating
broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. At times
during our offering stage, the amount of organization and offering expenses that we incur, or that
the Advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds
then raised, but our Advisor is required to reimburse us to the extent that our organization and
offering expenses exceed 3.5% of aggregate gross offering proceeds at the conclusion of our
offering. In addition, the Advisor will also pay any organization and offering expenses to the
extent that such expenses, plus sales commissions and the dealer manager fee (but not the
acquisition fees or expenses) are in excess of 13.5% of gross offering proceeds. In no event will
we have any obligation to reimburse the Advisor for organizational and offering costs totaling in
excess of 3.5% of the gross proceeds from our primary offerings. As of March 31, 2011, the Advisor
and its affiliates had incurred organizational and offering costs totaling
approximately $5.0 million, including approximately $0.1 million of organizational costs that have
been expensed and approximately $4.9 million of offering costs that reduce net proceeds of our
offerings. Of this amount $4.0 million reduced the net proceeds of our initial public offering and
$0.9 million reduced the net proceeds of our follow-on offering. As of December 31, 2010, the
advisor and its affiliates had incurred organizational and offering costs totaling
approximately $4.6 million, including approximately $0.1 million of organizational costs that have
been expensed and approximately $4.5 million of offering costs which reduce net proceeds of our
offerings.
Acquisition Fees and Expenses. The advisory agreement requires us to pay the Advisor
acquisition fees in an amount equal to 2.0% of the investments acquired, including any debt
attributable to such investments. A portion of the acquisition fees will be paid upon receipt of
offering proceeds, and the balance will be paid at the time we acquire a property. However, if the
advisory agreement is terminated or not renewed, the Advisor must return acquisition fees not yet
allocated to one of our investments. In addition, we are required to reimburse the Advisor for
direct costs the Advisor incurs and amounts the Advisor pays to third parties in connection with
the selection and acquisition of a property, whether or not ultimately acquired. For the three
months ended March 31, 2011 and 2010, the Advisor earned approximately $0.3 million and $0.4
million in acquisition fees, respectively. As of March 31, 2011, the amount of acquisition fees that
have been paid to the advisor, but have not yet been allocated to one of our investments is $0.9
million, that have been expensed and included in real estate
acquisition costs and earn out costs in our condensed consolidated
statements of operations.
Management Fees. The advisory agreement requires us to pay the Advisor a monthly
asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis in book carrying
values of our assets invested, directly or indirectly, in equity interests in and loans secured by
real estate before reserves for depreciation or bad debts or other similar non-cash reserves,
calculated in accordance with GAAP. In addition, we have historically reimbursed the Advisor for
the direct and indirect costs and expenses incurred by the Advisor in providing asset management
services to us, including personnel and related employment costs related to providing asset
management services on our behalf and amounts paid by our Advisor to Servant Investments, LLC and
Servant Healthcare Investments, LLC for portfolio management services provided on our behalf.
These fees and expenses are in addition to management fees that we expect to pay to third party
property managers. For the three months ended March 31, 2011 and 2010, the Advisor earned
approximately $0.4 million and $0.2 million of management fees, respectively, which were expensed.
For the three months ended March 31, 2011 and 2010, the Advisor incurred $172,000 and $55,000,
respectively, of such direct and indirect costs and expenses, which are included in
asset management fees and expenses in the condensed consolidated statement of operations.
Operating Expenses. The advisory agreement provides for reimbursement of the Advisors
direct and indirect costs of providing administrative and management services to us. For the three
months ended March 31, 2011 and 2010, approximately $0.4 million and $0.2 million of such costs,
respectively, were reimbursed and included in general and administrative expenses on our condensed
consolidated statements of operations. Consistent with limitations set forth in our charter, the
advisory agreement further provides that, commencing four fiscal quarters after the acquisition of
our first real estate asset, we shall not reimburse the Advisor at the end of any fiscal quarter
management fees and expenses and operating expenses that, in the four consecutive fiscal quarters
then ended exceed (the Excess Amount) the greater of 2% of our average invested assets or 25% of
our net income for such year (the 2%/25% Guidelines) unless the Independent Directors Committee
of our board of directors determines that such excess was justified, based on unusual and
nonrecurring factors which it deems sufficient. If the Independent Directors Committee does not
approve such excess as being so justified, the advisory agreement requires that any Excess Amount
paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our
charter provides that, if the Independent Directors Committee does not determine that the Excess
Amount is justified, the Advisor shall reimburse us the amount by which the aggregate annual
expenses paid to the Advisor during the four consecutive fiscal quarters then ended exceed the
2%/25% Guidelines. For the four quarters
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ended March 31, 2011, our management fees and expenses and operating expenses exceeded the greater
of 2% of our average invested assets and 25% of our net income and our Independent Directors
Committee has determined that $0.2 million of the Excess Amount was justified as unusual and non-recurring. The Excess Amount
for the fiscal quarter ended March 31, 2011 was approximately $0.6 million. The Excess Amount for
the four fiscal quarters ended March 31, 2011 was approximately $1.8 million. In accordance with
our charter, the Independent Directors Committee instructed us to record a receivable
from the Advisor for $1.6 million reflecting the Excess Amount for the four quarters ended March 31, 2011 less the
amount determined by the Independent Directors Committee to be justified as unusual and
non-recurring. Our March 31, 2011 financial statements include a receivable for this
amount and a corresponding reserve for the full amount related to our evaluation of various factors related to
collectability. The Advisor has informed us that it disputes the amount of this liability.
Disposition Fee. The advisory agreement provides that if the Advisor or its affiliate
provides a substantial amount of the services (as determined by a majority of our directors,
including a majority of our independent directors) in connection with the sale of one or more
properties, we will pay the Advisor or such affiliate at closing a disposition fee up to 3% of the
sales price of such property or properties. This disposition fee may be paid in addition to real
estate commissions paid to non-affiliates, provided that the total real estate commissions
(including such disposition fee) paid to all persons by us for each property shall not exceed an
amount equal to the lesser of (i) 6% of the aggregate contract sales price of each property or (ii)
the competitive real estate commission for each property. We will pay the disposition fees for a
property at the time the property is sold.
Subordinated Participation Provisions. The Advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or termination of the
Advisor, as follows:
| After we pay stockholders cumulative distributions equal to their invested capital plus a 6% cumulative, non-compounded return, the Advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized return of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more. | ||
| Upon termination of the advisory agreement, the Advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total distributions (other than stock distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus its liabilities plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more. | ||
| In the event we list our stock for trading, the Advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of our common stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more. |
Dealer Manager Agreements
PCC, as dealer manager for our initial and follow-on public offerings, is entitled to receive a
sales commission of up to 7% of gross proceeds from sales in the primary offerings. PCC is also
entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the
primary offerings. PCC is also entitled to receive a reimbursement of bona fide due diligence
expenses up to 0.5% of the gross proceeds from sales in the primary offerings. The advisory
agreement requires the Advisor to reimburse us to the extent that offering expenses including sales
commissions, dealer manager fees and organization and offering expenses (but excluding acquisition
fees and acquisition expenses discussed above) are in excess of 13.5% of gross proceeds from our
primary offerings. For the three months ended March 31, 2011 and 2010, our dealer manager earned
sales commission and dealer manager fee of approximately $1.1 million and $1.3 million,
respectively. Dealer manager fees and sales commissions paid to PCC are a cost of capital raised
and, as such, are included as a reduction of additional paid in capital in the accompanying
condensed consolidated balance sheets.
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14. Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no
assurance that a material environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that we believe would have a material effect
on our financial condition, results of operations and cash flows. Further, we are not aware of any
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.
Our commitments and contingencies include the usual obligations of real estate owners and operators
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our condensed consolidated financial position, cash flows and results of
operations. We are not presently subject to any material litigation nor, to our knowledge, is any
material litigation threatened against the Company which if determined unfavorably to us would have
a material adverse effect on our cash flows, financial condition or results of operations.
At the recommendation of our advisor, the Independent Directors Committee of our board of directors
is considering various strategic alternatives to enhance value for our stockholders. One of the
alternatives under consideration is the hiring of a new dealer manager for our public offering of
common stock, which was suspended on April 29, 2011. In addition, the Independent Directors
Committee is continuing to evaluate possible changes to our advisory relationships. We may have
difficulty finding a new qualified dealer manager and/or advisor, and any change in the dealer
manager and/or advisor would disrupt our operations and our ability to raise capital in our public
offering.
15. Business Combinations
On January 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property,
Forestview Manor, from 153 Parade Road, LLC a non-related party, for a purchase price of
approximately $10.8 million. The acquisition was funded with our revolving credit facility from
KeyBank National Association and with proceeds from our initial public offering.
The following summary provides the allocation of the acquired assets and liabilities as of the
acquisition date. We have accounted for the acquisition as business combination under U.S. GAAP.
Under business combination accounting, the assets and liabilities of the acquired property were
recorded as of the acquisition date, at their respective fair values, and consolidated in our
financial statements. The detail of the purchase price of the acquired property is set forth below:
Forestview | ||||
Manor | ||||
Land |
$ | 1,320,000 | ||
Buildings & improvements |
6,803,000 | |||
Site improvements |
1,040,000 | |||
Furniture & fixtures |
350,000 | |||
Intangible assets |
960,000 | |||
Goodwill |
277,000 | |||
Real estate acquisitions |
$ | 10,750,000 | ||
Acquisition expenses |
$ | 131,000 |
We did not complete any acquisitions during the first quarter of 2010. The following unaudited pro
forma information for the three months ended March 31, 2011 and 2010 has been prepared to reflect
the incremental effect of the acquisition as if such acquisition had occurred on January 1, 2010.
Three months | Three months | |||||||
Ended | Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Revenues |
$ | 9,783,000 | $ | 3,992,000 | ||||
Net loss |
$ | (1,594,000 | ) | $ | (979,000 | ) | ||
Basic and diluted net loss per common share attributable to common stockholders |
$ | (0.13 | ) | $ | (0.16 | ) |
The Company recorded revenues and net income for the three months ended March 31, 2011 of
approximately $0.8 million and $0.1 million, respectively, related to the acquisitions during the
first quarter of 2011.
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16. Subsequent Events
On April 14, 2011, we purchased an assisted-living property, Sunrise of Allentown, from an
affiliate of Sunrise Senior Living, Inc., a non-related party, for a purchase price of $9.0
million. The property will be rebranded as Woodland Terrace at the Oaks Senior Living (Woodland
Terrace). The acquisition was funded with proceeds from our initial public offering and with
proceeds from a mortgage loan from an unaffiliated lender that funded subsequent to the closing.
Sale of Shares of Common Stock
As of April 29, 2011, we had raised approximately $127.0 million through the issuance of
approximately 12.7 million shares of our common stock under our initial and follow-on public
offerings, excluding approximately 551,000 shares that were issued pursuant to our distribution
reinvestment plans reduced by approximately 202,000 shares repurchased pursuant to our stock
repurchase program.
Suspension of Offering, Dividend Reinvestment Plan and Stock Repurchase Program.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had
directed us to suspend our follow-on offering, our dividend reinvestment program and our stock
repurchase program (except repurchases due to death) because of the uncertainty associated with our
Independent Directors Committee consideration of various strategic alternatives to enhance our
stockholders value. One of the alternatives under consideration is the hiring of a new dealer
manager for our follow-on offering; however, the Independent Directors Committee has made no
determination regarding whether or when our follow-on offering may be recommenced.
Departure and Election of Certain Officers
On May 21, 2011, Terry G. Roussel, the President, Chief Executive Officer, Chairman of the board of
directors and a director of the Company, informed the Company that he had resigned from his
positions as President, Chief Executive Officer and Chairman of the board of directors effective as
of May 21, 2011. Mr. Roussel remains a director of the Company and continues to serve as a member
of the investment committee of the board of directors.
In response to the resignation of Mr. Roussel, our board of directors has elected Sharon C.
Kaiser to serve as our President, effective as of May 23, 2011.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements and notes thereto contained
elsewhere in this report. This section contains forward-looking statements, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based. These forward-looking statements
generally are identified by the words believes, project, expects, anticipates, estimates,
intends, strategy, plan, may, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations
and assumptions that are subject to risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. Forward-looking statements that were true
at the time made may ultimately prove to be incorrect or false. We undertake no obligation to
update or revise publicly any forward looking statements, whether as a result of new information,
future events or otherwise. All forward-looking statements should be read in light of the risks
identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31,
2010 as filed with the SEC, and the risks identified in Part II, Item 1A of this quarterly report.
Our actual future results and trends may differ materially from expectations depending on a variety
of factors discussed in our filings with the SEC. These factors include without limitation:
| the possibility of changes in our advisory and dealer-manager relationships as further described in the Risk Factors section of this quarterly report on Form 10-Q; | ||
| changes in economic conditions generally and the real estate and healthcare markets specifically; |
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| legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010; | ||
| legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation; | ||
| the availability of debt and equity 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; and | ||
| the risk factors in our Annual Report for the year ended December 31, 2010 and this quarterly report on Form 10-Q. |
Overview
We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing
in and owning commercial real estate. We intend to invest the net proceeds from our offerings
primarily in investment real estate including health care, multi-tenant industrial, net-leased
retail properties and other real estate related assets located in major metropolitan markets in the
United States. As of March 31, 2011, we raised approximately $124.5 million of gross proceeds from
the sale of approximately 12.5 million shares of our common stock in our initial and follow-on
public offerings.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had
directed us to suspend our follow-on offering, our dividend reinvestment program and our stock
repurchase program (except repurchases due to death) because of the uncertainty associated
with our Independent Directors Committee evaluation of various strategic alternatives to enhance
our stockholders value. One of the alternatives under consideration is the hiring of a new dealer
manager for our follow-on offering, however the Independent Directors Committee has made no
determination regarding whether or when our follow-on offering may be recommenced. In addition,
the Independent Directors Committee is continuing to evaluate possible changes to our advisory
relationships.
Our revenues, which will be comprised largely of rental income, will include rents reported on a
straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability
to (i) increase rental income and other earned income from leases by increasing rental rates and
occupancy levels; (ii) maximize tenant recoveries given the underlying lease structures; and (iii)
control operating and other expenses. Our operations are impacted by property specific,
market-specific, general economic and other conditions.
Highlights for the Three Months Ended March 31, 2011
| We completed one acquisition for an aggregate purchase price of approximately $10.8 million. See Note 15. | ||
| We increased our borrowing on the KeyBank credit facility by approximately $5.9 million in connection with the acquisition of Forestview Manor. |
Status of Our Offering
| Prior to the suspension of our follow-on offering on April 29, 2011, we had raised approximately $127.0 million through the issuance of approximately 12.7 million shares of our common stock under our initial and follow-on offerings, excluding approximately 551,000 shares that were issued pursuant to our distribution reinvestment plan, reduced by approximately 202,000 shares repurchased pursuant to our stock repurchase program. |
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Market Outlook Real Estate and Real Estate Finance Markets
In recent years, both the national and most global economies have experienced substantially
increased unemployment and a downturn in economic activity. Despite certain recent positive
economic indicators and improved stock market performance, the aforementioned conditions, combined
with low consumer confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the implementation of our business
strategy or force us to modify it.
Despite the economic conditions discussed above, the demand for health care services is projected
to continue to grow for the foreseeable future. The Centers for Medicare and Medicaid Services
projects that national health expenditures will rise to $3.4 trillion in 2015, or 17.7% of gross
domestic product (GDP), up from $2 trillion or 15.7% of GDP in 2005. The elderly are an important
component of health care utilization, especially independent living services, assisted-living
services, skilled nursing services, inpatient and outpatient hospital services and physician
ambulatory care. The elderly population aged 65 and over is projected to increase by 76.6% through
2030.
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.
Results of Operations
As of March 31, 2011, we operated in three reportable business segments: senior living operations,
triple-net leased properties, and medical office building (MOB) properties. Our senior living
operations segment invests in and operates assisted-living, memory care and other senior housing
communities located in the United States. We engage independent third party managers to operate
these properties. Our triple-net leased properties segment invests in healthcare properties in the
United States leased under long-term triple-net or absolute-net leases, which require the
tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings
and leases those properties to healthcare providers under long-term full service leases which may
require tenants to reimburse property related expenses to us.
We began accepting subscriptions for shares under our initial public offering on June 20, 2008. We
purchased our first senior housing property in January 2009, and as of March 31, 2011, we owned 14
properties. These properties included nine assisted-living facilities which comprise our senior
housing segment, one medical office building, which comprises our MOB segment, and four operating
healthcare facilities and one development healthcare facility, which comprise our triple-net leased
segment. During the three months ended March 31, 2010, we owned five properties, including three
senior housing facilities, one net leased facility and one development project. Accordingly, the
results of our first quarter 2011 and 2010 operations are not directly comparable.
Comparison of the Three Months Ended March 31, 2011 and 2010
Three Month Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) |
||||||||||||||||
Senior living operations |
$ | 2,567,000 | $ | 735,000 | $ | 1,832,000 | 249 | |||||||||
Triple-net leased properties |
1,144,000 | 447,000 | 697,000 | 156 | ||||||||||||
Medical office building |
186,000 | | 186,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 3,897,000 | $ | 1,182,000 | $ | 2,715,000 | 230 | |||||||||
Reconciliation to net loss: |
||||||||||||||||
Net operating income, as defined (1) |
$ | 3,897,000 | $ | 1,182,000 | $ | 2,715,000 | 229 | |||||||||
Unallocated (expenses) income: |
||||||||||||||||
General and administrative expenses |
(664,000 | ) | (528,000 | ) | 136,000 | 26 | ||||||||||
Asset management fees and expenses |
(431,000 | ) | (165,000 | ) | 266,000 | 161 | ||||||||||
Real estate acquisitions costs and earn out costs |
(1,127,000 | ) | (458,000 | ) | 669,000 | 146 | ||||||||||
Depreciation and amortization |
(1,861,000 | ) | (640,000 | ) | 1,221,000 | 191 | ||||||||||
Interest income |
4,000 | 3,000 | 1,000 | 33 | ||||||||||||
Interest expense |
(1,476,000 | ) | (337,000 | ) | 1,139,000 | 338 | ||||||||||
Net loss |
$ | (1,658,000 | ) | $ | (943,000 | ) | $ | 715,000 | 76 | |||||||
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(1) | Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies. |
Senior Living Operations
Total revenue for senior living operations includes rental revenue and resident fees and service
income. Property operating and maintenance expenses include labor, food, utilities, marketing,
management and other property operating costs. Net operating income for the three months ended
March 31, 2011 increased to $2.6 million from $0.7 million for the three months ended March 31,
2010. The increase is primarily due to acquisitions completed during 2010.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Senior Living Operations Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 6,200,000 | $ | 1,990,000 | $ | 4,210,000 | 212 | |||||||||
Resident services and fee income |
1,702,000 | 495,000 | 1,207,000 | 244 | ||||||||||||
Tenant reimbursement and other income |
110,000 | 70,000 | 40,000 | 57 | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
5,445,000 | 1,820,000 | 3,625,000 | 199 | ||||||||||||
Total portfolio net operating income |
$ | 2,567,000 | $ | 735,000 | $ | 1,832,000 | 249 | |||||||||
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements
from tenants. Property operating and maintenance expenses include insurance and property taxes and
other operating expenses reimbursed by our tenants. Net operating income increased to $1.1 million
for the three months ended March 31, 2011 compared to $0.4 million for the three months ended March 31,
2010 due to the acquisitions completed in 2010.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 1,159,000 | $ | 447,000 | $ | 712,000 | 159 | |||||||||
Tenant reimbursement and other income |
158,000 | 40,000 | 118,000 | 295 | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
173,000 | 40,000 | 133,000 | 333 | ||||||||||||
Total portfolio net operating income |
$ | 1,144,000 | $ | 447,000 | $ | 697,000 | 156 | |||||||||
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from
tenants. Property operating and maintenance expenses include utilities, repairs and maintenance,
insurance and property taxes. Net operating income increased to
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$0.2 million for the three months ended March 31, 2011 from $0 compared to the three months ended
March 31, 2010, due to the acquisition completed in December 2010.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Medical Office Buildings Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 201,000 | $ | | $ | 201,000 | N/A | |||||||||
Tenant reimbursement and other income |
55,000 | | 55,000 | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
70,000 | | 70,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 186,000 | $ | | $ | 186,000 | N/A |
Unallocated (expenses) income
General and administrative expenses increased to $0.7 million for the three months ended March 31,
2011 from $0.5 million for the three months ended March 31, 2010. The increase was principally due
to higher reimbursements to the Advisor for the direct and indirect costs of providing
administrative and management services and higher professional fees, resulting from the growth of
the investment portfolio since March 31, 2010.
As a result of the acquisitions in 2010, asset management fees and expenses for the three months
ended March 31, 2011 and 2010 increased to $0.4 million from $0.2 million and depreciation and
amortization for the same periods increased to $1.9 million from $0.6 million.
For the three months ended March 31, 2011 and 2010, real estate acquisition costs and earn out
costs, consisting of fees paid to the Advisor, acquisition costs paid directly to third-parties,
earn out provision related to GreenTree at Westwood and promote provision related to Rome LTACH,
were $1.1 million and $0.5 million, respectively. The 2011 increase in acquisition costs was due to
higher third party expenses related to transactions closed or in process during the first quarter
of 2011, partially offset by lower acquisition fees related to lower equity raised in the first
quarter of 2011. Additionally, the increase is due to increases in the estimated amounts to be paid
in connection with the Greentree acquisition earn out and the Rome LTACH promote provision. A
portion of the acquisition fees due to our Advisor are paid upon receipt of offering proceeds and
the balance is paid at the time of investment acquisition.
Interest income was comparable for the three months ended March 31, 2011 and 2010.
Interest expense for the three months ended March 31, 2011 increased to $1.5 million from $0.4
million for the three months ended March 31, 2010 due to increased real estate acquisition
financing in 2010 and during the first quarter of 2011.
Liquidity and Capital Resources
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had
directed us to suspend our offering, our dividend reinvestment program and our stock repurchase
program (except repurchases due to death) because of the uncertainty associated with their
consideration of various strategic alternatives to enhance our stockholders value. One of the
alternatives under consideration is the hiring of a new dealer manager for our follow-on offering,
however the Independent Directors Committee has made no determination regarding whether or when our
follow-on offering may be recommenced. In addition, the Independent Directors Committee is also
continuing to evaluate possible changes to our advisory relationships. In addition to uncertainties
associated with potentially engaging a new dealer manager or advisor and possibly restarting our
public offering, financial markets have recently experienced unusual volatility and uncertainty.
Liquidity has tightened in all financial markets, including the debt and equity markets. Our
ability to fund property acquisitions or development projects, as well as our ability to
repay or refinance debt maturities, could be adversely affected by an inability to successfully
resume our public offering and to secure financing at reasonable terms, if at all.
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We expect that primary sources of capital over the long-term will include net proceeds from the
sale of our common stock and net cash flows from operations. We expect that our primary uses of
capital will be for property acquisitions, for the payment of tenant improvements, for the payment
of operating expenses, including interest expense on any outstanding indebtedness, reducing
outstanding indebtedness and for the payment of distributions.
We expect to have sufficient cash available from cash on hand and operations to fund capital
improvements and principal payments due on our borrowings, including amounts which may become due
on our Key Bank credit facility, in the next twelve months. We expect to fund stockholder
distributions from the excess of cash on hand and from operations over required capital
improvements and debt payments. This excess may be insufficient to make distributions at the
current level or at all.
As of March 31, 2011, we had approximately $37.9 million in cash and cash equivalents on hand. Our
liquidity will increase if additional subscriptions for shares are accepted in our follow-on public
offering and decrease as net offering proceeds are expended in connection with the acquisition,
operation of properties and distributions made in excess of cash available from operating cash
flows.
As of March 31, 2011, a total of approximately 12.5 million shares of our common stock had been
sold in our initial and follow-on public offerings for aggregate gross proceeds of approximately
$124.5 million.
We intend to own our core plus properties with low to moderate levels of debt financing. We will
incur moderate to high levels of indebtedness when acquiring our value-added and opportunistic
properties and possibly other real estate investments. The debt levels on core plus properties
during the offering period may exceed the long-term target range of debt percentages on these types
of properties. However, we intend to reduce the percentage to fall within the 40% to 60% range no
later than the end of our offering stage. To the extent sufficient proceeds from our public
offering, debt financing, or a combination of the two are unavailable to repay acquisition debt
financing down to the target ranges within a reasonable time as determined by our board of
directors, we will endeavor to raise additional equity or sell properties to repay such debt so
that we will own our properties with low to moderate levels of permanent financing. In the event
that our public offering is not fully sold, our ability to diversify our investments may be
diminished.
On November 19, 2010, we entered into an agreement with KeyBank National Association, an
unaffiliated financial institution, to obtain a $25.0 million revolving credit facility (the
Facility). The Facility may be increased in the future in incremental amounts of at least $25.0
million at our request subject to attaining certain portfolio size targets. The initial term of the
Facility is 24 months, maturing on November 18, 2012, and may be extended by six months subject to
satisfaction of certain conditions, including payment of an extension fee. The actual amount of
credit available under the Facility is a function of certain loan-to-cost, loan-to-value and debt
service coverage ratios contained in the Facility. The Facility will be secured by first priority
liens on our eligible real property assets that make up the borrowing base (as such term is
defined) for the Facility. The interest rate for this Facility is one-month LIBOR plus a margin of
400 basis points, with a floor of 200 basis points for one-month LIBOR. The Facility also requires
payment of a fee of up to 25 basis points related to unused credit available to us under the
Facility. We are entitled to prepay the obligations at any time without penalty. The facility
includes a financial covenant requiring us to raise at least $20 million in our public offering in
the six month period ending June 30, 2011, and to raise an additional $20 million in net offering
proceeds during each six month calendar period thereafter. Because we suspended our public
offering on April 29, 2011, we will not be able to satisfy this covenant; however, we expect to
negotiate a waiver of the covenant with the lender or to pay off the outstanding balance under the
credit facility using currently available cash. As of March 31, 2011, the credit facility had a
balance of approximately $16.3 million.
We will not rely on advances from our Advisor to acquire properties but our Advisor and its
affiliates may loan funds to special purposes entities that may acquire properties on our behalf
pending our raising sufficient proceeds from our offerings to purchase the properties from the
special purpose entity.
There may be a delay between the sale of our shares and the purchase of properties. During this
period, our public offering net offering proceeds will be temporarily invested in short-term,
liquid investments that could yield lower returns than investments in real estate.
Potential future sources of capital include proceeds from future equity offerings, proceeds from
secured or unsecured financings from banks or other lenders, proceeds from the sale of properties
and undistributed funds from operations.
Distributions
Some or all of our distributions have been paid from sources other than operating cash flow, such
as offering proceeds and proceeds from loans, including those secured by our assets. Currently,
we make cash distributions to our stockholders at an annualized rate of
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7.5%, based on a $10.00 per
share purchase price. Until proceeds from our public offering are invested and generating operating
cash flow sufficient to make distributions to stockholders, we intend to pay all or a substantial
portion of our distributions from the proceeds of our public offering or from borrowings in
anticipation of future cash flow, reducing the amount of funds that would otherwise be available
for investment.
Historically, we have used a portion of the proceeds from our distribution reinvestment plan for
general corporate purposes, including capital expenditures on our real estate investments, tenant
improvement costs and leasing costs related to our investments in real estate properties; reserves
required by financings of our investments in real estate properties; and the repayment of debt.
Because our distribution reinvestment plan was suspended on May 10, 2011, we will no longer have
distribution reinvestment plan proceeds available for such general corporate purposes. Because such
funds will not be available from the distribution reinvestment plan offering, we may have to use a
greater proportion of our cash flow from operations to meet our general cash requirements, which
would reduce cash available for distributions.
Distributions Declared | Cash Flow from | |||||||||||||||
Period | Cash | Reinvested | Total | Operations | ||||||||||||
First quarter 2010 |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | $ | 48,000 | ||||||||
First quarter 2011 |
$ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 | $ | 1,583,000 |
From our inception in October 2006 through March 31, 2011, we declared aggregate distributions of
$10.5 million and our cumulative net loss during the same period was $13.3 million.
Contractual Obligations
The following table reflects our contractual obligations as of March 31, 2011, specifically our
obligations under long-term debt agreements and purchase obligations:
Payment due by period | ||||||||||||||||||||
Less than 1 | More than | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Long-Term Debt Obligations (1) |
$ | 90,885,000 | $ | 793,000 | $ | 33,902,000 | $ | 27,229,000 | $ | 28,961,000 | ||||||||||
Interest expense related to long-term debt (2) |
$ | 31,664,000 | $ | 4,595,000 | $ | 7,439,000 | $ | 4,875,000 | $ | 14,755,000 | ||||||||||
Payable to related parties (3) |
$ | 1,000 | $ | 1,000 | $ | | $ | | $ | | ||||||||||
Acquisition commitment (4) |
$ | 8,730,000 | $ | 8,730,000 | $ | | $ | | $ | | ||||||||||
Performance based earn outs (5) |
$ | 1,741,000 | $ | 1,000,000 | $ | 741,000 | $ | | $ | |
(1) | Represents principal amount owed on all outstanding debt as of March 31, 2011. | |
(2) | Represents interest expense related to various loan agreements in connection with all acquisitions as of March 31, 2011. The information in the table above reflects our projected interest rate obligations for these loan agreements based on the contract interest rates, interest payment dates, and scheduled maturity dates. | |
(3) | Payable to related parties consists of offering costs, acquisition fees, expense reimbursement payable, sales commissions and dealer manager fees to our Advisor and PCC. | |
(4) | On March 25, 2011, we became obligated under a purchase and sale agreement to acquire Sunrise of Allentown. The acquisition was initially funded with proceeds from our public offering. Subsequent to closing, we placed a mortgage debt of approximately $5.8 million from an unaffiliated lender. | |
(5) | Represents the earn out agreement related to the Greentree at Westwood and Terrance at Mountain Creek. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We invest our cash and cash equivalents in government-backed
securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate
fluctuations. However, we believe that the primary market risk to which we will be exposed is
interest rate risk relating the variable portion of our debt financing. As of March 31, 2011, we
had approximately $50.3 million of variable rate debt, the majority of which is at a rate tied to
the 3-month LIBOR. A 1.0% change in 3-Month LIBOR would result in a change in annual interest
expense of approximately $503,000 per year. Our interest rate risk management objectives will be to
monitor and manage the impact of interest rate changes on earnings and cash
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flows by using certain
derivative financial instruments such as interest rate swaps and caps in order to mitigate our
interest rate risk on variable rate debt. We will not enter into derivative or interest rate
transactions for speculative purposes.
In addition to changes in interest rates, the fair value of our real estate is subject to
fluctuations based on changes in the real estate capital markets, market rental rates for
healthcare facilities, local, regional and national economic conditions and changes in the credit
worthiness of tenants. All of these factors may also affect our ability to refinance our debt if
necessary.
Item 4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our senior management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our President and Chief Financial Officer has reviewed the effectiveness of our disclosure
controls and procedures and has concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
Under the supervision and with the participation of our management, including our President and
Chief Financial Officer, we evaluated our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
her evaluation as of the end of the period covered by this report, our President and Chief
Financial Officer has concluded that we maintained effective internal control over financial
reporting, at the reasonable assurance level, as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1A. | Risk Factors |
The following risk supplements the risks disclosed in Part I, Item 1A if our annual report on Form
10-K for the fiscal year ended December 31, 2010.
We are dependent upon our advisor and its affiliates to conduct our operations. Our advisor is
losing money with respect to its management and operation of our business, which could require us
to find alternative service providers. In addition, at our advisors recommendation, we are
considering engaging a new dealer manager for our public offering, which is currently suspended,
and this may also entail engaging a new advisor. We may have difficulty finding a qualified dealer
manager and/or advisor, and any successor dealer manager or advisor may not be as well suited to
manage us or our offering. These potential changes could result in a significant disruption of our
business and may adversely affect the value of our stockholders investment in us.
At the recommendation of our advisor, the Independent Directors Committee of our board of directors
is considering various strategic alternatives to enhance value for our stockholders. One of the
alternatives under consideration is the hiring of a new dealer manager for our public offering of
common stock, which was suspended on April 29, 2011. However, the Independent Directors Committee
has made no determination regarding whether or when our follow-on offering may be recommenced. We
may have difficulty finding a new qualified dealer manager, and any change in the dealer manager
will require our public offering to remain suspended until regulatory approvals are obtained. Such
a suspension could last months, and we cannot assure you that the necessary regulatory approvals
would be obtained. In addition, any new dealer manager we engage may fail to raise significant
capital. If we fail to raise significant capital, our portfolio will be less diversified and the
value of our stockholders investment in us will vary more greatly with changes in the value of any one asset.
Moreover, our general and administrative expenses will be greater in proportion to our assets,
which will adversely affect our stockholders returns.
The strategic alternatives under consideration may also involve changes to our advisory
relationships, including the possibility of a replacement of our advisor. As previously
reported, our advisor has been losing money with respect to the services it provides to us. In
addition, the financial condition of our advisor has been further weakened by the recent
determination of our Independent Directors Committee that only approximately $0.2 million of the total
Excess Amount (as defined in our charter) of total operating
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expenses for the four quarters ended
March 31, 2011 was justified. The effect of this determination is to obligate the advisor to repay
to us the balance of the total Excess Amount in the amount of approximately $1.6 million, which it
may not have the resources to do. In addition, the amount of this repayment obligation is disputed
by our advisor. If our advisor cannot meet its obligations as they arise, or if we are unable to
resolve the current dispute regarding repayment of excess operating expenses, we may have to find
another advisor. Moreover, adverse changes in the financial condition of our advisor could entitle
Servant Healthcare Investments LLC, on which our advisor relies to source and manage our healthcare
investments, to end its relationship with our advisor and to work with another program.
If we are required to find a new advisor, or if we seek to alter our advisory relationships in
connection with a change in dealer manager as described above, we may have difficulty doing so, and
any successor dealer manager or advisor may not be as well suited to manage us or our public
offering. In addition, our revolving credit facility with KeyBank National Association, and
mortgage indebtedness secured by certain of our properties, contain covenants that restrict our
ability to change advisors without the consent of the lenders. If we were required to change
advisors and are not able to obtain consent to do so from one or more of our lenders, we would be
in breach of such covenants. Such breaches could result in acceleration of our repayment
obligations under the affected loans. As we have no employees and are entirely dependent on our
advisor to manage our operations, these potential changes could result in a significant disruption
of our business.
Although our Independent Directors Committee is monitoring our relationships with our advisors
closely and will exercise care to try to minimize significant disruptions to our business, we
cannot assure you that these disruptions can be avoided or that your investment in us will not
suffer in connection with any of the potential changes in our advisory relationships.
We have paid, and may in the future pay, distributions from sources other than cash provided from
operations.
Until proceeds from our offerings are invested and generating operating cash flow sufficient to
support distributions to stockholders, we intend to pay a substantial portion of our distributions
from the proceeds of our offerings or from borrowings in anticipation of future cash flow. Our
organizational documents do not limit the amount of distributions we can fund from sources other
than from operating cash flow. To the extent that we use offering proceeds to fund distributions to
stockholders, the amount of cash available for investment in properties will be reduced. For the
four quarters ended March 31, 2011, our cash outflow from operations was approximately $1.6
million. During that period we paid distributions to investors of approximately $6.9 million, of
which approximately $3.4 million was reinvested pursuant to our distribution reinvestment plan and
approximately $3.5 million was paid to investors in cash from our offering proceeds.
We will no longer have funds available from the distribution reinvestment plan offering to use for
general corporate purposes; therefore, we may have to use a greater proportion of our cash flow
from operations to meet our general cash requirements, which would reduce cash available for
distributions.
Historically, we have used a portion of the proceeds from our distribution reinvestment plan for
general corporate purposes, including capital expenditures on our real estate investments, tenant
improvement costs and leasing costs related to our investments in real estate properties; reserves
required by financings of our investments in real estate properties; and the repayment of debt.
Because our distribution reinvestment plan was suspended on May 10, 2011, we will no longer have
distribution reinvestment plan proceeds available for such general corporate purposes. Because such
funds will not be available from the distribution reinvestment plan offering, we may have to use a
greater proportion of our cash flow from operations to meet our general cash requirements, which
would reduce cash available for distributions. As a consequence, we may not have sufficient cash
available to maintain our current level of distributions.
Our revolving credit facility with KeyBank National Association contains a debt covenant that
requires us to raise at least $20 million in net offering proceeds in our public offering by June
30, 2011. Because we suspended our public offering on April 29, 2011, we are likely to breach
this covenant unless we are able to negotiate a waiver with the lender or we pay off the
outstanding balance under the credit facility. If we are not able to negotiate a waiver of the
covenant or pay off the outstanding balance, the lender is likely to accelerate our obligations
under the credit facility, which could materially adversely affect the value of your investment in
us.
In November 2010, we entered into a revolving credit facility with KeyBank National Association, as
lead arranger, a lender and agent, under which we may borrow up to $25 million. The facility
includes a financial covenant requiring us to raise at least $20 million in our public offering
during the six months ended June 30, 2011, and to raise an additional $20 million in net offering
proceeds during each six-month calendar period thereafter. Should we not raise this amount of
capital, we will be in breach under the facility. Because we suspended our public offering on April
29, 2011, we will not be able to satisfy this covenant unless we are able to negotiate a waiver of
the covenant with the lender or we pay off the outstanding balance under the credit facility. Such
a breach
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could result in an acceleration of the repayment date. If we did not have sufficient cash
to repay the facility at that time, the lenders under the facility could foreclose on any of our
properties securing the facility. Such foreclosure could result in a material loss for us and
would adversely affect the value of our stockholders investment in us.
We are dependent on services provided to us by Servant Healthcare Investments, LLC (SHI) pursuant
to a sub-advisory arrangement between SHI and affiliates of our advisor. In the event that we are
required to find an alternative advisor, the services provided to us by SHI may be disrupted, which
could have a significant adverse impact on our business and could reduce the value of an investment
in us.
We rely on SHI and its key personnel to provide acquisition and asset management services for our
portfolio of properties. We do not contract directly with SHI for the provision of these services;
rather SHI provides these services to us pursuant to a sub-advisory arrangement between SHI and
affiliates of our advisor. If we are required to engage an alternative advisor, either as a result
of the deteriorating financial condition of our current advisor or as a result of our pursuit of
strategic alternatives that would entail engaging a new advisor, the services currently being
provided to us by SHI and its personnel could be disrupted. Because we have no employees and are
entirely dependent on the personnel of our advisor and SHI to manage our operations, a disruption
in the services provided by SHI could have a significant adverse impact on our business and could
reduce the value of our stockholders investments in us.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | We did not sell any equity securities that we did not registered under the Securities Act of 1933 during the period covered by this Form 10-Q. | |
(b) | On August 10, 2007, our Registration Statement on Form S-11 (File No. 333-139704), covering a public offering of up to 40,000,000 shares of common stock for an aggregate offering amount of $400.0 million was declared effective under the Securities Act of 1933. The offering has not terminated yet. As of March 31, 2011, we had sold approximately 12.5 million shares of common stock in our ongoing public offering and raised gross offering proceeds of approximately $124.5 million. From this amount, we incurred approximately $12.2 million in selling commissions and dealer manager fees payable to our dealer manager and approximately $3.9 million in acquisition fees payable to the Advisor. We had acquired 13 properties and one development project as of March 31, 2011. | |
(c) | During the three months ended March 31, 2011, we repurchased shares pursuant to our stock repurchase program as follows: |
Total Number | Average | |||||||
of Shares | Price Paid | |||||||
Period | Redeemed | per Share | ||||||
January |
1,194 | $ | 9.88 | |||||
February |
17,379 | $ | 9.42 | |||||
March |
25,217 | $ | 9.29 | |||||
43,790 | ||||||||
Item 5. | Other Information |
Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Cornerstone Healthcare Plus REIT, Inc. was held on May 12,
2011. The matters submitted to the stockholders for a vote were:
1. | To elect seven directors to hold office for one-year terms expiring in 2012. The nominees submitted for election as directors were Terry G. Roussel, William A. Bloomer, Romeo R. Cefalo, Barry A. Chase, Steven M. Pearson, Ronald Shuck, and James M. Skorheim. | ||
2. | To approve the following proposed amendments to our charter: |
a. | Amendments to the definition of independent director in our charter; | ||
b. | Amendments to the charter provision relating to the issuance of preferred stock; | ||
c. | Amendments to the charter provision relating to acquisition fees; |
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d. | Amendments to the charter provision relating to the approval of acquisitions; | ||
e. | Amendments to the charter provision relating to limitations on sales to affiliates; | ||
f. | Amendments to the charter provision relating to limitations on joint venture; | ||
g. | Amendments to the charter provision relating to limitations on other transactions involving affiliates; | ||
h. | Amendments to the charter provision relating to limitations on loans; | ||
i. | Amendments to the charter provision relating to roll-up transactions; | ||
j. | Amendments to the charter provision relating to meetings of our stockholders; | ||
k. | Amendments to the charter provision relating to voting limitations on shares held by our Advisor, directors and their affiliates; | ||
l. | Amendments to the charter provision relating to access to our stockholder list; and | ||
m. | Amendments to the charter provision relating to reports to our stockholders. |
3. | To approve, by a non-binding advisory vote, the compensation paid to our named executive officers. | ||
4. | To select, by a non-binding advisory vote, the frequency at which the stockholders will be asked to approve, by a non-binding advisory vote, the compensation paid to our named executive officers. |
Voting results
Proposal 1
The following are the voting results (in number of shares) with respect to the election of
directors:
Name | For | Withhold | ||||||
Terry G. Roussel |
7,177,661 | 200,061 | ||||||
William A. Bloomer |
7,196,711 | 181,011 | ||||||
Romeo R. Cefalo |
7,199,368 | 178,354 | ||||||
Barry A. Chase |
7,196,864 | 100,858 | ||||||
Steven M. Pearson |
7,203,553 | 174,169 | ||||||
Ronald Shuck |
7,203,553 | 174,169 | ||||||
James M. Skorheim |
7,201,077 | 176,645 |
A majority of the votes present in person or by proxy at the meeting was required for the election
of the directors. As a result, all of the nominees were elected to serve as directors for one-year
terms and until their successors are duly elected and qualified.
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Proposal 2
The following are the voting results (in number of shares) with respect to the proposed amendments
to our charter:
Proposal | For | Against | Abstain | |||||||||
2.a. |
6,941,500 | 134,731 | 301,491 | |||||||||
2.b. |
6,921,588 | 147,080 | 309,054 | |||||||||
2.c. |
6,909,006 | 164,415 | 304,301 | |||||||||
2.d. |
6,938,888 | 127,567 | 311,267 | |||||||||
2.e. |
6,968,882 | 105,064 | 303,776 | |||||||||
2.f. |
6,947,143 | 122,613 | 307,966 | |||||||||
2.g. |
6,939,822 | 129,303 | 308,598 | |||||||||
2.h. |
6,934,225 | 147,418 | 296,078 | |||||||||
2.i. |
6,929,054 | 147,128 | 301,541 | |||||||||
2.j. |
6,951,151 | 125,374 | 301,197 | |||||||||
2.k. |
6,959,181 | 126,079 | 292,461 | |||||||||
2.l. |
6,955,476 | 126,699 | 295,548 | |||||||||
2.m. |
6,975,301 | 110,022 | 292,399 |
The affirmative vote of the holders of at least a majority of our outstanding shares of common
stock entitled to vote on the proposals is required to approve the amendments to our charter.
Abstentions and broker non-votes have the same effect as votes against the proposals to amend our
charter. As result, all of the proposed amendments to our charter have been approved.
Proposal 3
The following are the voting results (in number of shares) with respect to the non-binding advisory
vote regarding the compensation paid to our named executive officers:
For | Against | Abstain | ||
6,504,593
|
408,773 | 464,357 |
The affirmative vote of a majority of the total votes cast at the annual meeting for or against
this proposal is required to approve the compensation paid to our named executive officers.
Abstentions and broker non-votes are not considered votes cast and have no
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effect on the outcome of this matter. As a result, the non-binding advisory vote has approved the
compensation paid to our named executive officers.
Proposal 4
The following are the voting results (in number of shares) with respect to the the frequency at which the stockholders will be asked to approve, by a non-binding advisory
vote, the compensation paid to our named executive officers:
One Year | Two Years | Three Years | Abstain | |||
928,492 | 462,669 | 5,642,195 | 344,366 |
The selection of the frequency of the advisory vote on the compensation paid to our named executive
officers is decided by a plurality of the votes cast for the frequency periods available.
Abstentions and broker non-votes are not considered votes cast and have no effect on the outcome of
this matter. As a result, the non-binding advisory vote has approved a triennial frequency for
non-binding advisory votes to approve the compensation paid to our named executive officers.
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Item 6. | Exhibits |
3.1 | Articles of Amendment and Restatement of the Registrant (incorporated
by reference to the Registrants annual report on Form 10-K for the
fiscal year ended December 31, 2009). |
|||
3.2 | Articles of Amendment of the Registrant, dated as of December 29, 2009
(incorporated by reference to the Registrants annual report on Form
10-K for the fiscal year ended December 31, 2009). |
|||
3.3 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-11 (No. 333-139704), filed on March 21, 2007). |
|||
4.1 | Subscription Agreement (incorporated by reference to Appendix A to the
Registrants prospectus filed on February 7, 2011). |
|||
4.2 | Statement regarding restrictions on transferability of shares of
common stock (to appear on stock certificate or to be sent upon
request and without charge to stockholders issued shares without
certificates) (incorporated by reference to Exhibit 4.2 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
S-11 (No. 333-139704) filed on June 15, 2007). |
|||
4.3 | Distribution Reinvestment Plan (incorporated by reference to Appendix
B to the Registrants prospectus filed on February 7, 2011). |
|||
31 | Certification of Principal Executive and Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32 | Certification of Principal Executive and Principal Financial Officer
and Chief Financial Officer Pursuant to 18 U.S.C. Sec.1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized this 27th day of May 2011.
CORNERSTONE HEALTHCARE PLUS REIT, INC. |
||||
By: | /s/ SHARON C. KAISER | |||
Sharon C. Kaiser, President and Chief Financial Officer | ||||
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
||||
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