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EXCEL - IDEA: XBRL DOCUMENT - Sentio Healthcare Properties Inc | Financial_Report.xls |
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EX-31 - EX-31 - Sentio Healthcare Properties Inc | a58027exv31.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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 (State or other jurisdiction of incorporation or organization) |
20-5721212 (I.R.S. Employer Identification No.) |
|
1920 MAIN STREET, SUITE 400, IRVINE, CA (Address of principal executive offices) |
92614 (Zip Code) |
949-852-1007
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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).
þ 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 | |||
(Do not check if a smaller reporting company) |
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 August 12, 2011, there were 12,981,826 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 | ||||||||
25 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
34 | ||||||||
35 | ||||||||
36 | ||||||||
37 | ||||||||
EX-31 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 31,683,000 | $ | 29,819,000 | ||||
Investments in real estate |
||||||||
Land |
21,269,000 | 18,949,000 | ||||||
Buildings and improvements, net |
115,680,000 | 87,933,000 | ||||||
Furniture, fixtures and equipment, net |
2,707,000 | 2,410,000 | ||||||
Development costs and construction in progress |
921,000 | 13,669,000 | ||||||
Intangible lease assets, net |
7,127,000 | 5,907,000 | ||||||
147,704,000 | 128,868,000 | |||||||
Deferred financing costs, net |
1,381,000 | 1,382,000 | ||||||
Tenant and other receivables |
1,613,000 | 1,462,000 | ||||||
Receivable from related parties, net (Note 12) |
| | ||||||
Deferred costs and other assets |
1,588,000 | 554,000 | ||||||
Restricted cash |
3,281,000 | 2,942,000 | ||||||
Goodwill |
5,965,000 | 5,329,000 | ||||||
Total assets |
$ | 193,215,000 | $ | 170,356,000 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Notes payable |
$ | 97,298,000 | $ | 80,792,000 | ||||
Accounts payable and accrued liabilities |
6,700,000 | 4,886,000 | ||||||
Payable to related parties |
| 65,000 | ||||||
Prepaid rent and security deposits |
1,625,000 | 1,127,000 | ||||||
Distributions payable |
801,000 | 722,000 | ||||||
Total liabilities |
106,424,000 | 87,592,000 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Equity |
||||||||
Preferred stock, $0.01 par value per share;
20,000,000 shares authorized; no shares
were issued or outstanding at June 30, 2011
and December 31, 2010 |
| | ||||||
Common stock, $0.01 par value per share;
580,000,000 shares authorized; 13,000,825 and
11,592,883 shares issued and outstanding at
June 30, 2011 and December 31, 2010,
respectively |
130,000 | 116,000 | ||||||
Additional paid-in capital |
99,012,000 | 91,588,000 | ||||||
Accumulated deficit |
(15,013,000 | ) | (11,722,000 | ) | ||||
Total stockholders equity |
84,129,000 | 79,982,000 | ||||||
Noncontrolling interests |
2,662,000 | 2,782,000 | ||||||
Total equity |
86,791,000 | 82,764,000 | ||||||
Total liabilities and equity |
$ | 193,215,000 | $ | 170,356,000 | ||||
The
accompanying notes are an integral part of these condensed consolidated financial
statements.
3
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Rental revenue |
$ | 8,371,000 | $ | 3,373,000 | $ | 15,931,000 | $ | 5,810,000 | ||||||||
Resident services and fee income |
2,020,000 | 576,000 | 3,722,000 | 1,071,000 | ||||||||||||
Tenant reimbursements and other income |
308,000 | 122,000 | 631,000 | 232,000 | ||||||||||||
10,699,000 | 4,071,000 | 20,284,000 | 7,113,000 | |||||||||||||
Expenses: |
||||||||||||||||
Property operating and maintenance |
6,464,000 | 2,642,000 | 12,152,000 | 4,502,000 | ||||||||||||
General and administrative expenses |
1,297,000 | 512,000 | 1,961,000 | 1,040,000 | ||||||||||||
Asset management fees and expenses |
376,000 | 195,000 | 807,000 | 360,000 | ||||||||||||
Real estate acquisition costs and earn-out costs |
514,000 | 881,000 | 1,641,000 | 1,339,000 | ||||||||||||
Depreciation and amortization |
2,129,000 | 930,000 | 3,990,000 | 1,570,000 | ||||||||||||
10,780,000 | 5,160,000 | 20,551,000 | 8,811,000 | |||||||||||||
Loss from operations |
(81,000 | ) | (1,089,000 | ) | (267,000 | ) | (1,698,000 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
3,000 | 9,000 | 7,000 | 12,000 | ||||||||||||
Interest expense |
(1,604,000 | ) | (546,000 | ) | (3,080,000 | ) | (883,000 | ) | ||||||||
Net loss |
(1,682,000 | ) | (1,626,000 | ) | (3,340,000 | ) | (2,569,000 | ) | ||||||||
Net income (loss) attributable to
noncontrolling interests |
16,000 | (82,000 | ) | (49,000 | ) | (78,000 | ) | |||||||||
Net loss attributable to common stockholders |
$ | (1,698,000 | ) | $ | (1,544,000 | ) | $ | (3,291,000 | ) | $ | (2,491,000 | ) | ||||
Basic and diluted net loss per common share
attributable to common stockholders |
$ | (0.13 | ) | $ | (0.22 | ) | $ | (0.26 | ) | $ | (0.42 | ) | ||||
Weighted-average number of common shares |
13,004,904 | 7,099,586 | 12,488,389 | 5,959,909 | ||||||||||||
Distribution declared, per common share |
$ | 0.19 | $ | 0.19 | $ | 0.38 | $ | 0.38 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Number of | Stock Par | Paid-In | Accumulated | Stockholders | Noncontrolling | Total | ||||||||||||||||||||||
Shares | Value | Capital | Deficit | Equity | Interests | 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 |
1,575,250 | 16,000 | 15,628,000 | | 15,644,000 | | 15,644,000 | |||||||||||||||||||||
Redeemed shares |
(167,308 | ) | (2,000 | ) | (1,602,000 | ) | | (1,604,000 | ) | | (1,604,000 | ) | ||||||||||||||||
Offering costs |
| | (1,890,000 | ) | | (1,890,000 | ) | | (1,890,000 | ) | ||||||||||||||||||
Distributions |
| | (4,712,000 | ) | | (4,712,000 | ) | (71,000 | ) | (4,783,000 | ) | |||||||||||||||||
Net loss |
| | | (3,291,000 | ) | (3,291,000 | ) | (49,000 | ) | (3,340,000 | ) | |||||||||||||||||
Balance June
30, 2011 |
13,000,825 | $ | 130,000 | $ | 99,012,000 | $ | (15,013,000 | ) | $ | 84,129,000 | $ | 2,662,000 | $ | 86,791,000 | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Common Stock | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Number of | Stock Par | Paid-In | Accumulated | Stockholders | Noncontrolling | Total | ||||||||||||||||||||||
Shares | Value | Capital | Deficit | Equity | Interests | 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 |
3,221,344 | 32,000 | 32,125,000 | | 32,157,000 | | 32,157,000 | |||||||||||||||||||||
Redeemed shares |
(23,709 | ) | | (220,000 | ) | | (220,000 | ) | | (220,000 | ) | |||||||||||||||||
Noncontrolling
interest
contribution |
| | | | | 2,621,000 | 2,621,000 | |||||||||||||||||||||
Offering costs |
| | (3,567,000 | ) | | (3,567,000 | ) | | (3,567,000 | ) | ||||||||||||||||||
Distributions |
| | (2,392,000 | ) | | (2,392,000 | ) | (7,000 | ) | (2,399,000 | ) | |||||||||||||||||
Net loss |
| | | (2,491,000 | ) | (2,491,000 | ) | (78,000 | ) | (2,569,000 | ) | |||||||||||||||||
Balance
June 30, 2010 |
8,191,386 | $ | 82,000 | $ | 65,497,000 | $ | (7,894,000 | ) | $ | 57,685,000 | $ | 2,536,000 | $ | 60,221,000 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,340,000 | ) | $ | (2,569,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities, net of acquisitions: |
||||||||
Amortization of deferred financing costs |
283,000 | 26,000 | ||||||
Depreciation and amortization |
3,990,000 | 1,570,000 | ||||||
Straight-line rent amortization |
(452,000 | ) | (146,000 | ) | ||||
Real estate earn out costs |
721,000 | | ||||||
Cancellation of advisor obligation |
1,630,000 | | ||||||
Change in operating assets and liabilities: |
||||||||
Tenant and other receivables |
299,000 | 266,000 | ||||||
Deferred costs and deposits |
(1,027,000 | ) | (517,000 | ) | ||||
Restricted cash |
(221,000 | ) | | |||||
Prepaid rent and tenant security deposits |
498,000 | 83,000 | ||||||
Payable to related parties |
(38,000 | ) | (180,000 | ) | ||||
Receivable from related parties |
(1,630,000 | ) | | |||||
Accounts payable and accrued liabilities |
1,475,000 | 918,000 | ||||||
Net cash provided by (used in) operating activities |
2,188,000 | (549,000 | ) | |||||
Cash flows from investing activities: |
||||||||
Real estate acquisitions |
(19,751,000 | ) | (12,363,000 | ) | ||||
Additions to real estate |
(371,000 | ) | (49,000 | ) | ||||
Restricted cash |
(118,000 | ) | (752,000 | ) | ||||
Development of real estate |
(2,807,000 | ) | (4,058,000 | ) | ||||
Acquisition deposits |
100,000 | (106,000 | ) | |||||
Net cash used in investing activities |
(22,947,000 | ) | (17,328,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
14,160,000 | 31,074,000 | ||||||
Redeemed shares |
(1,604,000 | ) | (220,000 | ) | ||||
Repayment of note payable |
(395,000 | ) | (137,000 | ) | ||||
Proceeds from notes payable |
16,901,000 | 5,613,000 | ||||||
Payment of real estate earn out costs |
(1,000,000 | ) | | |||||
Offering costs |
(1,917,000 | ) | (4,148,000 | ) | ||||
Deferred financing costs |
(302,000 | ) | (260,000 | ) | ||||
Noncontrolling interest contribution |
| 886,000 | ||||||
Distributions paid to stockholders |
(3,149,000 | ) | (1,129,000 | ) | ||||
Distributions paid to noncontrolling interests |
(71,000 | ) | (7,000 | ) | ||||
Net cash provided by financing activities |
22,623,000 | 31,672,000 | ||||||
Net increase in cash and cash equivalents |
1,864,000 | 13,795,000 | ||||||
Cash and cash equivalents beginning of period |
29,819,000 | 14,900,000 | ||||||
Cash and cash equivalents end of period |
$ | 31,683,000 | $ | 28,695,000 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 2,718,000 | $ | 652,000 | ||||
Cash paid for income taxes |
$ | 441,000 | $ | | ||||
Supplemental disclosure of non-cash financing and investing activities: |
||||||||
Distributions declared not paid |
$ | 801,000 | $ | 485,000 | ||||
Distribution reinvested |
$ | 1,484,000 | $ | 1,083,000 | ||||
Loan assumed at property acquisition |
$ | | $ | 12,902,000 | ||||
Assets contributed by noncontrolling interest |
$ | | $ | 1,735,000 | ||||
Accrued offering costs |
$ | | $ | 149,000 | ||||
Accrued real estate development costs |
$ | 279,000 | $ | | ||||
Accrued acquisition fees |
$ | | $ | 30,000 | ||||
Accrued promote monetization liability |
$ | 2,018,000 | $ | | ||||
Deferred financing amortization capitalized to real estate development |
$ | 20,000 | $ | |
The
accompanying notes are an integral part of these condensed consolidated financial
statements.
6
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Effective July 29, 2011, the Company and the Advisor, together with Cornerstone Ventures, Inc., an
affiliate of the Companys advisor (CVI), CIP Leveraged Fund Advisors, LLC, the sole member of
the Companys advisor (CLFA), Servant Healthcare Investment, LLC, the Companys sub-advisor (the
Sub-Advisor), and Terry Roussel (together with CVI, CLFA and the Advisor, the Cornerstone
Parties), entered into an Omnibus Agreement (the Omnibus Agreement) which, among other actions:
(1) amended the advisory agreement, initially executed on September 12, 2007, by and between the
Advisor and the Company (as amended, the Advisory Agreement); (2) provided for the transfer of
certain interests in the Company from the Cornerstone Parties to the Company; (3) terminated the
alliance agreement, dated as of May 19, 2008, by and between CVI and the Sub-Advisor; (4) modified and assigned to the Company the Sub-Advisory Agreement, dated as of May
19, 2008, by and between the Advisor, CLFA and the Sub-Advisor; and
(5) canceled and forgave certain amounts due from the Advisor to the Company, all as further
described herein.
Cornerstone Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the
Operating Partnership), was formed on October 17, 2006. At June 30, 2011, we owned a 99.8%
general partner interest in the Operating Partnership while the Advisor owned a 0.2% limited
partnership interest. In addition, the Advisor owned 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. Effective July 29, 2011, pursuant to the
Omnibus Agreement, the Advisor has no ownership interest in the Company or its affiliates.
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.
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. As a result of negotiations relating to the Omnibus Agreement, Mr. Roussel
also resigned as a director of the Company, effective July 29, 2011.
In response to the resignation of Mr. Roussel, our board of directors appointed Sharon C. Kaiser to
serve as our President, effective May 25, 2011.
7
Table of Contents
2. Public Offering and Strategic Alternatives
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 $123.9 million
from the sale of 12.4 million shares, including shares sold under the distribution reinvestment
plan.
On February 4, 2011, the U.S. 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.
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. The Independent Directors Committee is continuing to evaluate strategic alternatives, including a possible merger with another company or the sale of the entire portfolio.
As of June 30, 2011, we had sold a total of 12.7 million shares of our common stock for aggregate
gross proceeds of $127.0 million.
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 and six months ended June 30, 2011 are not necessarily indicative of the
results that may be expected for the full fiscal year. These financial statements should be read in
conjunction with the Companys 2010 Annual Report on Form 10-K, as filed with the SEC.
8
Table of Contents
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 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 settlement.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of June 30, 2011 and December 31, 2010, the fair
value of notes payable was $97.9 million and $81.7 million, compared to the carrying value of $97.3
million and $80.8 million, respectively.
4. Investment in Real Estate
The following table provides summary information regarding our current property portfolio.
Gross | June 30, | |||||||||||||||||||||||
Date | Square | Purchase | June 30, 2011 | 2011 | ||||||||||||||||||||
Property | Location | Purchased | Feet | Price | Debt | Occupancy | ||||||||||||||||||
Caruth Haven Court |
Highland Park, TX | 01/22/09 | 74,647 | $ | 20,500,000 | $ | 9,848,000 | 92.3 | % | |||||||||||||||
The Oaks Bradenton |
Bradenton, FL | 05/01/09 | 18,172 | $ | 4,500,000 | $ | 2,718,000 | 98.7 | % | |||||||||||||||
GreenTree at Westwood (1) |
Columbus, IN | 12/30/09 | 50,249 | $ | 5,150,000 | $ | 2,833,000 | 94.8 | % | |||||||||||||||
Mesa Vista Inn Health Center |
San Antonio, TX | 12/31/09 | 55,525 | $ | 13,000,000 | $ | 7,238,000 | 80.0 | % | |||||||||||||||
Rome LTACH Project (2) |
Rome, GA | 01/12/10 | 52,944 | | $ | 10,922,000 | 100.0 | % | ||||||||||||||||
Oakleaf Village Portfolio: |
$ | 17,745,000 | ||||||||||||||||||||||
Oakleaf Village at Lexington |
Lexington, SC | 04/30/10 | 63,917 | $ | 14,512,000 | 89.0 | % | |||||||||||||||||
Oakleaf Village at Greenville |
Greer, SC | 04/30/10 | 56,437 | $ | 12,488,000 | 72.0 | % | |||||||||||||||||
Global Rehab Inpatient Rehab
Facility |
Dallas, TX | 08/19/10 | 40,828 | $ | 14,800,000 | $ | 7,485,000 | 80.0 | % | |||||||||||||||
Terrace at Mountain Creek
(3) |
Chattanooga, TN | 09/03/10 | 109,643 | $ | 8,500,000 | $ | 5,700,000 | 93.1 | % | |||||||||||||||
Littleton Specialty Rehabilitation
Facility (5) |
Littleton, CO | 12/16/10 | 26,808 | (4) | | $ | 1,000 | | ||||||||||||||||
Carriage Court of Hilliard |
Hilliard, OH | 12/22/10 | 69,184 | $ | 17,500,000 | $ | 13,514,000 | 95.1 | % | |||||||||||||||
Hedgcoxe Health Plaza |
Plano, TX | 12/22/10 | 32,109 | $ | 9,094,000 | $ | 5,060,000 | 95.0 | % | |||||||||||||||
Rivers Edge of Yardley |
Yardley, PA | 12/22/10 | 26,146 | $ | 4,500,000 | $ | 2,500,000 | 95.9 | % | |||||||||||||||
Forestview Manor |
Meredith, NH | 01/14/11 | 34,270 | $ | 10,750,000 | $ | 5,934,000 | 88.0 | % | |||||||||||||||
Woodland Terrace |
Allentown, PA | 04/14/11 | 50,400 | $ | 9,000,000 | $ | 5,800,000 | 87.5 | % |
(1) | The earn-out liability associated with this acquisition was estimated to have a fair value of approximately $0.9 million and $0.4 million as of June 30, 2011 and December 31, 2010, respectively. For the three and six months ended June 30, 2011, the expense of $0.2 million and $0.5 million, respectively, is related to the increased liability and has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs. |
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(2) | Rome LTACH Project was completed in February 2011 and its first tenant moved in on February 1, 2011. As of June 30, 2011 the property had $16.2 million in real estate assets. For the three and six months ended June 30, 2011, the expense related to a promote feature was $0 and $0.2 million, respectively, which has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs. Refer to Note 5 for more information on the promote feature. | |
(3) | Under the purchase and sale agreement executed in connection with the acquisition, a portion of the purchase price for the property was to be calculated and paid to the seller as earn out payments based upon the net operating income, as defined, of the property during each of the three years following our acquisition of the property. The earn-out value of $1.0 million was paid during the second quarter of 2011. | |
(4) | Represents estimated gross square footage upon completion of development. | |
(5) | As of June 30, 2011, a total of $1.6 million had been invested in this project. |
As of June 30, 2011 and December 31, 2010, goodwill had a balance of $6.0 million and $5.3 million,
respectively, all related to our senior living operations segment. During the quarter ended March
31, 2011, we recorded goodwill of $0.3 million for the acquisition of Forestview Manor. During the
quarter ended June 30, 2011, we recorded goodwill of $0.4 million for the acquisition of Woodland
Terrace. In addition to our annual impairment tests, on a quarterly
basis, the Company evaluates for potential impairment indicators on
the individual investments or reporting units and performs an
interim test when indicators exist. As of June 30, 2011, the Company has recorded no accumulated impairment related to goodwill.
As of June 30, 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 |
$ | 21,269,000 | $ | 119,102,000 | $ | 3,399,000 | $ | 921,000 | $ | 12,441,000 | ||||||||||
Accumulated
depreciation and
amortization |
| (3,422,000 | ) | (692,000 | ) | | (5,314,000 | ) | ||||||||||||
Net |
$ | 21,269,000 | $ | 115,680,000 | $ | 2,707,000 | $ | 921,000 | $ | 7,127,000 | ||||||||||
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 | ||||||||||
Depreciation expense associated with buildings and improvements, site improvements and
furniture and fixtures for the three months ended June 30, 2011 and 2010 was $1.0 million and $0.4
million, respectively. Depreciation expense associated with buildings and improvements, site
improvements and furniture and fixtures for the six months ended June 30, 2011 and 2010 was $1.9
million and $0.6 million, respectively.
Amortization associated with the intangible assets for the three months ended June 30, 2011 and
2010 was $1.1 million and $0.6 million, respectively. Amortization associated with the intangible
assets for the six months ended June 30, 2011 and 2010 was $2.0 million and $0.9 million,
respectively.
As of June 30, 2011, the Company has not recorded any asset impairment as a result of its impairment analysis.
Estimated amortization for July 1, 2011 through December 31, 2011 and subsequent years is as
follows:
Intangible | ||||
assets | ||||
July 2011 December 2011 |
$ | 1,574,000 | ||
2012 |
$ | 1,328,000 | ||
2013 |
$ | 415,000 | ||
2014 |
$ | 354,000 | ||
2015 |
$ | 354,000 | ||
2016 |
$ | 354,000 | ||
2017 and thereafter |
$ | 2,748,000 |
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The estimated useful lives for intangible assets range from one to twenty years. As of June 30,
2011, the weighted-average amortization period for intangible assets was 10 years.
5. Investments in Joint Ventures
Oakleaf Joint Venture
On April 30, 2010, we invested $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, which is consolidated in the Companys financial statements, owns and operates two assisted-living
properties located in Lexington and Greenville, South Carolina. As of June 30, 2011, total net
assets related to Oakleaf Joint Venture were $8.7 million, which includes $24.8 million of real
estate assets and total liabilities of $18.4 million. Liabilities include $17.7
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 $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 $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 $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
June 30, 2011 and December 31, 2010, we owned a 75.0% limited partnership interest in Rome LTH
Partners, LP. This joint venture is consolidated in the Companys financial statements.
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 June 30, 2011, the construction of the medical facility was completed. During the
first quarter of 2011, we determined that payments under these obligations are probable;
accordingly, we recorded $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 as
of June 30, 2011. 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 certain construction period costs of $1.8
million and $0.2 million, which are included in intangible lease assets and building and
improvements, respectively, of our condensed consolidated balance sheet. We expensed post
construction period costs of $0.2 million, which are included in real estate acquisition costs and
earn out costs in 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 June 30, 2011, total assets related to this project were $16.5
million, which includes $15.9 million of net real estate assets. Total liabilities were $13.3 million
as of June 30, 2011, which includes $10.9 million of secured mortgage debt.
ASC 820-10 establishes a three-tiered fair value hierarchy that prioritizes valuation technique
inputs. 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 corroboration 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 June 30, 2011, we estimated the fair value of the monetization
feature at $2.2 million on a recurring basis using Level 3 inputs.
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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 $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 $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 June 30, 2011 and
December 31, 2010, we owned a 90.0% limited partnership interest in Littleton Med Partners,
LP. This joint venture is consolidated in the Companys financial
statements.
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. As of June 30, 2011, the specialty
rehabilitation facility in Littleton, CO is still under construction
and, therefore, the
monetization obligation is not determinable. Accordingly, we have not recognized any obligation as of
June 30, 2011 in our condensed consolidated financial statements.
6. 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 increased the cash limit of Securities Investor Protection Corporation protection
from $100,000 to $250,000. It also provides for unlimited federal deposit insurance until January
1, 2013 for non-interest bearing demand transaction accounts at all insured depository
institutions. As of June 30, 2011, we had no cash accounts in excess of Federal Deposit Insurance
Corporation insured limits.
Concentrations of credit risks arise when a number of operators, tenants or obligors related to our
investments are engaged in similar business activities, located 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 concentration 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 73.5% and 88.1% of total revenues for the three
months ended June 30, 2011 and 2010, respectively. Our senior living operations segment accounted
for 78.3% and 86.3% of total revenues for the six months ended June 30, 2011 and 2010,
respectively. The following table provides information about our senior living operation segment
concentration for the three and six months ended June 30, 2011:
Three Months Ended | Six Months Ended | |||||||||||||||
Percentage of | Percentage of | Percentage of | Percentage of | |||||||||||||
Operators |
Segment Revenues | Total Revenues | Segment Revenues | Total Revenues | ||||||||||||
Good Neighbor Care |
30.1 | % | 26.3 | % | 30.1 | % | 23.6 | % | ||||||||
Royal Senior Care |
14.8 | % | 5.8 | % | 14.8 | % | 11.6 | % | ||||||||
Woodbine Senior Living |
22.4 | % | 17.2 | % | 22.4 | % | 17.5 | % | ||||||||
12 Oaks Senior Living |
21.2 | % | 15.7 | % | 21.2 | % | 16.6 | % | ||||||||
Provision Living |
6.1 | % | 4.5 | % | 6.1 | % | 4.7 | % | ||||||||
Legend Senior Living |
5.4 | % | 4.0 | % | 5.4 | % | 4.3 | % | ||||||||
100.0 | % | 73.5 | % | 100.0 | % | 78.3 | % | |||||||||
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Our triple-net leased segment accounted for 24.1% and 11.9% of total revenues for the three months
ended June 30, 2011 and 2010, respectively. Our triple-net leased segment accounted for 19.2% and
13.7% of total revenues for the six months ended June 30, 2011 and 2010, respectively. The
following table provides information about our triple-net leased segment for the three and six
months ended June 30, 2011:
Three Months Ended | Six Months Ended | |||||||||||||||
Percentage of | Percentage of | Percentage of | Percentage of | |||||||||||||
Tenant | Segment Revenues | Total Revenues | Segment Revenues | Total Revenues | ||||||||||||
Babcock PM Management |
19.1 | % | 4.6 | % | 25.3 | % | 4.9 | % | ||||||||
Global Rehab Hospitals |
16.6 | % | 4.0 | % | 22.0 | % | 4.2 | % | ||||||||
The Specialty Hospital |
55.3 | % | 13.3 | % | 45.3 | % | 8.7 | % | ||||||||
Floyd Healthcare Management |
9.0 | % | 2.2 | % | 7.4 | % | 1.4 | % | ||||||||
100.0 | % | 24.1 | % | 100.0 | % | 19.2 | % | |||||||||
Our medical office building segment accounted for 2.4% and 0% of total revenues for the three
months ended June 30, 2011 and 2010, respectively. Our medical office building segment accounted
for 2.5% and 0% of total revenues for the six months ended June 30, 2011 and 2010, respectively.
As of June 30, 2011, we owned 15 properties, geographically located in ten states. The following
table provides information about our geographic risks by operating segment for the three and six
months ended June 30, 2011:
Three Months Ended | Six Months Ended | |||||||||||||||
Percentage of | Percentage of | Percentage of | Percentage of | |||||||||||||
State | Segment Revenues | Total Revenues | Segment Revenues | Total Revenues | ||||||||||||
Senior living operations |
||||||||||||||||
South Carolina |
7.9 | % | 5.8 | % | 14.8 | % | 11.6 | % | ||||||||
Texas |
21.3 | % | 15.7 | % | 21.2 | % | 16.6 | % | ||||||||
Ohio |
15.2 | % | 11.2 | % | 14.7 | % | 11.5 | % | ||||||||
Pennsylvania |
18.8 | % | 13.8 | % | 14.9 | % | 11.7 | % | ||||||||
New Hampshire |
12.3 | % | 9.1 | % | 11.4 | % | 8.9 | % | ||||||||
Tennessee |
12.8 | % | 9.4 | % | 11.5 | % | 9.0 | % | ||||||||
Indiana |
6.2 | % | 4.5 | % | 6.1 | % | 4.7 | % | ||||||||
Florida |
5.5 | % | 4.0 | % | 5.4 | % | 4.3 | % | ||||||||
Triple-net leased properties |
||||||||||||||||
Texas |
35.7 | % | 8.6 | % | 47.3 | % | 9.1 | % | ||||||||
Georgia |
64.3 | % | 15.5 | % | 52.7 | % | 10.1 | % | ||||||||
Colorado (1) |
| | | | ||||||||||||
Medical office building |
||||||||||||||||
Texas |
100.0 | % | 2.4 | % | 100.0 | % | 2.5 | % |
(1) | Under construction as of June 30, 2011 |
7. 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 June 30, 2011, we had acquired ten
assisted-living facilities and formed ten wholly owned taxable REIT subsidiaries, or TRSs, which
includes a Master TRS that consolidates our wholly owned TRSs.
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
13
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the future in
excess of their net recorded amount, we would establish a valuation allowance which would offset
the previously recognized income tax benefit.
For the six months ended June 30, 2011 and 2010 the consolidated income tax benefit was $0.2
million and $0, respectively, and was included in general and administrative expenses in our
condensed consolidated financial statements. 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
$0.7 million and $0 million at June 30, 2011 and December 31, 2010, respectively, related primarily
to book and tax basis differences for straight-line rent and accrued liabilities. Realization of
these deferred tax assets is dependent in part upon generating sufficient taxable income in future
periods. These deferred tax assets are included in deferred costs and other assets in our condensed
consolidated balance sheets. We have not recorded a valuation
allowance against our deferred tax assets as of June 30, 2011.
8. Payable to Related Parties
Payable to related parties at December 31, 2010 was $0.1 million, which consisted of offering
costs, acquisition fees, expense reimbursement payable, sales commissions and dealer manager fees
to our Advisor and PCC.
9. Segment Reporting
As of June 30, 2011, we operated in three reportable business segments for management and internal
financial reporting purposes: senior living operations, triple-net leased properties, and medical
office building (MOB) properties. These operating
segments are the segments of the Company for which separate financial
information is available and for which segment results are evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. 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 MOB 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 better reflects how our business
segments are managed and each segments performance is evaluated. Prior to the Hedgcoxe Health
Plaza acquisition, we operated in two reportable segments: senior living operations and triple-net
leased properties. As a result of this realignment, segment
information for the three and six months ended June 30, 2010 was
recasted to reflect the realigned segment structure.
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.
14
Table of Contents
The following tables reconcile the segment activity to consolidated net income for the three and six months ended June 30, 2011 and 2010:
Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | |||||||||||||||||||||||||||||||
Senior | Triple-net | Medical | Senior | Triple-net | Medical | |||||||||||||||||||||||||||
living | leased | office | living | leased | office | |||||||||||||||||||||||||||
operations | properties | building | Consolidated | operations | properties | building | Consolidated | |||||||||||||||||||||||||
Rental revenues |
$ | 5,774,000 | $ | 2,396,000 | $ | 201,000 | $ | 8,371,000 | $ | 2,927,000 | $ | 446,000 | $ | | $ | 3,373,000 | ||||||||||||||||
Resident services
and fee income |
2,020,000 | | | 2,020,000 | 576,000 | | | 576,000 | ||||||||||||||||||||||||
Tenant
reimbursements and
other income |
65,000 | 187,000 | 56,000 | 308,000 | 81,000 | 41,000 | | 122,000 | ||||||||||||||||||||||||
$ | 7,859,000 | $ | 2,583,000 | $ | 257,000 | $ | 10,699,000 | $ | 3,584,000 | $ | 487,000 | $ | | $ | 4,071,000 | |||||||||||||||||
Property operating
and maintenance
expenses |
5,119,000 | 1,282,000 | 63,000 | 6,464,000 | 2,601,000 | 41,000 | | 2,642,000 | ||||||||||||||||||||||||
Net operating income |
$ | 2,740,000 | $ | 1,301,000 | $ | 194,000 | $ | 4,235,000 | $ | 983,000 | $ | 446,000 | $ | | $ | 1,429,000 | ||||||||||||||||
General and administrative expenses | 1,297,000 | 512,000 | ||||||||||||||||||||||||||||||
Asset management fees and expenses | 376,000 | 195,000 | ||||||||||||||||||||||||||||||
Real estate acquisition costs and earn out costs | 514,000 | 881,000 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
2,129,000 | 930,000 | ||||||||||||||||||||||||||||||
Interest income |
(3,000 | ) | (9,000 | ) | ||||||||||||||||||||||||||||
Interest expense |
1,604,000 | 546,000 | ||||||||||||||||||||||||||||||
Net loss |
$ | (1,682,000 | ) | $ | (1,626,000 | ) | ||||||||||||||||||||||||||
Net income (loss) attributable
to the noncontrolling interests |
16,000 | (82,000 | ) | |||||||||||||||||||||||||||||
Net loss attributable to
common stockholders |
$ | (1,698,000 | ) | $ | (1,544,000 | ) | ||||||||||||||||||||||||||
Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 | |||||||||||||||||||||||||||||||
Senior | Triple-net | Medical | Senior | Triple-net | Medical | |||||||||||||||||||||||||||
living | leased | office | living | leased | office | |||||||||||||||||||||||||||
operations | properties | building | Consolidated | operations | properties | building | Consolidated | |||||||||||||||||||||||||
Rental revenues |
$ | 11,974,000 | $ | 3,555,000 | $ | 402,000 | $ | 15,931,000 | $ | 4,917,000 | $ | 893,000 | $ | | $ | 5,810,000 | ||||||||||||||||
Resident services
and fee income |
3,722,000 | | | 3,722,000 | 1,071,000 | | | 1,071,000 | ||||||||||||||||||||||||
Tenant
reimbursements and
other income |
175,000 | 345,000 | 111,000 | 631,000 | 151,000 | 81,000 | | 232,000 | ||||||||||||||||||||||||
$ | 15,871,000 | $ | 3,900,000 | $ | 513,000 | $ | 20,284,000 | $ | 6,139,000 | $ | 974,000 | $ | | $ | 7,113,000 | |||||||||||||||||
Property operating
and maintenance
expenses |
10,564,000 | 1,455,000 | 133,000 | 12,152,000 | 4,421,000 | 81,000 | | 4,502,000 | ||||||||||||||||||||||||
Net operating income |
$ | 5,307,000 | $ | 2,445,000 | $ | 380,000 | $ | 8,132,000 | $ | 1,718,000 | $ | 893,000 | $ | | $ | 2,611,000 | ||||||||||||||||
General and administrative expenses | 1,961,000 | 1,040,000 | ||||||||||||||||||||||||||||||
Asset management fees and expenses | 807,000 | 360,000 | ||||||||||||||||||||||||||||||
Real estate acquisition costs and earn out costs | 1,641,000 | 1,339,000 | ||||||||||||||||||||||||||||||
Depreciation and amortization | 3,990,000 | 1,570,000 | ||||||||||||||||||||||||||||||
Interest income |
(7,000 | ) | (12,000 | ) | ||||||||||||||||||||||||||||
Interest expense |
3,080,000 | 883,000 | ||||||||||||||||||||||||||||||
Net loss |
$ | (3,340,000 | ) | $ | (2,569,000 | ) | ||||||||||||||||||||||||||
Net loss attributable to the noncontrolling interests | (49,000 | ) | (78,000 | ) | ||||||||||||||||||||||||||||
Net loss attributable to common stockholders | $ | (3,291,000 | ) | $ | (2,491,000 | ) | ||||||||||||||||||||||||||
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The following table reconciles the segment activity to consolidated financial position as of
June 30, 2011 and December 31, 2010.
June 30, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Investment in real estate: |
||||||||
Senior living operations |
$ | 95,035,000 | $ | 78,722,000 | ||||
Triple-net leased properties |
44,102,000 | 41,433,000 | ||||||
Medical office building |
8,567,000 | 8,713,000 | ||||||
Total reportable segments |
$ | 147,704,000 | $ | 128,868,000 | ||||
Reconciliation to consolidated assets: |
||||||||
Cash and cash equivalents |
31,683,000 | 29,819,000 | ||||||
Deferred financing costs, net |
1,381,000 | 1,382,000 | ||||||
Tenant and other receivables, net |
1,613,000 | 1,462,000 | ||||||
Deferred costs and other assets |
1,588,000 | 554,000 | ||||||
Restricted cash |
3,281,000 | 2,942,000 | ||||||
Goodwill |
5,965,000 | 5,329,000 | ||||||
Total assets |
$ | 193,215,000 | $ | 170,356,000 | ||||
10. Notes Payable
Notes payable were $97.3 million and $80.8 million as of June 30, 2011 and December 31, 2010,
respectively. As of June 30, 2011, we had fixed and variable rate secured mortgage loans with
effective interest rates ranging from 3.45% to 6.5% per annum and a weighted-average effective
interest rate of 5.92% per annum. As of June 30, 2011, we had $33.0 million of fixed rate debt, or
approximately 34% of notes payable, at a weighted-average interest rate of 6.01% per annum and
$64.3 million of variable rate debt, or approximately 66% of notes payable, at a weighted-average
interest rate of 5.87% 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. Other than
our credit facility as described below, we were in compliance with all such covenants and
requirements as of June 30, 2011.
Outstanding | Outstanding | |||||||||||||||
Principal Balance | Principal Balance | |||||||||||||||
Interest | as of June 30, | 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 | $ | 13,514,000 | $ | 13,586,000 | August 1, 2044 | |||||||||
Caruth Haven Court |
Principal and interest at a 30-year amortization rate | 6.43% fixed | $ | 9,848,000 | $ | 9,904,000 | December 16, 2019 | |||||||||
Greentree (6) |
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,833,000 | | July 31, 2012 | ||||||||||
Forestview Manor (6) |
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,934,000 | | July 31, 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% | $ | 7,485,000 | $ | 7,530,000 | December 22, 2016 | |||||||||
Hedgcoxe Health Plaza (6) |
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,060,000 | $ | 5,060,000 | July 31, 2012 |
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Outstanding | Outstanding | |||||||||||||||
Principal Balance | Principal Balance | |||||||||||||||
Interest | as of June 30, | as of December 31, | ||||||||||||||
Property Name | Payment Type | Rate | 2011(1) | 2010(1) | Maturity Date | |||||||||||
Mesa Vista Inn Health Center |
Principal and interest at a 20-year amortization rate | 6.50% fixed | $ | 7,238,000 | $ | 7,336,000 | January 5, 2015 | |||||||||
Oakleaf Village Portfolio |
(2) | (2) | $ | 17,745,000 | $ | 17,849,000 | April 30, 2015 | |||||||||
Oakleaf Village at Lexington |
| | | | | |||||||||||
Oakleaf Village at Greenville |
| | | | | |||||||||||
Rivers Edge of Yardley (6) |
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,500,000 | $ | 2,500,000 | July 31, 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 | $ | 10,922,000 | $ | 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) | $ | 2,718,000 | $ | 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 | |||||||||
Woodland Terrace at the Oaks |
Month 1-22 interest only. Month 23 to 36 Principal and interests at a 25-year amortization rate | 3Mo LIBOR + 3.75% with a floor of 5.75% | $ | 5,800,000 | $ | | May 1, 2014 | |||||||||
$ | 97,298,000 | $ | 80,792,000 | |||||||||||||
(1) | As of June 30, 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 $12.9 million outstanding with respect to a prior loan (the Initial Loan), and an additional amount of $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. | |
(3) | For the three and six months ended June 30, 2011 we incurred $0.2 million and $0.3 million, respectively, of interest expense related to the Rome LTACH Project. No interest expense was incurred during the same periods last year as the project was under development until February 2011. Interest expense and deferred financing fees capitalized were insignificant during the 6 months ended June 30, 2011. | |
(4) | For the three months ended June 30, 2011 and 2010 we did not incur any interest expense related to the Littleton Specialty Rehabilitation Facility. Interest expense and deferred financing fees capitalized were insignificant during the 6 months ended June 30, 2011. | |
(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 were interest-only. Thereafter, monthly payments included interest and principal based on a 25-year amortization period. | |
(6) | In November 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution (KeyBank), to obtain a $25,000,000 revolving credit facility. The initial term of the credit facility was 24 months, maturing on November 18, 2012, and could 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 was a function of certain loan to cost, loan to value and debt service coverage ratios contained in the |
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credit facility. The amount outstanding under the credit facility was $16.3 million and $7.6 million at June 30, 2011 and December 31, 2010, respectively. The facility included 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 were not able to satisfy this covenant; however, effective August 1, 2011, the Company successfully negotiated the terms of a modification to the credit facility. KeyBank agreed to remove the covenant and revise the maturity date to July 31, 2012, which can be extended to October 30, 2012 subject to satisfaction of certain conditions, including payment of an extension fee. The line of credit was further modified to limit the outstanding balance to the current balance outstanding, impose additional monthly reporting covenants and require the establishment of tax and insurance impound accounts. The credit facility is 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 LIBOR plus 200 basis points. The original credit facility required payment of a fee of up to 25 basis points related to unused credit available to us under the credit facility. As a result of the modification, this fee is no longer applicable. We are entitled to prepay the obligations at any time without penalty. Financing fees associated with this modification were insignificant and were incurred primarily in the third quarter of 2011. |
The principal payments due on our notes payable for July 1, 2011 to December 31, 2011 and each of
the subsequent years are as follows and include the payments as modified for the KeyBank credit
facility:
Principal | ||||
Year | amount | |||
July 1, 2011 to December 31, 2011 |
$ | 396,000 | ||
2012 |
$ | 30,930,000 | ||
2013 |
$ | 6,641,000 | ||
2014 |
$ | 6,400,000 | ||
2015 |
$ | 23,919,000 | ||
2016 and thereafter |
$ | 29,012,000 |
Interest Expense and Deferred Financing Cost
The following table sets forth our gross interest expense and deferred financing cost amortization
for the three and six months ended June 30, 2011 and 2010. The capitalized amount is a cost of
development and increases the carrying value of construction in progress.
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total
interest costs incurred |
$ | 1,636,000 | $ | 578,000 | $ | 3,121,000 | $ | 948,000 | ||||||||
Capitalized
interest expense
and deferred
financing cost
amortization |
(32,000 | ) | (32,000 | ) | (41,000 | ) | (65,000 | ) | ||||||||
Interest Expense |
$ | 1,604,000 | $ | 546,000 | $ | 3,080,000 | $ | 883,000 | ||||||||
As of June 30, 2011 and December 31, 2010, our net deferred financing costs were $1.4 million. All
deferred financing costs are capitalized and amortized over the life of the agreements.
11. 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 June
30, 2011, including distributions reinvested, we had issued 13.3 million shares of common stock for
a total of $132.3 million of gross proceeds in our initial and follow-on public offering. As of
June 30, 2010, including distributions reinvested, we had issued 8.2 million shares of common stock
for total gross proceeds of $82.1 million in our initial public offering.
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Distributions
In 2007, we 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 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 June 30, 2011
and December 31, 2010, 551,000 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 quarterly during the six months ended June 30, 2011
and 2010:
Distribution Declared(1) | ||||||||||||
Period | Cash | Reinvested | Total | |||||||||
First quarter 2010 |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | ||||||
Second quarter 2010 |
$ | 696,000 | $ | 665,000 | $ | 1,361,000 | ||||||
First quarter 2011 |
$ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 | ||||||
Second quarter 2011 |
$ | 2,436,000 | $ | | $ | 2,436,000 |
(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 offerings 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 offerings 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. On June 30, 2011, our board of directors resolved to lower our
distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of
$10.00) from the current annualized rate of $0.75 per share (7.5% based on a share price of
$10.00), effective July 1, 2011 and continuing until and including September 30, 2011. The
distribution will be paid quarterly commencing October 2011. The rate and frequency of
distributions is subject to the discretion of our board of directors and may change from time to
time based on our operating results and cash flow.
From our inception in October 2006 through June 30, 2011, we declared aggregate distributions of
$13.0 million, our cumulative net loss attributable to common stockholders during the same
period was $15.0 million and our cumulative cash flow used in
operations during the same period was $5.2 million.
Stock Repurchase Program
In 2007, 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 with 30 days prior notice to stockholders. We
have no obligation to repurchase our stockholders shares. In 2009, 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.
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During the three and six months ended June 30, 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 | |||||
First quarter 2011 |
43,790 | $ | 9.35 | |||||
April |
45,139 | $ | 9.48 | |||||
May |
19,126 | $ | 9.14 | |||||
June |
59,213 | $ | 9.99 | |||||
Second quarter 2011 |
123,478 | $ | 9.67 | |||||
167,268 | ||||||||
During the three and six months ended June 30, 2010, we repurchased 13,500 and 23,709 shares
pursuant to our stock repurchase program.
During the six months ended June 30, 2011, we received requests to have an aggregate of 252,367
shares repurchased pursuant to our stock repurchase program. Of these requests, 71,293 shares were
not able to be repurchased due to the limitations contained in the terms of our stock repurchase
program and the suspension of our stock repurchase program as of May
29, 2011, as described below. During the six months ended June 30,
2010, all but 41 shares were repurchased. Such shares were not repurchased due to
limitations contained in the terms of our stock repurchase program.
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.
12. 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. As discussed in Note
1, on July 29, 2011, the Company executed the Omnibus Agreement, which provided for a number of
significant changes to the Companys material contracts as discussed in more detail in the
subsections below.
The Company may immediately terminate the Advisory Agreement in the event of (1) the
bankruptcy of the Advisor, CLFA or CVI or the commencement of any similar insolvency proceeding by
any such party; or (2) any material breach of the Advisory Agreement by the Advisor which
(a) is not cured within 30 days after written notice thereof, or (b) in the reasonable
determination of the Committee, cannot be cured within 30 days.
The Advisor also is no longer entitled to recommend nominees for election to the Companys
board of directors
Advisory Agreement
Advisory
Agreement Overview. 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.
Organizational and Offering Costs. Organizational and offering costs 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
20
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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 June 30, 2011, the Advisor and its affiliates had incurred organizational and offering costs
totaling $5.1 million, including $0.1 million of organizational costs that have been expensed and
$5.0 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 $1.0 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 $4.6 million, including $0.1 million of
organizational costs that have been expensed and $4.5 million of offering costs which reduce net
proceeds of our offerings. Upon the execution of the Omnibus Agreement, we forgave $0.8 million of
organization and offering costs in excess of the 3.5% of gross offering proceeds advanced to the
Advisor pursuant to the advisory agreement. This amount reduced our offering proceeds and
has therefore been treated as a reduction
in additional paid-in capital in our condensed consolidated balance sheet.
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 June 30, 2011 and 2010, the Advisor earned $0.2 million and $0.5 million in
acquisition fees, respectively. For the six months ended June 30, 2011 and 2010, the Advisor earned
$0.5 million and $0.9 million in acquisition fees, respectively.
As of June 30, 2011, the amount of acquisition fees advanced to the Advisor but not yet allocated
to an investment was $0.9 million. This amount has been expensed and included in real estate
acquisition costs and earn out costs in our condensed consolidated statements of operations. Upon
the execution of the Omnibus Agreement, we forgave the advance not earned through services rendered
in connection with future acquisitions.
Management Fees. Prior to the execution of the Omnibus Agreement, the Advisory Agreement required 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 (Average Invested Assets). 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 (SHI) for portfolio management services provided on our
behalf. These fees and expenses were in addition to management fees that we expect to pay to
third-party property managers.
For the three months ended June 30, 2011 and 2010, the Advisor earned $0.4 million and $0.2 million
of management fees, respectively, which were expensed. For the three months ended June 30,
2011 and 2010, the Advisor incurred $0.2 million and $0.1
million, respectively of direct and indirect costs and expenses, which
are included in asset management fees and expenses in the condensed consolidated statement of
operations.
For the six months ended June 30, 2011 and 2010, the Advisor earned $0.8 million and $0.4 million
of management fees, respectively, which were expensed. For both the six months ended June 30, 2011
and 2010, the Advisor
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incurred $0.4 million of direct and indirect costs and expenses, which are
included in asset management fees and expenses in the condensed consolidated statement of
operations.
Upon the
execution of the Omnibus Agreement, the asset management fee payable to the Advisor was
reduced to a maximum annual rate of 0.5% of Average Invested Assets and a separate
asset management fee payable to the Sub-Advisor at a
maximum annual rate of 0.25% of Average Invested Assets was added. In the event that operating
expenses, as described below, exceed the 2%/25% Guidelines, the asset management fees
will be reduced on a pro-rata basis with a minimum 0.35% annual asset management fee rate.
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 June 30, 2011 and 2010, $0.4 million and $0.3 million of such costs, respectively,
were reimbursed and included in general and administrative expenses on our condensed consolidated
statements of operations. Under the Advisory Agreement, the Advisor must restrict its total operating expenses for the
preceding four consecutive fiscal quarters, as determined at the end of each fiscal quarter, to the
greater of 2% of the Companys Average Invested Assets or 25% of the Companys net income for such
period (the 2%/25% Guidelines), unless the Independent Directors Committee of the Board of
Directors of the Company (the Committee) determines that a higher level of expenses (an Excess
Amount) is justified, based on unusual and non-recurring factors. The total operating expenses
include operating expenses incurred by both the Advisor and the Sub-Advisor. The Advisor must
estimate and submit all of its reasonable direct internal expenses on a semi-monthly basis for the
prior approval of the Committee and/or its financial advisor. The Committee will not approve any
operating expenses (other than those determined to be justified based on unusual and non-recurring
factors) if, in its reasonable discretion, the Committee determines that such operating expenses,
considered together with operating expenses previously approved for the relevant period, as well as
estimated operating expenses for the remainder of the relevant period, would exceed the 2%/25%
Guidelines. The Advisor must submit any operating expenses which it deems unusual and non-recurring
to the Committee, after review by the Committees financial advisor, for the Committees
determination of whether such expenses are justified prior to any payment thereof.
For the four quarters 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 had 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
$0.6 million. The Excess Amount for the four fiscal quarters ended March 31, 2011 was $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 paid to the Advisor 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. Upon the execution of the Omnibus
Agreement, we forgave the receivable of $1.6 million, as well as the Excess Amount for the second
quarter of 2011, which was $0.5 million. We recorded an allowance for receivable for the total
Excess Amount of $1.6 million during the first quarter of 2011, which is included in general and
administrative expenses in our condensed consolidated statement of operations.
Disposition
Fee. Prior to the execution of the Omnibus Agreement, the Advisory Agreement provided 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 would pay the Advisor or such affiliate at closing a disposition fee up to 3% of the
sales price of such property or properties. Upon the execution of the Omnibus Agreement, the
disposition fee payable to the Advisor was reduced to 0.25% of the sales price of properties sold
and a separate disposition fee to the Sub Advisor of 1% of the sales price of properties sold was
added. The Sub Advisor will receive monthly advances of its disposition fee at a rate of 1/12th of
.25% of the Companys Average Invested Assets, for up to, but not exceeding, six monthly
installments. Such advances will be credited against the final disposition fee payable to the
Sub-Advisor upon the sale of the Companys properties. The 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 pay the disposition fees for a
property at the time the property is sold.
Subordinated Participation Provisions. Prior to the execution of the Omnibus Agreement, the
Advisor was 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 would be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned an 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 would receive the subordinated performance fee due upon termination. This fee ranged 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 was terminated plus total distributions (other than stock distributions) paid prior to termination of the Advisory Agreement exceeded 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) exceeded the amount of invested capital plus annualized returns of 10% or more. | ||
| In the event we listed our stock for trading, the Advisor would receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranged 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) exceeded 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) exceeded the amount of invested capital plus annualized returns of 10% or more. |
Pursuant to the Omnibus Agreement, no fees, other than the disposition fee described above,
including any incentive fees or subordinated participations in cash flows, will be due to the
Advisor upon the sale of the Companys properties or the termination of the Advisory Agreement.
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Dealer Manager Agreements
PCC was
the dealer manager for our initial and follow-on public offerings.
Prior to the suspension of our follow-on offering on April
29, 2011, PCC was entitled to receive a sales commission of up to 7% of gross proceeds from sales in
our primary offerings. PCC was
also entitled to receive a dealer manager fee of up to 3% of gross
proceeds from sales in our
primary offerings. PCC was also entitled to receive a reimbursement of bona fide due diligence
expenses up to 0.5% of the gross proceeds from sales in our primary
offerings. Prior to the execution of the Omnibus Agreement, the
Advisory Agreement required 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) were in excess of 13.5% of
gross proceeds from our primary offerings. For the three months ended June 30, 2011 and 2010, our
dealer manager earned sales commission and a dealer manager fee of
$0.3 million and $1.7 million,
respectively. For the six months ended June 30, 2011 and 2010, our dealer manager earned sales
commission and a dealer manager fee of $1.4 million and $3.0 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.
13. Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no
assurance that a material environmental 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.
14. Business Combinations
On January 14, 2011, through a wholly-owned subsidiary, we purchased the assets of an
assisted-living property, Forestview Manor, from 153 Parade Road, LLC, for $10.8 million. The
acquisition was funded by our revolving credit facility from Key Bank National Association and with
proceeds from our initial public offering.
On April 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property,
Sunrise of Allentown, from an affiliate of Sunrise Senior Living, Inc., for $9.0 million. The
property has been rebranded as Woodland Terrace at the Oaks Senior Living. The acquisition of
Woodland Terrace was funded with proceeds from our public offerings and a mortgage loan from an
unaffiliated lender, post-closing.
On April 30, 2010, we purchased the Oakleaf Village Portfolio for
$12.4 million.
We have accounted for each acquisition as a business combination under U.S. GAAP. Under business
combination accounting, the assets and liabilities of the acquired property are recorded as of the
acquisition date, at their respective fair values, and consolidated in our financial statements.
The following table shows the allocation of the purchase price to the assets acquired and
liabilities assumed for each current year acquisition as of the acquisition date.
Forestview | Sunrise of | Oakleaf | |||||||||||
Manor | Allentown | Village | |||||||||||
Land |
$ | 1,320,000 | $ | 1,000,000 | $ | 3,121,000 | |||||||
Buildings & improvements |
6,803,000 | 6,395,000 | 20,058,000 | ||||||||||
Site improvements |
1,040,000 | 350,000 | 499,000 | ||||||||||
Furniture & fixtures |
350,000 | 220,000 | 515,000 | ||||||||||
Other intangible assets |
| 90,000 | | ||||||||||
In-place lease value |
960,000 | 500,000 | 1,658,000 | ||||||||||
Tenant relationship |
| | 219,000 | ||||||||||
Loan assumed at Property acquisition |
| | (12,902,000 | ) | |||||||||
Assets contributed by noncontrolling interest |
| | (1,735,000 | ) | |||||||||
Goodwill |
277,000 | 445,000 | 930,000 | ||||||||||
Real estate acquisitions |
$ | 10,750,000 | $ | 9,000,000 | $ | 12,363,000 | |||||||
Acquisition expenses |
$ | 160,000 | $ | 142,000 | $ | 306,000 |
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The following unaudited pro forma information for the three and six months ended June 30, 2011 and
2010 has been prepared to reflect the incremental effect of the
Oakleaf Village, Forestview Manor and Sunrise of
Allentown acquisitions as if such acquisitions had occurred on
January 1, 2010. For the three and six months ended June 30,
2011, acquisition-related costs of $0.1 million and $0.3 million,
respectively, were excluded from pro forma net loss. Pro forma net
loss for the six months ended June 30, 2010, was adjusted to include
$0.3 million of acquisition-related costs incurred in 2011 for the
Forestview Manor and Sunrise of Allentown acquisitions.
Three months | Three months | |||||||
Ended | Ended | |||||||
June 30, 2011 | June 30, 2010 | |||||||
Revenues |
$ | 10,810,000 | $ | 6,488,000 | ||||
Net loss |
$ | (1,618,000 | ) | $ | (1,516,000 | ) | ||
Basic and diluted
net loss per common
share attributable
to common
stockholders |
$ | (0.12 | ) | $ | (0.21 | ) |
Six months | Six months | |||||||
Ended | Ended | |||||||
June 30, 2011 | June 30, 2010 | |||||||
Revenues |
$ | 21,261,000 | $ | 13,117,000 | ||||
Net loss |
$ | (3,471,000 | ) | $ | (2,609,000 | ) | ||
Basic and diluted
net loss per common
share attributable
to common
stockholders |
$ | (0.28 | ) | $ | (0.44 | ) |
The Company recorded revenues of $1.0 million and $1.8 million for the three and six months ended
June 30, 2011, respectively, and net loss of $0.1 million and $0.3 million for the three and six
months ended June 30, 2011, respectively, for Forestview Manor.
The Company recorded revenues of $0.6 million for the three and six months ended June 30, 2011 and
net loss of $0.3 million for the three and six months ended June 30, 2011, respectively, for
Sunrise of Allentown.
15. Subsequent Events
Other than the KeyBank loan modification (as discussed at Note 10) and the executed Omnibus
Agreement (as discussed at Note 1 and Note 12), no significant events have occurred subsequent to
our balance sheet date that require further disclosure or adjustment to our balances.
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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:
| changes in economic conditions generally and the real estate and healthcare markets specifically; | ||
| 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. Our intent was 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 June 30, 2011, we raised $127.0 million of gross proceeds from the sale of
12.7 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.
The Independent Directors Committee is continuing to evaluate strategic alternatives, including a
possible merger with another company or the sale of the entire portfolio.
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Table of Contents
Our total revenue, which is comprised largely of rental income, includes 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 June 30, 2011
| We completed one acquisition for a purchase price of approximately $9.0 million. See Note 14 to the condensed consolidated financial statements. | ||
| On August 1, 2011, we executed a Second Amendment and Waiver to the KeyBank credit facility. See Note 10 to the condensed consolidated financial statements. | ||
| On July 29, 2011, we executed an Omnibus Agreement, which implemented, among other things, a number of advisory relationship changes. See Notes 1 and 12 to the condensed consolidated financial statements. |
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 281,000 shares repurchased pursuant to our stock repurchase program. |
Market Outlook Real Estate and Real Estate Finance Markets
In recent years, the national as well as most global economies have experienced substantially
increased unemployment and a downturn in economic activity. 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, together with the recent stock market turbulence, 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 June 30, 2011, we operated in three reportable business segments for management and internal
financial reporting purposes: 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 MOB 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.
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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 June 30, 2011, we
owned 15 properties. These properties include ten assisted-living facilities which comprise our
senior living operations segment, one medical office building, which comprises our MOB segment, and
four operating healthcare facilities including one development healthcare facility, which comprise
our triple-net leased segment. During the three-months ended June 30, 2010, we owned six real
estate properties and had one development project under construction. Accordingly, the results of
our first quarter 2011 and 2010 operations are not directly comparable.
Comparison of the Three Months Ended June 30, 2011 and 2010
Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) |
||||||||||||||||
Senior living operations |
$ | 2,740,000 | $ | 984,000 | $ | 1,756,000 | 178 | |||||||||
Triple-net leased properties |
1,301,000 | 445,000 | 856,000 | 192 | ||||||||||||
Medical office building |
194,000 | | 194,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 4,235,000 | $ | 1,429,000 | $ | 2,806,000 | 196 | |||||||||
Reconciliation to net loss: |
||||||||||||||||
Net operating income, as defined (1) |
$ | 4,235,000 | $ | 1,429,000 | $ | 2,806,000 | 196 | |||||||||
Unallocated (expenses) income: |
||||||||||||||||
General and administrative expenses |
(1,297,000 | ) | (512,000 | ) | 785,000 | 153 | ||||||||||
Asset management fees and expenses |
(376,000 | ) | (195,000 | ) | 181,000 | 93 | ||||||||||
Real estate acquisitions costs and earn out costs |
(514,000 | ) | (881,000 | ) | (367,000 | ) | (42 | ) | ||||||||
Depreciation and amortization |
(2,129,000 | ) | (930,000 | ) | 1,199,000 | 129 | ||||||||||
Interest income |
3,000 | 9,000 | (6,000 | ) | (67 | ) | ||||||||||
Interest expense |
(1,604,000 | ) | (546,000 | ) | 1,058,000 | 194 | ||||||||||
Net loss |
(1,682,000 | ) | (1,626,000 | ) | 56,000 | 3 | ||||||||||
Net loss (income) attributable to
noncontrolling interests |
(16,000 | ) | 82,000 | (98,000 | ) | (120 | ) | |||||||||
Net loss attributable to common stockholders |
$ | (1,698,000 | ) | $ | (1,544,000 | ) | $ | 154,000 | 10 | |||||||
(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,
resident services and fee income, and tenant reimbursement and other
income.
Total revenue for the three months ended June 30, 2011 increased to
$7.9 million from $3.6 million for the three months ended June 30,
2010.
Property operating and maintenance expenses include labor, food, utilities, marketing,
management and other property operating costs. Net operating income for the three months ended June
30, 2011 increased to $2.7 million from $1.0 million for the three months ended June 30, 2010. The
increase in total revenue and net operating income is primarily due to acquisitions completed during the second half of 2010.
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Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Senior Living Operations Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 5,774,000 | $ | 2,927,000 | $ | 2,847,000 | 97 | |||||||||
Resident services and fee income |
2,020,000 | 576,000 | 1,444,000 | 251 | ||||||||||||
Tenant reimbursement and other income |
65,000 | 81,000 | (16,000 | ) | (20 | ) | ||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(5,119,000 | ) | (2,601,000 | ) | 2,518,000 | 97 | ||||||||||
Total portfolio net operating income |
$ | 2,740,000 | $ | 983,000 | $ | 1,757,000 | 179 | |||||||||
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements
from tenants. Total revenue for the three months ended June 30, 2011
increased to $2.6 million from $0.5 million for the three months
ended June 30, 2010. Property operating and maintenance expenses include insurance and property taxes and
other operating expenses reimbursed by our tenants. Net operating income increased to $1.3 million
for the three months ended June 30, 2011 compared to $0.4 million for the three months ended June
30, 2010. Total revenue and net operating income increased due to the
completion of construction on the Rome LTACH project and its 100% occupancy as
of June 30, 2011.
Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 2,396,000 | $ | 446,000 | $ | 1,950,000 | 437 | |||||||||
Tenant reimbursement and other income |
187,000 | 41,000 | 146,000 | 356 | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(1,282,000 | ) | (41,000 | ) | 1,241,000 | 3027 | ||||||||||
Total portfolio net operating income |
$ | 1,301,000 | $ | 446,000 | $ | 855,000 | 192 | |||||||||
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from
tenants. Total revenue for the three months ended June 30, 2011
increased to $0.3 million from $0 for the three months ended June 30,
2010. Property operating and maintenance expenses include utilities, repairs and maintenance,
insurance and property taxes. Net operating income increased to $0.2 million for the three months
ended June 30, 2011 compared to $0 for the three months ended
June 30, 2010. Total revenue and net operating income increased due to the acquisition
completed in December 2010, which makes up this segment.
Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
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 |
56,000 | | 56,000 | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(63,000 | ) | | 63,000 | N/A | |||||||||||
Total portfolio net operating income |
$ | 194,000 | $ | | $ | 194,000 | N/A |
Unallocated (expenses) income
General and administrative expenses increased to $1.3 million for the three months ended June 30,
2011 from $0.5 million for the three months ended June 30, 2010. The increase was principally due
to higher legal, consulting and board of director fees associated with the Companys evaluation of
strategic alternatives. The increase was partially offset by an income tax benefit during the three
months ended June 30, 2011 as compared to income tax expense during the three months ended June 30,
2010. The income tax benefit during the three months ended June 30, 2011 is due to the Company
recognizing a deferred tax asset related primarily to book and tax-basis differences for
straight-line rent and accrued liabilities..
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As a result of the acquisitions during the second half of 2010 through June 30, 2011, asset
management fees and expenses for the three months ended June 30, 2011 and 2010 increased to $0.4
million from $0.2 million and depreciation and amortization for the same periods increased to $2.1
million from $0.9 million.
For the three months ended June 30, 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,
and an earn-out provision related to GreenTree at Westwood, were $0.5 million and $0.9 million,
respectively. The 2011 decrease in acquisition costs was due to lower third party expenses for
transactions closed or in process during the second quarter of 2011 and by lower acquisition fees
related to lower equity raised in the second quarter of 2011. These decreases were offset by an
increase in the estimated amount to be paid in connection with the GreenTree at Westwood
acquisition earn-out. 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 June 30, 2011 and 2010.
Interest expense for the three months ended June 30, 2011 increased to $1.6 million from $0.5
million for the three months ended June 30, 2010 due to increased real estate acquisition financing
during the second half of 2010 through June 30, 2011.
Net income attributable to noncontrolling interests for the three months ended June 30, 2011 as
compared to net loss attributable to noncontrolling interests for the three months ended June 30,
2010 was primarily due to the completion of Rome during the first quarter of 2011 and the high
occupancy rate of that joint venture.
Comparison of the Six Months Ended June 30, 2011 and 2010
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) |
||||||||||||||||
Senior living operations |
$ | 5,307,000 | $ | 1,718,000 | $ | 3,589,000 | 209 | |||||||||
Triple-net leased properties |
2,445,000 | 893,000 | 1,552,000 | 174 | ||||||||||||
Medical office building |
380,000 | | 380,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 8,132,000 | $ | 2,611,000 | $ | 5,521,000 | 211 | |||||||||
Reconciliation to net loss: |
||||||||||||||||
Net operating income, as defined (1) |
$ | 8,132,000 | $ | 2,611,000 | $ | 5,521,000 | 211 | |||||||||
Unallocated (expenses) income: |
||||||||||||||||
General and administrative expenses |
(1,961,000 | ) | (1,040,000 | ) | 921,000 | 89 | ||||||||||
Asset management fees and expenses |
(807,000 | ) | (360,000 | ) | 447,000 | 124 | ||||||||||
Real estate acquisitions costs and earn out costs |
(1,641,000 | ) | (1,339,000 | ) | 302,000 | 23 | ||||||||||
Depreciation and amortization |
(3,990,000 | ) | (1,570,000 | ) | 2,420,000 | 154 | ||||||||||
Interest income |
7,000 | 12,000 | (5,000 | ) | (42 | ) | ||||||||||
Interest expense |
(3,080,000 | ) | (883,000 | ) | 2,197,000 | 249 | ||||||||||
Net loss |
(3,340,000 | ) | (2,569,000 | ) | 771,000 | 30 | ||||||||||
Net loss attributable to
noncontrolling interests |
49,000 | 78,000 | (29,000 | ) | (37 | ) | ||||||||||
Net loss attributable to common stockholders |
$ | (3,291,000 | ) | (2,491,000 | ) | 800,000 | 32 | |||||||||
(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. |
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Table of Contents
Senior Living Operations
Total
revenue for senior living operations includes rental revenue, resident services and fee income, and tenant reimbursement and other
income. Total revenue for the six months ended June 30, 2011
increased to $15.9 million from $6.1 million for the six months ended
June 30, 2010. Property operating and maintenance expenses include labor, food, utilities, marketing,
management and other property operating costs. Net operating income for the six months ended June
30, 2011 increased to $5.3 million from $1.7 million for the six months ended June 30, 2010. The
increase in total revenue and net operating income is primarily due to acquisitions completed during the second half of 2010.
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Senior Living Operations Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 11,974,000 | $ | 4,917,000 | $ | 7,057,000 | 144 | |||||||||
Resident services and fee income |
3,722,000 | 1,071,000 | 2,651,000 | 248 | ||||||||||||
Tenant reimbursement and other income |
175,000 | 151,000 | 24,000 | 16 | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(10,564,000 | ) | (4,421,000 | ) | 6,143,000 | 139 | ||||||||||
Total portfolio net operating income |
$ | 5,307,000 | $ | 1,718,000 | $ | 3,589,000 | 209 | |||||||||
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements
from tenants. Total revenue for the six months ended June 30, 2011
increased to $3.9 million from $1.0 million for the six months ended
June 30, 2010. Property operating and maintenance expenses include insurance and property taxes and
other operating expenses reimbursed by our tenants. Net operating income increased to $2.4 million
for the six months ended June 30, 2011 compared to $0.9 million for the six months ended June 30,
2010. Total revenue and net operating income increased due to the
completion of construction on the Rome LTACH project and its 100%
occupancy as of June 30, 2011.
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 3,555,000 | $ | 893,000 | $ | 2,662,000 | 298 | |||||||||
Tenant reimbursement and other income |
345,000 | 81,000 | 264,000 | 326 | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(1,455,000 | ) | (81,000 | ) | 1,374,000 | 1696 | ||||||||||
Total portfolio net operating income |
$ | 2,445,000 | $ | 893,000 | $ | 1,552,000 | 174 | |||||||||
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from
tenants. Total revenue for the six months ended June 30, 2011
increased to $0.5 million from $0 for the six months ended June 30,
2010. Property operating and maintenance expenses include utilities, repairs and maintenance,
insurance and property taxes. Net operating income increased to $0.4 million for the six months
ended June 30, 2011 compared to $0 for the six months ended
June 30, 2010. Total revenue and net operating income increased due to the acquisition
completed in December 2010, which makes up this segment.
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Medical Office Buildings Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 402,000 | $ | | $ | 402,000 | N/A | |||||||||
Tenant reimbursement and other income |
111,000 | | 111,000 | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
(133,000 | ) | | 133,000 | N/A | |||||||||||
Total portfolio net operating income |
$ | 380,000 | $ | | $ | 380,000 | N/A |
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Unallocated (expenses) income
General and administrative expenses increased to $2.0 million for the six months ended June 30,
2011 from $1.0 million for the six months ended June 30, 2010. The increase was principally due to
higher legal, consulting and board of director fees associated with the Companys evaluation of
strategic alternatives. In addition, reimbursements to the Advisor for the direct and indirect
costs of providing administrative and management services were higher as a result of the growth of
the investment portfolio since June 30, 2010. These increases were partially offset by the
recognition of a deferred income tax benefit during the six months ended June 30, 2011 as compared
to income tax expense during the six months ended June 30, 2010.
As a result of the acquisitions during the second half of 2010 through June 30, 2011, asset
management fees and expenses for the six months ended June 30, 2011 increased to $0.8 million from
$0.4 million for the six months ended June 30, 2010 and depreciation and amortization for the same
periods increased to $4.0 million from $1.6 million.
For the six months ended June 30, 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, an
earn-out provision related to GreenTree at Westwood and the promote provision related to Rome
LTACH, were $1.6 million and $1.3 million, respectively. The 2011 increase in acquisition costs was
due to increases in the estimated amounts to be paid in connection with the GreenTree at Westwood
acquisition earn out and the Rome LTACH promote provision partially offset by lower third party
expenses related to transactions closed or in process during the first quarter of 2011 and lower
acquisition fees related to lower equity raised in the first half of 2011. 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 six months ended June 30, 2011 and 2010.
Interest expense for the six months ended June 30, 2011 increased to $3.1 million from $0.9 million
for the six months ended June 30, 2010 due to increased real estate acquisition financing during
the second half of 2010 through June 30.
Net loss attributable to noncontrolling interests was lower for the six months ended June 30, 2011
as compared to the six months ended June 30, 2010 primarily due to the completion of Rome during
the first quarter of 2011 and the high occupancy rate of that joint venture.
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. While one of
the alternatives under consideration was the hiring of a new dealer manager for our follow-on
offering, the Independent Directors Committee has made no determination regarding whether or when
our follow-on offering may be recommenced. The Independent Directors Committee also evaluated
possible changes to our advisory relationships. An agreement (the Omnibus Agreement) dated July 29,
2011, implemented a number of advisory relationship changes. The success of these changes in
accomplishing the Independent Directors objectives is uncertain. In addition to uncertainties
associated with dealer manager or advisor relationships, financial markets have recently
experienced unusual volatility and uncertainty. Liquidity has tightened in all financial markets,
including the debt and equity markets. We expect that our primary uses of capital over the next
twelve months will be for the payment of tenant improvements, earn out and promote liabilities,
operating expenses, including interest expense on any outstanding indebtedness, reducing
outstanding indebtedness and for the payment of distributions.
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We expect to have sufficient cash available from cash on hand and operations to fund capital
improvements and principal payments due on our borrowings in the next twelve months. We plan to refinance the KeyBank credit facility or use funds from the
sale of the portfolio to meet the payment obligations due in the second half of 2012. 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. On June 30, 2011, our directors
declared distributions for the quarter to end September 30, 2011 at a reduced
annualized rate of 2.5%.
As of June 30, 2011, we had approximately $31.7 million in cash and cash equivalents on hand. Our
liquidity will increase if cash flow from the operation of our properties exceeds non-property
expenditures and will decrease if it does not. Available cash is temporarily invested in
short-term, liquid investments that yield lower returns than investments in real estate.
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 included 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 were not able to satisfy this covenant; however, effective August 1, 2011, the Company
successfully negotiated the terms of a modification to the credit facility. The terms of the agreement were amended to convert the Facility
from a revolving loan commitment to a term loan and reduced the maximum amount of the commitment
from $25.0 million to the current outstanding amount of $16.3 million. The amendment also changed the
maturity date of the Facility from November 18, 2012 to July 31, 2012 (subject to one ninety-day
extension option). The amendment increased the minimum amount of cash and cash equivalents that
the Company must maintain from $5.0 million to $8.0 million, but eliminated a covenant that required
the Company to raise equity capital of at least $20.0 million during each calendar six-month period.
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. We are entitled to prepay the obligations at any
time without penalty.
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. Through June
30, 2011, we made cash distributions to our stockholders at an annualized rate of 7.5%, based on a
$10.00 per-share purchase price. On June 30, 2011, our board of directors resolved to lower our
distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of
$10.00). The distribution will be paid quarterly commencing
October 2011. This distribution rate is
expected to more closely align distributions to funds available from operations.
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 noted above, the distribution rate was decreased
to an annualized rate of 2.5% on June 30, 2011 in response to the current situation.
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Distributions Declared | Cash Flow from | |||||||||||||||
Period | Cash | Reinvested | Total | Operations | ||||||||||||
First quarter 2010 |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | $ | 48,000 | ||||||||
Second quarter 2010 |
$ | 696,000 | $ | 665,000 | $ | 1,361,000 | $ | (597,000 | ) | |||||||
First quarter 2011 |
$ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 | $ | 1,583,000 | ||||||||
Second quarter 2011 |
$ | 2,436,000 | $ | | $ | 2,436,000 | $ | 605,000 |
From our inception in October 2006 through June 30, 2011, we declared aggregate distributions of
$13.0 million, our cumulative net loss attributable to common
stockholders during the same period was $15.0 million, and our cumulative cash flow used in operations during the same period was $5.2 million.
Contractual Obligations
The following table reflects our contractual obligations as of June 30, 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) |
$ | 97,298,000 | $ | 880,000 | $ | 28,140,000 | $ | 14,893,000 | $ | 53,385,000 | ||||||||||
Interest expense related to long-term debt
(2) |
$ | 32,544,000 | $ | 5,602,000 | $ | 6,454,000 | $ | 5,271,000 | $ | 15,217,000 | ||||||||||
Performance based earn outs (3) |
$ | 941,000 | $ | 941,000 | $ | | $ | | $ | |
(1) | Represents principal amount owed on all outstanding debt as of June 30, 2011. | |
(2) | Represents interest expense related to various loan agreements in connection with all acquisitions as of June 30, 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) | Represents the earn-out agreement related to Greentree at Westwood. Contractually, the seller has until December 2012 to exercise the right to the earn out amount. Subsequent to June 30, 2011, the seller has provided the company with written notice of sellers election to receive the current amount earned. |
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 June 30, 2011, we had approximately
$64.3 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
$0.6 million per year. Our interest rate risk management objectives will be to monitor and manage
the impact of interest rate changes on earnings and cash 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,
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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 of our annual report on Form
10-K for the fiscal year ended December 31, 2010.
We
are dependent upon our Advisor and Sub-Advisor to conduct our operations. If our Advisor
or Sub-Advisor became unable to continue in those roles, we may have
difficulty finding qualified
successors, and any successor advisor or sub-advisor may not be as well suited to manage us and our
portfolio. In addition, we are continuing to explore various strategic alternatives to enhance
value for our stockholders. 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. In connection
with this process, our Independent Directors Committee, with the assistance of its independent
financial advisor, has negotiated and caused us to execute an Omnibus Agreement with, among other
parties, Cornerstone Leveraged Realty Advisors, LLC, our Advisor, and Servant Healthcare
Investments, LLC, our Sub-Advisor. Among other actions, the Omnibus Agreement amends the Advisory
Agreement between us and our Advisor, and amends and assigns to us the Sub-Advisory Agreement
originally entered into by and between our Advisor and the Sub-Advisor. The Omnibus
Agreement requires our Advisor to continue to provide the services that it is obligated to perform
pursuant to the Advisory Agreement, reduces the amounts of certain fees payable to our Advisor and
Sub-Advisor, and restricts total operating expenses that may be incurred on our behalf by the
Advisor and Sub-Advisor. As previously reported, our Advisor has been losing money with respect to
the services it provides to us. If our Advisor and Sub-Advisor cannot meet their obligations as
they arise, or if they are unable to provide adequate service to us as required under the terms of
the Omnibus Agreement, we may have to find another Advisor or Sub-Advisor. If we are required to
find a new Advisor or Sub-Advisor we may have difficulty doing so, and any successor advisor may
not be as well suited to manage us and our portfolio. As we have no employees and are entirely
dependent on our Advisor and Sub-Advisor to manage our operations, these potential changes could
result in a significant disruption of our business.
In addition, our Independent Directors Committee is continuing to explore various strategic
alternatives and capital raising opportunities. This focus could adversely affect our operations in
a number of ways, including, among other things, by:
| disrupting our operations and diverting management resources; | ||
| failing to successfully produce the expected benefits; | ||
| being time consuming and expensive; | ||
| resulting in the loss of business opportunities; and | ||
| subjecting us to litigation. |
The occurrence of any or all of these events could adversely affect the results of our operations
and lead to lower overall returns to our stockholders.
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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 June 30, 2011, our cash outflow from operations was approximately $0.4 million.
During that period we paid distributions to investors of approximately $8.6 million, of which
approximately $3.4 million was reinvested pursuant to our distribution reinvestment plan and
approximately $5.1 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | We did not sell any equity securities that we did not register 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 June 30, 2011, we had sold 12.7 million shares of common stock in our ongoing public offering and raised gross offering proceeds of $127.0 million. From this amount, we incurred $12.3 million in selling commissions and dealer manager fees payable to our dealer manager and $4.2 million in acquisition fees payable to the Advisor. We had acquired 15 properties including one development project as of June 30, 2011. | |
(c) | During the six months ended June 30, 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 | |||||
April |
45,139 | $ | 9.48 | |||||
May |
19,126 | $ | 9.14 | |||||
June |
59,213 | $ | 9.99 | |||||
167,268 |
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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. | ||
101.INS | XBRL Instance Document* | ||
101.SCH | XBRL Taxonomy Extension Schema Document* | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections. |
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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 15th day of August 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) | ||||
37