Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - AMERICAN REALTY CAPITAL HEALTHCARE TRUST INCFinancial_Report.xls
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - AMERICAN REALTY CAPITAL HEALTHCARE TRUST INCex311.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - AMERICAN REALTY CAPITAL HEALTHCARE TRUST INCex312.htm
EX-32 - WRITTEN STATEMENTS OF THE PRINCIAL EXECUTIVE AND FINANCIAL OFFICERS - AMERICAN REALTY CAPITAL HEALTHCARE TRUST INCex32.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended June 30, 2014
 OR
¨
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: 001-36394
AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.
(Exact name of registrant as specified in its charter) 
Maryland
  
27-3306391
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., 15th Floor, New York, NY      
  
 10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500   
(Registrant's 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨
 
Accelerated filer ¨
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
The number of outstanding shares of the registrant's common stock on August 12, 2014 was 169,316,257 shares.



AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)


 
 
June 30,
 
December 31,
 
 
2014
 
2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
143,505

 
$
107,719

Buildings, fixtures and improvements
 
1,729,130

 
1,363,858

Construction in progress
 
19,262

 
11,112

Acquired intangible lease assets
 
228,963

 
181,264

Total real estate investments, at cost
 
2,120,860

 
1,663,953

Less: accumulated depreciation and amortization
 
(148,543
)
 
(87,350
)
Total real estate investments, net
 
1,972,317

 
1,576,603

Cash and cash equivalents
 
28,695

 
103,447

Restricted cash
 
2,135

 
1,381

Investment securities, at fair value
 
19,427

 
14,670

Preferred equity investment
 
8,800

 

Prepaid expenses and other assets
 
26,080

 
17,431

Deferred costs, net
 
20,071

 
21,041

Total assets
 
$
2,077,525

 
$
1,734,573

LIABILITIES AND EQUITY
 
 
 
 

Mortgage notes payable
 
$
304,207

 
$
259,348

Mortgage premiums, net
 
4,000

 
2,769

Credit facility
 
507,500

 

Below-market lease liabilities, net
 
5,146

 
5,543

Derivatives, at fair value
 
58,490

 
333

Accounts payable and accrued expenses
 
28,277

 
17,460

Deferred rent and other liabilities
 
5,261

 
2,949

Dividends payable
 

 
10,427

Total liabilities
 
912,881

 
298,829

Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued or outstanding at June 30, 2014 and December 31, 2013
 

 

Common stock, $0.01 par value per share, 300,000,000 authorized, 169,316,257 and 180,463,898 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
1,691

 
1,805

Additional paid-in capital
 
1,462,108

 
1,591,941

Accumulated other comprehensive loss
 
(987
)
 
(3,243
)
Accumulated deficit
 
(312,655
)
 
(158,378
)
Total stockholders' equity
 
1,150,157

 
1,432,125

Non-controlling interests
 
14,487

 
3,619

Total equity
 
1,164,644

 
1,435,744

Total liabilities and equity
 
$
2,077,525

 
$
1,734,573


The accompanying notes are an integral part of these statements.

3

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
   Rental income
 
$
55,584

 
$
20,885

 
$
103,101

 
$
36,872

   Operating expense reimbursements
 
4,267

 
2,474

 
8,451

 
4,663

   Resident services and fee income
 
4,918

 
578

 
9,206

 
1,080

        Total revenues
 
64,769

 
23,937

 
120,758

 
42,615

Operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
26,238

 
7,444

 
49,717

 
12,636

Operating fees to affiliates
 
2,352

 

 
2,352

 

Acquisition and transaction related
 
22,456

 
2,713

 
25,878

 
4,751

Vesting of Class B units for asset management services
 
12,917

 

 
12,917

 

Fair value of listing note
 
58,150

 

 
58,150

 

General and administrative
 
2,674

 
1,240

 
4,592

 
1,481

Equity-based compensation
 
97

 
10

 
107

 
18

Depreciation and amortization
 
31,713

 
12,714

 
60,656

 
24,408

Total operating expenses
 
156,597

 
24,121

 
214,369

 
43,294

Operating loss
 
(91,828
)
 
(184
)
 
(93,611
)
 
(679
)
Other income (expenses):
 
 
 
 
 
 
 
 
Interest expense
 
(7,108
)
 
(3,315
)
 
(12,651
)
 
(6,404
)
Income from preferred equity investment and investment securities and interest income
 
495

 
255

 
795

 
255

Gain on sale of investment securities
 
335

 

 
335

 

Total other expense
 
(6,278
)
 
(3,060
)
 
(11,521
)
 
(6,149
)
Net loss
 
(98,106
)
 
(3,244
)
 
(105,132
)
 
(6,828
)
Net loss (income) attributable to non-controlling interests
 
817

 
(14
)
 
808

 
(36
)
Net loss attributable to stockholders
 
(97,289
)
 
(3,258
)
 
(104,324
)
 
(6,864
)
 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
 
Designated derivatives, fair value adjustment
 
(26
)
 
298

 
(7
)
 
343

Unrealized gain on investment securities, net
 
636

 
(985
)
 
2,263

 
(985
)
Comprehensive loss attributable to stockholders
 
$
(96,679
)
 
$
(3,945
)
 
$
(102,068
)
 
$
(7,506
)
 
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares outstanding
 
175,129,424

 
170,124,871

 
178,357,402

 
123,834,119

Basic and diluted net loss per share attributable to stockholders
 
$
(0.56
)
 
$
(0.02
)
 
$
(0.58
)
 
$
(0.06
)


The accompanying notes are an integral part of these statements.

4

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Six months ended June 30, 2014
(In thousands, except share data)
(Unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of
Shares
 
Par
Value
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Non-controlling Interests
 
Total Equity
Balance, December 31, 2013
 
180,463,898

 
$
1,805

 
$
1,591,941

 
$
(3,243
)
 
$
(158,378
)
 
$
1,432,125

 
$
3,619

 
$
1,435,744

Common stock issued through distribution reinvestment plan
 
2,344,631

 
23

 
22,231

 

 

 
22,254

 

 
22,254

Common stock repurchases, inclusive of fees and expenses
 
(13,718,177
)
 
(137
)
 
(151,995
)
 

 

 
(152,132
)
 

 
(152,132
)
Dividends declared
 

 

 

 

 
(49,953
)
 
(49,953
)
 

 
(49,953
)
Contributions from non-controlling interest holders
 

 

 

 

 

 

 
750

 
750

Vesting of Class B units for asset management services
 

 

 

 

 

 

 
12,917

 
12,917

Equity-based compensation
 
225,905

 

 
239

 

 

 
239

 

 
239

Distributions to non-controlling interest holders
 

 

 

 

 

 

 
(299
)
 
(299
)
Increase in interest in Reliant Rehabilitation - Dallas, TX
 

 

 
(308
)
 

 

 
(308
)
 
(1,692
)
 
(2,000
)
Other comprehensive income
 

 

 

 
2,256

 

 
2,256

 

 
2,256

Net loss
 

 

 

 

 
(104,324
)
 
(104,324
)
 
(808
)
 
(105,132
)
Balance, June 30, 2014
 
169,316,257

 
$
1,691

 
$
1,462,108

 
$
(987
)
 
$
(312,655
)
 
$
1,150,157

 
$
14,487

 
$
1,164,644


The accompanying notes are an integral part of this statement.

5

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss attributable to stockholders
$
(104,324
)
 
$
(6,864
)
Adjustment to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
36,628

 
17,065

Amortization of intangibles
24,028

 
7,343

Amortization of deferred financing costs
3,190

 
1,253

Amortization of mortgage premiums
(648
)
 
(368
)
Accretion of below-market lease liabilities and amortization of above-market lease assets, net
189

 
186

Vesting of Class B units for asset management services
12,917

 

Net loss (income) attributable to non-controlling interests
(808
)
 
36

Equity-based compensation
239

 
33

Fair value of listing note
58,150

 

Gain on sale of investment securities
(335
)
 

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
(6,097
)
 
(3,045
)
Accounts payable and accrued expenses
10,792

 
3,437

Deferred rent and other liabilities
2,312

 
(91
)
Net cash provided by operating activities
36,233

 
18,985

Cash flows from investing activities:
 
 
 
Investment in real estate and preferred equity investment
(411,875
)
 
(183,621
)
Deposits for real estate
(6,500
)
 
(5,152
)
Capital expenditures
(2,302
)
 
(104
)
Purchase of investment securities
(3,000
)
 
(18,966
)
Proceeds from sale of investment securities
841

 

Net cash used in investing activities
(422,836
)
 
(207,843
)
Cash flows from financing activities:
 
 
 
Payments of note payable

 
(2,500
)
Payments of mortgage notes payable
(671
)
 
(87
)
Proceeds from credit facility
507,500

 

Payments on credit facility

 
(26,000
)
Payments of deferred financing costs
(1,913
)
 
(584
)
Proceeds from issuance of common stock

 
1,196,951

Proceeds from the issuance of OP units
750

 

Common stock repurchases, inclusive of fees and expenses
(152,636
)
 
(990
)
Payments of offering costs and fees related to stock issuances

 
(122,161
)
Dividends paid
(38,126
)
 
(17,162
)
Due from/to affiliate

 
190

Payments to non-controlling interest holders
(2,000
)
 

Distributions to non-controlling interests holders
(299
)
 
(190
)
Restricted cash
(754
)
 
(238
)
Net cash provided by financing activities
311,851

 
1,027,229

Net change in cash
(74,752
)
 
838,371

Cash, beginning of period
103,447

 
13,869

Cash, end of period
$
28,695

 
$
852,240


6

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2014
 
2013
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
10,096

 
$
5,508

Cash paid for income taxes
1,223

 
84

 
 
 
 
Non-Cash Investing and Financing Activities:
 
 
 
Mortgage notes payable assumed or used to acquire investments in real estate
$
45,530

 
$
15,776

Premiums on assumed mortgage notes payable
1,879

 
340

Common stock issued through distribution reinvestment plan
22,254

 
17,801


The accompanying notes are an integral part of these statements.

7

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)


Note 1 — Organization
American Realty Capital Healthcare Trust, Inc. (the "Company") invests primarily in real estate serving the healthcare industry in the United States. The Company owns a diversified portfolio of healthcare-related real estate, focusing predominantly on medical office buildings ("MOBs") and seniors housing communities. Additionally, the Company selectively invests across the healthcare continuum in hospitals, post-acute care facilities and other properties. As of June 30, 2014, the Company owned 147 properties and one preferred equity investment, located in 30 states with an aggregate purchase price of $2.1 billion, comprised of 7.5 million rentable square feet.
In February 2011, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The Company closed its IPO in April 2013 and operated as a non-traded real estate investment trust ("REIT") through April 6, 2014. On April 7, 2014, the Company listed its common stock on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “HCT” (the "Listing"). Concurrent with the Listing, the Company offered to purchase up to 13.6 million of its common stock at a price of $11.00 per share (the "Tender Offer"). As a result of the Tender Offer, on May 2, 2014, the Company purchased 13.6 million shares of its common stock at a price of $11.00 per share, for an aggregate of $150.1 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter.
The Company, which was incorporated on August 23, 2010, is a Maryland corporation that qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2011. Substantially all of the Company's business is conducted through American Realty Capital Healthcare Trust Operating Partnership, L.P., a Delaware limited partnership (the "OP"). The Company has no direct employees. The Company has retained American Realty Capital Healthcare Advisors, LLC (the "Advisor") to manage its affairs on a day-to-day basis. The Company has retained American Realty Capital Healthcare Properties, LLC (the "Property Manager") to serve as the Company's property manager.  Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO and continues to provide the Company with various services. The Advisor, Property Manager and Dealer Manager are under common control with the parent of the Company's sponsor, American Realty Capital V, LLC (the "Sponsor"), as a result of which, they are related parties and each has received or may receive compensation and fees for services related to the IPO, the Listing and for the investment and management of the Company's assets.
Note 2 — Merger Agreement
On June 1, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Ventas, Inc., a Delaware corporation ("Ventas"), Stripe Sub, LLC a Delaware limited liability company and wholly owned subsidiary of Ventas ("Merger Sub"), Stripe OP, LP, a Delaware limited partnership of which Merger Sub is the sole general partner ("OP Merger Sub"), and the OP. The Merger Agreement provides for the merger of the Company with and into Merger Sub, with Merger Sub surviving as a wholly-owned subsidiary of Ventas (the "Merger"), and for the merger of OP Merger Sub with and into the OP, with the OP continuing as the surviving partnership (the "Partnership Merger"). The board of directors of the Company has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, including the Partnership Merger.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each outstanding share of common stock, par value $0.01 per share, of the Company will be converted into the right to receive, pursuant to an election made by each holder of the Company's common stock, (i) $11.33 in cash, limited to 10% of the shares outstanding of the Company's common stock, or (ii) 0.1688 (the "Exchange Ratio") shares of common stock, par value $0.25 per share, of Ventas ("Ventas Common Stock").

8

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

In addition, pursuant to the Partnership Merger, at the Effective Time: (i) the Company’s interest as the general partner of the OP will remain outstanding and constitute the only outstanding general partnership interest in the OP; and (ii) each unit of limited partnership interests in the OP (the “OP units”) issued and outstanding immediately prior to the Effective Time of the Partnership Merger, including the 5,613,374 OP units to be issued in respect of the termination of the Listing Note Agreement (as defined in Note 10 — Subordinated Listing Distribution Derivative), will be converted into such number of Ventas Class C units (as defined in the limited partnership agreement of the OP as contemplated to be amended and restated by the Merger Agreement) of the OP as is equal to the Exchange Ratio. In addition, unless otherwise notified by Ventas, prior to the Effective Time, the Company has agreed to terminate the Company’s Employee and Director Incentive Restricted Share Plan, the Company’s 2011 Stock Option Plan and the 2014 Advisor Multi-Year Outperformace Agreement (the "OPP"), all, however, contingent on the occurrence of the Effective Time.
The completion of the Merger is subject to various customary conditions. The Merger Agreement includes certain termination rights for both the Company and Ventas and provides that, in connection with the termination of the Merger Agreement, under specified circumstances, the Company may be required to pay to Ventas expense reimbursement in an amount equal to $10.0 million. The Merger Agreement also provides for the payment of a termination fee by the Company in the amount of $55.0 million (net of the expense reimbursement, if previously paid) if the Merger Agreement is terminated under specified circumstances. The Merger is expected to close during the fourth quarter of 2014.
Pursuant to the Merger Agreement, all Merger related fees, other than fees and expenses arising from any litigation, the obtainment of consents, debt prepayment penalties, defeasance costs, breakage costs, indemnification of liabilities (excluding liabilities to the Advisor or American Realty Capital Healthcare Special Limited Partnership, LLC, (the "SLP")) and accounting expenses are capped at $23.6 million. During the three and six months ended June 30, 2014, the Company has incurred $5.3 million related to the Merger.
Note 3 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of, and for the year ended December 31, 2013, which are included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on February 26, 2014. There have been no significant changes to the Company's significant accounting policies during the six months ended June 30, 2014, other than the updates described below.
Listing Note
Concurrently with the Listing, the Company caused the OP to issue the Listing Note (see Note 10 — Subordinated Listing Distribution Derivative). Except as provided below, the Listing Note's value will be determined, in part, based on the average market value of the Company’s outstanding common stock for the period 180 days to 210 days after the Listing. Until the principal amount of the Listing Note is determined, the Listing Note is treated as a derivative and the Company estimates the contingent consideration using a valuation model and records the fair value of the Listing Note on the consolidated balance sheets. The initial fair value and subsequent changes in fair value are recorded in the consolidated statements of operations and comprehensive loss. Concurrently with the execution of the Merger Agreement, the OP and the SLP entered into an amendment to the Listing Note agreement. Pursuant to the amended Listing Note agreement, contingent upon the occurrence of the Merger at the Effective Time, 5,613,374 OP units will be issued in respect of the termination of the Listing Note.

9

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Multi-Year Outperformance Agreement
On April 7, 2014 (the "OPP Effective Date") in connection with the Listing, the Company entered into the OPP with the OP and the Advisor. Because the Advisor can terminate at any time and receive the value of the award at the next anniversary date, the estimated value of the award as of the first anniversary was expensed on the OPP Effective Date and the estimated value of the award on the second and third anniversaries is being amortized over the first year and first two years of the OPP, respectively and adjusted to reflect the probability of the closing of the Merger. The award and related expense is adjusted each reporting period for changes in the estimated value. Concurrently with the execution of the Merger Agreement, the Company, the OP and the Advisor entered into an agreement terminating the OPP, pursuant to which the OPP will terminate without payment to the Advisor, contingent on the closing of the Merger (see Note 17 — Equity-Based Compensation).
Tender Offer
The Company recorded the excess of the cost of the tendered shares over its par value to additional paid-in capital.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In April 2014, the FASB amended the requirements for reporting discontinued operations. Under the revised guidance, in addition to other disclosure requirements, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale, disposed of by sale or other than by sale. The Company has adopted the provisions of this guidance effective January 1, 2014, and has applied the provisions prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.

10

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 4 — Real Estate Investments 
The following table presents the allocation of the assets acquired and liabilities assumed during the six months ended June 30, 2014 and 2013:
 
 
Six Months Ended June 30,
(Dollar amounts in thousands)
 
2014
 
2013
Real estate investments, at cost:
 
 
 
 
Land
 
$
34,786

 
$
11,677

Buildings, fixtures and improvements
 
363,968

 
167,407

Construction in progress
 
8,150

 

Total tangible assets
 
406,904

 
179,084

Acquired intangibles:
 
 
 
 
In-place leases
 
47,699

 
19,082

Above-market lease assets
 

 
3,163

Below-market lease liabilities
 

 
(639
)
Total assets acquired, net
 
454,603

 
200,690

Preferred equity investment (see Note 5 — Preferred Equity Investment)
 
8,800

 

Deposits for real estate
 
(3,590
)
 

Mortgage notes payable assumed or used to acquire real estate investments
 
(45,530
)
 
(15,776
)
Premiums on mortgages assumed
 
(1,879
)
 
(340
)
Other liabilities assumed
 
(529
)
 
(953
)
Cash paid for acquired real estate and preferred equity investments
 
$
411,875

 
$
183,621

Number of properties purchased
 
32

 
20

The allocations to buildings, fixtures and improvements have been provisionally assigned to each class, pending receipt of additional information from a third party specialist.
The following table presents unaudited pro forma information as if the acquisitions during the six months ended June 30, 2014, had been consummated on January 1, 2013. Additionally, the unaudited pro forma net loss attributable to stockholders was adjusted to exclude acquisition related expense of $6.6 million from the six months ended June 30, 2014.
 
 
Six Months Ended June 30,
(In thousands)
 
2014
 
2013
Pro forma revenues
 
$
137,887

 
$
75,311

Pro forma net loss attributable to stockholders
 
$
(96,390
)
 
$
(3,224
)

11

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum
Base Rent Payments
July 1, 2014 — December 31, 2014
 
$
56,300

2015
 
113,885

2016
 
114,770

2017
 
113,880

2018
 
108,851

Thereafter
 
801,879

 
 
$
1,309,565

As of June 30, 2014 and 2013, the Company did not have any tenants whose annualized rental income on a straight-line basis represented approximately 10% or greater of total annualized rental income for all portfolio properties on a straight-line basis.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represents approximately 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of June 30, 2014 and 2013:
 
 
June 30,
State
 
2014
 
2013
Florida
 
10.0%
 
*
Georgia
 
12.8%
 
16.7%
Illinois
 
*
 
10.6%
Oregon
 
*
 
16.1%
Texas
 
10.5%
 
16.8%
____________________________
*
State's annualized rental income on a straight-line basis was not 10% or more of total annualized rental income for all portfolio properties as of the date specified.
Note 5 — Preferred Equity Investment
As of June 30, 2014, the Company owned a preferred equity investment in an entity that owns the 80th Street Residence, a senior housing community located at 430 East 80th Street in the Upper East Side of Manhattan. As of June 30, 2014, the preferred equity investment had a carrying amount of $8.8 million. The investment has a ten-year term maturing in March 2024, a 0.5% origination fee, a 10.0% current pay rate distributed on a semi-annual basis. The Company's preferred equity investment includes a right of first refusal to acquire the 80th Street Residence in the event the owner elects to sell the property in the future. As of December 31, 2013, the Company did not have any preferred equity investments.
The preferred equity investment has a fixed return based on contributed capital and no participation in profits or losses of the real estate activities.  As such, the Company accounts for the returns earned in income from preferred equity investment and investment securities on the consolidated statements of operations.  The Company assesses the investment for impairment on a periodic basis.

12

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 6 — Investment Securities
As of June 30, 2014, the Company had investments in common stock, redeemable preferred stock, a real estate income fund and a senior note with an aggregate fair value of $19.4 million. The real estate income fund is managed by an affiliate of the Sponsor (see Note 15 — Related Party Transactions and Arrangements). These investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive loss as a component of equity on the consolidated balance sheets unless the securities are considered to be other than temporarily impaired at which time the losses would be reclassified to expense.
The following table details the unrealized gains and losses on investment securities as of June 30, 2014 and December 31, 2013:
(In thousands)
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2014
 
 
 
 
 
 
 
 
Investment securities
 
$
20,075

 
$
123

 
$
(771
)
 
$
19,427

December 31, 2013
 
 
 
 
 
 
 


Investment securities
 
$
17,580

 
$
202

 
$
(3,112
)
 
$
14,670

Unrealized losses as of June 30, 2014 were considered temporary and therefore no impairment was recorded during the three and six months ended June 30, 2014. During the six months ended June 30, 2014, the Company sold investments in common stock with a cost of $0.5 million for $0.8 million, resulting in a realized gain on sale of investment securities of $0.3 million.
The Company's preferred stock investments are redeemable at the respective issuer's option after five years from issuance. The senior note matures in 28.7 years and bears interest at 5.45% as of June 30, 2014.
Note 7 — Credit Facility
On May 25, 2012, the Company entered into a senior revolving credit facility in the aggregate principal amount of $50.0 million (the "Credit Facility") with KeyBank National Association ("KeyBank"). On October 25, 2012, the Company entered into an amendment, which increased the maximum commitments under the Credit Facility to $200.0 million.
On July 24, 2013, the Company entered into an unsecured amended and restated credit agreement (the "Amended Facility"), which allows for total borrowings of up to $755.0 million, comprised of a $500.0 million term loan component and a $255.0 million revolving loan component. The Amended Facility also contains a subfacility for letters of credit of up to $25.0 million. The Amended Facility contains an “accordion feature” to allow the Company, under certain circumstances, to increase the aggregate term loan borrowings under the Amended Facility to up to $750.0 million and the aggregate revolving loan borrowings to up to $450.0 million, or up to $1.2 billion of total borrowings.
Pursuant to the Amended Facility, the Company has the option, based upon its corporate leverage, to have the Amended Facility priced at either: (a) LIBOR, plus an applicable margin that ranges from 1.60% to 2.20%; or (b) the Base Rate, plus an applicable margin that ranges from 0.35% to 0.95%. Base Rate is defined in the Amended Facility as the greatest of (i) the fluctuating annual rate of interest announced from time to time by KeyBank as its “prime rate,” (ii) 0.5% above the federal funds effective rate or (iii) 1.0% above the applicable one-month LIBOR. Upon such time as the Company receives an investment grade credit rating as determined by major credit rating agencies, the Company will have the option, based upon its credit rating, to have the Amended Facility priced at either: (a) LIBOR, plus an applicable margin that ranges from 0.95% to 1.70%; or (b) the Base Rate, plus an applicable margin that ranges from 0.00% to 0.70%. The Amended Facility includes an unused fee per annum equal to (a) 0.25% of any unused balance of the revolving facility, if such unused balance exceeds 50% of the available revolving facility, (b) 0.15% of any unused balance of the revolving credit facility, if such unused balance is equal to or less than 50% of the available revolving facility and (c) 0.25% of any unused balance of the term facility.

13

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The Amended Facility provides for monthly interest payments for each Base Rate loan and periodic payments for each LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date. The term loan component of the Amended Facility matures in July 2018 and the revolving loan component of the Amended Facility matures in July 2016. The revolving loan component of the Amended Facility contains two, one-year extension options. The Amended Facility may be prepaid from time to time and at any time, in whole or in part, without premium or penalty, subject to reimbursement of certain costs and expenses. In the event of a default, the lenders have the right to terminate its obligations under the Amended Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans.
On January 23, 2014, the Company entered into the first amendment to the Amended Facility (the "First Amendment"), which permits the Company to make a maximum of five borrowings of term loans from the period beginning July 24, 2013 to July 24, 2014 (the “Term Loan Commitment Period”) in an aggregate principal amount which decreases over time as follows: for the period beginning July 24, 2013 to January 24, 2014, $500.0 million; for the period beginning January 25, 2014 to April 24, 2014, $400.0 million; and for the period beginning April 25, 2014 to July 24, 2014, $200.0 million. Additionally, under the First Amendment, the Company may from time to time, at its option, increase the total term loan commitment up to an amount not to exceed the sum of $750.0 million plus the amount of the initial term loan commitment not borrowed during the Term Loan Commitment Period.
On April 7, 2014, the Company entered into the second amendment to the Amended Facility (the “Second Amendment”). The Second Amendment, among other things, (i) permits the issuance of the Listing Note to the SLP following the Listing, (ii) modifies the distribution covenant to account for the suspension of the Company’s distribution reinvestment plan (the "DRIP"); (iii) permits the issuance of long term incentive plan units ("LTIP units") to the Advisor and (iv) modifies certain other terms of the Amended Facility to allow the Company to make additional restricted payments, including the Tender Offer.
As of June 30, 2014, the balance outstanding under the Amended Facility was $507.5 million, with a weighted average interest rate of 1.8%. The Company's unused borrowing capacity was $96.9 million, based on the assets assigned to the Amended Facility as of June 30, 2014. Availability of borrowings is based on a pool of eligible unencumbered real estate assets. There were no advances outstanding as of December 31, 2013.
The Amended Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of June 30, 2014, the Company was in compliance with the financial covenants under the Amended Facility.
Note 8 — Note Payable
In September 2011, the Company entered into an unsecured $4.5 million note payable with an unaffiliated third party investor. The note bore interest at a fixed rate of 8.0% per annum and was due to mature in September 2014. The note had two one-year extension options. The note required monthly interest payments with the principal balance due at maturity. The note could be repaid at any time, in whole or in part, without premium or penalty. Notwithstanding the foregoing, after the initial maturity date, the lender had a right to require the repayment in full of any outstanding principal and interest under the note upon 60 days' notice. The note was repaid in full in January 2013 at the Company's election.

14

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 9 — Mortgage Notes Payable
The Company's mortgage notes payable as of June 30, 2014 and December 31, 2013 consist of the following:
 
 

 
Outstanding Loan Amount as of
 
Effective Interest Rate
 

 

Portfolio
 
Encumbered Properties
 
June 30, 2014
 
December 31, 2013
 
 
Interest Rate
 
Maturity
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Texarkana ASC - Texarkana, TX
 
1
 
$
2,119

 
$
2,143

 
5.58
%
 
Fixed
 
Jun. 2016
Carson Tahoe Specialty Medical Center - Carson City, NV (1)
 
3
 
21,751

 
21,751

 
5.08
%
 
Fixed
 
Sep. 2015
Durango Medical Plaza - Las Vegas, NV (1)
 
1
 
17,172

 
17,172

 
5.08
%
 
Fixed
 
Sep. 2015
CareMeridian Rehabilitation - Phoenix, AZ (1)
 
1
 
6,936

 
6,936

 
5.08
%
 
Fixed
 
Sep. 2015
Reliant Rehabilitation - Dallas, TX (1)
 
1
 
24,850

 
24,850

 
5.15
%
 
Fixed
 
Sep. 2015
Select Rehabilitation - San Antonio, TX (1)
 
1
 
12,714

 
12,714

 
5.15
%
 
Fixed
 
Sep. 2015
Spring Creek Medical Plaza - Tomball, TX (1)
 
1
 
7,477

 
7,477

 
5.15
%
 
Fixed
 
Sep. 2015
Odessa Regional MOB - Odessa, TX
 
1
 
4,047

 
4,047

 
4.09
%
(2) 
Fixed
 
Dec. 2016
Methodist North MOB - Peoria, IL
 
1
 
13,544

 
13,544

 
3.99
%
(2) 
Fixed
 
Dec. 2016
University of Wisconsin Health MOB - Monona, WI
 
1
 
5,039

 
5,039

 
4.00
%
 
Fixed
 
Apr. 2017
Reliant Rehabilitation - Houston, TX (1)
 
1
 
13,437

 
13,437

 
4.98
%
 
Fixed
 
Sep. 2015
Village Healthcare Center - Santa Ana (1)
 
1
 
1,906

 
1,906

 
4.98
%
 
Fixed
 
Sep. 2015
Sisters of Mercy Building - Springfield, MO
 
1
 
5,500

 
5,500

 
4.11
%
 
Fixed
 
Sep. 2017
East Pointe Medical Plaza - Lehigh Acres, FL
 
1
 
5,260

 
5,260

 
4.11
%
 
Fixed
 
Sep. 2017
Unitron Hearing Building - Plymouth, MN
 
1
 
4,000

 
4,000

 
4.11
%
 
Fixed
 
Sep. 2017
Carson Tahoe MOB West - Carson City, NV
 
1
 
4,675

 
4,675

 
3.88
%
(2) 
Fixed
 
Jun. 2017
Aurora Health Care Portfolio
 
3
 
49,600

 
49,600

 
5.60
%
 
Fixed
 
Jan. 2017
Princeton Village - Clackamas, OR
 
1
 
3,068

 
3,114

 
7.48
%
 
Fixed
 
Jan. 2031
Pelican Pointe - Klamath Falls, OR
 
1
 
12,365

 
12,460

 
5.16
%
 
Fixed
 
Apr. 2022
Fayette MOB - Fayetteville, GA
 
1
 
6,902

 
6,986

 
5.18
%
 
Fixed
 
Sep. 2015
Garden House - Anderson, SC
 
1
 
8,082

 
8,149

 
4.86
%
 
Fixed
 
Dec. 2018
Benton House - Covington, GA
 
1
 
8,060

 
8,121

 
5.26
%
 
Fixed
 
May 2019
Arbor Terrace - Asheville, SC
 
1
 
9,433

 
9,497

 
5.58
%
 
Fixed
 
Feb. 2018
Arbor Terrace - Decatur, GA
 
1
 
10,896

 
10,970

 
5.57
%
 
Fixed
 
Jan. 2018
Casa de Santa Fe - Rocklin, CA
 
1
 
20,579

 

 
4.71
%
 
Fixed
 
Oct. 2021
Bay Medical Plaza - Lynn Haven, FL
 
1
 
9,579

 

 
6.61
%
 
Fixed
 
Aug. 2017
Bay Medical Center - Panama City, FL
 
1
 
9,321

 

 
6.61
%
 
Fixed
 
Aug. 2017
Legacy Heart Center - Plano, TX
 
1
 
5,895

 

 
5.76
%
 
Fixed
 
Oct. 2015
Total
 
32
 
$
304,207

 
$
259,348

 
5.17
%
(3) 
 
 
 
_____________________________________
(1)
These mortgages, aggregating $106.2 million, represent the first, second and third tranches of a multi-tranche mortgage loan agreement to provide funding for a portfolio of eight properties. The mortgages for each of the properties are cross-collateralized with one another and in the event that the Company defaults on one of the mortgages, the lender may look to the other properties as collateral.
(2)
Fixed as a result of entering into a swap agreement.
(3)
Calculated on a weighted average basis for all mortgages outstanding as of June 30, 2014.

15

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table summarizes the scheduled aggregate principal payments on mortgage notes payable for the five years subsequent to June 30, 2014:
(In thousands)
 
Future Principal
Payments
July 1, 2014 — December 31, 2014
 
$
769

2015
 
120,179

2016
 
20,936

2017
 
94,353

2018
 
27,778

Thereafter
 
40,192

 
 
$
304,207

Some of the Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of June 30, 2014 and December 31, 2013, the Company was in compliance with the financial covenants under its mortgage notes payable agreements.
Note 10 — Subordinated Listing Distribution Derivative
Upon occurrence of the Listing, the SLP became entitled to begin receiving distributions of net sales proceeds pursuant to its special limited partner interest in the OP (the “SLP Interest”) in an aggregate amount that is evidenced by the issuance of a note by the OP (the “Listing Note”). The Listing Note is equal to 15.0% of the amount, if any, by which (a) the average market value of the Company’s outstanding common stock for the period 180 days to 210 days after the Listing, plus dividends paid by the Company prior to Listing, exceeds (b) the sum of the total amount of capital raised from stockholders during the Company’s prior offering and the amount of cash flow necessary to generate a 6.0% annual cumulative, non-compounded return to such stockholders. Concurrently with the Listing, the Company, as general partner of the OP, caused the OP to enter into the Listing Note Agreement dated April 7, 2014 by and between the OP and the SLP (the "Listing Note Agreement"), and caused the OP to issue the Listing Note. The Listing Note is evidence of the SLP’s right to receive distributions of net sales proceeds from the sale of the Company’s real estate and real estate-related assets up to an aggregate amount equal to the principal balance of the Listing Note. Pursuant to the terms of the limited partnership agreement of the OP, the SLP has the right, but not the obligation, to convert all or a portion of the SLP Interest into OP units which are convertible into shares of the Company's common stock.
Except as provided below, the principal amount of the Listing Note will be determinable based on the actual market value of the Company’s outstanding common stock for the period 180 days to 210 days after the Listing and therefore the principal amount of the Listing Note is not yet definitive. Until the amount of the Listing Note can be determined, the Listing Note is considered a derivative, which is marked to fair value at each reporting date, with changes in the estimated value recorded in the consolidated statements of operations and comprehensive loss. The Listing Note fair value, as of June 30, 2014, was estimated using a Monte Carlo simulation, which uses a combination of observable and unobservable inputs and was adjusted to reflect the probability of the closing of the Merger (see Note 11 — Fair Value of Financial Instruments). As of June 30, 2014, the Listing Note had a fair value of $58.2 million. The final value of the Listing Note could differ materially from the current estimate.
However, concurrently with the execution of the Merger Agreement, the OP and the SLP entered into an amendment to the Listing Note Agreement (the "Listing Note Amendment"), to provide that: (i) immediately prior to, and contingent upon, the closing of the Merger, the SLP will be deemed to have contributed its right to distributions from the OP pursuant to its SLP Interest, the amount of which distributions are evidenced by the Listing Note, to the OP in exchange for 5,613,374 OP units in the OP; and (ii) the Listing Note Agreement will terminate upon receipt by the SLP of such OP units. The Listing Note Amendment will, pursuant to its terms, automatically terminate and be of no further force or effect if the Merger Agreement is terminated in accordance with its terms.

16

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 11 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the instrument. This alternative approach also reflects the contractual terms of the instrument, as applicable, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities, and unobservable inputs, such as expected volatility. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2014 and December 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swap positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's interest rate swaps. As a result, the Company has determined that its interest rate swap valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of interest rate swaps is determined using a discounted cash flow analysis on the expected cash flows. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
The valuation of the OPP was determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the vesting periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility and a probability of the closing of the Merger. As a result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy.
The valuation of the Listing Note is determined using a Monte Carlo simulation. This analysis reflects the known inputs of the valuation of the Listing Note, including the gross share proceeds received and the sum of dividends paid prior to the Listing, as well as observable market-based inputs, including interest rate curves, implied probability of the closing of the Merger and unobservable inputs, such as expected volatility. As a result, the Company has determined that its Listing Note valuation in its entirety is classified in Level 3 of the fair value hierarchy.
The Company has investments in common stock, redeemable preferred stock, a real estate income fund and senior notes that are traded in active markets and therefore, due to the availability of quoted market prices in active markets, the Company has classified these investments as Level 1 in the fair value hierarchy.

17

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
(340
)
 
$

 
$
(340
)
Investment securities
 
$
19,427

 
$

 
$

 
$
19,427

OPP (1)
 
$

 
$


$
(1,350
)
 
$
(1,350
)
Listing Note
 
$

 
$

 
$
(58,150
)
 
$
(58,150
)
December 31, 2013
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
(333
)
 
$

 
$
(333
)
Investment securities
 
$
14,670

 
$

 
$

 
$
14,670

__________________
(1) The amount presented represents the fair value of all LTIP units issued under the OPP, of which $0.5 million has been recorded in general and administrative expense on the consolidated statement of operations and presented as a liability on the consolidated balance sheet in accounts payable and accrued expenses.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2014.
Level 3 valuations
The following is a reconciliation of the beginning and ending balance for the changes in instruments with Level 3 inputs in the fair value hierarchy for the six months ended June 30, 2014:
(In thousands)

 
OPP
 
Listing Note
Beginning balance as of December 31, 2013
 
$

 
$

Fair value at issuance
 
33,200

 
27,400

Fair value adjustments
 
(31,850
)
 
30,750

Ending balance as of June 30, 2014
 
$
1,350

 
$
58,150

The following table provides quantitative information about the significant Level 3 inputs used:
Financial Instrument
 
Fair Value at June 30, 2014
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
Listing Note
 
$
58,150

 
Monte Carlo Simulation
 
Expected volatility
 
17.0%
 
 
 
 
Merger Probability
 
95.0%
OPP
 
$
1,350

 
Monte Carlo Simulation
 
Expected volatility
 
29.0%
 
 
 
 
Merger Probability
 
95.0%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.

18

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Pursuant to the OPP Termination Agreement, the OPP will terminate without payment to the Advisor, contingent on the closing of the Merger (see Note 17 — Equity-Based Compensation). As such, all LTIP units previously issued under the OPP may be forfeited and any value associated with the OPP would be eliminated. The closing of the Merger also requires the Listing Note to be settled through the issuance of 5,613,374 OP units pursuant to the Listing Note Amendment, which will be converted into Ventas Class C units that are convertible into shares of Ventas Common Stock (see Note 2 — Merger Agreement). The probability input is a measure of the likelihood that the Merger will occur given legal and due diligence requirements that exist in order to close the Merger. An increase in the probability of the Merger, in isolation, would generally result in a decrease in the fair value of the OPP and an increase in the fair value of the Listing Note.
Financial instruments not carried at fair value
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, investment securities, other receivables, due to affiliates, accounts payable and dividends payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below:
 
 
 
 
Carrying Amount at
 
Fair Value at
 
Carrying Amount at
 
Fair Value at
(In thousands)
 
Level
 
June 30, 2014
 
June 30, 2014
 
December 31, 2013
 
December 31, 2013
Mortgage notes payable and premiums, net (1)
 
3
 
$
308,207

 
$
313,932

 
$
262,117

 
$
266,242

Credit facility
 
3
 
$
507,500

 
$
507,500

 
$

 
$

Preferred equity investment
 
3
 
$
8,800

 
$
8,800

 
$

 
$

________________
(1) Carrying value includes $304.2 million and $259.3 million mortgage notes payable and $4.0 million and $2.8 million net mortgage premiums as of June 30, 2014 and December 31, 2013, respectively.
The fair value of the mortgage notes payable are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. Advances under the credit facility are considered to be reported at fair value, since its interest rate varies with changes in LIBOR.
Note 12 — Interest Rate Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, collars, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements will not be able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may use interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with forecasted variable-rate debt. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.

19

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $0.2 million will be reclassified from other comprehensive loss as an increase to interest expense.
As of June 30, 2014 and December 31, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
 
June 30, 2014
 
December 31, 2013
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps
 
3
 
$
22,266

 
3
 
$
22,266


The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2014 and December 31, 2013:
(In thousands)
 
Balance Sheet Location
 
June 30, 2014
 
December 31, 2013
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Derivatives, at fair value
 
$
(340
)
 
$
(333
)
Derivatives in Cash Flow Hedging Relationships
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2014
 
2013
 
2014
 
2013
Amount of income (loss) recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion)
 
$
(90
)
 
$
237

 
$
(134
)
 
$
222

Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense (effective portion)
 
$
(64
)
 
$
(61
)
 
$
(127
)
 
$
(121
)
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion and amount excluded from effectiveness testing)
 
$

 
$

 
$

 
$


20

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's interest rate derivatives as of June 30, 2014 and December 31, 2013. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The table below provides the location that the fair value of derivative assets and liabilities are presented on the accompanying consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 
Derivatives (In thousands)
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Liabilities presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Posted
 
Net Amount
June 30, 2014
 
$
(340
)
 
$

 
$
(340
)
 
$

 
$

 
$
(340
)
December 31, 2013
 
$
(333
)
 
$

 
$
(333
)
 
$

 
$

 
$
(333
)
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative. These derivatives may be used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. The Company does not have any hedging instruments that do not qualify for hedge accounting.
Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligation.
As of June 30, 2014, the fair value of derivatives in a liability position related to these agreements, including accrued interest, but excluding any adjustment for nonperformance risk related to these agreements, was $0.4 million. As of June 30, 2014, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreement at its aggregate termination value of $0.4 million at June 30, 2014.
Note 13 — Common Stock
The Company listed its common stock on the NASDAQ under the symbol "HCT" on April 7, 2014. As of June 30, 2014 and December 31, 2013, the Company had 169.3 million and 180.5 million shares of common stock outstanding, respectively, including unvested restricted stock and shares issued under the DRIP.
On April 7, 2014, the Company commenced the Tender Offer. The Tender Offer was completed on May 2, 2014 with the Company purchasing approximately 13.6 million shares of its common stock at a price of $11.00 per share, for an aggregate of $150.1 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter. The Company funded the Tender Offer using a drawn on its Amended Facility.
On April 11, 2014, the Company filed a universal shelf registration statement that was declared effective. The Company intends to maintain the universal shelf registration statement.
On December 10, 2011, the board of directors authorized, and the Company declared, dividends payable to stockholders of record each day during the applicable period at a rate equal to $0.0018630137 per day, or $0.68 annually, per share of common stock beginning January 1, 2012. Following the Listing, dividends are paid to stockholders of record at the close of business on the 8th day of each month and payable on the 15th day of such month. Dividend payments are dependent on the availability of funds. The board of directors may reduce the amount of dividends paid or suspend dividend payments at any time and therefore dividend payments are not assured.
On April 1, 2014, the Company provided notice to its stockholders that, pursuant to the terms of the DRIP, the board of directors approved an amendment to the DRIP that enables the Company to suspend the DRIP. Subsequently, the board of directors approved the suspension of the DRIP, effective March 30, 2014. The final issuance of shares of common stock pursuant to the DRIP in connection with the Company’s March 2014 dividend was paid in April 2014.

21

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

On March 30, 2014, the board of directors approved the termination of the Company’s Share Repurchase Program (“SRP”). The Company processed all of the requests received under the SRP for the first quarter of 2014 and will not process further requests. The following table reflects the cumulative number of shares repurchased under the Company's SRP cumulatively through June 30, 2014:
 
 
Number of Requests
 
Number of Shares Repurchased
 
Average Price per Share
Cumulative repurchase requests as of December 31, 2013
 
122

 
386,968

 
$
9.77

Six months ended June 30, 2014
 
22

 
69,476

 
9.85

Cumulative repurchase requests as of June 30, 2014
 
144

 
456,444

 
$
9.79

Note 14 — Commitments and Contingencies
Future Minimum Lease Payments
The Company has entered into lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter under these arrangements.  These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum
Lease Payments
July 1, 2014 — December 31, 2014
 
$
335

2015
 
627

2016
 
634

2017
 
641

2018
 
664

Thereafter
 
23,553

 
 
$
26,454

Purchase Commitments
In July 2013, the Company entered into a construction advance agreement and purchase and sale agreement to initially fund the construction of, and subsequently purchase upon construction completion and rent commencement, a medical office building in Kenosha, Wisconsin for $24.5 million. As of June 30, 2014, the Company has funded $1.8 million and $19.3 million for the land and construction in progress, respectively.

22

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Litigation
In connection with the proposed acquisition by Ventas of all of the outstanding stock of the Company, purported shareholders of the Company have filed thirteen class action lawsuits in the Circuit Court for Baltimore City, Maryland and the Supreme Court of the State of New York and federal district court in Maryland naming the Company and its board of directors, among others, as defendants. The filed actions are: Holzer v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003553 (Md. Cir. Ct.), filed June 6, 2014; Romano v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003534 (Md. Cir. Ct.) filed June 6, 2014; Brenner v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003540 (Md. Cir. Ct.) filed June 9, 2014; Schindler v. Burns, et al., Index No. 671761/2014 (N.Y. Sup. Ct.), filed June 10, 2014; Frey v. American Realty Capital Healthcare Trust, Inc. et al., Index No. 651772/2014 (N.Y. Sup. Ct.), filed June 10, 2014; Hamill v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003636, (Md. Cir. Ct.), filed June 11, 2014; Stanley v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003664 (Md. Cir. Ct.), filed June 12, 2014; Shine v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003707 (Md. Cir. Ct.), filed June 13, 2014; Uhl v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003710 (Md. Cir. Ct.), filed June 13, 2014; Kuo v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003765 (Md. Cir. Ct), filed June 17, 2014; Flor v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-003817 (Md. Cir. Ct.), filed June 19, 2014, Rosenzweig v. Schorsch et al., Case No. 1:14-CV-02019-GLR (U.S.D.C. - Dist. Md.) (Russell, D.J.), filed June 23, 2014 and Abbassi, et al. v. American Realty Capital Healthcare Trust, Inc. et al., Case No. 24-C-14-004104 (Md. Cir. Ct.), filed July 9, 2014. The Stanley, Shine, Kuo, Rosenzweig and Abbassi complaints also assert derivative claims on behalf of the Company against the individual defendants. The filed actions allege, inter alia, breach of fiduciary duty and breach of contract claims arising from the proposed acquisition of the Company by Ventas and seek (i) to enjoin the proposed acquisition and (ii) recover damages if the proposed acquisition is completed. There have been no other court filings in any of these matters.
The Company believes that such lawsuits are without merit, but the ultimate outcome of such matter cannot be predicted with certainty. Because the lawsuits are in their early stages, neither the outcome of the lawsuits nor an estimate of a probable loss or any reasonable possible losses are determinable at this time. No provisions for such losses have been recorded in the accompanying consolidated financial statements for the three and six months ended June 30, 2014. An adverse judgment for monetary damages could have a material adverse effect on the operations and liquidity of the Company. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger. All defendants believe that the claims are without merit and are defending against them vigorously. Additional lawsuits arising out of or related to the Merger Agreement may be filed in the future. As of June 30, 2014, there were no other material legal proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of June 30, 2014, the Company maintains environmental insurance for its properties that provides coverage for potential environmental liabilities, subject to the policy's coverage conditions and limitations. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the consolidated results of operations and comprehensive loss.
Note 15 — Related Party Transactions and Arrangements
The SLP, an entity wholly owned by the Sponsor, owned 20,000 shares of the Company's outstanding common stock as of June 30, 2014 and December 31, 2013.
The Advisor, as the holder of Class B units, had the right to make a capital contribution to the OP in exchange for OP units. Pursuant to a contribution and exchange agreement entered into between the Advisor and the OP dated April 7, 2014 (the "Contribution and Exchange Agreement"), the Advisor contributed $0.8 million in cash to the OP in exchange for 83,333 OP units of the OP (see Note 19  — Non-Controlling Interests).
During the six months ended June 30, 2014, the Company invested $3.0 million in a real estate income fund managed by an affiliate of the Sponsor (see Note 6 — Investment Securities). There is no obligation to purchase any additional shares and the shares can be sold at any time.

23

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Fees Paid in Connection with the IPO
The Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock in the IPO. The Dealer Manager received a selling commission of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager received up to 3.0% of the gross proceeds, from the sale of common stock, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager was permitted to reallow its dealer manager fee to participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. The following table details total selling commissions and dealer manager fees incurred and receivable from the Dealer Manager as of and for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
 
Receivable (1) as of
 
 
June 30,
 
June 30,
 
June 30,
 
December 31,
(In thousands)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Total commissions and fees incurred from the Dealer Manager
 
$
(19
)
 
$
60,913

 
$

 
$
117,425

 
$
(18
)
 
$
(18
)
_____________________
(1) Includes reimbursements received for selling commissions and dealer manager fees as a result of share purchase cancellations related to common stock sales prior to the close of the IPO
The Advisor and its affiliates received compensation and reimbursement for services provided in connection with the IPO. Effective March 1, 2013, the Company utilized transfer agent services provided by an affiliate of the Dealer Manager. All offering costs related to the IPO incurred by the Company, or its affiliated entities, on behalf of the Company were charged to additional paid-in capital on the accompanying consolidated balance sheets during the IPO. The following table details offering costs and reimbursements incurred from and payable to the Advisor and Dealer Manager as of and for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
 
Payable as of
 
 
June 30,
 
June 30,
 
June 30,
 
December 31,
(In thousands)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Fees and expense reimbursements incurred from the Advisor and Dealer Manager
 
$

 
$
622

 
$

 
$
1,901

 
$

 
$

Fees Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment and is reimbursed for acquisition costs incurred in the process of acquiring properties, which is expected to be approximately 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. The total of all acquisition fees, acquisition expenses and financing coordination fees (as defined below), with respect to the Company's portfolio of investments, did not exceed 4.5% of the contract purchase price of the Company's portfolio as measured at the close of the acquisition phase. On April 7, 2014, in connection with the Listing, the Company entered into the Third Amended and Restated Advisory Agreement (the "Amended Advisory Agreement") by and among the Company, the OP and the Advisor, which, among other things, terminates the acquisition fee 180 days after the Listing, or October 4, 2014 (the "Termination Date"), except for fees with respect to properties under contract, letter of intent or under negotiation as of the Termination Date.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company pays the Advisor a financing coordination fee equal to 1.0% of the amount available or outstanding under such financing, subject to certain limitations. In accordance with the Amended Advisory Agreement, the financing coordination fee terminates on the Termination Date, except for fees with respect to properties under contract, letter of intent or under negotiation as of the Termination Date.

24

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

In connection with providing strategic advisory services related to certain portfolio acquisitions, the Company has entered into arrangements in which the investment banking division of the Dealer Manager receives a transaction fee of 0.25% of the transaction value for such portfolio acquisition transactions. Should the Dealer Manager provide strategic advisory services related to additional portfolio acquisition transactions, the Company will enter into new arrangements with the Dealer Manager on such terms as may be agreed upon between the two parties.
Until the Listing, in respect of the asset management subordination, the Advisor was entitled to Class B units equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the per share price in the primary portion of the IPO, excluding commissions and dealer manager fees. In respect of this arrangement, the Company caused the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B units," which were intended to be profit interests and vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all dividends made equaled or exceeded the total amount of capital contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). The value of issued Class B units was determined and expensed when the Company deemed the achievement of the performance condition to be probable, which occurred as of the Listing. As of April 7, 2014, in aggregate, the board of directors had approved the issuance of 1,360,362 Class B units to the Advisor in connection with this arrangement. The Advisor received dividends on unvested Class B units equal to the dividend rate received on the Company's common stock. Such dividends on issued Class B units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss. The performance condition related to these Class B units was satisfied upon completion of the Listing, which resulted in $12.9 million of expense on April 7, 2014, which is included in vesting of Class B units for asset management services expense on the consolidated statement of operations and comprehensive loss. On April 7, 2014, the Class B units were converted to OP units on a one-to-one basis.
In accordance with the Amended Advisory Agreement, the asset management fee was amended to 0.50% per annum of average invested assets up to $3.0 billion and 0.40% per annum of average invested assets above $3.0 billion. The Amended Advisory Agreement also permits the asset management fee to be paid in the form of cash, OP units and shares of restricted common stock of the Company, or a combination thereof, at the Advisor's election.
Concurrently with the execution of the Merger Agreement, the Company entered into an amendment, whereby the parties have agreed to terminate the Amended Advisory Agreement immediately prior to, and contingent upon, the closing of the Merger.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee of up to 1.5% of gross revenues from the Company's stand-alone single-tenant net leased properties and up to 2.5% of gross revenues from all other types of properties, respectively, plus market-based leasing commission applicable to the geographic location of each property.  The Company also reimburses the affiliate for property level expenses. If the Company contracts directly with third parties for such services, the Company pays them customary market fees and pays the Property Manager an oversight fee of up to 1.0% of the gross revenues of the applicable property. In no event will the Company pay the Property Manager or any affiliate both a property management fee and an oversight fee with respect to any particular property. Concurrently with the execution of the Merger Agreement, the Company entered into an amendment (the “Property Management Agreement Amendment”). Under the Property Management Agreement Amendment, the parties have agreed to terminate the property management agreement immediately prior to, and contingent upon, the closing of the Merger. The Property Management Agreement Amendment will, pursuant to its terms, automatically terminate and be of no further force or effect if the Merger Agreement is terminated in accordance with its terms.
Effective March 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over the term of the IPO and included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss. The Dealer Manager and its affiliates also provide transfer agency services, as well as transaction management and other professional services. After the close of the IPO, these fees were included in general and administrative expenses on the consolidated statement of operations and comprehensive loss during the period the service was provided.

25

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table details amounts incurred, forgiven and payable to related parties in connection with the Company's operations-related services described above as of and for the periods presented:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Payable as of
 
 
2014
 
2013
 
2014
 
2013
 
June 30,
 
December 31,
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
2014
 
2013
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements
 
$
2,218

 
$

 
$
1,852

 
$

 
$
4,533

 
$

 
$
2,880

 
$

 
$

 
$

Financing coordination fees
 
59

 

 

 

 
361

 

 
158

 

 

 

Other expense reimbursements
 

 

 
19

 

 

 

 
19

 

 

 

Ongoing fees:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management services (1)
 
2,352

 

 

 

 
2,352

 

 

 

 
2,352

 

Property management and leasing fees
 

 
704

 

 
268

 

 
1,311

 

 
491

 

 

Transfer agent and other professional fees
 
615

 

 
226

 

 
1,197

 

 
226

 

 
377

 
235

Strategic advisory fees
 

 

 
460

 

 

 

 
920

 

 

 

Dividends on Class B Units
 
12

 

 
37

 

 
151

 

 
54

 

 

 

Total related party operation fees and reimbursements
 
$
5,256

 
$
704

 
$
2,594

 
$
268

 
$
8,594

 
$
1,311

 
$
4,257

 
$
491

 
$
2,729

 
$
235

___ ____________
(1) Prior to the Listing, the Company caused the OP to issue the Advisor restricted performance based Class B units for asset management services, which vested with the Listing. Amounts reflected in the table reflect asset management services following the Listing as described above.
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that it will not reimburse the Advisor for any amount by which its operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2% of average invested assets, or (b) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No reimbursement was incurred from the Advisor for providing administrative services, including any reimbursement for compensation to named officers of the Company, for the three and six months ended June 30, 2014 or 2013.
In order to improve operating cash flows and the ability to pay dividends from operating cash flows, the Advisor and the Property Manager agreed to waive certain fees including property management fees during the three and six months ended June 30, 2014. Because the Advisor and the Property Manager waived certain fees, cash flows from operations that would have been paid to the Advisor and the Property Manager were available to pay dividends to stockholders. The fees that were forgiven are not deferrals and accordingly, will not be paid to the Advisor or the Property Manager in any subsequent periods. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs. No such fees were absorbed during the three and six months ended June 30, 2014 or the three months ended June 30, 2013. For the six months ended June 30, 2013, the Advisor absorbed $0.3 million of the Company's general and administrative costs. The Company did not have a receivable due from the Advisor related to absorbed general and administrative costs as of June 30, 2014 and December 31, 2013. These absorbed costs are presented net in the accompanying consolidated statements of operations and comprehensive loss.




26

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Fees Incurred in Connection with the Liquidation or Listing of the Company's Real Estate Assets
Fees Incurred in Connection with the Listing
In December 2013, the Company entered into a transaction management agreement with RCS Advisory Services, LLC, an entity owned by the Dealer Manager, to provide strategic alternatives transaction management services through the occurrence of a liquidity event and a-la-carte services thereafter. The Company agreed to pay $3.0 million pursuant to this agreement. During the three and six months ended June 30, 2014, the Company incurred $1.5 million in fees pursuant to this agreement, which includes amounts for services provided in preparation for the Listing, and is included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss. No such amounts were incurred during the three and six months ended June 30, 2013. The Company incurred $1.5 million in fees pursuant to this arrangement during the year ended December 31, 2013 which were included in acquisition and transaction related costs in the consolidated statement of operations and comprehensive loss. Thus the Company does not owe the Dealer Manager any more fees pursuant to this agreement.
In December 2013, the Company entered into an information agent and advisory services agreement with the Dealer Manager and American National Stock Transfer, LLC, an entity owned by the Dealer Manager, to provide in connection with a liquidity event, advisory services, educational services to external and internal wholesalers, communication support as well as proxy, tender offer or redemption and solicitation services. The Company agreed to pay $1.9 million pursuant to this agreement. During the three and six months ended June 30, 2014, the Company incurred $1.3 million of these fees pursuant to this agreement, which includes amounts for services provided in preparation for the Tender Offer, and is included in additional paid in capital on the consolidated balance sheet. No such amounts were incurred during the three and six months ended June 30, 2013. The Company incurred $0.6 million in fees pursuant to this arrangement during the year ended December 31, 2013 which were included in acquisition and transaction related costs in the consolidated statement of operations.
The investment banking division of the Dealer Manager provided the Company with strategic and financial advice and assistance in connection with (i) a possible sale transaction involving the Company (ii) the possible listing of the Company's securities on a national securities exchange, and (iii) a possible acquisition transaction involving the Company. The Dealer Manager received a listing advisory fee equal to an amount equal to 0.25% of the transaction value. During the three and six months ended June 30, 2014, the Company incurred $6.4 million in connection with this agreement, which is included in acquisition and transaction related expenses on the consolidated statement of operations and comprehensive loss.
During the three and six months ended June 30, 2014, the Company also incurred $1.5 million of expenses with affiliated entities relating to general legal, marketing and sales services provided in connection with the Listing and other non-recurring transactions. These expenses are included in acquisition and transaction related costs in the consolidated statement of operations and comprehensive loss.
Fees Incurred in Connection with the Merger
In May 2014, the Company entered into a transaction management agreement with RCS Advisory Services, LLC, an entity owned by the Dealer Manager, to provide, in connection with the Merger, strategic alternatives transaction management services through the occurrence of a sale transaction and a-la-carte services thereafter. The Company agreed to pay $3.0 million pursuant to this agreement. During the three and six months ended June 30, 2014, the Company incurred $2.0 million in fees pursuant to this agreement, which includes amounts for services provided in preparation for the Merger, and is included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss. This amount is included in accounts payable and accrued expenses on the consolidated balance sheet as of June 30, 2014. No such amounts were incurred during three and six months ended June 30, 2013.
In May 2014, the Company entered into an information agent and advisory services agreement with the Dealer Manager and American National Stock Transfer, LLC, an entity owned by the Dealer Manager, to provide in connection with the Merger, advisory services, educational services to external and internal wholesalers and communication support. The Company agreed to pay $1.9 million pursuant to this agreement. During the three and six months ended June 30, 2014, the Company incurred $0.6 million of these fees pursuant to this agreement, which includes amounts for services provided in preparation for the Merger, and is included in acquisition and transaction related costs on the consolidated statement of operations and comprehensive loss. This amount is included in accounts payable and accrued expenses on the consolidated balance sheet as of June 30, 2014. No such amounts were incurred during three and six months ended June 30, 2013.

27

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The investment banking division of the Dealer Manager provides the Company with strategic and financial advice and assistance in connection with a possible sale transaction involving the Company. The Dealer Manager will receive a transaction advisory fee equal to the greatest (i) an amount equal to 0.25% of the transaction value, (ii) $1.0 million and (iii) the highest fee payable to any co-bookrunner (or comparable person) in connection with the transaction. If the possible sale transaction does not occur, the Dealer Manger will receive a base advisor services fee of $1.0 million on the earlier of (a) the date the Dealer Manager resigns or is terminated for cause and (b) 18 months from the date of any other termination of this agreement by the Company. No such amounts were incurred during the three and six months ended June 30, 2014 or 2013.
During the three and six months ended June 30, 2014, the Company also incurred $0.1 million of expenses with affiliated entities relating to legal, consulting and other expenses provided in connection with the Merger. These expenses are included in acquisition and transaction related costs in the consolidated statement of operations and comprehensive loss.
Other Liquidation Related Fees
The Company will pay a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in light of the size, type and location of the property, in each case, payable to the Advisor or its affiliates, as determined by a majority of the independent directors. No such fees were incurred during the three and six months ended June 30, 2014 or 2013.
Concurrent with the Listing, the OP entered into the Listing Note (see Note 10 — Subordinated Listing Distribution Derivative) and the OPP (see Note 17 — Equity-Based Compensation).
In connection with the Listing and the Amended Advisory Agreement, the Company terminated the subordinated termination fee that would be due to the Advisor in the event of termination of the advisory agreement.
Note 16 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor and its affiliates and entities under common control with our Advisor, to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, transfer agency services, as well as other administrative responsibilities for the Company including accounting services, transaction management services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 17 — Equity-Based Compensation
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan was fixed at $10.00 per share until the Listing, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. Upon a change in control, unvested options will become fully vested and any performance conditions imposed with respect to the options will be deemed to be fully achieved. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of June 30, 2014 and December 31, 2013, no stock options were issued under the Plan. In connection with the Merger Agreement, the Company has agreed to terminate the Plan, contingent on the closing of the Merger.
Restricted Share Plan
The Company's employee and director incentive restricted share plan ("RSP") provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company.

28

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Prior to April 28, 2014, the RSP provided for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder's meeting. Restricted stock issued to independent directors vested over a five-year period following the first anniversary of the date of grant in increments of 20% per annum. On April 28, 2014, the Company amended the RSP to, among other things, remove the fixed amount of shares that are automatically granted to the independent directors and remove the fixed vesting period of five years. Under the amended RSP, the annual amount granted to the independent directors is determined by the board of directors. Under the amended RSP, restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company.
Prior to March 30, 2014, the total number of common shares granted under the RSP could not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time, and in any event could not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events). On March 30, 2014, the Company adopted an amendment to the Company’s RSP to increase the number of shares of the Company capital stock, par value $0.01 per share, available for awards thereunder to 10.0% of the Company’s outstanding shares of stock on a fully diluted basis at any time. The amendment also eliminated the RSP limit of 7.5 million shares of stock.
Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares. In connection with the Merger Agreement, the Company has agreed to terminate the RSP, contingent on the closing of the Merger.
The following table reflects restricted share award activity to the Company's board of directors for the six months ended June 30, 2014:
 
Number of Restricted Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2013
18,000

 
$
9.23

Granted
225,905

 
9.07

Vested (1)
(18,000
)
 
9.23

Unvested, June 30, 2014
225,905

 
$