Sentio Healthcare Properties Inc - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - Sentio Healthcare Properties Inc	v384819_ex31-2.htm
EX-10.4 - EXHIBIT 10.4 - Sentio Healthcare Properties Inc	v384819_ex10-4.htm
EX-31.1 - EXHIBIT 31.1 - Sentio Healthcare Properties Inc	v384819_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Sentio Healthcare Properties Inc	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Sentio Healthcare Properties Inc	v384819_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - Sentio Healthcare Properties Inc	v384819_ex32-2.htm

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

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-53969

SENTIO HEALTHCARE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

MARYLAND	20-5721212
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

189 South Orange Avenue, Suite 1700,
Orlando, FL	32801
(Address of principal executive offices)	(Zip Code)

407-999-7679

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. Check one:

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

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

As of August 6, 2014, there were 11,464,924 shares of common stock of Sentio Healthcare Properties, Inc. outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

FORM 10-Q

SENTIO HEALTHCARE PROPERTIES, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013		1

Condensed Consolidated Statements of Operations for the Three and Six months ended June 30, 2014 (unaudited) and 2013 (unaudited)		2

Condensed Consolidated Statement of Equity for the Six months ended June 30, 2014 (unaudited)		3

Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2014 (unaudited) and 2013 (unaudited)		4

Notes to Condensed Consolidated Financial Statements (unaudited)		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		29

Item 4. Controls and Procedures		29

PART II. OTHER INFORMATION		30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 5. Other Information

Item 6. Exhibits		31

SIGNATURES		32

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents	$	18,072,000		$	21,792,000
Investments in real estate:
Land		34,111,000			28,561,000
Buildings and improvements, net		194,680,000			192,495,000
Furniture, fixtures and vehicles, net		4,759,000			4,743,000
Intangible lease assets, net		7,735,000			9,420,000
		241,285,000			235,219,000
Deferred financing costs, net		1,921,000			1,966,000
Investment in unconsolidated entities		1,736,000			1,297,000
Tenant and other receivables, net		3,465,000			3,204,000
Deferred costs and other assets		4,815,000			3,469,000
Restricted cash		4,436,000			3,930,000
Goodwill		5,965,000			5,965,000
Total assets	$	281,695,000		$	276,842,000

LIABILITIES AND EQUITY
Liabilities:
Notes payable, net	$	186,514,000		$	181,645,000
Accounts payable and accrued liabilities		5,856,000			5,367,000
Prepaid rent and security deposits		2,982,000			1,996,000
Distributions payable		1,540,000			1,589,000
Total liabilities		196,892,000			190,597,000
Equity:
Preferred Stock Series C, $0.01 par value; 1,000 shares authorized; 1,000 and 1,000 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively.		-			-
Common stock, $0.01 par value; 580,000,000 shares authorized; 11,457,401 and 12,608,534 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively.		115,000			126,000
Additional paid-in capital		69,496,000			83,346,000
Accumulated deficit		(17,462,000	)		(16,048,000	)
Total stockholders' equity		52,149,000			67,424,000
Noncontrolling interests:
Series B preferred OP units		28,969,000			15,100,000
Other noncontrolling interest		3,685,000			3,721,000
Total equity		84,803,000			86,245,000
Total liabilities and equity	$	281,695,000		$	276,842,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013

Revenues:

Rental revenues	$	12,175,000		$	8,402,000		$	23,202,000		$	16,874,000
Resident fees and services		6,939,000			5,967,000			14,207,000			11,921,000
Tenant reimbursements and other income		378,000			402,000			718,000			810,000
		19,492,000			14,771,000			38,127,000			29,605,000
Expenses:
Property operating and maintenance		12,404,000			8,880,000			24,530,000			17,718,000
General and administrative		260,000			220,000			655,000			663,000
Asset management fees and expenses		984,000			746,000			1,941,000			1,394,000
Real estate acquisition costs		311,000			-			346,000			-
Depreciation and amortization		3,191,000			2,398,000			6,111,000			4,789,000
		17,150,000			12,244,000			33,583,000			24,564,000
Income from operations		2,342,000			2,527,000			4,544,000			5,041,000
Other (income) expense:
Interest expense, net		2,394,000			2,059,000			4,603,000			4,091,000
Equity in loss (income) from unconsolidated entities		115,000			(51,000	)		200,000			(80,000	)
Net (loss) income		(167,000	)		519,000			(259,000	)		1,030,000
Net income attributable to Series B OP Units		482,000			-			843,000			-
Net income attributable to noncontrolling interest		156,000			39,000			312,000			45,000
Net (loss) income attributable to common stockholders	$	(805,000	)	$	480,000		$	(1,414,000	)	$	985,000

Basic and diluted weighted average number of common shares		12,487,384			12,726,051			12,575,560			12,777,182

Basic and diluted net (loss) income per common share attributable to common stockholders	$	(0.06	)	$	0.04		$	(0.11	)	$	0.08

The accompanying notes are an integral part of these condensed consolidated financial statements.

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2014 and 2013

(Unaudited)

	Preferred Stock				Common Stock
	Number of Shares		Stock Par Value		Number of Shares			Stock Par Value			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders' Equity			Noncontrolling Interest			Total
BALANCE - December 31, 2013		1,000	$	-		12,608,534		$	126,000		$	83,346,000		$	(16,048,000	)	$	67,424,000		$	18,821,000		$	86,245,000

Issuance of Common Stock		-		-		12,041			-			130,000			-			130,000			-			130,000
Issuance of Series B Preferred OP Units, net		-		-		-			-			-			-			-			13,869,000			13,869,000
Redeemed Shares		-		-		(1,163,174	)		(11,000	)		(10,588,000	)		-			(10,599,000	)		-			(10,599,000	)
Offering Costs		-		-		-			-			(297,000	)		-			(297,000	)		-			(297,000	)
Noncontrolling Interest Contribution		-		-		-			-			-			-			-			293,000			293,000
Distributions		-		-		-			-			(3,095,000	)		-			(3,095,000	)		(1,484,000	)		(4,579,000	)
Net (loss) income		-		-		-			-			-			(1,414,000	)		(1,414,000	)		1,155,000			(259,000	)
BALANCE - June 30, 2014		1,000	$	-		11,457,401		$	115,000		$	69,496,000		$	(17,462,000	)	$	52,149,000		$	32,654,000		$	84,803,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net (loss) income	$	(259,000	)	$	1,030,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of deferred financing costs		280,000			211,000
Depreciation and amortization		6,111,000			4,789,000
Straight-line rent and above/below market lease amortization		(258,000	)		(327,000	)
Amortization of loan premium		(33,000	)		(35,000	)
Equity in loss (income) from unconsolidated entities		200,000			(80,000	)
Bad debt expense		173,000			19,000
Deferred tax (benefit)		(582,000	)		(530,000	)
Changes in operating assets and liabilities:
Tenant and other receivables		(34,000	)		(108,000	)
Deferred costs and other assets		(201,000	)		613,000
Restricted cash		229,000			268,000
Prepaid rent and tenant security deposits		986,000			12,000
Accounts payable and accrued expenses		(108,000	)		(697,000	)
Net cash provided by operating activities		6,504,000			5,165,000

Cash flows from investing activities:
Real estate acquisitions		(5,364,000	)		-
Additions to real estate		(770,000	)		(334,000	)
Purchase of an interest in an unconsolidated entity		(1,161,000	)		-
Changes in restricted cash		(184,000	)		(54,000	)
Acquisition deposits		(419,000	)		-
Distributions from unconsolidated entities		522,000			278,000
Net cash used in investing activities		(7,376,000	)		(110,000	)

Cash flows from financing activities:
Proceeds from issuance of Series B OP units, net		14,025,000			-
Redeemed shares		(10,599,000	)		(904,000	)
Repayment of notes payable		(1,412,000	)		(1,131,000	)
Offering costs		(129,000	)		(13,000	)
Deferred financing costs		(235,000	)		(18,000	)
Distributions paid to stockholders		(3,014,000	)		(3,026,000	)
Distributions paid to noncontrolling interests		(1,484,000	)		(427,000	)
Prepaid preferred stock offering costs		-			(4,004,000	)
Net cash used in financing activities		(2,848,000	)		(9,523,000	)

Net (decrease) in cash and cash equivalents		(3,720,000	)		(4,468,000	)
Cash and cash equivalents - beginning of period		21,792,000			21,507,000
Cash and cash equivalents - end of period	$	18,072,000		$	17,039,000

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,382,000		$	3,884,000
Cash paid for income taxes	$	403,000		$	133,000

Supplemental disclosure of non-cash financing and investing activities:
Note payable assumed in connection with a real estate acquisition	$	6,314,000		$	-
Equity contribution by noncontrolling interest	$	293,000		$	-
Distributions declared not paid	$	1,452,000		$	1,585,000
Distributions reinvested	$	27,000		$	-
Accrued preferred stock offering costs	$	156,000		$	70,000
Accrued tender offer costs	$	168,000		$	-
Accrued additions to real estate	$	129,000		$	-
Accrued deferred acquisition costs	$	144,000		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(Unaudited)

1. Organization

Sentio Healthcare Properties, Inc., a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Sentio Healthcare Properties, Inc. and its consolidated subsidiaries, except where context otherwise requires. Our business is managed by Sentio Investments, LLC, a Florida limited liability company that was formed on December 20, 2011 (the “Advisor”), which is majority-owned and controlled by John Mark Ramsey, our Chief Executive Officer. Beginning with the taxable year ended December 31, 2008, Sentio Healthcare Properties, Inc. has elected to be taxed as a real estate investment trust (“REIT”).

Sentio Healthcare Properties OP, LP, a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. At June 30, 2014, we owned approximately 77% and Sentinel RE Investment Holdings LP, an affiliate of Kohlberg & Kravis Roberts & Co. L.P., (the “KKR Investor”) owned the remaining interest in the Operating Partnership. We anticipate that we will conduct substantially all of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the guidance for the consolidation of variable interest entities (“VIEs”), we analyze our variable interests, including investments in partnerships and joint ventures, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews, based on our review of the design of the entity, its organizational structure including decision-making ability, risk and reward sharing experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions and financial agreements. We also use quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the SEC. Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Our accompanying interim condensed consolidated financial statements should be read in conjunction with our audited condensed consolidated financial statements and the notes thereto included on our 2013 Annual Report on Form 10-K, as filed with the SEC.

3. Acquisitions

Compass on the Bay Joint Venture

On April 4, 2014, through wholly-owned subsidiaries, we invested approximately $5.4 million to acquire 95% of the respective equity interests in Sentio SLR Boston Portfolio, LLC (“Landlord LLC”) and Sentio SLR Boston TRS Portfolio, LLC (“Tenant LLC”) (collectively, we refer to the Landlord LLC and the Tenant LLC as the “SLR Joint Venture”). Landlord LLC, through its wholly-owned subsidiary, indirectly owns 100% of Compass on the Bay. Compass on the Bay has a total of 56 beds in 39 units, and provides both assisted living and memory care. Tenant LLC owns 100% of the tenant entity that operates the Compass on the Bay licensed community residential care facility. Bay View of Boston Associates Limited Partnership, a Senior Living Residences (“SLR”) affiliate, invested approximately $0.3 million to acquire the remaining 5% equity interests in Landlord LLC and Tenant LLC. SLR specializes in the acquisition, development, and management of senior housing communities. Based in Massachusetts, SLR owns or operates 10 senior living facilities in the New England area. As a result of the structure described above, the Company controls Landlord LLC and Tenant LLC and consolidates these entities. We funded the purchase of our interest in Compass on the Bay with $5.4 million in proceeds from the sale of preferred units of limited partnership interest in our Operating Partnership to the KKR Investor as further described in Note 10, and an assumption of HUD debt in the amount of $6.3 million, net.

The following summary provides the allocation of the acquired assets and liabilities as of the acquisition date. We have accounted for the acquisition as a business combination under GAAP. Under business combination accounting, the assets and liabilities of the acquired property were recorded at its respective fair value as of the acquisition date and consolidated in our financial statements. The details of the purchase price of the acquired property are set forth below:

	Compass on the Bay
Land	$	5,551,000
Buildings & improvements		4,756,000
Site improvements		69,000
Furniture & fixtures		392,000
Financial Assets		280,000
Intangible assets		652,000

Real estate acquisition	$	11,700,000
Acquisition expenses	$	289,000

The following unaudited pro forma information for the six month periods ended June 30, 2014 and 2013 have been prepared to reflect the incremental effect of the Compass on the Bay acquisition as if such acquisition had occurred on January 1, 2013. We have not adjusted the proforma information for any items that may be directly attributable to the business combination or are non-recurring in nature.

	Period ended June 30, 2014			Period ended June 30, 2013
Revenues	$	39,795,000		$	31,167,000
Net (loss) income	$	(1,537,000	)	$	1,044,000
Basic and diluted net (loss) income per common share attributable to common stockholders	$	(0.12	)	$	0.08

The Company recorded revenues of $0.8 million and a net loss of $0.2 million for the six month period ended June 30, 2014 for the Compass on the Bay acquisition.

4. Investments in Real Estate

As of June 30, 2014, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Land		Buildings and improvements			Furniture, fixtures, and equipment			Intangible lease assets
Cost	$	34,111,000	$	212,084,000		$	8,143,000		$	22,167,000
Accumulated depreciation and amortization		-		(17,404,000	)		(3,384,000	)		(14,432,000	)
Net	$	34,111,000	$	194,680,000		$	4,759,000		$	7,735,000

As of December 31, 2013, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Land		Buildings and improvements			Furniture, fixtures, and equipment			Intangible lease assets
Cost	$	28,561,000	$	206,720,000		$	7,505,000		$	21,515,000
Accumulated depreciation and amortization		-		(14,225,000	)		(2,762,000	)		(12,095,000	)
Net	$	28,561,000	$	192,495,000		$	4,743,000		$	9,420,000

Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended June 30, 2014 and 2013 was approximately $1.9 million and $1.4 million, respectively. Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the six months ended June 30, 2014 and 2013 was approximately $3.8 million and $2.9 million, respectively.

Amortization associated with intangible assets for the three months ended June 30, 2014 and 2013 was $1.3 million and $1.0 million, respectively. Amortization associated with intangible assets for the six months ended June 30, 2014 and 2013 was $2.3 million and $1.9 million, respectively.

Estimated amortization for July 1, 2014 through December 31, 2014 and each of the subsequent years is as follows:

	Intangible assets
July 1, 2014 - December 1, 2014	$	1,263,000
2015	$	499,000
2016	$	497,000
2017	$	497,000
2018	$	475,000
2019 and thereafter	$	4,504,000

The estimated useful lives for intangible assets range from approximately one to 20 years. As of June 30, 2014, the weighted-average amortization period for intangible assets was 15 years.

5. Investments in Unconsolidated Entities

As of June 30, 2014, the Company owns interests in the following entities that are accounted for under the equity method of accounting:

Entity ⁽¹⁾	Property Type		Acquired		Investment ⁽²⁾		Ownership %
Physicians Center MOB		Medical Office Building		April 2012	$	575,000		71.9	%
Buffalo Crossing		Assisted-Living Facility		January 2014		1,161,000		25.0	%
					$	1,736,000

(1)	These entities are not consolidated because the Company exercises significant influence, but does not control or direct the activities that most significantly impact the entity’s performance.
(2)	Represents the carrying value of the Company’s investment in the unconsolidated entities.

Summarized combined financial information for the Company’s unconsolidated entities is as follows:

	June 30,		December 31,
	2014		2013
Cash and cash equivalents	$	872,000	$	97,000
Investments in real estate, net		13,163,000		8,888,000
Other assets		582,000		359,000
Total assets	$	14,617,000	$	9,344,000

Notes payable	$	8,473,000	$	7,472,000
Accounts payable and accrued liabilities		1,186,000		73,000
Other liabilities		184,000		52,000
Total stockholders’ equity		4,774,000		1,747,000
Total liabilities and equity	$	14,617,000	$	9,344,000

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014(1)(2)			2013(2)(3)			2014(1)(2)			2013(2)(3)
Total revenues	$	393,000		$	685,000		$	790,000		$	1,393,000
Net (loss) income		(160,000	)		45,000			(273,000	)		59,000
Company’s equity in loss (income) from unconsolidated entities		115,000			(51,000	)		200,000			(80,000	)

	(1)	On January 28, 2014, through a wholly-owned subsidiary, we acquired a 25% interest in a joint venture entity that will develop Buffalo Crossing, a 108-unit, assisted living community. Buffalo Crossing was accounted for under the equity method of accounting beginning with the first quarter of 2014.
	(2)	The Physicians Centre MOB joint venture was acquired in April 2012 and was accounted for under the equity method of accounting beginning with the second quarter of 2012.
	(3)	Littleton Specialty Rehabilitation Facility was completed in April 2012 and the single tenant began paying rent in July 2012, in accordance with the lease. Tenant operations commenced upon licensure of the facility in July 2012 and Littleton Specialty Rehabilitation Facility was accounted for under the equity method of accounting. On December 17, 2012, our joint venture partner notified the Company of their intent to exercise their promote monetization right. The Company elected to satisfy the monetization provision through a sale of the property. The property was sold on August 8, 2013.

6. Income Taxes

For federal income tax purposes, we have elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our taxable year ended December 31, 2008. REIT status imposes limitations related to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly operate assisted-living facilities. However, such facilities may generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease with the Company. Therefore, we have formed Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of HC Operating Partnership, LP, to lease any assisted-living properties we acquire and to operate the assisted-living properties pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the management companies have direct control of the daily operations of these assisted-living properties.

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would establish a valuation allowance which would reduce the provision for income taxes.

The Master TRS recognized a $0.2 million benefit and a $0.1 million expense for Federal and State income taxes in the three months ended June 30, 2014 and 2013, respectively, and a $0.3 million benefit and a $0.2 million expense for Federal and State income taxes in the six months ended June 30, 2014 and 2013, respectively, which have been recorded in general and administrative expenses. Net deferred tax assets related to the TRS entities totaled approximately $2.5 million at June 30, 2014 and $1.9 million at December 31, 2013, respectively, related primarily to book and tax basis differences for prepaid rent, straight-line rent and accrued liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. These deferred tax assets are included in deferred costs and other assets in our condensed consolidated balance sheets. We have not recorded a valuation allowance against our deferred tax assets as of June 30, 2014, as we have determined that the future projected taxable income from the operations of the TRS entities are sufficient to cover the additional future expenses resulting from these book tax differences.

7. Segment Reporting

As of June 30, 2014, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our medical office building operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

We evaluate performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenue less property operating and maintenance expenses. There are no intersegment sales or transfers. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, asset management fees and expenses, real estate acquisition costs, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

The following tables reconcile the segment activity to consolidated net (loss) income for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
	Senior living operations		Triple-net leased properties		Medical office building		Consolidated by Segment			Senior living operations		Triple-net leased properties		Medical office building		Consolidated by Segment

Rental revenue	$	10,653,000	$	1,309,000	$	213,000	$	12,175,000		$	6,879,000	$	1,309,000	$	214,000	$	8,402,000
Resident services and fee income		6,939,000		-		-		6,939,000			5,967,000		-		-		5,967,000
Tenant reimbursements and other income		94,000		208,000		76,000		378,000			108,000		219,000		75,000		402,000
	$	17,686,000	$	1,517,000	$	289,000	$	19,492,000		$	12,954,000	$	1,528,000	$	289,000	$	14,771,000
Property operating and maintenance		12,115,000		219,000		70,000		12,404,000			8,578,000		227,000		75,000		8,880,000
Net operating income	$	5,571,000	$	1,298,000	$	219,000	$	7,088,000		$	4,376,000	$	1,301,000	$	214,000	$	5,891,000
General and administrative								260,000									220,000
Asset management fees and expenses								984,000									746,000
Real estate acquisition costs								311,000									-
Depreciation and amortization								3,191,000									2,398,000
Interest expense, net								2,394,000									2,059,000
Equity in loss (income) from unconsolidated entities								115,000									(51,000	)
Net (loss) income							$	(167,000	)							$	519,000

	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
	Senior living operations		Triple-net leased properties		Medical office building		Consolidated by Segment			Senior living operations		Triple-net leased properties		Medical office building		Consolidated by Segment

Rental revenue	$	20,157,000	$	2,618,000	$	427,000	$	23,202,000		$	13,828,000	$	2,619,000	$	427,000	$	16,874,000
Resident services and fee income		14,207,000		-		-		14,207,000			11,921,000		-		-		11,921,000
Tenant reimbursements and other income		193,000		372,000		153,000		718,000			226,000		437,000		147,000		810,000
	$	34,557,000	$	2,990,000	$	580,000	$	38,127,000		$	25,975,000	$	3,056,000	$	574,000	$	29,605,000
Property operating and maintenance		23,944,000		438,000		148,000		24,530,000			17,115,000		453,000		150,000		17,718,000
Net operating income	$	10,613,000	$	2,552,000	$	432,000	$	13,597,000		$	8,860,000	$	2,603,000	$	424,000	$	11,887,000
General and administrative								655,000									663,000
Asset management fees and expenses								1,941,000									1,394,000
Real estate acquisition costs								346,000									-
Depreciation and amortization								6,111,000									4,789,000
Interest expense, net								4,603,000									4,091,000
Equity in loss (income) from unconsolidated entities								200,000									(80,000	)
Net (loss) income							$	(259,000	)							$	1,030,000

The following table reconciles the segment activity to consolidated financial position as of June 30, 2014 and December 31, 2013.

	June 30, 2014		December 31, 2013
Assets
Investments in real estate:
Senior living operations	$	192,214,000	$	185,116,000
Triple-net leased properties		41,373,000		42,248,000
Medical office building		7,698,000		7,855,000
Total reportable segments	$	241,285,000	$	235,219,000

Reconcilation to consolidated assets:
Cash and cash equivalents		18,072,000		21,792,000
Deferred financing costs, net		1,921,000		1,966,000
Investment in unconsolidated entities		1,736,000		1,297,000
Tenant and other receivables, net		3,465,000		3,204,000
Deferred costs and other assets		4,815,000		3,469,000
Restricted cash		4,436,000		3,930,000
Goodwill		5,965,000		5,965,000
Total assets	$	281,695,000	$	276,842,000

As of June 30, 2014 and December 31, 2013, goodwill had a balance of approximately $6.0 million, all of which related to the senior living operations segment. The Company historically has not recorded any impairment charges for goodwill.

8. Fair Value Measurements

FASB Accounting Standards Codification (“ASC”) 825-10, “Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). The amendments in this update result in additional fair value measurement and disclosure requirements within U.S. GAAP and International Financial Reporting Standards and change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.

Level 1. Quoted prices in active markets for identical instruments.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument.

We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, prepaid rent and security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. We consider the carrying values of our financial instruments, other than notes payable, to approximate fair value because they generally expose the Company to limited credit risk and because of the short period of time between origination of the financial assets and liabilities and their expected settlement.

The fair value of the Company’s notes payable is estimated by discounting future cash flows of each instrument at rates that reflect the current market rates available to the Company for debt of the same terms and maturities. The fair value of the notes payable was determined using Level 2 inputs of the fair value hierarchy. Based on the estimates used by the Company, the fair value of notes payable was $182.0 million and $178.4 million, compared to the carrying values of $186.4 million ($186.5 million, net of premium) and $181.3 million ($181.7 million, net of premium) at June 30, 2014 and December 31, 2013, respectively.

There were no transfers between Level 1 or 2 during the three and six months ended June 30, 2014.

9. Notes Payable

Notes payable were $186.4 million ($186.5 million, including premium) and $181.3 million ($181.7 million, including premium) as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.80% to 6.50% per annum and a weighted average effective interest rate of 4.89% per annum. As of June 30, 2014, notes payable consisted of $155.3 million of fixed rate debt, or approximately 83% of notes payable, at a weighted average interest rate of 5.13% per annum and $31.1 million of variable rate debt, or approximately 17% of notes payable, at a weighted average interest rate of 3.68% per annum. As of December 31, 2013, we had $150.0 million of fixed rate debt, or 83% of notes payable, at a weighted average interest rate of 5.17% per annum and $31.3 million of variable rate debt, or 17% of notes payable, at a weighted average interest rate of 3.68% per annum.

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of June 30, 2014, we were in compliance with all such covenants and requirements.

Principal payments due on our notes payable for July 1, 2014 to December 31, 2014 and each of the subsequent years is as follows:

Year	Principal amount
July 1, 2014 to December 31, 2014	$	26,481,000
2015		15,246,000
2016		2,878,000
2017		14,702,000
2018		26,995,000
2019 and thereafter		100,131,000
	$	186,433,000
Add: premium		81,000
	$	186,514,000

On April 4, 2014, the Company acquired a 95% interest in the SLR Joint Venture subject to existing indebtedness of two loans that totaled approximately $6.6 million. The Company assumed a note payable in the amount of approximately $3.9 million with the rate of interest fixed at 3.32% and a 35 year term. In addition, the Company assumed a loan payable in the amount of approximately $2.7 million with the rate of interest fixed at 5.65% and a 35 year term. These notes payable are secured by the underlying real estate.

We intend to extend a $25 million loan that matures on October 21, 2014. The terms of this loan provide for two, one-year extension options, requiring the payment of a 25 basis point fee as well as compliance with loan financial covenants for each exercise.

Interest Expense and Deferred Financing Cost

For the six months ended June 30, 2014 and 2013, the Company incurred interest expense, including amortization of deferred financing costs of $2.4 million and $2.1 million, respectively. As of June 30, 2014 and December 31, 2013, the Company’s net deferred financing costs were approximately $1.9 million and $2.0 million, respectively. All deferred financing costs are capitalized and amortized over the life of the respective loan agreement.

10. Stockholders’ Equity

Common Stock

Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of June 30, 2014 and December 31, 2013, including distributions reinvested, we had issued approximately 13.3 million shares of common stock for a total of approximately $132.3 million of gross proceeds, respectively, in our initial and follow-on public offerings.

On April 10, 2014, we announced the commencement of an issuer tender offer to purchase for cash up to $35 million of our issued and outstanding shares of common stock from stockholders at a price of $8.50 per share. On May 22, 2014, we amended the tender offer to increase the purchase price to $9.00 per share and to extend the tender offer expiration date. The tender offer expired on June 12, 2014. We purchased 1,113,213 shares of our common stock pursuant to the tender offer for an aggregate cost of approximately $10.0 million, excluding fees and expenses related to the tender offer paid by the Company. The tender offer was funded by a sale of Series B Preferred Units to the KKR Investor on June 18, 2014 which is further discussed below, and the remainder from the Company’s existing cash.

Preferred Stock and OP Units

As of June 30, 2014 and December 31, 2013 we had issued 1,000 and 1,000 shares of Series C Preferred Stock and 334,260 and 193,000 Series B Preferred Convertible Operating Partnership Units to the KKR Investor for gross proceeds of $33.5 million and $19.4 million, respectively. The Series B Preferred Convertible Operating Partnership Units outstanding are classified within noncontrolling interests and are convertible into approximately 3,335,928 shares of the Company’s common stock.

The Series C Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on liquidation. The holders of the Series C Preferred Stock are entitled to receive dividends, as and if authorized by our board of directors out of funds legally available for that purpose, at an annual rate equal to 3% of the liquidation preference for each share. Dividends on the Series C Preferred Stock are payable annually in arrears.

The Series B Preferred Units rank senior to the Operating Partnership’s common units with respect to distribution rights and rights on liquidation. The Series B Preferred Units are entitled to receive cash distributions at an annual rate equal to 7.5% of the Series B liquidation preference to any distributions paid to common units of the Operating Partnership. If the Operating Partnership is unable to pay cash distributions, distributions will be paid in kind at an annual rate of 10% of the Series B liquidation preference. After payment of the preferred distributions, additional distributions will be paid first to the common units until they have received an aggregate return of 7.5% per unit in annual distributions commencing from February 10, 2013, and thereafter to the common units and Series B Preferred Units pro rata.

After giving effect to the Series C Preferred Stock and Series B Preferred Units issued at June 30, 2014, 1,252,000 Series B Preferred Units remained issuable under the Purchase Agreement. The obligation of the Investor to purchase additional Series B Preferred Units under the Purchase Agreement is conditioned upon, among other things, the receipt of notice from us of the intention to sell a specified amount of securities to the Investor to finance a proposed real estate acquisition.

On April 4, 2014, in connection with a put exercise to the KKR Investor, we issued 54,000 Series B Preferred Units in our Operating Partnership to the KKR Investor for proceeds of $5.4 million, which are convertible into approximately 538,922 shares of the Company’s common stock at the currently effective conversion price.

On June 18, 2014, in connection with a put exercise to the KKR Investor, we issued 87,260 Series B Preferred Units in our Operating Partnership to the KKR Investor for proceeds of $8.7 million, which are convertible into approximately 870,858 shares of the Company’s common stock at the currently effective conversion price.

Distributions

The following are the distributions declared during the six months ended June 30, 2014 and 2013:

	Distributions Declared						Cash Flow from
Period	Cash		Reinvested		Total		Operations
First quarter 2013	$	1,493,000	$	-		1,493,000		2,643,000
Second quarter 2013	$	1,585,000	$	-		1,585,000		2,522,000
First quarter 2014	$	1,486,000	$	69,000		1,555,000		3,652,000
Second quarter 2014	$	1,452,000	$	88,000		1,540,000		2,852,000

Beginning October 1, 2012, our board of directors declared distributions for daily record dates occurring in the first and second quarters of 2013 in amounts per share that, if declared and paid each day for a 365 -day period, would equate to an annualized rate of $0.475 per share (4.75% based on share price of $10.00). Beginning April 1, 2013, our board of directors declared distributions for daily record dates occurring in the first and second quarters of 2014 in amounts per share that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $0.50 per share (5.00% based on a share price of $10.00).

The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.

Stock Repurchase Program

In 2007, we adopted a stock repurchase program for investors who had held their shares for at least one year. Under our stock repurchase program, the repurchase price varied depending on the purchase price paid by the stockholder and the number of years the shares are held. Our board of directors may amend, suspend or terminate the program at any time with 30 days prior notice to stockholders. We have no obligation to repurchase our stockholders’ shares. In 2009, our board of directors waived the one-year holding period in the event of the death of a stockholder and adjusted the repurchase price to 100% of such stockholder’s purchase price if the stockholder held the shares for less than three years.

On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our public offering, our dividend reinvestment program and our stock repurchase program (except for repurchases due to death). As a result our stock repurchase program has been suspended since May 29, 2011 for all repurchases, except repurchases due to death of a stockholder.

On March 31, 2014, we informed our stockholders of the suspension of the share repurchase program following the March 2014 redemption date. The Company redeemed all stock repurchase requests received prior to March 31, 2014 due to death. Thereafter no shares will be repurchased until the repurchase program is reinstated.

During the three and six months ended June 30, 2014, we repurchased shares pursuant to our stock repurchase program as follows:

Period	Total Number of Shares Redeemed		Price Paid per Share
First quarter 2014		6,000	$	11.63
Second quarter 2014		43,962		11.63

11. Earnings Per Share

We report earnings (loss) per share pursuant to ASC Topic 260, “Earnings per Share.” Basic earnings (loss) per share attributable for all periods presented are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of our common stock outstanding during the period. Diluted earnings (loss) per share are computed based on the weighted average number of shares of our common stock and all potentially dilutive securities, if any. The Series B Preferred Units give rise to potentially dilutive securities of our common stock. As of June 30, 2014 there were 334,260 Series B Preferred Units outstanding, but such units were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during these periods.

12. Related Party Transactions

The Company has no employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the policies established by our board of directors. We are party to an advisory agreement that entitles the Advisor to specified fees upon the provision of certain services to us.

Advisory Agreement and Transition to Internal Management Agreement

Sentio Investments, LLC became our Advisor on January 1, 2012, pursuant to an advisory agreement dated December 22, 2011. As required by our charter, that advisory agreement had a one-year term that ended on December 31, 2012. Effective January 1, 2013, we renewed the advisory agreement on substantially similar terms for an additional one-year term ending on December 31, 2013. Effective January 1, 2014, we renewed the advisory agreement for an additional one-year term ending on December 31, 2014 upon similar terms except to the extent amended by the Transition Agreement (defined below).

Under the terms of the current advisory agreement, the Advisor is required to use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. The advisory agreement calls for the Advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties.

On February 10, 2013, in connection with the initial execution of the transactions with the KKR Investor (See Note 10), we entered into a Transition to Internal Management Agreement (the “Transition Agreement”) with our Advisor and the KKR Investor. The Transition Agreement provides, following the satisfaction of certain conditions, for certain amendments to the advisory agreement between us and the Advisor and sets forth the terms for our transition to an internal management structure.

The terms of our advisory agreement with our Advisor and the terms of the Transition Agreement are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the proxy statement related to our 2013 annual meeting of stockholders as filed with the SEC on April 9, 2013.

The fees and expense reimbursements payable to the Advisor under the advisory agreement for the three and six months ended June 30, 2014 and June 30, 2013 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Asset management fees and expenses	$	984,000	$	746,000	$	1,941,000	$	1,394,000

Consistent with limitations set forth in our charter, the advisory agreement further provides that, commencing four fiscal quarters after the acquisition of our first real estate asset, we shall not reimburse the Advisor at the end of any fiscal quarter management fees and expenses and operating expenses that, in the four consecutive fiscal quarters then ended exceed (the “Excess Amount”) the greater of 2% of our average invested assets or 25% of our net income for such year (the “2%/25% Guidelines”) unless the Independent Directors Committee of our board of directors determines that such excess was justified, based on unusual and nonrecurring factors which it deems sufficient. If the Independent Directors Committee does not approve such excess as being so justified, the advisory agreement requires that any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our charter provides that, if the Independent Directors Committee does not determine that the Excess Amount is justified, the Advisor shall reimburse us the amount by which the aggregate annual expenses paid to the Advisor during the four consecutive fiscal quarters then ended exceed the 2%/25% Guidelines.

For the four fiscal quarters ended June 30, 2014, our management fees and expenses and operating expenses totaled did not exceed the greater of 2% of our average invested assets and 25% of our net income.

13. Commitments and Contingencies

We monitor our properties for the presence of hazardous or toxic substances. We are not currently aware of any environmental liability with respect to the properties that we believe would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our condensed consolidated financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.

14. Subsequent Events

On July 21, 2014, through wholly-owned subsidiaries, we became obligated to acquire real estate property (“St. Andrews Village”) from ERB PROPCO SAV, LLC, which is not affiliated with us, for an approximate purchase price of $42.5 million. St. Andrews Village is a retirement community which consists of 146 independent living units, 60 assisted living units, and 40 skilled nursing facility units in Aurora, Colorado. Except with respect to specific contingencies, we do not have the right to terminate the agreement of sale without seller’s consent. We expect to fund the purchase of St. Andrews Village with proceeds from the sale of preferred units of limited partnership interest in Sentio Healthcare Properties OP, L.P., our operating partnership to the KKR Investor in accordance with a securities purchase agreement executed on February 10, 2013, and with proceeds from a mortgage loan from an unaffiliated lender.

Pursuant to the agreement of sale, we have paid an aggregate deposit of $1.5 million to an escrow account, and we are obligated to pay a portion of certain closing costs, including, but not limited to attorney fees, certain title insurance premiums, survey costs, recording costs and escrow charges. The deposit became non-refundable except with respect to specific contingencies upon the expiration of the due diligence. Although most contingencies have been satisfied and we expect to close in accordance with the terms of the Agreement, there can be no assurance that remaining contingencies will be satisfied or that events will not arise that could prevent us from acquiring the property.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2013 as listed with the SEC.

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

•

Macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets.

•

changes in national and local economic conditions in the real estate and healthcare markets specifically;

•

legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;

•

legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation;

•

the availability of debt and equity capital;

•

changes in interest rates;

•

competition in the real estate industry;

•

the supply and demand for operating properties in our market areas;

•

changes in accounting principles generally accepted in the United States of America, or GAAP; and

•

the risk factors in our Annual Report for the year ended December 31, 2013.

Overview

We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing in and owning commercial real estate. We invest primarily in real estate including health care properties and other real estate related assets located in markets in the United States.

Since January 1, 2012, our business has been managed by our Advisor pursuant to the Advisory Agreement. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf under the terms of the Advisory Agreement. Our Advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms of the Advisory Agreement, our Advisor will use commercially reasonable efforts to present to us investment opportunities and to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors.

On February 10, 2013, we entered into a series of agreements with the KKR Investor for the purpose of obtaining the KKR Equity Commitment. Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of two to three years, up to $150 million in aggregate issuance amount of preferred securities in the Company and the Operating Partnership.

As of June 30, 2014, we had issued and outstanding 11,457,401 shares of common stock, and 1,000 shares of 3% Senior Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”). All 1,000 shares of the Series C Preferred Stock were issued to the KKR Investor pursuant to the KKR Equity Commitment. In addition, as of June 30, 2014 the Operating Partnership had issued and outstanding 11,457,401 Common Units, 1,000 Series A Preferred Units (the “Series A Preferred Units”), and 334,260 Series B Convertible Preferred Units (the “Series B Preferred Units”).

In connection with the KKR Equity Commitment, we entered into the Transition Agreement with our Advisor and the KKR Investor which sets forth the terms for a transition to an internal management structure for the Company. The Transition Agreement requires that, unless the parties agree otherwise or certain third party consents cannot be obtained in time, the existing external advisory structure will remain in place upon substantially the same terms as currently in effect for a period of two years from the Transition Agreement date, upon which time the advisory function will be internalized in accordance with procedures set forth in the Transition Agreement.

We commenced our initial public offering of our common stock on June 20, 2008. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan. On February 4, 2011, we commenced a follow-on offering of our common stock. We suspended primary offering sales in our follow-on offering on April 29, 2011 and completed the final sale of shares under the distribution reinvestment plan on May 10, 2011. We raised gross offering proceeds under the follow-on offering of $8.4 million from the sale of approximately 800,000 shares, including shares sold under the distribution reinvestment plan. On June 12, 2013, we deregistered all remaining unsold follow-on offering shares.

On June 19, 2013, we filed a registration statement on Form S-3 to register up to $99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to the DRIP offering. The DRIP offering shares were initially offered at a purchase price of $10.02 per share, which was 100% of the then-current estimated per-share value of our common stock. The DRIP offering shares are currently offered at a purchase price of $11.63 per share, which is our updated estimated per-share value of common stock as of February 28, 2014.

Our revenues, which are comprised largely of rental income, include rents reported on a straight-line basis over the initial term of each lease. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; and (ii) control operating and other expenses, including maximizing tenant recoveries as provided for in lease structures. Our operations are impacted by property specific, market specific, general economic and other conditions.

Market Outlook — Real Estate and Real Estate Finance Markets

In recent years, both the national and most global economies have experienced substantially increased unemployment and a downturn in economic activity over an extended period, as well as significant market fluctuations. Despite certain recent more positive economic indicators and improved stock market performance, the economic environment continues to be unpredictable and to present challenges that may delay the implementation of our business strategy or force us to modify it.

Despite the economic conditions discussed above, the demand for health care services is projected to continue to grow for the foreseeable future. According to The National Coalition on Healthcare, by 2016 nearly $1 in every $5 in the U.S. will be spent on healthcare, and the aging US population is expected to continue to fuel the need for healthcare services. The over age 65 population of the United States is projected to grow 36% between 2010 and 2020, compared with 9% for the general population, according to the US Census Bureau. Presently, the healthcare real estate market is fragmented, with a local or regional focus, offering opportunities for consolidation and market dominance. We believe that a diversified portfolio of healthcare property types minimizes risks associated with third-party payors, such as Medicare and Medicaid, while also allowing us to capitalize on the favorable demographic trends described above.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

Results of Operations

As of June 30, 2014, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment invests in and directs the operations of assisted-living, memory care and other senior housing communities located in the United States. We engage independent third party managers to operate these properties. Our triple-net leased properties segment invests in healthcare properties in the United States leased under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings and leases those properties to healthcare providers under long-term “full service” leases which may require tenants to reimburse property related expenses to us.

As of June 30, 2014, we owned or had joint venture interests in 24 properties. These properties included 17 assisted-living facilities and one independent-living facility, which comprise our senior housing segment, one medical office building, which comprises our MOB segment, three operating healthcare facilities, which comprise our triple-net leased segment, one development stage assisted living facility, and one medical office building held as an unconsolidated entity. As of June 30, 2013, we owned or had joint venture interests in 20 properties. These properties included 14 assisted-living facilities which comprised our senior housing segment, one medical office building, which comprised our MOB segment, three operating healthcare facilities, which comprised our triple-net leased segment and one medical office building and one net leased healthcare facility held in unconsolidated entities. The Woodbury Mews and Standish Village senior living investments were acquired in the fourth quarter of 2013 and the Compass senior living investment was acquired in the second quarter of 2014. The equity interest in Littleton Specialty Rehabilitation Center was sold in August 2013. The results of our operations for the three and six months ended June 30, 2014 and 2013 vary accordingly.

Comparison of the Three Months Ended June 30, 2014 and 2013

	Three Months Ended
	June 30,
	2014			2013			$ Change			% Change
Net operating income, as defined (1)
Senior living operations	$	5,571,000		$	4,376,000		$	1,195,000			27	%
Triple-net leased properties		1,298,000			1,301,000			(3,000	)		0	%
Medical office building		219,000			214,000			5,000			2	%
Total portfolio net operating income	$	7,088,000		$	5,891,000		$	1,197,000			20	%

Reconciliation to net (loss) income:
Net operating income, as defined (1)	$	7,088,000		$	5,891,000		$	1,197,000			20	%
Other (income) expense:
General and administrative		260,000			220,000			40,000			18	%
Asset management fees and expenses		984,000			746,000			238,000			32	%
Real estate acquisition costs		311,000			-			311,000			100	%
Depreciation and amortization		3,191,000			2,398,000			793,000			33	%
Interest expense, net		2,394,000			2,059,000			335,000			16	%
Equity in loss (income) income from unconsolidated entities		115,000			(51,000	)		166,000			(325	)%
Net (loss) income	$	(167,000	)	$	519,000		$	(686,000	)		(132	)%

(1)

Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our consolidated real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of our consolidated income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as a gain or loss from investments in unconsolidated entities depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the three months ended June 30, 2014 increased to $5.6 million from $4.4 million for the three months ended June 30, 2013 primarily as a result of the acquisition of the Woodbury Mews and Standish Village in the fourth quarter of 2013 and Compass on the Bay in the second quarter of 2014.

	Three Months Ended
	June 30,
	2014		2013		$ Change			% Change
Senior Living Operations — Net operating income
Total revenues
Rental revenue	$	10,653,000	$	6,879,000	$	3,774,000			55	%
Resident services and fee income		6,939,000		5,967,000		972,000			16	%
Tenant reimbursement and other income		94,000		108,000		(14,000	)		(13	)%
Less:
Property operating and maintenance expenses		12,115,000		8,578,000		3,537,000			41	%
Total portfolio net operating income	$	5,571,000	$	4,376,000	$	1,195,000			27	%

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income for the three month period ended June 30, 2014 of $1.3 million was comparable to net operating income for the three month period ended June 30, 2013.

	Three Months Ended
	June 30,
	2014		2013		$ Change			% Change
Triple-Net Leased Properties — Net operating income
Total revenues
Rental revenue	$	1,309,000	$	1,309,000	$	-			0	%
Tenant reimbursement and other income		208,000		219,000		(11,000	)		(5	)%
Less:
Property operating and maintenance expenses		219,000		227,000		(8,000	)		(4	)%
Total portfolio net operating income	$	1,298,000	$	1,301,000	$	(3,000	)		0	%

Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the three month period ended June 30, 2014 of $0.2 million was comparable to net operating income for the three month period ended June 30, 2013.

	Three Months Ended
	June 30,
	2014		2013		$ Change			% Change
Medical Office Buildings — Net operating income
Total revenues
Rental revenue	$	213,000	$	214,000	$	(1,000	)		0	%
Tenant reimbursement and other income		76,000		75,000		1,000			1	%
Less:
Property operating and maintenance expenses		70,000		75,000		(5,000	)		(7	)%
Total portfolio net operating income	$	219,000	$	214,000	$	5,000			2	%

Unallocated (expenses) income

General and administrative expenses for the three month period ended June 30, 2014 of $0.3 million were comparable to general and administrative expenses for the three month period ended June 30, 2013.

Asset management fees for the three months ended June 30, 2014 increased to $1.0 million from $0.7 million for the three months ended June 30, 2013 as a result of a higher asset base and the incentive management fees earned in the current quarter, resulting from a higher base of assets under management. Depreciation and amortization for the same periods increased to $3.2 million from $2.4 million as a result of additional depreciation and amortization from acquisitions, driven by higher amortization of the in-place leases related to the acquisition of Woodbury Mews and Standish Village in the fourth quarter of 2013.

Interest expense, net, for the three months ended June 30, 2014 increased to $2.4 million from $2.1 million for the three months ended June 30, 2013 as a result of the debt incurred for acquisitions that occurred in the fourth quarter of 2013.

The Company recognized a loss from unconsolidated entities of $0.1 million for the three months ended June 30, 2014 as compared to income of $0.1 million for the three months ended June 30, 2013, as the result of the sale of our equity interest in Littleton Specialty Rehabilitation Center in August 2013.

Comparison of the Six Months Ended June 30, 2014 and 2013

	Six Months Ended June 30,
	2014			2013			$ Change			% Change
Net operating income, as defined (1)
Senior living operations	$	10,613,000		$	8,860,000			1,753,000			20	%
Triple-net leased properties		2,552,000			2,603,000			(51,000	)		(2	)%
Medical office building		432,000			424,000			8,000			2	%
Total portfolio net operating income	$	13,597,000		$	11,887,000			1,710,000			14	%

Reconciliation to net (loss) income:
Net operating income, as defined (1)	$	13,597,000		$	11,887,000			1,710,000			14	%
Other (income) expense:
General and administrative		655,000			663,000			(8,000	)		(1	)%
Asset management fees and expenses		1,941,000			1,394,000			547,000			39	%
Real estate acquisitions costs		346,000			-			346,000			100	%
Depreciation and amortization		6,111,000			4,789,000			1,322,000			28	%
Interest expense, net		4,603,000			4,091,000			512,000			13	%
Equity in loss (income) from unconsolidated entities		200,000			(80,000	)		280,000			(350	)%
Net (loss) income	$	(259,000	)	$	1,030,000		$	(1,289,000	)		(125	)%

(1)

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the six months ended June 30, 2014 increased to $10.6 million from $8.9 million for the six months ended June 30, 2013. The increase is primarily due to the acquisitions of Woodbury Mews, Standish Village, and Compass on the Bay, but also reflects higher levels of care for several senior living properties in the portfolio.

	Six Months Ended
	June 30,
	2014		2013		$ Change			% Change
Senior Living Operations — Net operating income
Total revenues
Rental revenue	$	20,157,000	$	13,828,000	$	6,329,000			46	%
Resident services and fee income		14,207,000		11,921,000		2,286,000			19	%
Tenant reimbursement and other income		193,000		226,000		(33,000	)		(15	)%
Less:
Property operating and maintenance expenses		23,944,000		17,115,000		6,829,000			40	%
Total portfolio net operating income	$	10,613,000	$	8,860,000	$	1,753,000			20	%

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income for the six month period ended June 30, 2014 of $2.6 million is comparable to net operating income for the six months ended June 30, 2013.

	Six Months Ended
	June 30,
	2014		2013		$ Change			% Change
Triple-Net Leased Properties — Net operating income
Total revenues
Rental revenue	$	2,618,000	$	2,619,000	$	(1,000	)		0	%
Tenant reimbursement and other income		372,000		437,000		(65,000	)		(15	)%
Less:
Property operating and maintenance expenses		438,000		453,000		(15,000	)		(3	)%
Total portfolio net operating income	$	2,552,000	$	2,603,000	$	(51,000	)		(2	)%

Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the six month period ended June 30, 2014 of $0.4 million is comparable to net operating income for the six months ended June 30, 2013.

	Six Months Ended
	June 30,
	2014		2013		$ Change			% Change
Medical Office Buildings — Net operating income
Total revenues
Rental revenue	$	427,000	$	427,000	$	-			0	%
Tenant reimbursement and other income		153,000		147,000		6,000			4	%
Less:
Property operating and maintenance expenses		148,000		150,000		(2,000	)		(1	)%
Total portfolio net operating income	$	432,000	$	424,000	$	8,000			2	%

Unallocated (expenses) income

General and administrative expenses of $0.7 million for the six months ended June 30, 2014 was comparable to the corresponding amount for the six months ended June 30, 2013.

Asset management fees for the six months ended June 30, 2014 increased to $1.9 million from $1.4 million in the six months ended June 30, 2013 as a result of a higher base of assets under management and higher incentive asset management fees earned in the 2014 period. Depreciation and amortization for the same periods increased to $6.1 million from $4.8 million, as a result of additional depreciation and amortization from acquisitions, driven by higher amortization of the in-place leases related to the acquisition of Woodbury Mews and Standish Village in the fourth quarter of 2013.

For the six months ended June 30, 2014, real estate acquisition costs were $0.3 million, consisting primarily of costs associated with the Compass on the Bay acquisition. There were not comparable costs in the 2013 six-month period.

Interest expense, net, for the six months ended June 30, 2014 increased to $4.6 million from $4.1 million for the six months ended June 30, 2013, principally due to higher debt levels associated with acquisitions.

Income from unconsolidated entities decreased to a $0.2 million loss for the six months ended June 30, 2014 from $0.1 million of income for the six months ended June 30, 2013, due primarily to the sale of our interest in the Littleton Specialty Rehabilitation Center.

Liquidity and Capital Resources

Primary offering sales in our follow-on public offering were suspended in April 29, 2011 and the final sale of shares under the related dividend reinvestment plan was completed on May 10, 2011. On June 12, 2013, we concluded the follow-on offering by deregistering all remaining unsold shares that had been registered in connection with the offering.

On June 19, 2013, we filed a registration statement on Form S-3 to register up to $99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to an amended and restated distribution reinvestment plan (the “DRIP offering”). The DRIP offering shares were initially offered at a purchase price of $10.02, which was 100% of the then-current estimated per-share value of our common stock. The DRIP offering shares are currently offered at a purchase price of $11.63 per share, which reflects our estimated per-share value of our common stock as of February 28, 2014.

On February 10, 2013, we entered into the KKR Equity Commitment for the purpose of obtaining up to $150 million of equity funding to be used to finance future real estate acquisitions. Pursuant to the KKR Equity Commitment, we may issue and sell to the KKR Investor and its affiliates on a private placement basis from time to time over a period of two to three years, up to $150 million in aggregate issuance amount of shares of newly issued Series C Preferred Stock and newly issued Series B Convertible Preferred Units of our Operating Partnership. As of June 30, 2014, approximately $125.1 million of this commitment is available for acquistions.

We expect that primary sources of capital over the long-term will include net proceeds from the sale of our capital stock, the sale of preferred units of partnership interest in our Operating Partnership in accordance with the terms of the KKR Equity Commitment, debt financing, and net cash flows from operations. We expect that our primary uses of capital will be for property acquisitions, including promote monetization payments, for the payment of tenant improvements and capital improvements and operating expenses, including interest expense on any outstanding indebtedness, reducing outstanding indebtedness and for the payment of distributions.

We intend to own our stabilized properties with low to moderate levels of debt financing. We will incur moderate to high levels of indebtedness when acquiring development or value-added properties and possibly other real estate investments. For our stabilized core plus properties, our long-term goal will be to use low to moderate levels of debt financing with leverage ranging from 50% to 65% of the value of the asset. For development and value-added properties, our goal will be to acquire and develop or redevelop these properties using moderate to high levels of debt financing with leverage ranging from 65% to 75% of the cost of the asset. Once these properties are developed, redeveloped and stabilized with tenants, we plan to reduce the levels of debt to fall within target debt ranges appropriate for core properties. While we seek to fall within the outlined targets on a portfolio basis, for any specific property we may exceed these estimates. To the extent sufficient proceeds from public offerings, debt financing, the KKR Equity Commitment or a combination of these are unavailable to repay acquisition debt financing down to the target ranges within a reasonable time as determined by our board of directors, we will endeavor to raise additional equity or sell properties to repay such debt so that we will own our properties with low to moderate levels of permanent financing. In the event that we are unable to raise additional equity, our ability to diversify our investments may be diminished.

As of June 30, 2014 we had approximately $18.1 million in cash and cash equivalents on hand. Our liquidity will increase from the sale of common stock pursuant to our DRIP Offering, the sale of preferred units of partnership interest in our Operating Partnership pursuant to the KKR Equity Commitment, if refinancing results in excess loan proceeds, and increased cash flows from operations. The Company’s liquidity will decrease as net offering proceeds are expended in connection with the acquisition and if distributions are made in excess of cash available from operating cash flows.

Cash flows provided by operating activities for the six months ended June 30, 2014 and 2013 were $6.5 million and $5.2 million, respectively. The increase in cash flows from operations was primarily due to an increase in operating income of $0.6 million and the timing of cash receipts and payments, including an increase in deferred revenue of approximately $0.6 million.

Cash flows used in investing activities for the six months ended June 30, 2014 and 2013 were $7.4 million and $0.1 million, respectively. The 2014 increase was due primarily to the investments in Buffalo Crossing and Compass on the Bay in 2014.

Cash flows used in financing activities for the six months ended June 30, 2014 and 2013 were $2.8 million and $9.5 million, respectively. The change was due primarily to activity related to the KKR Equity Commitment and redemption of the Company’s common shares. During the six months ended June 30, 2014, the Company received $14.0 million of proceeds from the issuance of Series B Preferred units, redeemed $10.6 million off its common shares and paid $1.5 million of distributions to noncontrolling interests, principally to the investor in the Series B Preferred units. During the six months ended June 30, 2013, the Company received no proceeds from the issuance of Series B Preferred units, redeemed $0.9 million of its common shares, paid $0.4 million of distributions to noncontrolling interests and paid $4.0 million of fees and expenses in connection with the KKR Equity Commitment.

We expect to have sufficient cash available from cash on hand and operations to fund capital improvements and recurring principal payments due on our borrowings in the next 12 months. We expect to fund stockholder distributions from cash on hand and from the excess cash provided by operations over required capital improvements and debt payments. This excess may be insufficient to make distributions at the current level or at all.

There may be a delay between the sale of our shares or equity securities and the purchase of properties. During this period, proceeds from sales of securities may be temporarily invested in short-term, liquid investments that could yield lower returns than investments in real estate.

Potential future sources of capital include proceeds from future equity offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations.

Funds from Operations and Modified Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by the accounting principles generally accepted in the United States of America (“GAAP”), and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and subsidiaries. Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions, as well as dividend sustainability.

Changes in the accounting and reporting rules under GAAP have prompted a significant increase in the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use modified funds from operations (“MFFO”), which excludes from FFO real estate acquisition expenses, and non-cash amounts related to straight line rent to further evaluate our operating performance as well as dividend sustainability. We compute MFFO consistently with the definition suggested by the Investment Program Association (the “IPA”), the trade association for direct investment programs (including non-listed REITs). However, certain adjustments included in the IPA’s definition are not applicable to us and are therefore not included in the foregoing definition.

We believe that MFFO is a helpful measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes. Accordingly, we believe that MFFO can be a useful metric to assist management, investors and analysts in assessing the sustainability of our operating performance. As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following considerations:

	•	Adjustments for straight line rents. Under GAAP, rental income recognition can be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the economic impact of our lease terms and presents results in a manner more consistent with management’s analysis of our operating performance.

	•	Real estate acquisition costs. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. These acquisition costs have been funded from the proceeds of our initial public offering and other financing sources and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. Real estate acquisition expenses include those paid to our advisor and to third parties.

	•	Non-recurring gains or losses included in net income from the extinguishment or sale of debt.

	•	Unrealized gains or losses resulting from consolidation to, or deconsolidation from equity accounting.

FFO or MFFO should not be considered as an alternative to net income (loss) nor as an indication of our liquidity. Nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and MFFO should be reviewed along with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs. In addition, FFO and MFFO presented for different periods may not be directly comparable.

We believe that MFFO is helpful as a measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes.

Our calculations of FFO and MFFO for the three and six months ended June 30, 2014 and 2013 are presented below:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net (loss) income attributable to common stockholders	$	(805,000	)	$	480,000		$	(1,414,000	)	$	985,000
Adjustments:
Real estate depreciation and amortization		3,191,000			2,398,000			6,111,000			4,789,000
Joint venture depreciation and amortization		146,000			178,000			290,000			355,000
Funds from operations (FFO)		2,532,000			3,056,000			4,987,000			6,129,000
Adjustments:
Straight-line rent and above/below market lease amortization		(111,000	)		(180,000	)		(258,000	)		(369,000	)
Real estate acquisition costs		311,000			-			346,000			-
Modified funds from operations (MFFO)		2,732,000			2,876,000			5,075,000			5,760,000

Weighted average common shares		12,487,384			12,726,051			12,575,560			12,777,182

FFO per weighted average common shares	$	0.20		$	0.24		$	0.40		$	0.48
MFFO per weighted average common shares	$	0.22		$	0.23		$	0.40		$	0.45

Distributions

	Distributions Declared						Cash Flow from
Period	Cash		Reinvested		Total		Operations
First quarter 2013	$	1,493,000	$	—	$	1,493,000	$	2,643,000
Second quarter 2013		1,585,000		—		1,585,000		2,522,000
First quarter 2014		1,486,000		69,000		1,555,000		3,652,000
Second quarter 2014		1,452,000		88,000		1,540,000		2,852,000

For the six months ended June 30, 2014 and 2013, we paid distributions, including distributions reinvested, aggregating approximately $3.1 million and $3.0 million, respectively to our stockholders. The distributions declared in the second quarter of 2014 to be reinvested in the Company’s common stock resulted in 7,523 shares of common stock being issued in July 2014. FFO for the six months ended June 30, 2014 was approximately $5.0 million and cash flow from operations was approximately $6.5 million. We funded our total distributions paid with cash flows from operations. For the purposes of determining the source of our distributions paid, we assume first that we use cash flows from operations from the relevant periods to fund distribution payments. See the reconciliation of FFO to net income above.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We invest our cash and cash equivalents in government-backed securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate fluctuations. However, we believe that the primary market risk to which we will be exposed is interest rate risk relating the variable portion of our debt financing. As of June 30, 2014, we had approximately $31.1 million of variable rate debt, the majority of which is at a rate tied to the three-month LIBOR. A 1.0% change in three-Month LIBOR would result in a change in annual interest expense of approximately $0.3 million per year. Our interest rate risk management objectives are to monitor and manage the impact of interest rate changes on earnings and cash flows. We may use certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the fair value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for healthcare facilities, local, regional and national economic conditions and changes in the credit worthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

On April 4, 2014, in connection with the third put exercise pursuant to the KKR Equity Commitment, we issued 54,000 Series B Preferred Units in our Operating Partnership to the KKR Investor. On June 18, 2014, in connection with the fourth put exercise pursuant to the KKR Equity Commitment, we issued an additional 87,260 Series B Preferred Units in our Operating Partnership to the KKR Investor. The put exercises were made pursuant to the private placement exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated by the SEC thereunder. The terms of the put exercises were disclosed in the Company’s current reports on Form 8-K filed with the SEC on April 8, 2014 and June 20, 2014.

(c)

During the six months ended June 30, 2014, we repurchased shares pursuant to (i) our stock repurchase program and (ii) our issuer tender offer (described below), as follows:

							Approximate Dollar
							Value
	Total Number		Average		Total Number of Shares		of Shares Available that
	of Shares		Price Paid		Purchased as Part of Publicly		may yet be Redeemed
Period	Redeemed		per Share		Announced Plans or Programs		under the program
January		0	$	-	0		(1)
February		6,000		11.63	6,000		(1)
March		0		-	0		(1)
April		43,961		11.63	43,961		(1)
May		0		-	0		(1)
June		1,113,213		9.00	1,113,213	(2)	(1)
		1,163,174

(1)

As further discussed in Note 10 (Stockholders’ Equity) to the condensed consolidated financial statements included in this report, the stock repurchase program has been suspended since May 29, 2011 for all repurchases except repurchases in connection with the death of a stockholder. The plan does not specify a limit on the number of shares that may be repurchased upon the death of stockholders. On March 31, 2014, we informed our stockholders of the suspension of the share repurchase program following the March 2014 redemption date. The Company redeemed all stock repurchase requests received prior to March 31, 2014 due to death. Thereafter no shares will be repurchased until the repurchase program is reinstated.

(2)

Item 5.

Exhibits

Ex.		Description

3.1		Articles of Amendment and Restatement of the Registrant, as amended on December 29, 2009 and January 24, 2012 (incorporated by reference to Exhibit 3.1 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2011).

3.2		Articles of Amendment of the Registrant, dated August 6, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.3		Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series A, dated August 6, 2013 (incorporated by reference to Exhibit 3.3 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.4		Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series C, dated August 6, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.5		Second Amended and Restated Bylaws of the Registrant as adopted on August 6, 2013 (incorporated by reference to Exhibit 3.5 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.6		Second Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

4.1		Form of Distribution Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Registrant’s prospectus filed on June 19, 2013).

4.2		Statement regarding restrictions on transferability of the Registrant’s shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007 (“Pre-Effective Amendment No. 2”).

4.3		Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on June 19, 2013).

10.1		Second Amendment Agreement, dated April 8, 2014, by and among Sentinel RE Investment Holdings LP, the Company and the Operating Partnership (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed on April 10, 2014)

10.2		Amendment No. 1 to the Transition to Internal Management Agreement, dated April 8, 2014, by and among the Company, the Operating Partnership, Sentinel RE Investment Holdings LP and Sentio Investments, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed on April 10, 2014)

10.3		Amendment No. 2 to the Transition to Internal Management Agreement, dated April 8, 2014, by and among the Company, the Operating Partnership, Sentinel RE Investment Holdings LP and Sentio Investments, LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed on April 10, 2014)

10.4		Purchase and Sale Agreement dated May 22, 2014 by and among Sentio STAV Landlord, LLC, and ERB Propco SAV LLC

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 12^th day of August 2014.

	SENTIO HEALTHCARE PROPERTIES, INC.

	By:	/s/ JOHN MARK RAMSEY
		John Mark Ramsey, President and Chief
		Executive Officer
		(Principal Executive Officer)

	By:	/s/ SHARON C. KAISER
		Sharon C. Kaiser, Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

Attached files

Sentio Healthcare Properties Inc Reports

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