Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - CNL Healthcare Properties, Inc.Financial_Report.xls
EX-31.2 - CERTIFICATION - CNL Healthcare Properties, Inc.d778723dex312.htm
EX-32.1 - CERTIFICATION - CNL Healthcare Properties, Inc.d778723dex321.htm
EX-31.1 - CERTIFICATION - CNL Healthcare Properties, Inc.d778723dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 000-54685

 

 

CNL Healthcare Properties, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-2876363

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida
 

32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (407) 650-1000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨       Accelerated filer    ¨
Non-accelerated filer    x  (Do not check if a smaller reporting company)       Smaller reporting company    ¨

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

The number of shares of common stock of the registrant outstanding as of November 3, 2014 was 100,038,382.

 

 

 


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

   Condensed Consolidated Financial Information (unaudited):   
   Condensed Consolidated Balance Sheets      2   
   Condensed Consolidated Statements of Operations      3   
   Condensed Consolidated Statements of Comprehensive Loss      4   
   Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest      5   
   Condensed Consolidated Statements of Cash Flows      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      62   

Item 4.

   Controls and Procedures      63   
PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      63   

Item 1A.

   Risk Factors      63   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      64   

Item 3.

   Defaults Upon Senior Securities      66   

Item 4.

   Mine Safety Disclosures      66   

Item 5.

   Other Information      66   

Item 6.

   Exhibits      66   

Signatures

        67   

Exhibits

        68   


Item 1. Financial Statements

CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share data)

 

     September 30,
2014
    December 31,
2013
 

ASSETS

    

Real estate assets:

    

Real estate investment properties, net (including VIEs $111,838 and $72,053, respectively)

   $ 1,361,777      $ 848,791   

Real estate under development, including land (including VIEs $29,720 and $16,210, respectively)

     29,720        17,409   
  

 

 

   

 

 

 

Total real estate assets, net

     1,391,497        866,200   

Intangibles, net (including VIEs $11,166 and $4,535, respectively)

     105,122        52,400   

Cash (including VIEs $7,314 and $727, respectively)

     83,483        44,209   

Loan costs, net (including VIEs $1,869 and $912, respectively)

     11,232        7,919   

Other assets (including VIEs $314 and $21, respectively)

     9,522        6,445   

Investments in unconsolidated entities

     7,627        18,438   

Restricted cash (including VIEs $459 and $257, respectively)

     6,379        2,839   

Deferred rent (including VIEs $247 and $104, respectively)

     4,725        2,782   

Deposits

     3,533        8,892   

Note receivable from related party

     —          3,949   
  

 

 

   

 

 

 

Total assets

   $ 1,623,120      $ 1,014,073   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Mortgage and other notes payable, net (including VIEs $84,560 and $52,596 respectively)

   $ 699,591      $ 438,107   

Revolving credit facility

     180,615        98,500   

Other liabilities (including VIEs $1,581 and $939, respectively)

     19,964        7,243   

Accounts payable and accrued expenses (including VIEs $829 and $309, respectively)

     17,363        7,887   

Accrued development costs (including VIEs $4,683 and $7,047, respectively)

     4,683        7,047   

Due to related parties (including VIEs $643 and $112, respectively)

     2,654        3,308   
  

 

 

   

 

 

 

Total liabilities

     924,870        562,092   
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Redeemable noncontrolling interests

     568        —     

Stockholders’ equity:

    

Preferred stock, $0.01 par value per share,
200,000 shares authorized; none issued or outstanding

     —          —     

Excess shares, $0.01 par value per share,
300,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $0.01 par value per share, 1,120,000 shares authorized, 94,122 and 58,308 shares issued, and 93,799 and 58,218 shares outstanding, respectively

     938        582   

Capital in excess of par value

     805,264        500,361   

Accumulated loss

     (67,610     (30,580

Accumulated distributions

     (39,100     (17,423

Accumulated other comprehensive loss

     (1,810     (959
  

 

 

   

 

 

 

Total stockholders’ equity

     697,682        451,981   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,623,120      $ 1,014,073   
  

 

 

   

 

 

 

The abbreviation VIEs above mean variable interest entities

    

See accompanying notes to condensed consolidated financial statements.

 

2


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Revenues:

        

Rental income from operating leases

   $ 13,393      $ 7,251      $ 33,478      $ 14,803   

Resident fees and services

     34,162        6,537        86,636        15,382   

Tenant reimbursement income

     1,957        950        4,787        960   

Interest income on note receivable from related party

     148        34        498        38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     49,660        14,772        125,399        31,183   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Property operating expenses

     25,716        5,501        64,703        12,049   

General and administrative

     1,997        1,158        5,689        3,835   

Acquisition fees and expenses

     3,729        6,694        15,726        9,638   

Asset management fees

     2,753        1,208        5,572        2,795   

Property management fees

     2,358        682        6,118        1,623   

Contingent purchase price consideration adjustment

     1,800        —          479        —     

Depreciation and amortization

     17,550        4,566        44,111        9,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     55,903        19,809        142,398        39,388   

Operating loss

     (6,243     (5,037     (16,999     (8,205
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest and other income

     7        53        27        55   

Interest expense and loan cost amortization

     (8,549     (2,091     (21,654     (7,006

Equity in earnings (loss) of unconsolidated entities

     (180     284        (1,193     1,744   

Gain on sale of investment in unconsolidated entity

     —          4,486        —          4,486   

Gain on purchase of controlling interest of investment in unconsolidated entity

     2,798        —          2,798     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (5,924     2,732        (20,022     (721
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (12,167     (2,305     (37,021     (8,926

Income tax expense

     (37     —          (9     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,204   $ (2,305   $ (37,030   $ (8,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net loss attributable to noncontrolling interest

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (12,204     (2,305     (37,030     (8,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock (basic and diluted)

   $ (0.14   $ (0.05   $ (0.50   $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

     85,649        44,436        74,348        34,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net loss

   $ (12,204   $ (2,305   $ (37,030   $ (8,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized gain (loss) on derivative financial instruments, net

     224        (1,230     (872     (1,230

Unrealized gain (loss) on derivative financial instruments of equity method investments

     (2     (69     21        62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     222        (1,299     (851     (1,168
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (11,982   $ (3,604   $ (37,881   $ (10,112
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Comprehensive loss attributable to noncontrolling interest

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to common stockholders

   $ (11,982   $ (3,604   $ (37,881   $ (10,112
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

Nine Months Ended September 30, 2014 (Unaudited) and the Year Ended December 31, 2013

(in thousands, except per share data)

 

                        Accumulated        
     Redeemable      Common Stock     Capital in                 Other     Total  
     Noncontrolling      Number     Par     Excess of     Accumulated     Accumulated     Comprehensive     Stockholders’  
     Interests      of Shares     Value     Par Value     Loss     Distributions     Income (Loss)     Equity  

Balance at December 31, 2012

   $ —           18,446      $ 184      $ 156,200      $ (12,480   $ (3,253   $ —        $ 140,651   

Subscriptions received for common stock through public offering and reinvestment plan

     —           38,798        388        386,975        —          —          —          387,363   

Stock distributions

     —           1,063        11        (11     —          —          —          —     

Redemptions of common stock

     —           (89     (1     (826     —          —          —          (827

Stock issuance and offering costs

     —           —          —          (41,977     —          —          —          (41,977

Net loss

     —           —          —          —          (18,100     —          —          (18,100

Other comprehensive loss

     —           —          —          —          —          —          (959     (959

Cash distributions declared and paid or reinvested ($0.39996 per share)

     —           —          —          —          —          (14,170     —          (14,170
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     —           58,218        582        500,361        (30,580     (17,423     (959     451,981   

Subscriptions received for common stock through public offering and reinvestment plan

     —           34,209        342        345,512        —          —          —          345,854   

Stock distributions

     —           1,605        16        (16     —          —          —          —     

Redemptions of common stock

     —           (233     (2     (2,122     —          —          —          (2,124

Stock issuance and offering costs

     —           —          —          (36,471     —          —          —          (36,471

Cash distributions declared and paid or reinvested ($0.3042 per share)

     —           —          —          —          —          (21,677     —          (21,677

Distribution to holder of promoted interest

     —           —          —          (2,000     —          —          —          (2,000

Net loss

     —           —          —          —          (37,030     —          —          (37,030

Other comprehensive loss

     —           —          —          —          —          —          (851     (851

Contribution from redeemable noncontrolling interests

     568         —          —          —          —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 568         93,799      $ 938      $ 805,264      $ (67,610   $ (39,100   $ (1,810   $ 697,682   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

     Nine Months Ended
September 30,
 
     2014     2013  

Operating activities:

    

Net cash flows provided by operating activities

   $ 18,673      $ 3,282   
  

 

 

   

 

 

 

Investing activities:

    

Acquisition of properties

     (524,654     (311,437

Development of properties

     (32,893     (16,169

Issuance of note receivable to related party

     (2,065     (2,647

Collection of note receivable from related party

     5,591        —     

Distribution from unconsolidated entities

     2,206        —     

Purchase of controlling interest in unconsolidated entity

     (1,584     —     

Investment in unconsolidated entities

     (220     (12,175

Proceeds from sale of unconsolidated entity

     —          61,761   

Changes in restricted cash

     (3,539     (1,237

Capital expenditures

     (2,570     (180

Payment of tenant improvements

     (797     —     

Payment of leasing costs

     (324     (12

Deposits on real estate

     (2,950     (14,070
  

 

 

   

 

 

 

Net cash used in investing activities

     (563,799     (296,166
  

 

 

   

 

 

 

Financing activities:

    

Subscriptions received for common stock through public offering

     333,960        283,893   

Payment of stock issuance and offering costs

     (36,575     (30,607

Distributions to stockholders, net of distribution reinvestments

     (9,782     (4,209

Distribution to holder of promoted interest

     (2,000     —     

Contribution from redeemable noncontrolling interest

     568        —     

Redemptions of common stock

     (1,068     (424

Draws under revolving credit facility

     112,115        —     

Repayment on revolving credit facility

     (30,000     —     

Proceeds from mortgage and other notes payable

     245,587        197,580   

Principal payments on mortgage and other notes payable

     (24,096     (116,566

Lender deposits

     (335     (5,261

Payment of loan costs

     (3,974     (4,302
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     584,400        320,104   
  

 

 

   

 

 

 

Net increase in cash

     39,274        27,220   

Cash at beginning of period

     44,209        18,262   
  

 

 

   

 

 

 

Cash at end of period

   $ 83,483      $ 45,482   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

    

Amounts incurred but not paid (including amounts due to related parties):

    

Stock issuance and offering costs

   $ 650      $ 837   
  

 

 

   

 

 

 

Accrued development costs

   $ 4,683      $ 3,070   
  

 

 

   

 

 

 

Redemptions payable

   $ 1,178      $ 282   
  

 

 

   

 

 

 

Contingent purchase price consideration

   $ —        $ 507   
  

 

 

   

 

 

 

Unrealized loss on derivative financial instruments, net

   $ 1,798      $ 1,168   
  

 

 

   

 

 

 

Assumption of mortgage note payable on acquisition of property

   $ 27,657      $ —     
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

1. Organization

CNL Healthcare Properties, Inc. (the “Company”) is a Maryland corporation incorporated on June 8, 2010 that elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the year ended December 31, 2012.

The Company is externally advised by CNL Healthcare Corp. (the “Advisor”) and its property manager is CNL Healthcare Manager Corp. (the “Property Manager”), each of which is a Florida corporation and a wholly owned subsidiary of CNL Financial Group, LLC, the Company’s sponsor. CNL Financial Group, LLC is an affiliate of CNL Financial Group, Inc. (“CNL”). The Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an advisory agreement among the Company, the operating partnership and the Advisor. Substantially all of the Company’s acquisition, operating, administrative and certain property management services are provided by affiliates of the Advisor and the Property Manager. In addition, third-party sub-property managers have been engaged by the Company to provide certain property management services.

On June 27, 2011, the Company commenced its initial public offering of up to $3.0 billion of common stock (the “Offering”), including shares being offered from its distribution reinvestment plan (the “Reinvestment Plan”), pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended. The shares were initially being offered at $10 per share and effective December 11, 2013 are being offered at $10.14 per share, or $9.64 per share pursuant to the Reinvestment Plan. In November 2014, the Company announced that, effective November 4, 2014, its shares will be offered at $10.58 per share, or $10.06 per share pursuant to the Reinvestment Plan. Additionally, the Company filed a follow-on registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) in connection with the proposed offering of up to $1 billion in shares of common stock (the “Follow-On Offering”). The Company plans to extend the Offering through the effective date of a subsequent continuous Follow-On Offering, which is expected to occur on or about January 30, 2015. As of the date of this filing, the registration statement for the Follow-On Offering had not been declared effective by the SEC. The Company expects to sell shares of its common stock in the Follow-On Offering until the earlier of the date on which the maximum offering amount has been sold, or December 31, 2015; provided, however, that it will periodically evaluate the status of the offering, and its board of directors may extend the offering beyond December 31, 2015 after taking into account such factors as it deems appropriate, including but not limited to, the amount of capital raised, future acquisition opportunities, and economic or market trends.

The Company’s investment focus is on acquiring a diversified portfolio of healthcare real estate or real estate-related assets, primarily in the United States, within the senior housing, medical office, post-acute care and acute care asset classes. The types of senior housing that the Company may acquire include active adult communities (age-restricted and age-targeted housing), independent and assisted living facilities, continuing care retirement communities, and memory care facilities. The types of medical offices that the Company may acquire include medical office buildings, specialty medical and diagnostic service facilities, surgery centers, outpatient rehabilitation facilities, and other facilities designed for clinical services. The types of post-acute care facilities that the Company may acquire include skilled nursing facilities, long-term acute care hospitals and inpatient rehabilitative hospitals. The types of acute care facilities that the Company may acquire include general acute care hospitals and specialty surgical hospitals. The Company views, manages and evaluates its portfolio homogeneously as one collection of healthcare assets with a common goal to maximize revenues and property income regardless of the asset class or asset type.

The Company primarily expects to lease its properties to third-party tenants under triple-net or similar lease structures, where the tenant bears all or substantially all of the costs including cost increases, for real estate taxes, utilities, insurance and ordinary repairs. However, the Company may also invest through other strategic investment types aimed to maximize stockholder value by generating sustainable cash flow growth and increasing the value of the Company’s healthcare assets, including leasing properties to wholly-owned taxable REIT subsidiaries (“TRS”) and engaging independent third-party managers under management agreements to operate the properties as permitted under REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). In addition, the Company expects most investments will be wholly owned, although, the Company has and may continue to invest

 

7


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

1. Organization (continued)

 

through partnerships with other entities where the Company believes it is appropriate and beneficial. The Company has and expects to continue to invest in new property developments or properties which have not reached full stabilization. Finally, the Company also may invest in and originate mortgage, bridge or mezzanine loans or in entities that make investments similar to the foregoing investment types. The Company generally makes loans to the owners of properties to enable them to acquire land, buildings, or to develop property. In exchange, the owner generally grants the Company a first lien or collateralized interest in a mortgage collateralized by the property or by interests in the entity that owns the property.

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair statement of the Company’s results for the interim period presented. Operating results for the quarter or nine months ended September 30, 2014 may not be indicative of the results that may be expected for the year ending December 31, 2014. Amounts as of December 31, 2013 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date but do not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The accompanying unaudited condensed consolidated financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries or subsidiaries for which the Company has a controlling financial interest, including the accounts of variable interest entities (“VIEs”) in which the Company is the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the guidance for the consolidation of VIEs, the Company analyzes its variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it has a variable interest is a variable interest entity (“VIE”). The Company’s analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity, and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it includes the accounts of the VIE in its consolidated financial statements.

Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the disclosure of contingent liabilities. For example, significant assumptions are made in the allocation of purchase price, the analysis of real estate impairments, the valuation of contingent assets and liabilities, and the valuation of restricted stock shares issued. Accordingly, actual results could differ from those estimates.

Redeemable Noncontrolling Interest The Company entered into a joint venture agreement with a third party and acquired a 95% membership interest. The Company’s joint venture partner acquired a 5% noncontrolling interest that includes a put option of its membership to the Company upon the occurrence of certain events that are not solely within the control of the Company and at price that is determinable upon exercising the option. The Company classifies redeemable equity securities in accordance with Accounting Standard Update (“ASU”) No. 2009-04, “Liabilities (Topic 480): Accounting for Redeemable Equity Instruments,” which requires that equity securities redeemable at the option of the holder be classified outside of permanent stockholders’ equity. Accordingly, the Company has classified these redeemable equity securities as redeemable noncontrolling interest within the accompanying condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity and redeemable noncontrolling interest.

 

8


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

Promoted Interest Distributions The Company accounts for distributions to holders of promoted interests in a manner similar to noncontrolling interests. The Company identifies the distributions to holders of promoted interests separately within the accompanying condensed consolidated statements of equity. During the nine months ended September 30, 2014, the Company made distributions of approximately $2.0 million to a holder of promoted interest related to HarborChase of Villages Crossing, which has been recorded as a reduction to capital in excess of par value in the accompanying condensed consolidated statement of stockholders’ equity and redeemable noncontrolling interest.

Adopted Accounting Pronouncements In February 2013, the Financial Accounting Standards Board (“FASB”) issued “ASU” No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This update clarified the guidance in subtopic 405 and requires entities to measure obligations resulting from joint and several liability arrangements for which total obligation is fixed at the reporting date. Entities are required to measure the obligation as the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus any additional amount the reporting entity expects to pay on behalf of its co-obligors. Additionally, the guidance requires entities to disclose the nature and amount of the obligations as well as other information about those obligations. Effective January 1, 2014, the Company adopted this ASU. The adoption of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a similar Tax Loss, or a Tax Credit Carryforward Exists.” This update clarified the guidance in subtopic 740 and requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward to the extent one is available. Effective January 1, 2014, the Company adopted this ASU. The adoption of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

Recent Accounting Pronouncements In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update changes the criteria for reporting discontinued operations where only disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, such as a major line of business or geographical area, should be presented as a discontinued operation. This ASU is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 with early adoption permitted. The Company has determined that the amendments will impact the Company’s determinations of which future property disposals, if any, qualify as discontinued operations and will require additional disclosure about discontinued operations for future property disposals, if any.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” as a new Accounting Standard Concept (“ASC”) topic (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard further provides guidance for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, lease contracts). This ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted using one of two retrospective application methods: 1) retrospectively to each prior reporting period presented or 2) as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the amendments of ASU 2014-09; however, these amendments could potentially have a significant effect on the Company’s consolidated financial position, results of operations or cash flows.

 

9


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions

 

Real Estate Investment Properties — During the nine months ended September 30, 2014, the Company acquired the following 22 properties, which were comprised of 13 senior housing communities, three medical office buildings (“MOB”), three post-acute care hospitals, and three acute care hospitals:

 

Name and Location

   Structure    Date
Acquired
     Purchase Price
(in thousands)
 

Acute Care

        

Houston Orthopedic & Spine Hospital

   Triple-net Lease      6/2/2014       $ 49,000   

Bellaire, TX (“Houston”)

        

Medical Portfolio II Properties

        

Hurst Specialty Hospital

   Modified Lease      8/15/2014         29,465   

Hurst, TX (“Dallas/Fort Worth”)

        

Beaumont Specialty Hospital

   Modified Lease      8/15/2014         33,600   

Beaumont, TX (“Houston”)

        

Medical Office

        

Chula Vista Medical Arts Center - Plaza I

   Modified Lease      1/21/2014         17,863  (1) 

Chula Vista, CA (“San Diego”)

        

Houston Orthopedic & Spine Hospital Medical Office Building

   Modified Lease      6/2/2014         27,000   

Bellaire, TX (“Houston”)

        

Lee Hughes Medical Building

   Modified Lease      9/29/2014         29,870  (1) 

Glendale, CA (“Los Angeles”)

        

Post-Acute Care

        

Medical Portfolio II Properties

        

Oklahoma City Inpatient Rehabilitation Hospital

   Modified Lease      7/15/2014         25,504   

Oklahoma City, OK

        

Las Vegas Inpatient Rehabilitation Hospital

   Modified Lease      7/15/2014         22,292   

Las Vegas, NV

        

South Bend Inpatient Rehabilitation Hospital

   Modified Lease      7/15/2014         20,240   

Mishawaka, IN (“South Bend”)

        

Senior Housing

        

Pacific Northwest II Communities

        

Prestige Senior Living Auburn Meadows

   Managed      2/3/2014         21,930   

Auburn, WA (“Seattle”)

        

Prestige Senior Living Bridgewood

   Managed      2/3/2014         22,096   

Vancouver, WA (“Portland”)

        

Prestige Senior Living Monticello Park

   Managed      2/3/2014         27,360   

Longview, WA

        

Prestige Senior Living Rosemont

   Managed      2/3/2014         16,877   

Yelm, WA

        

Prestige Senior Living West Hills

   Managed      3/3/2014         14,986   

Corvallis, OR

        

 

10


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

South Bay II Communities

        

Isle at Cedar Ridge

   Managed      2/28/2014         21,630   

Cedar Park, TX (“Austin”)

        

HarborChase of Plainfield

   Managed      3/28/2014         26,500   

Plainfield, IL

        

Legacy Ranch Alzheimer’s Special Care Center

   Managed      3/28/2014         11,960   

Midland, TX

        

The Springs Alzheimer’s Special Care Center

   Managed      3/28/2014         10,920   

San Angelo, TX

        

Isle at Watercrest – Bryan

   Managed      4/21/2014         22,050   

Bryan, TX

        

Watercrest at Bryan

   Managed      4/21/2014         28,035   

Bryan, TX

        

Isle at Watercrest – Mansfield

   Managed      5/5/2014         31,300   

Mansfield, TX (“Dallas/Fort Worth”)

        

Watercrest at Mansfield

   Managed      6/30/2014         49,000   

Mansfield, TX (“Dallas/Fort Worth”)

        
        

 

 

 
         $ 559,478   
        

 

 

 

 

FOOTNOTE:

 

(1) This represents a single property acquisition that is not considered material to the Company and as such no pro forma financial information has been included related to this property.

During the nine months ended September 30, 2013, the Company acquired the following properties, which were comprised of 13 medical office buildings, six post-acute care facilities, three senior housing communities, and one acute care hospital:

 

Name and Location

   Structure    Date
Acquired
     Purchase Price
(in thousands)
 

Acute Care

        

Medical Portfolio I Properties

        

Doctors Specialty Hospital

   Modified Lease      8/16/2013       $ 10,003   

Leawood, KS (“Kansas City”)

        

Medical Office

        

LaPorte Cancer Center

   Modified Lease      6/14/2013         13,100   

Westville, IN

        

Knoxville Medical Office Properties

        

Physicians Plaza A at North Knoxville Medical Center

   Modified Lease      7/10/2013         18,124   

Powell, TN (“Knoxville”)

        

Physicians Plaza B at North Knoxville Medical Center

   Modified Lease      7/10/2013         21,800   

Powell, TN (“Knoxville”)

        

Jefferson Medical Commons

   Modified Lease      7/10/2013         11,616   

Jefferson City, TN (“Knoxville”)

        

Physicians Regional Medical Center - Central Wing Annex

   Modified Lease      7/10/2013         5,775   

Knoxville, TN

        

 

11


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

Medical Portfolio I Properties

        

John C. Lincoln Medical Office Plaza I

   Modified Lease      8/16/2013         4,420   

Phoenix, AZ

        

John C. Lincoln Medical Office Plaza II

   Modified Lease      8/16/2013         3,106   

Phoenix, AZ

        

North Mountain Medical Plaza

   Modified Lease      8/16/2013         6,185   

Phoenix, AZ

        

Escondido Medical Arts Center

   Modified Lease      8/16/2013         15,602   

Escondido, CA (“San Diego”)

        

Chestnut Commons Medical Office Building

   Modified Lease      8/16/2013         20,205   

Elyria, OH (“Cleveland”)

        

Calvert Medical Office Properties

        

Calvert Medical Office Buildings I, II, III

   Modified Lease      8/30/2013         16,409   

Prince Frederick, MD (“Washington D.C.”)

        

Calvert Medical Arts Center

   Modified Lease      8/30/2013         19,320   

Prince Frederick, MD (“Washington D.C.”)

        

Dunkirk Medical Center

   Modified Lease      8/30/2013         4,617   

Dunkirk, MD (“Washington D.C.”)

        

Post-Acute Care

        

Perennial Communities

        

Batesville Healthcare Center

   Triple-net Lease      5/31/2013         6,206   

Batesville, AR

        

Broadway Healthcare Center

   Triple-net Lease      5/31/2013         11,799   

West Memphis, AR

        

Jonesboro Healthcare Center

   Triple-net Lease      5/31/2013         15,232   

Jonesboro, AR

        

Magnolia Healthcare Center

   Triple-net Lease      5/31/2013         11,847   

Magnolia, AR

        

Mine Creek Healthcare Center

   Triple-net Lease      5/31/2013         3,373   

Nashville, AR

        

Searcy Healthcare Center

   Triple-net Lease      5/31/2013         7,898   

Searcy, AR

        

Senior Housing

        

HarborChase of Jasper

   Managed      8/1/2013         7,300   

Jasper, AL

        

South Bay I Communities

        

Raider Ranch

   Managed      8/29/2013         55,000   

Lubbock, TX

        

Town Village

   Managed      8/29/2013         22,500   

Oklahoma City, OK

        
        

 

 

 
         $ 311,437   
        

 

 

 

 

12


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

The following summarizes the purchase price allocation for the above properties, and the estimated fair values of the assets acquired and liabilities assumed (in thousands):

 

     September 30,
2014
    September 30,
2013
 

Land and land improvements

   $ 46,064      $ 13,086   

Buildings and building improvements

     442,887        263,516   

Furniture, fixtures and equipment

     10,014        5,135   

Intangibles (1)

     67,431        33,138   

Other liabilities

     (8,718     (2,931

Mortgage note payable assumed (2)

     (27,657     —     
  

 

 

   

 

 

 

Net assets acquired

     530,021        311,944   

Contingent purchase price consideration

     (12,395     (507
  

 

 

   

 

 

 

Total purchase price consideration

   $ 517,626      $ 311,437   
  

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) At the acquisition date, the weighted-average amortization period on the acquired lease intangibles for the nine months ended September 30, 2014 and 2013 was approximately 7.1 years and 6.5 years, respectively. The acquired lease intangibles during the nine months ended September 30, 2014 were comprised of approximately $61.4 million and $6.0 million of in-place lease intangibles and other lease intangibles, respectively, and the acquired lease intangibles during the nine months ended September 30, 2013 were comprised of approximately $25.8 million and $7.3 million of in-place lease intangibles and other lease intangibles, respectively.
(2) At the acquisition date, the fair value of the mortgage note payable assumed reflects an approximate $0.4 million premium on the above-market mortgage note payable assumed.

 

13


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

The revenues and net loss (including deductions for acquisition fees and expenses and depreciation and amortization expense) attributable to the acquired properties included in the Company’s condensed consolidated statements of operations were approximately $19.8 million and $4.7 million, respectively, and $36.5 million and $15.3 million, respectively, for the quarter and nine months ended September 30, 2014; and approximately $5.9 million and $2.3 million, respectively, and $6.5 million and $3.9 million, respectively, for the quarter and nine months ended September 30, 2013.

The following table presents the unaudited pro forma results of operations for the Company as if each of the properties were acquired as of January 1, 2013 and owned during the quarter and nine months ended September 30, 2014 and 2013 (in thousands except per share data):

 

     (Unaudited)
Quarter Ended
September 30,
     (Unaudited)
Nine Months Ended
September 30,
 
     2014     2013      2014     2013  

Revenues

   $ 50,724      $ 36,188       $ 146,933      $ 105,817   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) (1)

   $ (8,963   $ 2,326       $ (29,640   $ (20,756
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss per share of common stock (basic and diluted)

   $ (0.10   $ 0.04       $ (0.33   $ (0.39
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted) (2)

     93,530        62,864         88,840        52,663   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) The unaudited pro forma results for the quarter and nine months ended September 30, 2014, were adjusted to exclude approximately $3.1 million and $13.8 million, respectively, of acquisition related expenses directly attributable to the properties acquired during the quarter and nine months ended September 30, 2014. The unaudited pro forma results for the nine months ended September 30, 2013 were adjusted to include the approximate $13.8 million of acquisition related expenses, as if the properties acquired during the nine months ended September 30, 2014 had been acquired on January 1, 2013. The unaudited pro forma results for the quarter and nine months ended September 30, 2013 were adjusted to exclude approximately $6.3 million and $8.3 million, respectively, of acquisition related expenses directly attributable to the properties acquired during the quarter and nine months ended September 30, 2013.
(2) As a result of the acquired properties being treated as operational since January 1, 2013, the Company assumed approximately 18.1 million shares were issued as of January 1, 2013. Consequently the weighted average shares outstanding was adjusted to reflect this amount of shares being issued on January 1, 2013 instead of actual dates on which the shares were issued, and such shares were treated as outstanding as of the beginning of the period presented.

 

14


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

Real Estate Under Development In February 2014, the Company acquired a tract of land in Tega Cay, South Carolina for $2.8 million (“Wellmore of Tega Cay”), which is a suburb of Charlotte, North Carolina. In connection with the acquisition, the Company entered into a development agreement with a third party developer for the construction and development of a continuing care retirement community with a maximum development budget of approximately $35.6 million, including the allocated purchase price of the land. The Company determined that Wellmore of Tega Cay is a VIE because it believes there is insufficient equity at risk due to the development nature of the property. The Company is the primary beneficiary while the developer or its affiliates manage the development, construction and certain day-to-day operations of the property subject to the Company’s oversight. Under a promoted interest agreement with the developer, certain net operating income targets have been established which, upon meeting such targets, result in the developer being entitled to additional payments based on enumerated percentages of the assumed net proceeds of a deemed sale, subject to achievement of an established internal rate of return on the Company’s investment in the development.

In June 2014, the Company entered into a joint venture agreement with a third party and acquired a 95% membership interest in a tract of land in Katy, Texas for $4.0 million (“Watercrest at Katy”), which is a suburb of Houston, Texas. The joint venture plans to construct and develop an independent living community with a maximum development budget of approximately $38.2 million, including the allocated purchase price of the land. The Company determined that Watercrest at Katy is a VIE because it believes there is insufficient equity at risk due to the development nature of the joint venture. The Company is the primary beneficiary and managing member while the joint venture partner or its affiliates manage the development, construction and certain day-to-day operations of the property subject to the Company’s oversight. Refer to Note 13, “Equity – Redeemable Noncontrolling Interest,” for additional information on a put option held by the joint venture partner. Pursuant to the joint venture agreement, distributions of operating cash flow will be distributed pro rata based on each member’s ownership interest until the members of the joint venture receive a specified minimum return on their invested capital, and thereafter, the joint venture partner will receive a disproportionately higher share of any remaining proceeds at varying levels based on the Company having received certain minimum threshold returns.

In July 2014, the Company acquired a tract of land in Shorewood, Wisconsin for $2.2 million (“HarborChase of Shorewood”), which is a suburb of Milwaukee, Wisconsin. In connection with the acquisition, the Company entered into a development agreement with a third party developer for the construction and development of an assisted living and memory care community with a maximum development budget of approximately $25.6 million, including the allocated purchase price of the land. The Company determined that HarborChase of Shorewood is a VIE because it believes there is insufficient equity at risk due to the development nature of the property. The Company is the primary beneficiary while the developer or its affiliates manage the development, construction and certain day-to-day operations of the property subject to the Company’s oversight. Under a promoted interest agreement with the developer, certain net operating income targets have been established which, upon meeting such targets, result in the developer being entitled to additional payments based on enumerated percentages of the assumed net proceeds of a deemed sale, subject to achievement of an established internal rate of return on the Company’s investment in the development.

 

15


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

3. Acquisitions (continued)

 

Purchase of Controlling Interest in Montecito Joint Venture — In January 2013, the Company acquired a 90% membership interest in a two-story MOB in Claremont, California for approximately $7.0 million in equity through a joint venture (“Montecito Joint Venture”) formed by the Company and its co-venture partner, an unrelated party, that initially held the remaining 10% interest. The Montecito Joint Venture was previously recorded under the equity method of accounting because the decisions that significantly impacted the entity were shared between the Company and its co-venture partner.

In August 2014, the Company acquired its co-venture partner’s 10% interest in the Montecito Joint Venture for approximately $1.6 million. As a result of this transaction, the Company owns 100% of the Montecito Joint Venture, and began consolidating all of the assets, liabilities and results of operations in the Company’s consolidated financial statements upon acquisition. Accordingly, the Company recorded a step up from its carrying value of the investment in the Montecito Joint Venture to the estimated fair value of the net assets acquired and liabilities assumed. The following summarizes the allocation of the purchase price, and the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Land and land improvements

   $ 6,135   

Buildings and building improvements

     13,728   

Intangibles (1)

     2,677   

Working capital, net

     87   

Other liabilities

     (167

Mortgage note payable assumed (2)

     (12,331
  

 

 

 

Net assets acquired

   $ 10,129   
  

 

 

 

 

FOOTNOTES:

 

(1) At the acquisition date, the weighted-average amortization period on the acquired lease intangibles was approximately 5.1 years and was comprised of approximately $1.9 million and $0.6 million of in-place lease intangibles and other lease intangibles, respectively.
(2) At the acquisition date, the fair value of the mortgage note payable assumed reflects an approximate $0.6 million discount on the below-market mortgage note payable assumed.

The fair value of the Company’s equity interest in the Montecito Joint Venture immediately before the acquisition date was approximately $5.7 million. The Company recorded a gain of approximately $2.8 million based on the acquisition-date fair value of its equity interest in the Montecito Joint Venture. The following summarizes the gain that resulted from the change of control in the equity method investment for the quarter and nine months ended September 30, 2014 (in thousands):

 

Fair value of net assets acquired

   $ 10,129   

Less: Previous investment in Montecito Joint Venture

     (5,747

Less: Cash paid to acquire co-venture partner’s interest

     (1,584
  

 

 

 

Gain on purchase of controlling interest of investment in unconsolidated entity

   $ 2,798   
  

 

 

 

Refer to Note 8, “Unconsolidated Entities,” for additional information on the Montecito Joint Venture prior to the Company’s purchase of the controlling interest in August 2014.

 

16


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

4. Real Estate Assets, net

 

The gross carrying amount and accumulated depreciation of the Company’s real estate assets as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     September 30,
2014
    December 31,
2013
 

Land and land improvements

   $ 113,455      $ 59,208   

Building and building improvements

     1,255,200        783,260   

Tenant improvements

     797        —     

Furniture, fixtures and equipment

     33,770        20,339   

Less: accumulated depreciation

     (41,445     (14,016
  

 

 

   

 

 

 

Real estate investment properties, net

     1,361,777        848,791   

Real estate under development, including land

     29,720        17,409   
  

 

 

   

 

 

 

Total real estate assets, net

   $ 1,391,497      $ 866,200   
  

 

 

   

 

 

 

Depreciation expense on the Company’s real estate investment properties, net was approximately $10.8 million and $27.4 million for the quarter and nine months ended September 30, 2014, respectively, and approximately $3.3 million and $7.2 million for the quarter and nine months ended September 30, 2013, respectively.

In June 2014, the Company completed the construction and development of a senior housing community in Acworth, Georgia (“Dogwood Forest of Acworth”). Dogwood Forest of Acworth opened to residents beginning in July 2014 and was considered placed into service as of June 30, 2014. As such, the asset values related to Dogwood Forest of Acworth are included in real estate investment properties, net in the accompanying condensed consolidated balance sheet as of September 30, 2014.

As of September 30, 2014, four of the Company’s senior housing communities have real estate under development with third-party developers as follows (in thousands):

 

Property Name (and Location)

  

Developer

   Real Estate
Development
Costs Incurred 
(1)
     Remaining
Development
Budget
(2)
 

Raider Ranch

(Lubbock, TX)

   South Bay Partners, Ltd    $ 3,669       $ 12,755   

Wellmore of Tega Cay

(Tega Cay, SC)

   Maxwell Group, Inc.      14,104         25,050   

Watercrest at Katy

(Katy, TX) (3)

   South Bay Partners, Ltd      6,131         33,311   

HarborChase of Shorewood

(Shorewood, WI)

   Habor Shorewood Development, LLC      5,816         20,109   
     

 

 

    

 

 

 

Total

      $ 29,720       $ 91,225   
     

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  This amount represents land and total capitalized costs for GAAP purposes for the acquisition, development and construction of the senior housing community as of September 30, 2014. Amounts include investment services fees, asset management fees, interest expense and other costs capitalized during the development period.
(2)  This amount includes preleasing and marketing costs which will be expensed as incurred.
(3)  This property is owned through a joint venture in which the Company’s initial ownership interest is 95%.

The development budgets of the senior housing developments include the cost of the land, construction costs, development fees, financing costs, start-up costs and initial operating deficits of the respective properties. An affiliate of the developer of the respective community coordinates and supervises the management and administration of the development and construction. Each developer is responsible for any cost overruns beyond the approved development budget for the applicable project pursuant to a cost overrun guarantee. These developments were deemed to be VIEs; refer to Note 7, “Variable Interest Entities,” for additional information.

 

17


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

5. Intangibles, net

 

The gross carrying amount and accumulated amortization of the Company’s intangible assets and liabilities as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     September 30,
2014
    December 31,
2013
 

In-place lease intangibles

   $ 112,887      $ 49,642   

Above-market lease intangibles

     8,904        3,704   

Below-market ground lease intangibles

     5,815        4,153   

Less: accumulated amortization

     (22,484     (5,099
  

 

 

   

 

 

 

Intangible assets, net

   $ 105,122      $ 52,400   
  

 

 

   

 

 

 

Below-market lease intangibles

   $ (11,501   $ (2,987

Above-market ground lease intangibles

     (317     (317

Less: accumulated amortization

     720        168   
  

 

 

   

 

 

 

Intangible liabilities, net (1)

   $ (11,098   $ (3,136
  

 

 

   

 

 

 

 

FOOTNOTE:

 

(1)  Intangible liabilities, net are included in other liabilities in the accompanying condensed consolidated balance sheets.

Amortization on the Company’s intangible assets was approximately $7.1 million and $17.4 million for the quarter and nine months ended September 30, 2014, respectively, of which approximately $0.3 million and $0.7 million, respectively, was treated as a reduction of rental income from operating leases, approximately $0.02 million and $0.1 million, respectively, was treated as an increase of property operating expenses and approximately $6.7 million and $16.7 million, respectively, was included in depreciation and amortization. Amortization on the Company’s intangible assets was approximately $1.3 million and $2.3 million for the quarter and nine months ended September 30, 2013, respectively, of which approximately $0.05 million was treated as a reduction of rental income from operating leases for both the quarter and nine months ended September 30, 2013, approximately $0.01 million was treated as an increase of property operating expenses for both the quarter and nine months ended September 30, 2013 and approximately $1.3 million and $2.3 million, respectively, was included in depreciation and amortization.

Amortization on the Company’s intangible liabilities was approximately $0.3 million and $0.5 million for the quarter and nine months ended September 30, 2014, of which approximately $0.3 million and $0.5 million, respectively, were treated as an increase of rental income from operating leases and approximately two thousand dollars and six thousand dollars, respectively, was treated as a reduction of property operating expenses. For both the quarter and nine months ended September 30, 2013, amortization on the Company’s intangible liabilities was approximately $0.1 million which was treated as an increase of rental income from operating leases.

 

18


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

5. Intangibles, net (continued)

 

The estimated future amortization on the Company’s intangibles for the remainder of 2014, each of the next four years and thereafter, in the aggregate, as of September 30, 2014 is as follows (in thousands):

 

     In-place
Lease
Intangibles
     Above-
market
Leases
     Below-
market
Ground
Leases
     Total Assets      Below-
market
Leases
    Above-
market
Ground
Leases
    Total
Liabilities
 

2014

   $ 6,963         367         37       $ 7,367       $ (286     (2   $ (288

2015

     25,898         1,430         149         27,477         (1,094     (8     (1,102

2016

     16,768         1,192         149         18,109         (1,047     (8     (1,055

2017

     6,702         1,085         149         7,936         (997     (8     (1,005

2018

     6,256         999         149         7,404         (924     (8     (932

Thereafter

     28,761         3,003         5,065         36,829         (6,442     (274     (6,716
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 91,348         8,076         5,698       $ 105,122       $ (10,790     (308   $ (11,098
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average remaining useful life as of September 30, 2014 (in years):

 

  

      
     In-place
Lease
Intangibles
     Above-
market
Leases
     Below-
market
Ground
Leases
            Below-
market
Leases
    Above-
market
Ground
Leases
       
     6.4         7.6         38.8            12.8        38.6     
  

 

 

    

 

 

    

 

 

       

 

 

   

 

 

   

 

19


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

6. Operating Leases

 

As of September 30, 2014, the Company owned 43 properties that were leased to tenants on a triple-net, net or modified gross basis, and accounted for as operating leases; of which, 24 are single-tenant properties that are 100% leased under operating leases and the remaining 19 are multi-tenant properties that are leased under operating leases. The Company’s leases had a weighted average remaining lease term of 8.3 years based on annualized base rents expiring between 2014 and 2033, subject to the tenants’ options to extend the lease periods ranging from two to ten years. In addition, certain tenants hold options to extend their leases for multiple periods.

Under the terms of the Company’s triple-net lease agreements, each tenant is responsible for the payment of property taxes, general liability insurance, utilities, repairs and maintenance, including structural and roof maintenance expenses. Each tenant is expected to pay real estate taxes directly to taxing authorities. However, if the tenant does not pay, the Company will be liable. The total annualized property tax assessed on these properties is approximately $1.9 million.

Under the terms of the multi-tenant lease agreements that have third-party property managers, each tenant is responsible for the payment of their proportionate share of property taxes, general liability insurance, utilities, repairs and common area maintenance. These amounts are billed monthly and recorded as tenant reimbursement income in the accompanying consolidated statements of operations.

The following are future minimum lease payments to be received under non-cancellable operating leases for the remainder of 2014, each of the next four years and thereafter, as of September 30, 2014 (in thousands):

 

2014

   $ 13,092   

2015

     52,335   

2016

     51,032   

2017

     50,442   

2018

     50,093   

Thereafter

     260,436   
  

 

 

 
   $ 477,430   
  

 

 

 

The above future minimum lease payments to be received excludes tenant reimbursements, straight-line rent adjustments, amortization of above- and below-market lease intangibles and base rent attributable to any renewal options exercised by the tenants in the future.

 

20


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

7. Variable Interest Entities

 

Consolidated VIEs – As of September 30, 2014, the Company has 12 wholly-owned subsidiaries, which are VIEs due to following factors and circumstances:

 

  (1) Three of these subsidiaries are single property entities, designed to own and lease their respective properties to single tenants, for which buy-out options are held by the respective tenants that are formula based.

 

  (2) Three of these subsidiaries are single property entities, designed to own and lease their respective properties to multiple tenants, which are subject to either a ground lease or an air rights lease that include buy-out and put options held by either the tenant or landlord under the applicable lease.

 

  (3) Five of these subsidiaries are entities with real estate under development or completed developments in which the third-party developers have an opportunity to earn promoted interest payments after certain net operating income targets and internal rate of return targets have been met.

 

  (4) One of these subsidiaries is a joint venture with real estate under development in which the third-party developer has an opportunity to earn promoted interest payments after certain net operating income targets and internal rate of return targets have been met.

The Company determined it is the primary beneficiary and holds a controlling financial interest in each of the aforementioned property and development entities due to its power to direct the activities that most significantly impact the economic performance of the entities, as well as its obligation to absorb the losses and its right to receive benefits from these entities that could potentially be significant to these entities. As such, the transactions and accounts of these VIEs are included in the accompanying condensed consolidated financial statements.

The aggregate carrying amount and major classifications of the consolidated assets that can be used to settle obligations of the VIEs and liabilities of the consolidated VIEs that are non-recourse to the Company as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     September 30,
2014
     December 31,
2013
 

Assets:

     

Real estate investment properties, net

   $ 111,838       $ 72,053   
  

 

 

    

 

 

 

Real estate under development, including land

   $ 29,720       $ 16,210   
  

 

 

    

 

 

 

Intangibles, net

   $ 11,166       $ 4,535   
  

 

 

    

 

 

 

Cash

   $ 7,314       $ 727   
  

 

 

    

 

 

 

Loan costs, net

   $ 1,869       $ 912   
  

 

 

    

 

 

 

Other

   $ 1,020       $ 382   
  

 

 

    

 

 

 

Liabilities:

     

Mortgages and other notes payable

   $ 84,560       $ 52,596   
  

 

 

    

 

 

 

Accrued development costs

   $ 4,683       $ 7,047   
  

 

 

    

 

 

 

Other liabilities

   $ 1,581       $ 939   
  

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 829       $ 309   
  

 

 

    

 

 

 

Due to related parties

   $ 643       $ 112   
  

 

 

    

 

 

 

The Company’s maximum exposure to loss as a result of its involvement with these VIEs is limited to its net investment in these entities which totaled approximately $70.0 million as of September 30, 2014. The Company’s exposure is limited because of the non-recourse nature of the borrowings of the VIEs.

 

21


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

8. Unconsolidated Entities

 

The following presents financial information for each of the Company’s unconsolidated entities as of and for the quarter and nine months ended September 30, 2014 (in thousands):

 

     For the quarter ended September 30, 2014  
     Montecito (2)     CHTSunIV (3)      Windsor
Manor
    Total  

Revenues

   $ 328      $ —         $ 2,172      $ 2,500   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

   $ 106      $ —         $ 17      $ 123   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 37      $ —         $ (208   $ (171
  

 

 

   

 

 

    

 

 

   

 

 

 

Income allocable to other venture partners (1)

   $ 4      $ —         $ (1   $ 3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) allocable to the Company (1)

   $ 33      $ —         $ (207   $ (174

Amortization of capitalized acquisition costs

     (2     —           (4     (6
  

 

 

   

 

 

    

 

 

   

 

 

 

Equity in earnings (loss) of unconsolidated entities

   $ 31      $ —         $ (211   $ (180
  

 

 

   

 

 

    

 

 

   

 

 

 

Distributions declared to the Company

   $ 313      $ —         $ 76      $ 389   
  

 

 

   

 

 

    

 

 

   

 

 

 

Distributions received by the Company (4)

   $ 174      $ —         $ 2,493      $ 2,667   
  

 

 

   

 

 

    

 

 

   

 

 

 
     For the nine months ended September 30, 2014  
     Montecito (2)     CHTSunIV (3)      Windsor
Manor
    Total  

Revenues

   $ 1,356      $ —         $ 6,439      $ 7,795   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

   $ 436      $ —         $ 114      $ 550   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 165      $ —         $ (950   $ (785
  

 

 

   

 

 

    

 

 

   

 

 

 

Income allocable to other venture partners (1)

   $ 17      $ —         $ 373      $ 390   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) allocable to the Company (1)

   $ 148      $ —         $ (1,323   $ (1,175

Amortization of capitalized acquisition costs

     (6     —           (12     (18
  

 

 

   

 

 

    

 

 

   

 

 

 

Equity in earnings (loss) of unconsolidated entities

   $ 142      $ —         $ (1,335   $ (1,193
  

 

 

   

 

 

    

 

 

   

 

 

 

Distributions declared to the Company (4)

   $ 659      $ —         $ 2,853      $ 3,512   
  

 

 

   

 

 

    

 

 

   

 

 

 

Distributions received by the Company (4)

   $ 517      $ —         $ 3,157      $ 3,674   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) Income (loss) is allocated between the Company and its joint venture partner using the HLBV method of accounting.
(2) In August 2014, the Company acquired its co-venture partner’s 10% interest in the Montecito joint venture; refer to Note 3, “Acquisitions – Purchase of Controlling Interest in Montecito Joint Venture,” for additional information.
(3) In July 2013, the Company completed the sale of its joint venture membership interest in CHTSunIV.
(4) The distributions declared to and received by the Company for the Windsor Manor joint venture for the nine months ended September 30, 2014 include approximately $2.2 million of capital proceeds from a debt refinancing; refer to “Off-Balance Sheet Arrangements” for additional information.

 

22


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

8. Unconsolidated Entities (continued)

 

The following presents financial information for each of the Company’s unconsolidated entities as of and for the quarter and nine months ended September 30, 2013 (in thousands):

 

     For the quarter ended September 30, 2013  
     Montecito (2)     CHTSunIV (3)     Windsor
Manor (2)
    Total  

Revenues

   $ 446      $ —        $ 2,043      $ 2,489   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 121      $ —        $ (24   $ 97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 21      $ —        $ (251   $ (230
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) allocable to other venture partners (1)

   $ 2      $ —        $ (524   $ (522
  

 

 

   

 

 

   

 

 

   

 

 

 

Income allocable to the Company (1)

   $ 19      $ —        $ 273      $ 292   

Amortization of capitalized acquisition costs

     (2     —          (6     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings (loss) of unconsolidated entities

   $ 17      $ —        $ 267      $ 284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared to the Company

   $ 357      $ —        $ 107      $ 464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions received by the Company

   $ 342      $ 1,503      $ —        $ 1,845   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2013  
     Montecito (2)     CHTSunIV (3)     Windsor
Manor (2)
    Total  

Revenues

   $ 1,255      $ 24,107      $ 5,326      $ 30,688   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) (4)

   $ 66      $ 3,603      $ (18   $ 3,651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (218   $ (46   $ (743   $ (1,007
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss allocable to other venture partners (1)

   $ (22   $ (1,365   $ (1,418   $ (2,805
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) allocable to the Company (1)

   $ (196   $ 1,319      $ 675      $ 1,798   

Amortization of capitalized acquisition costs

     (6     (36     (12     (54
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings (loss) of unconsolidated entities

   $ (202   $ 1,283      $ 663      $ 1,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared to the Company

   $ 699      $ 2,990      $ 287      $ 3,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions received by the Company

   $ 342      $ 4,458      $ 224      $ 5,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) Income (loss) is allocated between the Company and its joint venture partner using the HLBV method of accounting.
(2) Represents operating results from the date of acquisition through the end of the periods presented.
(3) In July 2013, the Company completed the sale of its joint venture membership interest in CHTSunIV.
(4) Includes approximately $0.3 million and $0.2 million of non-recurring acquisition expenses incurred by the Montecito and Windsor Manor joint ventures, respectively, for nine months ended September 30, 2013.

 

23


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

9. Contingent Purchase Price Consideration

 

Capital Health Communities

In connection with the acquisition of the Capital Health Communities in 2012, the Company required that approximately $7.0 million of the purchase price be placed in an escrow account as the seller guaranteed the Company an annual return of at least $6.9 million, $7.0 million, and $7.1 million of net operating income on the acquired properties during 2013, 2014 and 2015, respectively (“Yield Guaranty”). As of September 30, 2014, the Company determined the fair value of the Yield Guaranty to be $3.2 million, which was recorded as other assets in the accompanying condensed consolidated balance sheet. The following table provides a roll-forward of the fair value of the contingent purchase price consideration related to the Yield Guaranty on the Capital Health Communities for the quarter and nine months ended September 30, 2014 and 2013 (in thousands):

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  

Beginning balance

   $ 3,509      $ 2,664       $ 4,488      $ 2,664   

Yield Guaranty payment received from seller

     (301     —           (2,601     —     

Change in fair value

     —          —           1,321        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 3,208      $ 2,664       $ 3,208      $ 2,664   
  

 

 

   

 

 

    

 

 

   

 

 

 

South Bay II Communities

In conjunction with the acquisition of the South Bay II Communities, the Company entered into an agreement with the sellers whereby the purchase price is adjusted in the event that certain net operating income targets are met. The additional consideration was determined within three months of the acquisition date and is equal to (a) the baseline net operating income divided by the baseline capitalization rates (as defined in the purchase and sale agreement) less (b) the purchase price paid at closing. The following table provides a roll-forward of the fair value of the estimated contingent purchase price consideration related to the South Bay II Communities for the quarter and nine months ended September 30, 2014 and 2013 (in thousands):

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  

Beginning balance

   $ (8,500   $ —         $ —        $ —     

Contingent consideration in connection with acquisition

     —          —           (12,395     —     

Change in fair value

     (1,800     —           (1,800     —     

Contingent consideration payment

     10,300        —           14,195        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ —        $ —         $ —        $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Fair Value Measurements

The fair value of the contingent purchase price consideration was based on a then-current income approach that is primarily determined based on the present value and probability of future cash flows using internal underwriting models. The income approach further includes estimates of risk-adjusted rate of return and capitalization rates for each property. Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurements of the estimated fair value related to the Company’s contingent purchase price consideration are categorized as Level 3 on the three-level fair value hierarchy.

 

24


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

10. Indebtedness

 

The following table provides details of the Company’s indebtedness as of September 30, 2014 and December 31, 2013 (in thousands):

 

     September 30,
2014
    December 31,
2013
 

Mortgages payable and other notes payable:

    

Fixed rate debt

   $ 373,219      $ 290,817   

Variable rate debt (1)

     326,623        147,290   
  

 

 

   

 

 

 

Mortgages and other notes payable

     699,842        438,107   

Premium (discount), net (2)

     (251     —     
  

 

 

   

 

 

 

Mortgages and other notes payable, net

     699,591        438,107   

Revolving credit facility

     180,615        98,500   
  

 

 

   

 

 

 

Total borrowings

   $ 880,206      $ 536,607   
  

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) As of September 30, 2014 and December 31, 2013, the Company had entered into forward-starting interest rate swaps for total notional amounts of approximately $269.4 million and $124.3 million, respectively, in order to hedge its exposure to this variable rate debt in future periods. The forward-starting interest rate swaps have a range of effective dates beginning in 2015 and continuing through the maturity date of the respective loan (ranging from 2016 through 2019). Refer to Note 12, “Derivative Financial Instruments,” for additional information.
(2) Premium (discount), net is reflective of the Company recording mortgage note payables assumed at fair value on the respective acquisition date.

Maturities of indebtedness for the remainder of 2014 and each of the next four years and thereafter, in the aggregate, as of September 30, 2014 are as follows (in thousands):

 

2014

   $ 3,020   

2015

     14,587   

2016

     276,550   

2017

     30,081   

2018

     288,403   

Thereafter

     267,565   
  

 

 

 
   $ 880,206   
  

 

 

 

 

25


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

10. Indebtedness (continued)

 

The Company financed a portion of the acquisitions described in Note 3, “Acquisitions,” through additional borrowings and loan assumptions. The following table provides details as of September 30, 2014 (in thousands):

 

Property and Loan Type

   Interest Rate at   

Payment Terms

   Maturity
Date (2)
     September 30,
2014
 
  

September 30, 2014 (1)

        
Pacific Northwest II Communities; Mortgage Loan   

4.30%

per annum

   Monthly principal and interest payments based on a 30-year amortization schedule      12/5/2018       $ 62,309   

Isle at Watercrest –

Mansfield; Mortgage Loan (3)

  

4.68%

per annum

   Monthly principal and interest payments based on a total payment of $143,330      6/1/2023         27,181   
           

 

 

 
      Total fixed rate debt         89,490   
           

 

 

 

Wellmore of Tega Cay;

Construction Loan

  

30-day LIBOR

(with floor

of 0.50%) plus

5.4% per annum

   Monthly interest only payments through February 2019; principal and interest payments thereafter based on 25-year amortization schedule      2/6/2019         1,229   

Houston Orthopedic & Spine Hospital and Medical Building;

Mortgage Loan

  

90-day LIBOR

plus 2.85% per

annum

   Monthly principal and interest payments based on a 30-year amortization schedule      6/1/2019         49,814   

Medical Portfolio II Properties;

Mortgage Loan

  

90-day LIBOR

(with 0.25%

floor) plus 2.35%

per annum

   Monthly principal and interest payments based on 25-year amortization schedule      7/14/2019         85,445   

Claremont Medical Office;

Mortgage Loan (4)

  

30-day LIBOR

plus 2.6%

per annum

   Monthly principal and interest payments based upon a 30-year amortization schedule      1/15/2018         12,958   

Lee Hughes Medical Building;

Mortgage Loan

  

30-day LIBOR

plus 1.85%

per annum

   Monthly principal and interest payments based upon a 30-year amortization schedule      9/5/2016         19,250   
           

 

 

 
      Total variable rate debt         168,696   
           

 

 

 
      Fixed and variable rate debt         258,186   
      Premium (discount), net         (251
           

 

 

 
      Total debt       $ 257,935   
           

 

 

 

 

FOOTNOTES:

 

(1)  The 30-day LIBOR and 90-day LIBOR were approximately 0.16% and 0.24%, respectively, as September 30, 2014.
(2)  Represents the initial maturity date (or, as applicable, the maturity date as extended). The maturity date may be extended beyond the date shown subject to certain lender conditions.
(3)  The balance for this loan excludes a premium of $0.4 million related to the mortgage note payable assumed being recorded at fair value on the acquisition date.
(4)  The balance for this loan excludes a discount of $0.6 million related to the mortgage note payable assumed being recorded at fair value on the acquisition date.

 

26


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

10. Indebtedness (continued)

 

In February 2014, through its limited partnership, the Company modified the terms of its Revolving Credit Facility and exercised its option to increase the aggregate maximum principal amount available for borrowing from $120 million to $240 million. In April, the Company increased the aggregate maximum principal amount available to $275 million. The Company borrowed approximately $112.1 million of on its Revolving Credit Facility during the nine months ended September 30, 2014 to finance acquisitions (primarily the South Bay II Communities). As of September 30, 2014, the Revolving Credit Facility had an outstanding balance of approximately $180.6 million and was collateralized by 15 properties with an aggregate net book carrying value of approximately $266.2 million. The Revolving Credit Facility has sizing requirements that govern the total amount that the Company may borrow at any given time based on the purchase price of the collateral and a metric of debt service coverage.

The Company’s Revolving Credit Facility contains affirmative, negative, and financial covenants which are customary for loans of this type, including without limitation: (i) limitations on incurrence of additional indebtedness; (ii) restrictions on payments of cash distributions except if required by REIT requirements; (iii) minimum occupancy levels for collateralized properties; (iv) minimum loan-to-value and debt service coverage ratios with respect to collateralized properties; (v) maximum leverage, secured recourse debt, and unimproved land/development property ratios; (vi) minimum fixed charge coverage ratio and minimum consolidated net worth, unencumbered liquidity, and equity raise requirements; (vii) limitations on certain types of investments and additional indebtedness; and (viii) minimum liquidity. The limitations on distributions includes a limitation on the extent of allowable distributions, which are not to exceed the greater of 95% of adjusted FFO (as defined per the loan agreement) or the minimum amount of distributions required to maintain the Company’s REIT status. As of September 30, 2014, the Company was in compliance with all affirmative, negative and financial covenants.

All of the Company’s mortgage and construction loans contain customary financial covenants and ratios; including (but not limited to) the following: debt service coverage ratio, minimum occupancy levels, limitations on incurrence of additional indebtedness, etc. As of September 30, 2014, the Company was in compliance with all financial covenants and ratios.

The fair market value and carrying value of the mortgage and other notes payable was approximately $689.2 million and $669.8 million, respectively, and both the fair market value and carrying value of the Revolving Credit Facility was $180.6 million as of September 30, 2014. The fair market value and carrying value of the mortgage and other notes payable was approximately $431.4 million and $438.1 million, respectively, and both the fair market value and carrying value of the Revolving Credit Facility was $98.5 million as of December 31, 2013. These fair market values are based on current rates and spreads the Company would expect to obtain for similar borrowings. Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage notes payable is categorized as level 3 on the three-level valuation hierarchy. The estimated fair value of accounts payable and accrued expenses approximates the carrying value as of September 30, 2014 and December 31, 2013 because of the relatively short maturities of the obligations.

 

27


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

11. Related Party Arrangements

 

The Company incurs operating expenses which, in general, relate to administration of the Company on an ongoing basis. Pursuant to the advisory agreement, the Advisor shall reimburse the Company the amount by which the total operating expenses paid or incurred by the Company exceed, in any four consecutive fiscal quarters (an “Expense Year”) commencing with the Expense Year ending June 30, 2013, the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors (the “Expense Cap Test”). In performing the Expense Cap Test, the Company uses operating expenses on a GAAP basis after making adjustments for the benefit of expense support under the Expense Support Agreements. For the Expense Year ended September 30, 2014, the Company did not incur operating expenses in excess of the Limitation.

The Company maintains accounts totaling approximately $0.1 million and $0.4 million as of September 30, 2014 and December 31, 2013, respectively, at a bank in which the Company’s chairman serves as a director.

In March 2013, the Company entered into the Advisor Expense Support Agreement, whereby commencing on April 1, 2013, the Advisor has agreed to provide expense support to the Company through forgoing the payment of fees in cash and acceptance of restricted stock for services rendered and specified expenses incurred in an amount equal to the positive excess, if any, of (a) aggregate stockholder cash distributions declared for the applicable quarter, over (b) the Company’s aggregate modified funds from operations (as defined in the Advisor Expense Support Agreement). The Advisor expense support amount is determined for each calendar quarter of the Company, on a non-cumulative basis, each quarter-end date (“Determination Date”). In August 2013, the Company entered into the Property Manager Expense Support Agreement, whereby commencing on July 1, 2013, the Property Manager agreed to provide expense support to the Company through forgoing the payment of fees in cash and accepting restricted stock for services in an amount equal to the positive excess, if any, of (a) aggregate stockholder cash distributions declared for the applicable quarter, over (b) the Company’s aggregate modified funds from operations (as defined in the Property Manager Expense Support Agreement). The Property Manager expense support amount shall be determined, on a non-cumulative basis, after the calculation of the Advisor expense support amount pursuant to the Property Manager Expense Support Agreement on each Determination Date. The terms of both the Advisor Expense Support Agreement and the Property Manager Expense Support Agreement (‘the Expense Support Agreements”) run through December 31, 2014 and automatically renews for successive one-year periods thereafter, subject to the right of the Advisor or Property Manager to terminate their respective agreements upon 30 days’ written notice to the Company.

In exchange for services rendered and in consideration of the expense support provided, the Company will issue, within 45 days following each Determination Date, a number of shares of restricted stock equal to the quotient of the expense support amount provided by to the Advisor and Property Manager for the preceding quarter divided by the then-current public offering price per share of common stock, on the terms and conditions and subject to the restrictions set forth in the respective expense support agreements (“Expense Support Agreements”). Any amounts foregone, and for which restricted stock shares are issued, pursuant to the Expense Support Agreements will be permanently waived and the Company will have no obligation to pay such amounts to the Advisor or the Property Manager. The Restricted Stock is subordinated and forfeited to the extent that stockholders do not receive their original invested capital back with at least a 6% annualized return of investment upon ultimate liquidity of the Company. Since the vesting criteria is outside the control of the Advisor and Property Manager and involves both market conditions and counterparty performance conditions, the restricted stock shares will be treated as unissued for financial reporting purposes until the vesting criteria, as defined in the Expense Support Agreements, are met.

 

28


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

11. Related Party Arrangements (continued)

 

The fees incurred by and reimbursable to the Advisor in connection with the Company’s Offering for the quarters and nine months ended September 30, 2014 and 2013, and related amounts unpaid as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     Quarter ended      Nine Months Ended      Unpaid amounts as of (1)  
     September 30,      September 30,      September 30,      December 31,  
     2014      2013      2014      2013      2014      2013  

Selling commissions (2)

   $ 6,689       $ 3,247       $ 12,285       $ 7,165       $ 170       $ 71   

Marketing support fees (2)

     4,524         3,252         9,937         8,463         135         70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,213       $ 6,499       $ 22,222       $ 15,628       $ 305       $ 141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The expenses and fees incurred by and reimbursable to the Company’s related parties for the quarters and nine months ended September 30, 2014 and 2013, and related amounts unpaid as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     Quarter ended      Nine Months Ended      Unpaid amounts as of (1)  
     September 30,      September 30,      September 30,      December 31,  
     2014      2013      2014      2013      2014      2013  

Reimbursable expenses:

                 

Offering costs (2)

   $ 1,075       $ 692       $ 3,442       $ 2,714       $ 345       $ 612   

Operating expenses (3)

     918         667         2,402         1,776         594         915   

Acquisition fees and expenses

     130         97         463         336         —           138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,123         1,456         6,307         4,826         939         1,665   

Investment services fees (4)

     3,651         4,584         11,875         6,450         523         —     

Disposition fee (5)

     —           608         —           608         —           —     

Financing coordination fees (6)

     —           —           220         —           —           —     

Property management fees (7)

     728         295         1,763         879         459         322   

Asset management fees (8)

     3,696         1,264         9,510         2,898         420         894   

Interest reserve and other advances (9)

     —           —           —           —           8         286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,198       $ 8,207       $ 29,675       $ 15,661       $ 2,349       $ 3,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

29


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

11. Related Party Arrangements (continued)

 

 

FOOTNOTES:

 

(1)  Amounts are recorded as due to related parties in the accompanying condensed consolidated balance sheets.
(2)  Amounts are recorded as stock issuance and offering costs in the accompanying condensed consolidated statements of stockholders’ equity and redeemable noncontrolling interest.
(3)  Amounts are recorded as general and administrative expenses in the accompanying condensed consolidated statements of operations.
(4)  For the quarter and nine months ended September 30, 2014, the Company incurred approximately $3.7 million and $11.9 million, respectively, in investment services fees of which approximately $0.4 million and $1.6 million, respectively, was capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. For the quarter and nine months ended September 30, 2013, the Company incurred approximately $4.6 million and $6.4 million, respectively, in investment service fees, of which approximately $0.5 million, was capitalized as part of its investment in the Montecito Joint Venture and the additional Windsor Manor II Communities, and included in investments in unconsolidated entities in the accompanying condensed consolidated balance sheet. Investment service fees, that are not capitalized, are recorded as acquisition fees and expenses in the accompanying condensed consolidated statements of operations.
(5)  Amounts are recorded as a reduction to gain on sale of investment in unconsolidated entity in the accompanying consolidated statements of operations.
(6)  For the nine months ended September 30, 2014, the Company incurred approximately $0.2 million in financing coordination fees, which was capitalized and included in its investment in the Windsor Manor Joint Venture. There were no financing coordination fees for the quarter and nine months ended September 30, 2013.
(7)  For the quarter and nine months ended September 30, 2014, the Company incurred approximately $0.7 million and $1.8 million, respectively, in property and construction management fees payable to the Property Manager of which approximately $0.2 million and $0.3 million, respectively, in construction management fees were capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. For the quarter and nine months ended September 30, 2013, the Company incurred approximately $0.3 million and $0.9 million, respectively, in property and construction management fees payable to the Property Manager of which $0.07 million and $0.2 million, respectively, was capitalized and included in real estate under development.
(8)  For the quarter and nine months ended September 30, 2014, the Company incurred approximately $3.7 million and $9.5 million, respectively, in asset management fees payable to the Advisor of which approximately $0.9 million and $3.8 million, respectively, was forgone in accordance with the terms of the Advisor Expense Support Agreement and approximately $0.1 million and $0.2 million, respectively, was capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. For the quarter and nine months ended September 30, 2013, the Company incurred approximately $1.3 million and $3.4 million, respectively, in asset management fees payable to the Advisor of which approximately $0.5 million for the nine months ended September 30, 2013 was forgone in accordance with the terms of the Expense Support Agreement and approximately $0.2 million and $0.2 million, respectively, was capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet.
(9)  Amounts primarily consists of an interest reserve account related to the acquisition, development and construction loan (“ADC Loan”) that the Company originated in June 2013.

 

30


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

11. Related Party Arrangements (continued)

 

The following fees were foregone in connection with the Expense Support Agreements for the quarter and nine months ended September 30, 2014 and 2013, and cumulatively as of September 30, 2014 (in thousands, except offering price):

 

     Quarter ended
September 30,
     Nine Months Ended
September 30,
     As of
September 30,
 
     2014      2013      2014      2013      2014  

Asset management fees (1)

   $ 884       $ —         $ 3,764       $ 474       $ 5,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Then-current offering price

   $ 10.14       $ 10.00       $ 10.14       $ 10.00       $ 10.14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restricted stock shares (2)

     87         —           371         47         510   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash distributions on Restricted Stock (3)

   $ 30       $ —         $ 48       $ —        $ 53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Stock distributions on Restricted Stock (4)

     2         —           4         —          4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  No other amounts have been forgone in connection with the Expense Support Agreements for the quarter and nine months ended September 30, 2014 and 2013, and cumulatively as of September 30, 2014.
(2)  Restricted stock shares are comprised of approximately 0.42 million issued to the Advisor and approximately 0.09 million issuable to the Advisor as of September 30, 2014. Since the vesting conditions were not met through September 30, 2014, no fair value was assigned to the restricted stock shares as the shares were valued at zero, which represents the lowest possible value estimated at vesting. In addition, the restricted stock shares were treated as unissued for financial reporting purposes because the vesting criteria had not been met through September 30, 2014.
(3)  The cash distributions have been recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.
(4)  The par value of the stock distributions has been recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

As of September 30, 2014, the Company’s ADC Loan of approximately $6.0 million to C4 Development, LLC, a related party, for the development of an MOB in Rutland, Virginia had been fully repaid. The previous funding on the ADC Loan was recorded as a note receivable from related party in the accompanying condensed consolidated balance sheet as of December 31, 2013. In addition, the Company recorded interest income for both the quarter and nine months ended September 30, 2014 and 2013, which is included in interest income on note receivable from related party in the accompanying condensed consolidated statements of operations for the respective periods.

 

31


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

12. Derivative Financial Instruments

 

The following table summarizes the terms of the derivative financial instruments held by the Company or through its joint venture and the asset (liability) that has been recorded (in thousands):

 

                                  Fair value
asset (liability) as of
 

Notional
Amount

  Strike (1)     Credit
Spread 
(1)
    Trade
date
    Forward
date
    Maturity
date
    September 30,
2014
    December 31,
2013
 
$12,421(2)     1.3     2.6     1/17/2013        1/15/2015        1/16/2018      $ 7      $ 115   
$38,255(2)     2.7     2.5     9/6/2013        8/17/2015        7/10/2018      $ (928   $ (590
$26,067(2)     2.8     2.5     9/6/2013        8/17/2015        8/29/2018      $ (689   $ (435
$30,000(2)     1.1     2.7     10/22/2013        8/5/2015        8/19/2016      $ (35   $ (10
$29,952(2)     0.9     4.3     11/13/2013        5/11/2015        5/31/2016      $ (31   $ (8
$11,000(3)     3.0     —       6/27/2014        6/30/2014        6/30/2017      $ 21      $ —     
$48,415(2)     2.4     2.9     8/15/2014        6/1/2016        6/2/2019      $ 206      $ —     
$84,251(2)     2.3     2.4     9/12/2014        8/1/2015        7/15/2019      $ (330   $ —     

 

FOOTNOTES:

 

(1)  The all-in rates for each derivative financial instrument are equal to the sum of the Strike and Credit Spread detailed above.
(2)  Amounts related to interest rate swaps held by the Company or its subsidiaries, which are recorded at fair value and included in either other assets or other liabilities in the accompanying condensed consolidated balance sheets.
(3)  Amounts related to the interest rate cap held by the Windsor Manor Joint Venture for which the proportionate amounts of fair value relative to the Company’s ownership percentage are included in investments in unconsolidated entities in the accompanying condensed consolidated balance sheets.

Although the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative financial instruments and has determined that the credit valuation adjustments on the overall valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the Company determined that its derivative financial instruments valuation in its entirety is classified in Level 2 of the fair value hierarchy. Determining fair value requires management to make certain estimates and judgments. Changes in assumptions could have a positive or negative impact on the estimated fair values of such instruments which could, in turn, impact the Company’s or its joint venture’s results of operations.

 

32


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

13. Equity

 

Redeemable Noncontrolling Interest:

In connection with the Watercrest at Katy joint venture described in Note 3, “Acquisitions – Real Estate Under Development,” the Company’s joint venture partner acquired a 5% noncontrolling interest that includes a put option of its membership to the Company at any time commencing on the date on which Watercrest at Katy development opens to residents and concluding on the fifth anniversary thereof, when net operating income (“NOI”) is: (a) equal to or greater than the NOI threshold established in the joint venture agreement, and (b) has been equal to or greater than the NOI threshold established in the joint venture agreement for the three calendar months immediately preceding the calendar month during which the joint venture partner exercises the put option. The put option is redeemable for cash at a price equal to the appraised market value (less certain transaction-related costs) at the time the put option is exercised (“Put Price”). The Company’s maximum exposure, as a result of these redeemable equity securities, is limited to the Put Price multiplied by the joint venture partner’s 5% membership interest.

Stockholders’ Equity:

Public Offering As of September 30, 2014 and December 31, 2013, the Company had received aggregate offering proceeds of approximately $914.8 million (91.2 million shares) and $568.9 million (57.0 million shares), respectively, including approximately $21.3 million (2.2 million shares) and $9.4 million (1.0 million shares), respectively, received through its Reinvestment Plan.

Distributions During the nine months ended September 30, 2014 and 2013, the Company declared cash distributions of approximately $21.7 million and $9.0 million, respectively. In addition, the Company declared and made stock distributions of 1.6 million shares and 0.7 million shares of common stock, respectively, for the nine months ended September 30, 2014 and 2013, which are reflected for the purposes of earnings per share as being outstanding since the beginning of the earliest period presented.

For the nine months ended September 30, 2014, 21.5% of distributions paid to stockholders were considered taxable as ordinary income and 78.5% were considered a return of capital for federal income tax purposes. For the nine months ended September 30, 2013, 100.0% of distributions paid to stockholders were considered capital gain for federal income tax purposes as a result of the gain on the sale of our unconsolidated senior housing joint venture. No amounts distributed to stockholders for the nine months ended September 30, 2014 and 2013 were required to be or have been treated by the Company as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in the Company’s advisory agreement. The distribution of new common shares to recipients is non-taxable.

Refer to Note 11, “Related Party Arrangements,” for information on distributions paid to the Advisor in connection with restricted stock shares received under the Advisor Expense Support Agreement.

Redemptions During the nine months ended September 30, 2014 and 2013, the Company received requests for the redemption of common stock of an aggregate of 0.2 million shares and 0.08 million shares, respectively, all of which were approved for redemption at an average price of $9.13 and $9.27, respectively, and for a total of approximately $2.1 million and $0.7 million, respectively.

 

33


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

13. Equity (continued)

 

Other comprehensive income (loss) — The following table reflects the effect of derivative financial instruments held by Company, or its equity method investments, and included in the condensed consolidated statements of comprehensive loss for the quarter and nine months ended September 30, 2014 and 2013 (in thousands):

 

Derivative Financial

Instrument

   Gain (loss) recognized in
other comprehensive loss

on derivative  financial
instrument

(Effective Portion)
   

Location of

gain (loss)
reclassified

into earnings
(Effective
Portion)

   Gain (loss) reclassified
from AOCI into earnings

(Effective Portion)
 
     Quarter Ended
September 30,
         Quarter Ended September 30,  
     2014     2013          2014      2013  

Interest rate swaps

   $ 224      $ (1,230   Not applicable    $ —         $ —     

Interest rate cap held by unconsolidated joint venture

     (2     —        Not applicable      —           —     

Interest rate swap held by unconsolidated joint venture

     —          (69   Not applicable      —           —     
  

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ 222      $ (1,299      $ —         $ —     
  

 

 

   

 

 

      

 

 

    

 

 

 

Derivative Financial

Instrument

   Gain (loss) recognized in
other comprehensive loss

on derivative financial
instrument

(Effective Portion)
   

Location of

gain (loss)
reclassified

into earnings
(Effective
Portion)

   Gain (loss) reclassified
from AOCI into earnings

(Effective Portion)
 
     Nine Months Ended
September 30,
         Nine Months Ended
September 30,
 
     2014     2013          2014      2013  

Interest rate swaps

   $ (872   $ (1,230   Not applicable    $ —         $ —     

Interest rate cap held by unconsolidated joint venture

     21        —        Not applicable      —           —     

Interest rate swap held by unconsolidated joint venture

     —          62      Not applicable      —           —     
  

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (851   $ (1,168      $ —         $ —     
  

 

 

   

 

 

      

 

 

    

 

 

 

 

34


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

14. Income Taxes

 

The components of the income tax benefit (expense) for the quarter and nine months ended September 30, 2014 are as follows (in thousands):

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  

Current:

         

Federal

   $ —        $ —         $ —        $ 13   

State

     (37     —           (9     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current benefit (expense)

     (37     —           (9     13   
  

 

 

   

 

 

    

 

 

   

 

 

 

Deferred:

         

Federal

     —          —           —          (25

State

     —          —           —          (6
  

 

 

   

 

 

    

 

 

   

 

 

 

Total deferred expense

     —          —           —          (31
  

 

 

   

 

 

    

 

 

   

 

 

 

Income tax benefit (expense)

   $ (37   $ —         $ (9   $ (18
  

 

 

   

 

 

    

 

 

   

 

 

 

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of September 30, 2014 are as follows:

 

Carryforwards of net operating loss

   $ 1,787   

Prepaid rent

     337   

Valuation allowance

     (2,124
  

 

 

 

Net deferred tax assets

   $ —     
  

 

 

 

A reconciliation of the income tax benefit (expense) computed at the statutory federal tax rate on income before income taxes is as follows (in thousands):

 

     Quarter Ended September 30,  
     2014     2013  

Tax expense computed at federal statutory rate

   $ (4,259     (35.00 )%    $ (806     (35.00 )% 

Benefit of REIT election

     4,259        35.00 %     806        35.00 %

State income tax expense

     (37     (0.30 )%      —          —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (37     (0.30 )%   $ —          —    %
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30,  
     2014     2013  

Tax expense computed at federal statutory rate

   $ (12,957     (35.00 )%    $ (3,130     (35.00 )% 

Benefit of REIT election

     12,957        35.00 %     3,118        34.86 %

State income tax expense

     (9     (0.02 )%      (6     (0.07 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (9     (0.02 )%   $ (18     (0.21 )%
  

 

 

   

 

 

   

 

 

   

 

 

 

The tax years 2010 through 2013 remain subject to examination by taxing authorities throughout the United States. The Company analyzed its material tax positions and determined that it has not taken any uncertain tax positions.

 

35


CNL HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

15. Commitments and Contingencies

 

From time to time the Company may be exposed to litigation arising from operations of its business in the ordinary course of business. Management is not aware of any litigation that it believes will have a material adverse impact on the Company’s financial condition or results of operations.

Refer to Note 4, “Real Estate Assets, net,” for additional information on the remaining development budgets for the Company’s senior housing developments.

 

16. Ground and Air Rights Leases

During the nine months ended September 30, 2014 in conjunction with the Glendale MOB detailed in Note 3. “Acquisitions,” the Company acquired interests in a ground lease. The Glendale MOB’s ground lease represents an operating lease with scheduled payments over the life of the respective lease expiring in 2053.

Overall, under the terms of its ground and air rights lease agreements, the Company is responsible for the monthly rental payments. These amounts are billed monthly and recorded as property operating expenses in the accompanying consolidated statements of operations. In some cases, the Company is able to pass this expense through to its tenants as tenant reimbursement income. The Company incurred approximately $0.04 million and $0.1 in ground and air rights lease expense for the quarter and nine months ended September 30, 2014, respectively. For both the quarter and nine months ended September 30, 2013, the Company incurred $0.03 million in ground and air rights lease expense.

The following is a schedule of future minimum lease payments to be paid under the ground and air rights leases for the remainder of 2014, each of the next four years and thereafter, in the aggregate, as of September 30, 2014 (in thousands):

 

2014

   $ 54   

2015

     217   

2016

     220   

2017

     223   

2018

     227   

Thereafter

     21,846   
  

 

 

 
   $ 22,787   
  

 

 

 

 

17. Subsequent Events

During the period from October 1, 2014 through November 3, 2014, the Company received additional subscription proceeds of approximately $63.1 million (6.2 million shares).

The Company’s board of directors declared a monthly cash distribution of $0.0338 and a monthly stock distribution of 0.0025 shares on each outstanding share of common stock on October 1, 2014 and November 1, 2014. These distributions are to be paid and distributed by December 31, 2014.

In November 2014, the Company announced that, effective November 4, 2014, its shares will be offered at $10.58 per share, or $10.06 per share pursuant to the Reinvestment Plan. In connection therewith, the Company’s board of directors increased the amount of monthly cash distributions to $0.0353 per share together with monthly stock distributions remaining at 0.0025 shares of common stock payable to all common stockholders of record as of the close of business on the first business day of each month beginning December 1, 2014. This change allows the Company to maintain its historical annual distribution rate of 4.0% in cash (based on the revised $10.58 offering price) and 3 shares (or 3%) on each 100 outstanding shares of common stock. The new distribution rates are payable to all common stockholders of record as of the close of business of the first day of each month beginning December 1, 2014.

In November 2014, the Company filed an amendment in which it increased the size of the follow-on offering from $750 million to $1 billion.

 

36


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

Caution Concerning Forward-Looking Statements

Certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events, and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.

Important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions, and the following: risks associated with the Company’s investment strategy; a worsening economic environment in the U.S. or globally, including financial market fluctuations; risks associated with real estate markets, including declining real estate values; the availability of proceeds from the Company’s offering of its shares; risks of doing business internationally, including currency risks; the Company’s failure to obtain, renew or extend necessary financing or to access the debt or equity markets; the use of debt to finance the Company’s business activities, including refinancing and risk of rising interest rates and the Company’s failure to comply with debt covenants; the Company’s inability to identify and close on suitable investments; failure to successfully manage growth or integrate acquired properties and operations; the Company’s inability to make necessary improvements to properties on a timely or cost-efficient basis; risks related to property expansions and renovations; risks related to development projects or acquired property value-add conversions, if applicable, including construction delays, cost overruns, the Company’s inability to obtain necessary permits, and/or public opposition to these activities; competition for properties and/or tenants; defaults on or non-renewal of leases by tenants; failure to lease properties on favorable terms or at all; the impact of current and future environmental, zoning and other governmental regulations affecting the Company’s properties; the impact of changes in accounting rules; the impact of regulations requiring periodic valuation of the Company on a per share basis; inaccuracies of the Company’s accounting estimates; unknown liabilities of acquired properties or liabilities caused by property managers or operators; material adverse actions or omissions by any joint venture partners; increases in operating costs and other expenses; uninsured losses or losses in excess of the Company’s insurance coverage; the impact of outstanding and/or potential litigation; risks associated with the Company’s tax structuring; failure to qualify for and maintain the Company’s REIT qualification; and the Company’s inability to protect its intellectual property and the value of its brand.

 

37


For further information regarding risks and uncertainties associated with the Company’s business, and important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, the Company’s quarterly reports on Form 10-Q and the Company’s annual report on Form 10-K, copies of which may be obtained from the Company’s website at www.cnlhealthcareproperties.com.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

 

38


Introduction

The following discussion is based on the unaudited condensed consolidated financial statements as of September 30, 2014 and December 31, 2013. Amounts as of December 31, 2013, included in the unaudited condensed consolidated balance sheets have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated balance sheets and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our annual report on Form 10-K for the year ended December 31, 2013.

Overview

CNL Healthcare Properties, Inc., (the “Company”), is a Maryland corporation incorporated on June 8, 2010 that elected to be taxed as a real estate investment trust (“REIT”) beginning with the year ended December 31, 2012 for U.S. federal income tax purposes. The terms “us,” “we,” “our,” “Company” and “CNL Healthcare Properties” include CNL Healthcare Properties, Inc. and each of its subsidiaries.

We had no operations prior to the commencement of our initial public offering on June 27, 2011 (the “Offering”). The net proceeds from our offering are contributed to CHP Partners, LP, our limited partnership, in exchange for partnership interests. Substantially all of our assets are held by, and substantially all of our operations are conducted through, the limited partnership.

We are externally managed and advised by CNL Healthcare Corp. (our “Advisor”). Our Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf. We have also retained CNL Healthcare Manager Corp. (our “Property Manager”) to manage our properties under a six year property management agreement, which goes until June 8, 2017.

Our investment focus is on acquiring a diversified portfolio of healthcare real estate or real estate-related assets, primarily in the United States, within the senior housing, medical office, post-acute care and acute care asset classes. The types of senior housing that we may acquire include active adult communities (age-restricted and age-targeted housing), independent and assisted living facilities, continuing care retirement communities, and memory care facilities. The types of medical office facilities that we may acquire include medical office buildings, specialty medical and diagnostic service facilities, surgery centers, outpatient rehabilitation facilities, and other facilities designed for clinical services. The types of post-acute care facilities that we may acquire include skilled nursing facilities, long-term acute care hospitals and inpatient rehabilitative hospitals. The types of acute care facilities that we may acquire include general acute care hospitals and specialty surgical hospitals. We view, manage and evaluate our portfolio homogeneously as one collection of healthcare assets with a common goal to maximize revenues and property income regardless of the asset class or asset type.

We primarily expect to lease our properties to third-party tenants under triple-net, net or gross modified lease structures, where the tenant bears all or substantially all of the costs (including cost increases, for real estate taxes, utilities, insurance and ordinary repairs); however, we may also invest through other strategic investment types aimed to maximize stockholder value by generating sustainable cash flow growth and increasing the value of our healthcare assets including leasing properties to wholly-owned taxable REIT subsidiaries (“TRS”) and engaging independent third-party managers to operate the properties as permitted under the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). In addition, we expect most investments will be wholly owned, although, we have and may continue to invest through partnerships with other entities where we believe it is appropriate and beneficial. We have and expect to continue to invest in new property developments or properties which have not reached full stabilization. Finally, we also may invest in and originate mortgage, bridge or mezzanine loans or in entities that make investments similar to the foregoing investment types. We generally make loans to the owners of properties to enable them to acquire land, buildings, or to develop property. In exchange, the owner generally grants us a first lien or collateralized interest in a participating mortgage collateralized by the property or by interests in the entity that owns the property.

 

39


Portfolio Overview

We believe recent demographic trends and compelling supply and demand indicators present a strong case for an investment focus on the acquisition of healthcare real estate or real estate-related assets. We believe that the healthcare sector will continue to provide attractive opportunities as compared to other asset sectors over the long-term. Our healthcare investment portfolio is geographically diversified with properties in 27 states. The map below shows our current property allocations across geographic regions as of November 3, 2014:

 

 

LOGO

As of November 3, 2014, our healthcare investment portfolio consisted of interests in 89 properties, including 54 senior housing communities, 22 medical offices, nine post-acute care facilities and four acute care hospitals. Of our properties held at November 3, 2014, four of our 54 senior housing communities currently have real estate under development and five were owned through an unconsolidated joint venture. The following table summarizes our healthcare portfolio by asset class and investment structure as of November 3, 2014:

 

Type of Investment

   Number of
Investments
     Amount of
Investments
(in millions)
     Percentage
of Total
Investments
 

Consolidated investments:

        

Senior housing leased (1)

     10       $ 157.1         10.0

Senior housing managed (2)

     35         786.2         49.9

Senior housing developments (3)

     4         25.4         1.6

Medical office leased (1)

     22         329.0         20.9

Post-acute care leased (1)

     9         124.4         7.9

Acute care leased (1)

     4         122.1         7.7

Unconsolidated investments:

        

Senior housing managed (4)

     5         31.0         2.0
  

 

 

    

 

 

    

 

 

 
     89       $ 1,575.2         100.0
  

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  Properties that are leased to third-party tenants for which we report rental income from operating leases.
(2)  Senior housing communities are leased to TRSs and managed pursuant to third-party management contracts (i.e. RIDEA structure) where we report resident fees and services, and the corresponding property operating expenses.
(3)  Investments herein represent funding and accrued development costs as of September 30, 2014.
(4)  Properties that are owned through an unconsolidated joint venture and are leased to TRSs and managed pursuant to third-party management contracts (i.e. RIDEA structure). The joint venture is accounted for using the equity method.

 

40


Portfolio Evaluation

We monitor the performance of our tenants and third party operators to stay abreast of any material changes in the operations of the underlying properties by (1) reviewing the current, historical and prospective operating margins (measured by a tenant’s earnings before interest, taxes, depreciation, amortization and facility rent), (2) monitoring trends in the source of our tenants’ revenue, including the relative mix of public payors (including Medicare, Medicaid, etc.) and private payors (including commercial insurance and private pay patients), (3) evaluating the effect of evolving healthcare legislation and other regulations on our tenants’ profitability and liquidity, and (4) reviewing the competition and demographics of the local and surrounding areas in which the tenants operate.

In addition to operating statistics of the underlying properties, when evaluating the performance of our healthcare portfolio within the senior housing and post-acute care asset classes, management reviews occupancy levels and monthly revenue per occupied unit (“RevPOU”), which we define as total revenue divided by average number of occupied units or beds during a month and is a performance metric within these asset classes. Similarly, within the medical office and acute care asset classes, management reviews operating statistics of the underlying properties, including occupancy levels and monthly revenue per square foot. Lastly, when evaluating the performance of our third party operators or developers, management reviews monthly financial statements, property level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits. All of the aforementioned metrics assist us in determining the ability of our properties or operators to achieve market rental rates, to assess the overall performance of our diversified healthcare portfolio, and to review compliance with leases, debt, licensure, real estate taxes, and other collateral.

Furthermore, in our evaluation of the properties that we have purchased and additional properties that we expect to purchase, we consider the operating stage of the investments within the following stages: development, value-add or stabilizing and stabilized. Development properties are those in which we or our joint venture have purchased land for the development of new operating properties. We typically hold rights as the owner or managing member of the development properties while a third-party or our joint venture partner manages the development, construction and certain day-to-day operations of the property subject to our oversight. Stabilizing properties are either developed properties that have been fully constructed and in lease-up phase (typically 18 months post-construction) or existing (“value-add”) properties purchased in which we expect to make capital investments to upgrade or expand. A property is considered stabilized upon the earlier of (i) when the property reaches 85% occupancy for a trailing three month period, or (ii) a two year period from acquisition or completion of development. For those assets that are above an 85% occupancy level and subsequently drop below 85%, they are reclassified to stabilizing until they hit the trailing three month 85% occupancy metric.

We have increased the level of our investment in new ground up development and value-add or stabilizing properties. During the construction and lease up phase, these types of investments are expected to generate limited cash flows from operations and may result in near term downward pressure on our net asset valuation. However, we believe that investing a portion of our capital into these types of properties is beneficial because they are expected to provide a higher yield on cost and higher net asset valuations in the long-term as compared to stabilized acquisitions. Additionally, these types of assets will result in our portfolio having a lower average age, which we believe will enhance our overall market value over the long-term.

Based on revenues as of September 30, 2014, the Company’s portfolio is comprised of 58% stabilized properties and 42% value-add or stabilizing properties, of which 2% are recently completed developments that are currently in the lease-up phase.

 

41


The following table lists our occupancy, RevPOU and revenue per square feet by asset class within our healthcare portfolio as of September 30, 2014:

 

Operating Stage

   Occupancy %     RevPOU      Rent per
Square Feet
 

Value-add or Stabilizing:

       

Senior Housing

     67.6   $ 3,568       $ —     
  

 

 

   

 

 

    

 

 

 

Stabilized:

       

Senior Housing

     89.9   $ 4,157       $ —     
  

 

 

   

 

 

    

 

 

 

Medical Office

     92.7   $ —         $ 2.81   
  

 

 

   

 

 

    

 

 

 

Acute

     100.0   $ —         $ 3.88   
  

 

 

   

 

 

    

 

 

 

Post-Acute(1)

     99.9   $ 6,696       $ 2.67   
  

 

 

   

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) Post-acute is comprised of skilled nursing facilities, which are evaluated based on RevPOU and inpatient rehab hospitals, which are evaluated based on revenue per square feet.

Tenant Lease Expirations

During the nine months ended September 30, 2014, our rental revenues represented approximately 26.7% of our total revenues. As of September 30, 2014, approximately 81.2% of our rental revenues were scheduled to expire in 2019 or later. Based on this, we do not expect lease turnover or any increases in property operating expenses to have a significant impact on our cash flow from operations in the near term.

The following table lists, on an aggregate basis, scheduled expirations for the remainder of 2014, the next 10 years ending December 31st and thereafter on our consolidated healthcare investment portfolio (excludes real estate under development), assuming that none of the tenants exercise any of their renewal options (in thousands, except for number of tenants and percentages) as of September 30, 2014:

 

Year of

Expiration (1)

   Number of
Tenants
   Expiring Rentable
Square Feet
     Expiring
Annualized Base
Rents (2)
     Percentage of
Expiring Annual

Base Rents
 

2014

   19      85       $ 2,160         3.8

2015

   42      96         2,239         3.9

2016

   34      103         2,708         4.8

2017

   16      66         1,462         2.6

2018

   31      97         2,105         3.7

2019

   30      153         4,295         7.6

2020

   8      66         1,318         2.3

2021

   8      36         856         1.5

2022

   15      983         13,889         24.4

2023

   50      589         15,742         27.7

Thereafter

   11      345         10,082         17.7
  

 

  

 

 

    

 

 

    

 

 

 

Total

   264      2,619       $ 56,856         100.0
  

 

  

 

 

    

 

 

    

 

 

 

Weighted Average Remaining Lease Term: (3)

     8.3 years      

 

FOOTNOTES:

 

(1)  Represents current lease expiration and does not take into consideration lease renewals available under existing leases at the option of the tenants.
(2)  Represents the current base rent, excluding tenant reimbursements and the impact of future rent bumps included in leases, multiplied by 12 and included in the year of expiration.
(3)  Weighted average remaining lease term is the average remaining term weighted by annualized current base rents.

 

42


Significant Tenants and Operators

Our real estate portfolio is operated by a mix of national or regional operators and the following represent the significant tenants and operators that lease or manage 5% or more of our rentable space as of September 30, 2014:

 

Tenants and Operators    Number of
Tenants/
Properties
  

Rentable
Square Feet

(in thousands)

     Percentage of
Rentable
Square Feet
    Lease / Operator
Expiration Year

Tenants

          

TSMM Management, LLC

   10      945         36.1   2022

Senior Living Centers

   6      261         10.0   2023

Houston Orthopedic & Spine Hospital

   9      158         6.0   2023

Other tenants (1)

   239      1,255         47.9   2014-2033
  

 

  

 

 

    

 

 

   

Tenants Total

   264      2,619         100.0  
  

 

  

 

 

    

 

 

   

Operators

          

Integrated Senior Living, LLC

   5      1,319         34.3   2024

Prestige Senior Living, LLC

   13      895         23.3   2019

MorningStar Senior Management, LLC

   4      834         21.7   2018

Harbor Retirement Associates, LLC

   3      246         6.4   2023

Jerry Erwin Associates, Inc.

   4      235         6.1   2019

Capital Health Managers

   5      225         5.9   2017

Trinity Lifestyles Management II, LLC

   1      87         2.3   2019
  

 

  

 

 

    

 

 

   

Operators Total

   35      3,841         100.0  
  

 

  

 

 

    

 

 

   

 

FOOTNOTE:

 

(1)  Comprised of various tenants each of which comprise less than 5% of our rentable square footage.

While we are not directly impacted by the performance of the underlying properties leased to third party tenants, we believe that the financial and operational performance of our tenants provides an indication about the health of our tenants and their ability to pay rent. To the extent that our tenants, managers or joint venture partners experience operating difficulties and become unable to generate sufficient cash to make rent payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Our tenants and managers are contractually required to provide this information to us in accordance with their respective lease, management and joint venture agreements. Therefore, in order to mitigate the aforementioned risk, we monitor our investments through a variety of methods determined by the type of property.

We monitor the credit of our tenants to stay abreast of any material changes in quality. We monitor tenant credit quality by (1) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (2) direct interaction with onsite property managers, (3) monitoring news and rating agency reports regarding our tenants (or their parent companies) and their underlying businesses, (4) monitoring the timeliness of rent collections and (5) monitoring lease coverage.

 

43


Liquidity and Capital Resources

General

Our primary source of capital has been and is expected to continue to be proceeds we receive from our Offering. Our principal demands for funds will be for:

 

    the acquisition of real estate and real estate-related assets,

 

    the payment of offering and operating expenses,

 

    the payment of debt service on our outstanding indebtedness, and

 

    the payment of distributions.

Generally, we expect to meet cash needs for items other than acquisitions from our cash flows from operations, and we expect to meet cash needs for acquisitions from net proceeds from our Offering and financings. However, until such time as we are fully invested, we may continue to use proceeds from our Offering and financings to pay a portion of our operating expenses, distributions and debt service.

We intend to strategically leverage our real properties and possibly other assets and use debt as a means of providing additional funds for the acquisition of properties and the diversification of our portfolio. Our ability to increase our diversification through borrowing could be adversely affected by credit market conditions which result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate. We may also be negatively impacted by rising interest rates on any unhedged variable rate debt or the timing of when we seek to refinance existing debt. During times when interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. In addition, we will continue to evaluate the need for additional interest rate swaps on unhedged variable rate debt.

Potential future sources of capital include proceeds from collateralized or uncollateralized financings from banks or other lenders, proceeds from the sale of properties, other assets and undistributed operating cash flows. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

The number of properties, loans and other permitted investments we may acquire or make will depend on the number of shares sold through our Offering of common stock and the resulting amount of the net offering proceeds available for investment.

Sources of Liquidity and Capital Resources

Common Stock Offering

For the nine months ended September 30, 2014 and 2013, we received offering proceeds of approximately $334.0 million (33.0 million shares) and $283.9 million (28.4 million shares), respectively. During the period October 1, 2014 through November 3, 2014, we received additional subscription proceeds of approximately $63.1 million (6.2 million shares).

We expect to continue to raise capital under our Offering until January 30, 2015. In May 2014, we filed our proposed follow-on offering of up to an additional $750 million in shares of common stock, including approximately $37.5 million in shares to be issued pursuant to our distribution reinvestment plan; however, in November 2014, we filed an amendment in which we increased the size of the follow-on offering to $1 billion. It is expected that the follow-on offering will become effective and sales will commence upon the completion of our initial offering at the end of January 2015, subject to the receipt of all necessary regulatory approvals, unless earlier terminated by the board of directors. Even though we have filed another registration statement to sell additional shares prior to the expiration of this registration statement, we expect to continue to sell shares in this offering under this registration statement until the effective date of the subsequent registration statement.

 

44


As of September 30, 2014, we had unused offering proceeds of approximately $83.5 million as cash on hand. We plan to use the available uncommitted cash on hand as of September 30, 2014, as well as additional borrowings and offering proceeds obtained subsequently, to acquire additional healthcare real estate and real estate-related assets in the fourth quarter of 2014.

Borrowings

We have borrowed and intend to continue borrowing money to acquire properties, make loans and other permitted investments, fund ongoing enhancements to our portfolio, and to cover periodic shortfalls between distributions paid and cash flows from operating activities. During the nine months ended September 30, 2014 and 2013, we borrowed proceeds of approximately $357.7 million and $197.6 million, respectively. These amounts were primarily used to acquire additional properties during the respective periods; however, in 2013, approximately $75 million was used to refinance existing debt on the Primrose II bridge loan.

In February 2014, we modified the terms of the Revolving Credit Facility and increased the aggregate maximum principal amount available for borrowing under the Revolving Credit Facility from $120 million to $240 million. In April 2014, we modified the terms of the Revolving Credit Facility and increased the aggregate maximum principal amount available for borrowing under the Revolving Credit Facility from $240 million to $275 million. The Revolving Credit Facility has sizing requirements that govern the total amount that we may borrow at any given time based on the purchase price of our collateral and a metric of debt service coverage. As of September 30, 2014, our total availability was approximately $192.7 million, which is expected to be reduced to approximately $191.0 million in December 2014, unless additional properties are added as collateral, as a result of the sizing metrics resetting to new ratios at year-end.

We may borrow money to pay distributions to stockholders, for working capital and for other corporate purposes. See “Uses of Liquidity and Capital Resources – Distributions” below for additional information related to the payment of distributions with other sources for GAAP purposes. In many cases, we have pledged our assets in connection with our borrowings and intend to encumber assets in connection with additional borrowings. The aggregate amount of long-term financing is not expected to exceed 60% of our total assets on an annual basis. As of September 30, 2014 and December 31, 2013, we had an aggregate debt leverage ratio of approximately 54.2% and 52.9%, respectively, of the aggregate carrying value of our assets.

Refer to Note 10. “Indebtedness” for additional information on our borrowings, including a schedule of future principal payments and maturity dates.

Contributions from Redeemable Noncontrolling Interests

During the nine months ended September 30, 2014, our co-venture partner made cash capital contributions aggregating to approximately $0.6 million. In accordance with the terms of our joint venture agreement relating to the Watercrest at Katy development property, these amounts will be or have been used to fund part of the land acquisition and initial development costs of the development projects. Refer to Note 13, “Equity,” for additional information.

Distributions from Unconsolidated Entities

As of September 30, 2014, we had investments in five properties through an unconsolidated entity. We are entitled to receive quarterly preferred cash distributions to the extent there is cash available to distribute. These distributions are generally received within 45 days after each quarter end.

In August 2014, we acquired our co-venture partner’s 10% interest in the Montecito Joint Venture for approximately $1.6 million. As a result of this transaction, we own 100% of the Montecito Joint Venture, and began consolidating all of the assets, liabilities and results of operations in our consolidated financial statements upon acquisition. Refer to Note 3, “Acquisitions – Purchase of Controlling Interest in Montecito Joint Venture,” for additional information. In July 2013, we completed the sale of our interest in the CHTSunIV joint venture for a sales price of approximately $61.8 million, net of transaction costs, which reflects an aggregate gain of approximately $4.5 million.

 

45


For the nine months ended September 30, 2014, we received approximately $1.5 million of operating distributions from our investments in two unconsolidated entities. Similarly, for the nine months ended September 30, 2013, we received approximately $5.0 million of operating distributions from our investments in three unconsolidated entities. See “Off-Balance Sheet Arrangements” below for additional information related to capital distributions received from the Windsor Manor joint venture during the nine months ended September 30, 2014 of approximately $2.2 million, which resulted from excess proceeds from refinancing the joint venture’s debt.

Net Cash Provided by Operating Activities

We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from the net operating income (“NOI”) from our properties, which primarily is rental income from operating leases, resident fees and services, tenant reimbursement income and interest income less the property operating expenses and property management fees from managed properties. We experienced positive cash flow from operating activities for the nine months ended September 30, 2014 and 2013 of approximately $18.7 million and $3.3 million, respectively.

The difference in cash flows from operating activities for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily the result of the following:

 

    an increase in total revenues and NOI for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, primarily as the result of having 78 consolidated operating properties in 2014 as compared with 40 consolidated operating properties in 2013 coupled with HarborChase of Villages Crossing and Dogwood Forest of Acworth being placed into service in December 2013 and June 2014, respectively, and the positive impact of growth in occupancy rates at these two stabilizing senior housing communities to 67.7% and 40.1%, respectively, as of September 30, 2014;

 

    approximately $3.8 million in asset management fees that were foregone by our Advisor under the Advisor Expense Support Agreement for the nine months ended September 30, 2014 (discussed below), whereas only approximately $0.5 million were foregone during the nine months ended September 30, 2013;

 

    offset by lower distributions from our unconsolidated entities for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013, which was primarily the result of having three unconsolidated entities in 2013 as compared with having two unconsolidated entities in 2014 given the sale of our interest in the CHTSunIV joint venture in July 2013; and

 

    offset by an increase in acquisition fees and expenses during the nine months ended September 30, 2014, in which we acquired 22 consolidated operating properties during the period totaling $559.5 million and built a pipeline of acquisitions for Q4 2014, compared with the nine months ended September 30, 2013, in which we purchased 23 consolidated operating properties totaling $311.4 million. The acquisition fees and expenses were funded from proceeds of our Offering or debt proceeds and are treated as an operating activity in accordance with GAAP.

As we continue to acquire additional properties we expect that cash flows provided by operating activities will continue to grow.

Expense Support Agreements

As discussed above, during the nine months ended September 30, 2014, our cash from operating activities was positively impacted by the Expense Support Agreements, which we entered into with our Advisor and Property Manager commencing on April 1, 2013 and July 1, 2013, respectively, through December 31, 2014 and automatically renews for successive one-year periods thereafter, subject to the right of the Advisor or Property Manager to terminate their respective agreements upon 30 days’ written notice. Pursuant to the Expense Support Agreements, our Advisor and Property Manager have agreed to forgo the payment of fees in cash and accept restricted forfeitable stock for services in an amount equal to the positive excess, if any, of (a) aggregate stockholder cash distributions declared for the applicable quarter, over (b) our aggregate modified funds from operations (as defined in the Expense Support Agreements). The expense support amount is determined for each calendar quarter, on a non-cumulative basis, on each quarter-end date. The Property Manager expense support amount is determined for each calendar quarter, on a non-cumulative basis, after the calculation of the Advisor Expense Support Amount pursuant to the Property Manager Expense Support Agreement on each quarter-end date. For the quarter and nine

 

46


months ended September 30, 2014, our Advisor had forgone approximately $0.9 million and $3.8 million, respectively, in asset management fees under the terms of the Advisor Expense Support Agreement. For the nine months ended September 30, 2013, our Advisor had forgone $0.5 million in asset management fees under the terms of the Advisor Expense Support Agreement. There were no amounts forgone under the Property Manager expense support agreement through September 30, 2014.

Refer to Note 11, “Related Party Arrangements,” for additional information.

Uses of Liquidity and Capital Resources

Acquisitions

During the nine months ended September 30, 2014 and 2013, we acquired 22 and 25 consolidated operating properties for an aggregate purchase price of approximately $524.7 million and $311.4 million, respectively, net of liabilities assumed. The acquired operating properties were spread across our targeted asset classes and located in eight and 11 different states, respectively, which allowed us to expand both the variety of our asset classes and the geographical diversification of our healthcare investment portfolio. In addition, the operating properties acquired during the nine months ended September 30, 2014 increased our total units by 1303. The operating properties acquired during the nine months ended September 30, 2013 increased our total units by 510. Furthermore, during the nine months ended September 30, 2014 and 2013, our total leasable square footage increased by approximately 0.7 million and 0.8 million, respectively. We expect to continuously expand our healthcare investment portfolio in the near term through continued acquisitions.

Development Properties

In connection with our various senior housing developments, we funded approximately $32.9 million and $16.2 million in development costs during the nine months ended September 30, 2014 and 2013, respectively. Pursuant to the development agreements for the other active senior housing communities under development as of September 30, 2014, we expect to fund approximately $91.2 million of additional development and other costs. We expect to fund the remaining development and other costs primarily from construction loans on each development or with proceeds from our Offering. Our Advisor continues to evaluate additional development opportunities.

During the nine months ended September 30, 2014, we made distributions of approximately $2.0 million to a third-party developer, who is a holder of promoted interest related to our HarborChase of Villages Crossing, which has been recorded as a reduction to capital in excess of par value in the accompanying condensed consolidated statement of stockholders’ equity and redeemable noncontrolling interest. No such payments were made during the nine months ended September 30, 2013.

Debt Repayments

During the nine months ended September 30, 2014, we paid approximately $24.1 million of scheduled repayments. During the nine months ended September 30, 2013, we had total repayments of $116.6 million, which was comprised of the early repayment of $40.0 million on the CHTSunIV mezzanine loan, total repayments of $75 million on the Primrose II Bridge loan, and approximately $0.9 million of scheduled repayments. As part of the repayment of the CHTSunIV mezzanine loan, we paid an exit fee of $0.8 million upon extinguishment and expensed an additional $0.2 million in unamortized loan costs as a result of our CHTSunIV mezzanine loan being repaid in full prior to its maturity date.

In August 2014, we repaid the approximate $15 million unsecured bridge loan financing and, in September 2014, we paid approximately $30 million on the Revolving Credit Facility. In November 2014, we repaid an additional $25 million of the outstanding balance on the Revolving Credit Facility, all of which was funded with proceeds from our Offering.

 

47


Stock Issuance and Offering Costs

Under the terms of the Offering, certain affiliates and third-party broker dealers are entitled to receive selling commissions of up to 7% of gross offering proceeds on all shares sold, a marketing support fee of up to 3% of gross offering proceeds, and reimbursement of actual expenses incurred in connection with the Offering. In accordance with our articles of incorporation and the advisory agreement, the total amount of selling commissions, marketing support fees, due diligence expense reimbursements, and organizational and other offering costs to be paid by us may not exceed 15% of the gross aggregate Offering proceeds.

During the nine months ended September 30, 2014 and 2013, we paid approximately $36.6 million and $30.6 million, respectively, of stock issuance and offering costs.

Distributions

In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income. We may make distributions in the form of cash or other property, including distributions of our own securities. Until we have sufficient cash flow from operating activities or funds from operations, we have decided and may continue to make stock distributions or to fund all or a portion of the payment of distributions from other sources; such as from cash flows generated by financing activities, a component of which includes our borrowings and the proceeds of our Offering.

On December 6, 2013, our board of directors determined to increase the amount of monthly cash distributions to $0.0338 per share (from $0.0333 per share) and together with monthly stock distributions of 0.0025 shares of common stock payable to all common stockholders of record as of the close of business on the first business day of each month. The change allowed us to maintain our historical distribution rate of 4% cash and 3% stock on each outstanding share of our common stock based on our then-current public offering price of $10.14. The increase in distributions took effect for stockholders of record on January 1, 2014.

In November 2014, in connection with our determination of the Company’s estimated net asset value per share, we announced that our board of directors increased the amount of monthly cash distributions to $0.0353 per share together with monthly stock distributions of 0.0025 shares of common stock payable to all common stockholders of record as of the close of business on the first business day of each month beginning December 1, 2014. This change allows us to maintain our historical annual distribution rate of 4.0% in cash (based on the revised $10.58 offering price) and 3 shares (or 3%) on each 100 outstanding shares of common stock. The new distribution rates are payable to all common stockholders of record as of the close of business of the first day of each month beginning December 1, 2014.

 

48


The following table represents total cash distributions declared, distributions reinvested and cash distributions per share for nine months ended September 30, 2014 and 2013 (in thousands, except per share data):

 

            Distributions Paid (1)                              

Periods

   Cash
Distributions
per Share
     Total Cash
Distributions
Declared
     Reinvested via
Reinvestment
Plan
     Cash
Distributions
net of
Reinvestment
Proceeds
     Stock
Distributions
Declared
(Shares)
     Stock
Distributions
Declared

(at $10.14
offering price)
     Total Cash
and Stock
Distributions
Declared (2)
     Cash Flows
Provided by
Operating
Activities (3)
 

2014 Quarters

                       

First

   $ 0.1014       $ 6,147       $ 3,349       $ 2,798         455       $ 4,614       $ 10,761       $ 6,277   

Second

     0.1014         7,145         3,916         3,229         529         5,364         12,509         5,035   

Third

     0.1014         8,385         4,630         3,755         621         6,295         14,680         7,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.3042       $ 21,677       $ 11,895       $ 9,782         1,605       $ 16,273       $ 37,950       $ 18,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            Distributions Paid (1)                              

Periods

   Cash
Distributions
per Share
     Total Cash
Distributions
Declared
     Reinvested via
Reinvestment
Plan
     Cash
Distributions
net of
Reinvestment
Proceeds
     Stock
Distributions
Declared
(Shares)
     Stock
Distributions
Declared

(at $10.00
offering
price)
     Total Cash
and Stock
Distributions
Declared (2)
     Cash Flows
Provided by
Operating
Activities (3)
 

2013 Quarters

                       

First

   $ 0.09999       $ 2,099       $ 1,112       $ 987         157       $ 1,574       $ 3,673       $ 212   

Second

     0.09999         2,878         1,544         1,334         216         2,159         5,037         2,964   

Third

     0.09999         4,038         2,151         1,888         303         3,029         7,067         106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.29997       $ 9,015       $ 4,807       $ 4,209         676       $ 6,762       $ 15,777       $ 3,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

49


 

FOOTNOTES:

 

(1)  Represents the amount of cash used to fund distributions and the amount of distributions paid which were reinvested in additional shares through our Reinvestment Plan.
(2)  For the nine months ended September 30, 2014 and 2013, our net loss was approximately $37.0 million and $8.9 million, respectively, while cash distributions declared were approximately $21.7 million and $9.0 million, respectively, and total distributions declared were approximately $38.0 million and $15.8 million, respectively. For the nine months ended September 30, 2014 and 2013, approximately 86% and 35%, respectively, of cash distributions declared to stockholders were considered to be funded with cash provided by operating activities as calculated on a quarterly basis for GAAP purposes and approximately 14% and 65%, respectively, were considered to be funded with other sources (i.e., Offering proceeds). For the nine months ended September 30, 2014 and 2013, approximately 49% and 21%, respectively, of total distributions declared to stockholders were considered to be funded with cash provided by operating activities as calculated on a quarterly basis for GAAP purposes and approximately 51% and 79%, respectively, of total distributions declared to stockholders were considered to be funded with other sources (i.e., Offering proceeds).

For the nine months ended September 30, 2014, 21.5% of distributions paid to stockholders were considered taxable as ordinary income and 78.5% were considered a return of capital for federal income tax purposes. For the nine months ended September 30, 2013, 100.0 of distributions paid to stockholders were considered capital gain for federal income tax purposes as a result of the gain on the sale of our unconsolidated senior housing joint. No amounts distributed to stockholders for the nine months ended September 30, 2014 and 2013 were required to be or have been treated by the Company as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in the Company’s advisory agreement. The distribution of new common shares to recipients is non-taxable.

 

(3)  Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions. For example, GAAP requires that the payment of acquisition fees and costs related to business combinations be classified as a use of cash in operating activities in the statement of cash flows, which directly reduces the measure of cash flows from operations. However, acquisition fees and costs are paid for with proceeds from our offering as opposed to operating cash flows. For the nine months ended September 30, 2014 and 2013, we expensed approximately $15.7 million and $9.6 million in acquisition fees and expenses, respectively, which were paid from the proceeds of our Offering. Additionally, the board of directors also uses other measures such as FFO and MFFO in order to evaluate the level of distributions.

 

50


Common Stock Redemptions

We have adopted a share redemption plan that allows our stockholders who hold shares for at least one year to request that we redeem between 25% and 100% of their shares. If we have sufficient funds available to do so and if we choose, in our sole discretion, to redeem shares, the number of shares we may redeem in any calendar year and the price at which they are redeemed are subject to conditions and limitations, including:

 

    If we elect to redeem shares, some or all of the proceeds from the sale of shares under our distribution reinvestment plan attributable to any quarter may be used to redeem shares presented for redemption during such quarter. In addition, we may use the unused amount of any offering proceeds available for use in future quarters to the extent not used to invest in assets or for other purposes;

 

    No more than 5% of the weighted average number of shares of our common stock outstanding during such 12-month period may be redeemed during such 12-month period; and

 

    Redemption pricing shall not exceed an amount equal to the lesser of (i) the then-current public offering price for our shares of common stock (other than the price at which the shares are sold under our Reinvestment Plan); and (ii) the purchaser price paid by the stockholder.

Our board of directors has the ability, in their sole discretion, to amend or suspend the redemption plan or to waive any specific conditions if it is deemed to be in our best interest.

During the nine months ended September 30, 2014, we received requests for the redemption of common stock totaling approximately $2.1 million, of which $1.2 million was paid in October 2014. Similarly, during the nine months ended September 30, 2013, we received requests for the redemption of common stock totaling approximately $0.7 million, of which approximately $0.3 million was paid in October 2013.

The following tables present a summary of requests received and shares redeemed pursuant to our stock redemption plan during the quarters and nine months ended September 30, 2014 and 2013:

 

2014 Quarters

   First     Second     Third     Total  

Redemptions Requested

     28,343        75,313        129,022        232,678   

Shares Redeemed

     (28,343     (75,313     (129,022     (232,678
  

 

 

   

 

 

   

 

 

   

 

 

 

Pending redemption requests

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Price paid per share

     9.13        9.13        9.13        9.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

2013 Quarters

   First     Second     Third     Total  

Redemptions Requested

     23,565        22,692        29,872        76,129   

Shares Redeemed

     (23,565     (22,692     (29,872     (76,129
  

 

 

   

 

 

   

 

 

   

 

 

 

Pending redemption requests

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Price paid per share

     9.30        9.02        9.43        9.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

51


Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto of our Annual Report on Form 10-K for the year ended December 31, 2013.

As of September 30, 2014, we owned 87 real estate investment properties and our portfolio consisted of 4,712 units operated under management agreements with third-party operators and approximately 2.6 million leasable square feet that was 94.9% leased to third-party tenants.

In understanding our operating results in the accompanying consolidated financial statements, it is important to understand how the growth in our assets has impacted our results. The chart below illustrates our net losses and property-level NOI for the quarter and nine months ended September 30, 2014 and 2013 (in thousands), and the amount invested in properties as of September 30, 2014 and 2013 (in thousands):

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Total revenues

   $ 49,660      $ 14,772      $ 125,399      $ 31,183   

Less:

        

Property operating expenses

     25,716        5,501        64,703        12,049   

Property management fees

     2,358        682        6,118        1,623   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOI

     21,586        8,589        54,578        17,511   

Less:

        

General and administrative expenses

     1,997        1,158        5,689        3,835   

Acquisition fees and expenses

     3,729        6,694        15,726        9,638   

Asset management fees

     2,753        1,208        5,572        2,795   

Depreciation and amortization

     17,550        4,566        44,111        9,448   

Contingent purchase price consideration adjustment

     1,800        —          479        —     

Other expenses, net of other income

     5,924        (2,732     20,022        721   

Income tax expense (benefit)

     37        —          9        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,204   $ (2,305   $ (37,030   $ (8,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Invested in operating properties, end of period

   $ 1,455,295      $ 553,637      $ 1,455,295      $ 553,637   
  

 

 

   

 

 

   

 

 

   

 

 

 

We anticipate using our cash on hand as of September 30, 2014, additional borrowings as well as additional net offering proceeds received through the close of our Offering and through our Follow-On Offering to invest in additional properties. As such, we anticipate additional operating income will be generated in subsequent periods.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of properties, loans and other permitted investments, other than those referred to in the risk factors identified in “Part II, Item 1A” of this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

52


Quarter and nine months ended September 30, 2014 as compared to the quarter and nine months ended September 30, 2013

Rental Income from Operating Leases. Rental income from operating leases was approximately $13.4 million and $33.5 million for the quarter and nine months ended September 30, 2014, respectively, as compared to $7.3 million and $14.8 million for the quarter and nine months ended September 30, 2013, respectively. The increase in rental income from operating leases resulted from our acquisition of six medical office buildings, three post-acute care hospitals and three acute care hospitals subsequent to September 30, 2013 as well as the 13 medical office buildings and one acute care hospital during the nine months ended September 30, 2013 being owned for the entire period. We expect this revenue stream to increase as these investments are held in future periods and we acquire additional properties with operating leases.

Resident Fees and Services. Resident fees and services income was approximately $34.2 million and $86.6 million for the quarter and nine months ended September 30, 2014, respectively, as compared to approximately $6.5 million and $15.4 million for the quarter and nine months ended September 30, 2013, respectively. The increase in resident fees and services is a result of the 25 managed senior housing communities acquired subsequent to September 30, 2013 as well as three managed senior housing communities acquired during the nine months ended September 30, 2013 being owned for the entire period and HarborChase of Villages Crossing and Dogwood Forest of Acworth being placed into service in December 2013 and June 2014, respectively. We expect this revenue stream to increase as these investments are held in future periods, our value-add and completed development properties stabilize and we acquire additional managed senior housing communities.

Tenant Reimbursement Income. Tenant reimbursement income was approximately $2.0 million and $4.8 million, respectively, for the quarter and nine months ended September 30, 2014. Tenant reimbursement income was approximately $1.0 million and $1.0 million, respectively, for the quarter and nine months ended September 30, 2013. This amount is comprised of common area maintenance (“CAM”) revenue and the increase resulted from our acquisition of six medical office buildings, three post-acute care hospitals and three acute care hospitals subsequent to September 30, 2013 as well as the 13 medical office buildings and one acute care hospital during the nine months ended September 30, 2013 being owned for the entire period. We expect this revenue stream to increase as these investments are held in future periods and we acquire additional properties with modified operating leases.

Interest Income on Note Receivable from Related Party. Interest income on note receivable from related party was approximately $0.1 million and $0.5 million for the quarter and nine months ended September 30, 2014. Interest income on note receivable from related party was approximately $0.04 million for both the quarter and nine months ended September 30, 2013. This amount is comprised of interest income on the outstanding amounts of the ADC loan made to Crosland Southeast for the HCA Rutland development beginning in June 2013. Interest income from this loan will not continue since the ADC loan was repaid in August 2014.

Property Operating Expenses. Property operating expenses were approximately $25.7 million and $64.7 million for the quarter and nine months ended September 30, 2014, respectively, compared to approximately $5.5 million and $12.0 million for the quarter and nine months ended September 30, 2013, respectively. This increase is a result of our acquisition of 25 managed senior housing communities, six medical office buildings, three post-acute care hospitals and three acute care hospitals subsequent to September 30, 2013 as well as three managed senior housing communities, 13 medical office buildings and one acute care hospital acquired during the nine months ended September 30, 2013 being owned for the entire period and HarborChase of Villages Crossing and Dogwood Forest of Acworth being placed into service in December 2013 and June 2014, respectively. We expect property operating expenses to increase as these investments are held in future periods, our value-add and completed development properties stabilize and we acquire additional managed properties.

General and Administrative. General and administrative expenses for the quarter and nine months ended September 30, 2014 were approximately $2.0 million and $5.7 million, respectively, as compared to approximately $1.2 million and $3.8 million for the quarter and nine months ended September 30, 2013, respectively. General and administrative expenses were comprised primarily of personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, franchise taxes, accounting and legal fees, and board of director fees and will continue to grow as our asset base increases. The increase in general and administrative expense was primarily attributed to increased costs as a result of the growth of our portfolio. Specifically, we incurred increased personnel expenses reimbursable

 

53


to the Advisor due to increased accounting, legal and administrative activity as a result of the growth of the portfolio and related reporting. We expect increases in general and administrative expenses in the future as we purchase additional real estate properties and the properties acquired during the nine months ended September 30, 2014 are operational for a full period.

Acquisition Fees and Expenses. Acquisition fees and expenses for the quarter and nine months ended September 30, 2014 were approximately $4.3 million and $19.0 million, respectively, of which approximately $0.5 million and $3.3 million, respectively, were capitalized as real estate under development in 2014. We incurred approximately $6.9 million and $9.8 million for the quarter and nine months ended September 30, 2013, respectively, of which approximately $0.2 million and $0.2 million, respectively, were capitalized as real estate under development and approximately, $0.2 million and $0.5 million, respectively, were capitalized as investment in unconsolidated entities. The increase in acquisition fees and expenses resulted from the acquisition of 22 operating properties totaling approximately $559.5 million in investments, during the nine months ended September 30, 2014 as compared with the acquisition of 23 operating properties totaling approximately $311.4 million in investments during the nine months ended September 30, 2013. We expect to incur additional acquisition fees and expenses in the future as we purchase additional real estate or real estate-related assets.

Asset Management Fees. We incurred approximately $3.7 million and $9.5 million in asset management fees payable to our Advisor during the quarter and nine months ended September 30, 2014, respectively, as compared to approximately $1.3 million and $3.4 million for the quarter and nine months ended September 30, 2013, respectively. For the quarter and nine months ended September 30, 2014, approximately $0.9 million and $3.8 million, respectively, in asset management fees were forgone in accordance with the terms of the Expense Support Agreements and approximately $0.1 million and $0.2 million, respectively, were capitalized as real estate under development. As described in Note 11, “Related Party Arrangements,” during the quarter and nine months ended September 30, 2014, asset management fees were reduced by $0.9 million and $3.8 million, respectively, because the shares of restricted stock, which will be accepted by the Advisor as payment for asset management services rendered, were valued at zero— the lowest possible value estimated at vesting since the vesting criteria had not been met. For the nine months ended September 30, 2013, approximately $0.5 million in asset management fees were forgone and settled with issuance of restricted stock in accordance with the Expense Support Agreements. Monthly asset management fees equal to 0.08334% of invested assets are paid to the Advisor for management of our real estate assets, including our pro rata share of our investments in unconsolidated entities, loans and other permitted investments. We expect increases in asset management fees in the future as we purchase additional real estate or real estate-related assets and the properties owned as of September 30, 2014 are operational for a full period; however, a portion of such fees may be settled in the form of forfeitable restricted stock under the Expense Support Agreements.

Property Management Fees. We incurred approximately $3.0 million and $7.0 million in property management fees for the quarter and nine months ended September 30, 2014, respectively, and approximately $0.8 million and $1.8 million for the quarter and nine months ended September 30, 2013, respectively. For the quarter and nine months ended September 30, 2014, approximately $0.6 million and $0.9 million, respectively, were capitalized as real estate under development. For the quarter and nine months ended September 30, 2013, approximately $0.1 million and $0.2 million, respectively, were capitalized as real estate under development. Property management fees generally range from 2% to 5% of property revenues for leased properties depending on the type of property and are paid to third-party managers. However, an oversight fee equal to 1% of property revenues is paid to the Property Manager for those properties managed by a third-party. Overall property management fees increased as a result of the increases in rental income from operating leases and resident fees and services from acquisitions subsequent to September 30, 2013 as well as the properties acquired during the quarter ended September 30, 2013 being owned for the entire nine months ended September 30, 2014. Although we expect total property management fees will increase during 2014, a portion of such fees may be settled in the form of forfeitable restricted stock under the Expense Support Agreements.

 

54


Contingent purchase price consideration adjustment. During the quarter and nine months ended September 30, 2014, the adjustment for contingent purchase price consideration was $1.8 million and $0.5 million, respectively, relating to two separate acquisitions. Based on lower than expected occupancy and revised projections of future net operating income, we revised our fair value estimate of our Capital Health Yield Guaranty receivable by approximately $1.3 million and recorded as a reduction to our operating loss in the accompanying consolidated statements of operations for nine months ended September 30, 2014. Additionally, based on exceeding certain NOI targets on one of the South Bay II communities, we have recognized $1.8 million of expense during the quarter and nine months ended September 30, 2014. There were no such adjustments for contingent purchase price consideration adjustment for the quarter and nine months ended September 30, 2013.

Depreciation and Amortization. Depreciation and amortization expenses for the quarter and nine months ended September 30, 2014 were approximately $17.6 million and $44.1 million, respectively, and approximately $4.6 million and $9.4 million for the quarter and nine months ended September 30, 2013, respectively. Depreciation and amortization expenses are comprised of depreciation and amortization of the buildings, equipment, land improvements and in-place leases related to our real estate portfolio. The increase in depreciation and amortization expense across periods resulted from our acquisition of 25 managed senior housing communities, six medical office buildings, three post-acute care hospitals and three acute care hospitals subsequent to September 30, 2013 as well as three managed senior housing communities, 13 medical office buildings and one acute care hospital acquired during the nine months ended September 30, 2013 being owned for the entire period and HarborChase of Villages Crossing and Dogwood Forest of Acworth being placed into service in December 2013 and June 2014, respectively. We expect depreciation and amortization expense to increase as these investments are held in future periods and we acquire additional properties.

Interest Expense and Loan Cost Amortization. Interest expense and loan cost amortization for the quarter and nine months ended September 30, 2014 were approximately $8.7 million and $22.3 million, respectively, of which $0.2 million and $0.6 million, respectively, was capitalized as development costs relating to our real estate under development. Interest expense and loan cost amortization for the quarter and nine months ended September 30, 2013 was approximately $2.5 million and $7.7 million, respectively, of which approximately $0.5 million and $0.7 million, respectively, were capitalized as development costs relating to our real estate under development. Approximately $5.7 million and $12.9 million of the increase for the quarter and nine months ended September 30, 2014, respectively, was primarily the result of an increase in our average debt outstanding to approximately $845.2 million and $708.5 million, respectively, as compared with approximately $222.0 million and $233.7 million, respectively, for the quarter and nine months ended September 30, 2013. In addition, during the quarter and nine months ended September 30, 2014, we incurred approximately $0.4 million and $1.3 million, respectively, in additional loan costs amortization relating to debt obtained subsequent to September 30, 2013, as well as approximately $0.1 million and $0.4 million, respectively, relating to debt obtained on properties acquired during the nine months ended September 30, 2013. The increase across the nine month periods was partially offset by a write-off of approximately $0.2 million as a loss on the early extinguishment of debt and the payment of an exit fee of approximately $0.8 million upon extinguishment of the CHTSunIV mezzanine loan prior to its maturity date during the nine months ended September 30, 2013.

Equity in Earnings (Loss) of Unconsolidated Entities. Our unconsolidated entities generated losses of approximately $0.2 million and $1.2 million for the quarter and nine months ended September 30, 2014, respectively, relating to our investments in the Windsor Manor and Montecito joint ventures, as compared to earnings of approximately $0.3 million and $1.7 million for the quarter and nine months ended September 30, 2013 relating to our investments in the CHTSunIV, Windsor Manor and Montecito joint ventures. Equity in earnings (loss) from unconsolidated entities is determined using the hypothetical liquidation method book value (“HLBV”) method of accounting, which can create significant variability in earnings or loss from the joint venture while the preferred cash distributions that we anticipate to receive from the joint venture may be more consistent as result of our distribution preferences. The change in equity in earnings (loss) of unconsolidated entities was impacted by the sale of our interest in CHTSunIV in July 2013 and will be further impacted by us purchasing the controlling interest in the Montecito Joint Venture in August 2014, which resulted in the consolidation of this investment.

 

55


Gain on Sale of Investment in Unconsolidated Entity. During the quarter and nine months ended September 30, 2013, we recognized a gain of approximately $4.5 million related to the CHTSunIV Disposition. See “Sources of Liquidity and Capital Resources – Distributions from Unconsolidated Entities” for additional information. There was no sale of unconsolidated entities during the quarter and nine months ended September 30, 2014 nor do we currently expect future sales of investments in unconsolidated entities.

Gain from Purchase of Controlling Interest of Investment in Unconsolidated Entity. During the quarter and nine months ended September 30, 2014, we recognized a gain of approximately $2.8 million related to the purchase of our co-venture partner’s 10% interest in the Montecito Joint Venture for approximately $1.6 million. As a result of this transaction, we own 100% of the Montecito Joint Venture, and began consolidating all of the assets, liabilities and results of operations in our consolidated financial statements upon acquisition. Accordingly, we recorded a step up from our carrying value of the investment in the Montecito Joint Venture to the estimated fair value of the net assets acquired and liabilities assumed. Refer to Note 3, “Acquisitions – Purchase of Controlling Interest in Montecito Joint Venture,” for additional information. There was no change in the controlling interest of unconsolidated entities during the quarter and nine months ended September 30, 2013 nor do we currently expect future changes in control of investments in unconsolidated entities.

Income Tax Benefit (Expense). During the quarter and nine months ended September 30, 2014, we recognized state and federal income tax benefit (expense) related to our properties of approximately $0.04 million and $0.01 million, respectively, as compared to approximately $0.02 million during the nine months ended September 30, 2013. There was no tax expense for the quarter ended September 30, 2013.

 

56


Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, National Association Real Estate Investment Trust (“NAREIT”), promulgated a measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, plus depreciation and amortization of real estate related assets, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. However, FFO and modified funds from operations (“MFFO”), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model) to an expensed-as-incurred model that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP and accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after its acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as MFFO which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

 

57


We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to remove the impact of GAAP straight-line adjustments from rental revenues); accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from our subscription proceeds and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.

 

58


Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust its calculation and characterization of FFO or MFFO.

The following table presents a reconciliation of net loss to FFO and MFFO for the quarter and nine months ended September 30, 2014 and 2013 (in thousands, except per share data):

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net loss

   $ (12,204   $ (2,305   $ (37,030   $ (8,944

Adjustments:

        

Depreciation and amortization

     17,550        4,566        44,111        9,448   

FFO adjustments from unconsolidated entities (6)

     551        359        2,570        2,605   

Gain from change in control of investment in unconsolidated entity

     (2,798     —          (2,798     —     

Gain on sale of investment in unconsolidated entity

     —          (4,486     —          (4,486
  

 

 

   

 

 

   

 

 

   

 

 

 

Total funds from operations

     3,099        (1,866     6,853        (1,377

Acquisition fees and expenses (1)

     3,729        6,694        15,726        9,638   

Straight-line adjustments for leases (2)

     (323     (566     (1,595     (1,403

Amortization of above/below market intangible assets and liabilities (3)

     71        (7     188        (7

Loss on extinguishment of debt (4)

     —          —          —          244   

Adjustments relating to contingent purchase price obligations (5)

     1,800        —          479        —     

MFFO adjustments from unconsolidated entities (6)

     12        5        46        328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Modified funds from operations

   $ 8,388      $ 4,260      $ 21,697      $ 7,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted) (7)

     85,649        44,436        74,348        34,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share (basic and diluted)

   $ (0.14   $ (0.05   $ (0.50   $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

FFO per share (basic and diluted)

   $ 0.04      $ (0.04   $ 0.09      $ (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

MFFO per share (basic and diluted)

   $ 0.10      $ 0.10      $ 0.29      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

FOOTNOTES:

 

(1)  In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. By adding back acquisition expenses, management believes MFFO provides useful supplemental information of its operating performance and will also allow comparability between different real estate entities regardless of their level of acquisition activities. Acquisition expenses include payments to our Advisor or third parties. Acquisition expenses for business combinations under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid or accrued acquisition expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property.

 

59


(2)  Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(3)  Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(4)  Management believes that adjusting for the realized loss on the early extinguishment of debt is appropriate because the write-off of unamortized loan costs is a non-recurring, non-cash adjustment that is not reflective of our ongoing operating performance and aligns results with management’s analysis of operating performance.
(5)  Management believes that the elimination of the adjustments relating to contingent purchase price obligations included in operating income (expense) for GAAP purposes is appropriate because the adjustment is a non-recurring adjustment that is not reflective of our ongoing operating performance and aligns results with management’s analysis of operating performance.
(6)  This amount represents our share of the FFO or MFFO adjustments allowable under the NAREIT or IPA definitions, respectively, calculated using the HLBV method.
(7)  For purposes of determining the weighted average number of shares of common stock outstanding, stock distributions are treated as if they were outstanding as of the beginning of the periods presented.

Off-Balance Sheet Arrangements

In June 2014, our Windsor Manor joint venture refinanced approximately $18 million of its then-current outstanding debt related to five senior housing communities in Iowa of which approximately $11.6 million related to a bridge loan maturing on June 30, 2014 and the approximate $6.4 million remaining related to the extinguishment of joint venture’s other mortgage loans prior to the scheduled expirations. In connection therewith, the joint venture paid an exit fee of approximately $0.5 million upon extinguishment of the mortgage loans. The new loan includes a five year term with monthly principal and interest payments based upon a 25-year amortization and a variable interest rate equal to LIBOR plus 3.5%. In addition, in connection with the refinancing, our Windsor Manor joint venture received aggregate proceeds of $22 million of which approximately $0.4 million were used to pay loan costs associated with the refinancing and the remaining $3.6 million were available for capital distribution to the members. Our Windsor Manor joint venture declared capital distributions of $2.2 million and $1.4 million, respectively, to us and our joint venture partner as a return of capital. These capital distributions were paid to the respective members in the third quarter of 2014.

 

60


Contractual Obligations

The following table presents our contractual obligations and the related payment periods as of September 30, 2014:

 

     Payments Due by Period  
     2014      2015-2016      2017-2018      Thereafter      Total  

Mortgage and other notes payable
(principal and interest)

   $ 9,191       $ 160,481       $ 357,341       $ 332,746       $ 859,759   

Revolving Credit Facility
(principal and interest)

     1,626         191,457         —           —           193,083   

Development contracts on development properties (1)

     33,202         58,023         —           —           91,225   

Ground and air rights leases (2)

     54         437         449         21,846         22,786   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 44,073       $ 410,398       $ 357,790       $ 354,592       $ 1,166,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  The amounts presented above represent accrued development costs as of September 30, 2014 and development costs not yet incurred of the aggregate budgeted development costs, including start-up costs, in accordance with the development agreements, and the expected timing of such costs. The amounts include approximately $86.1 million of contractual obligations with third-party developers and approximately $5.1 million of additional expected development costs that have been included in the respective development budgets.
(2)  Ground and air rights leases are operating leases with scheduled payments over the life of the respective leases and with expirations ranging from 2053 to 2082.

Critical Accounting Policies and Estimates

See Item 1. “Financial Statements” and our Annual Report on Form 10-K for the year ended December 31, 2013 for a summary of our critical accounting policies and estimates.

Recent Accounting Pronouncements

See Item 1. “Financial Information” for a summary of the impact of recent accounting pronouncements.

Subsequent Events

See Item 1. “Financial Information” for a listing of subsequent events.

 

61


Item 3.         Quantitative and Qualitative Disclosures about Market Risks

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and to make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

We may be exposed to foreign currency exchange rate movements in the event that we invest outside of the United States. At such time as we have foreign investments, we will evaluate various foreign currency risk mitigating strategies in an effort to minimize any impact on earnings.

The following is a schedule as of September 30, 2014, of our variable rate debt maturities for the remainder of 2014 and each of the next four years, and thereafter (principal maturities only) (in thousands):

 

    Expected Maturities              
    2014     2015     2016     2017     2018     Thereafter     Total     Fair Value  

Fixed rate debt

  $ 2,040      $ 8,373      $ 8,733      $ 9,135      $ 203,217      $ 142,082      $ 373,580      $ 361,000  (1) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average interest rate on fixed debt

    4.26     4.26     4.26     4.26     4.30     4.18     4.25  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Variable rate debt

  $ 980      $ 6,214      $ 267,817      $ 20,946      $ 85,186      $ 125,483      $ 506,626      $ 508,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average interest rate on variable rate debt

    Libor + 2.73     Libor + 2.73     Libor + 2.73     Libor + 2.61     Libor + 2.57     Libor + 2.57     Libor + 2.71  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

FOOTNOTES:

 

(1) The estimated fair value of our fixed rate debt was determined using discounted cash flows based on market interest rates as of September 30, 2014. We determined market rates through discussions with our existing lenders pricing our loans with similar terms and current rates and spreads.

Management estimates that a one-percentage point increase in LIBOR in 2014 compared to LIBOR rates as of September 30, 2014 would result in additional interest expense on our variable rate debt of approximately $5.1 million for the year ending December 31, 2014. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and actual results will likely vary given that our sensitivity analysis on the effects of changes in LIBOR does not factor in a potential change in variable rate debt levels or any offsetting gains on interest rate swap contracts.

As of September 30, 2014, the Company’s debt is comprised of approximately 42.4% in fixed rate debt, approximately of 30.6% variable rate debt with forward starting interest rate swaps and approximately 27.0% of unhedged variable rate debt (the majority of which is our Revolving Credit Facility). We believe longer term fixed rate debt could be beneficial in a rising interest rate or rising inflation rate environment and as such we continue to evaluate the need for additional interest rate swaps on unhedged variable rate debt.

 

62


Item 4.         Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there were no changes in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1.         Legal Proceedings - None

Item 1A.      Risk Factors

Except as set forth below, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Development and stabilizing properties are expected to initially generate limited cash flows.

We have increased the level of our investment in new ground-up development and value-add or stabilizing properties. During the construction and lease-phase, these types of investments are expected to initially generate limited cash flows, FFO and MFFO and may result in near term downward pressure on our net asset valuation.

Our long-term leases may not result in fair market lease rates over time; therefore, our income and our distributions could be lower than if we did not enter into long-term leases.

We typically enter into long-term leases with tenants of certain of our properties. Our long-term leases would likely provide for rent to increase over time. However, if we do not accurately judge the potential for increases in market rental rates, we may set the terms of these long-term leases at levels less than then-current market rental rates even after contractual rent increases. Further, we may have no ability to terminate those leases or to adjust the rent to then-prevailing market rates. As a result, our income and distributions could be lower than if we did not enter into long-term leases.

Medical office building properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on your investment.

Our medical office building properties may have vacancies as a result of a tenant’s default under its lease or the expiration of tenant leases. If a high rate of vacancies occur and persist, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce your return.

 

63


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

Unregistered Sales of Equity Securities

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, and we did not repurchase any of our securities.

Secondary Sales of Registered Shares between Investors

In July 2014, we became aware of transfers of 1,039 shares by investors. The shares were transferred at a sales price of $8.57 per share. We are not aware of any other transfers of shares by investors for the nine months ended September 30, 2014 and we are not aware of any other trades of our shares, other than previous purchases made in our public offerings and redemptions of shares by us.

Issuer Purchases of Equity Securities

The following table presents details regarding our repurchase of securities between July 1, 2014 and September 30, 2014:

 

Period

   Total
number

of shares
purchased
     Average
price paid
per share
     Total number
of shares
purchased as
part of a
publically
announced plan
     Maximum
number of shares
that may yet be
purchased under
the plan
(1)
 

July 1, 2014 through July 31, 2014

     —           —           —           1,520,016   

August 1, 2014 through August 31, 2014

     —           —           —           1,555,020   

September 1, 2014 through September 30, 2014

     232,678       $ 9.13         232,678         1,465,804   
  

 

 

       

 

 

    

Total

     232,678       $ 9.13         232,678      
  

 

 

       

 

 

    

 

FOOTNOTE:

 

(1)  This represents the maximum number of shares which can be redeemed under the redemption plan is subject to a five percent limitation in a rolling 12-month period as described above. However, we are not obligated to redeem such amounts and this does not take into account the amount the board of directors has determined to redeem or whether there are sufficient proceeds under the redemption plan. Under the redemption plan, we can, at our discretion, use the full amount of the proceeds from the sale of shares under our Reinvestment Plan attributable to any month to redeem shares presented for redemption during such month. Any amount of Offering proceeds which is available for redemptions but which is unused may be carried over to the next succeeding calendar quarter for use in addition to the amount of Offering proceeds and Reinvestment Plan proceeds that would otherwise be available for redemptions.

 

64


Use of Proceeds from Registered Securities

On June 27, 2011, our Registration Statement (File No. 333-168129), covering a public offering of up to 300,000,000 shares of common stock, was declared effective by the SEC, and our Offering commenced and is ongoing. The use of proceeds from our Offering was as follows as of September 30, 2014 (in thousands, except shares):

 

     Total     Payments to
Affiliates
(2)
    Payments to
Others
 

Shares registered

     300,000,000       

Aggregate price of offering amount registered

   $ 3,000,000       

Shares sold (1)

     91,188,140       

Aggregate amount sold (3)

   $ 893,522       

Offering expenses (4)

     (103,161   $ (64,821   $ (38,340
  

 

 

     

Net offering proceeds to the issuer

     790,361       

Proceeds from borrowings, net of loan costs

     1,014,968       
  

 

 

     

Total net offering proceeds and borrowings

     1,805,329       

Purchases of real estate and development costs

     (1,475,262     —          (1,475,262

Repayment of borrowings

     (173,710     —          (173,710

Payment of acquisition fees and expenses

     (51,120     (32,860     (18,260

Investments in unconsolidated entities

     (9,509     —          (9,509

Deposits on real estate

     (2,950     —          (2,950

Distribution to holder of promoted interest

     (2,000     —          (2,000

Payment of distributions

     (3,431     (15     (3,416

Operating expenses (5)

     (1,801     (1,466     (335

Payment of lender deposits

     (1,417     —          (1,417

Redemption of common stock

     (375     —          (375

Payment of leasing costs

     (271     —          (271
  

 

 

     

Unused proceeds from Offering and borrowings

   $ 83,483       
  

 

 

     

 

FOOTNOTES:

 

(1)  Excludes 22,222 unregistered shares of our common stock sold to the Advisor in June 2010 and approximately 2.9 million shares issued as stock distributions as of September 30, 2014.
(2)  Represents direct or indirect payments to directors, officers, or general partners of the issuer or their associates; to persons owning 10% or more of any class of equity securities of the issuer; and to affiliates of the issuer.
(3)  Excludes dividend reinvestment proceeds of approximately $21.3 million.
(4)  Offering expenses paid to affiliates includes selling commissions and marketing support fees paid to the Managing Dealer of our Offering (all or a portion of which may be paid to unaffiliated participating brokers by the Managing Dealer). Reimbursements to our Advisor of expenses of the Offering that it has incurred on our behalf from unrelated parties such as legal fees, auditing fees, printing costs, and registration fees are included in payments to others for purposes of this table.
(5)  Until such time as we have sufficient operating cash flows from our assets, we will pay distributions, debt service and/or operating expenses from net proceeds of our Offering and borrowings. The amounts presented above represent the net proceeds used for such purposes as of September 30, 2014.

We intend to pay offering expenses, acquire properties and make other permitted investments with proceeds from the Offering. In addition, we have paid, and until such time as we have sufficient operating cash flows from our assets, we will continue to pay distributions and operating expenses from our net proceeds from our Offering.

 

65


Item 3.         Defaults Upon Senior Securities - None

Item 4.         Mine Safety Disclosure – Not Applicable

Item 5.         Other Information - None

Item 6.         Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

 

66


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 13th day of November 2014.

 

CNL HEALTHCARE PROPERTIES, INC.
By:  

/s/ Stephen H. Mauldin

  STEPHEN H. MAULDIN
  Chief Executive Officer
  (Principal Executive Officer)
By:  

/s/ Joseph T. Johnson

  JOSEPH T. JOHNSON
  Senior Vice President, Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

67


EXHIBIT INDEX

 

Exhibit No.    Description
31.1    Certification of Chief Executive Officer of CNL Healthcare Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2    Certification of Chief Financial Officer of CNL Healthcare Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1    Certification of Chief Executive Officer and Chief Financial Officer of CNL Healthcare Properties, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101    The following materials from CNL Healthcare Properties, Inc. Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of Operations, (iii) Condensed Consolidated Statement of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest, (v) Condensed Consolidated Statement of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.

 

68