Griffin-American Healthcare REIT III, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Griffin-American Healthcare REIT III, Inc.	ex311-2015xq210xqgahr3.htm
EX-32.2 - EXHIBIT 32.2 - Griffin-American Healthcare REIT III, Inc.	ex322-2015xq210xqgahr3.htm
EX-31.2 - EXHIBIT 31.2 - Griffin-American Healthcare REIT III, Inc.	ex312-2015xq210xqgahr3.htm
EX-32.1 - EXHIBIT 32.1 - Griffin-American Healthcare REIT III, Inc.	ex321-2015xq210xqgahr3.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015



¨	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: 000-55434

GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

(Exact name of registrant as specified in its charter)



Maryland		46-1749436
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

18191 Von Karman Avenue, Suite 300, Irvine, California		92612
(Address of principal executive offices)		(Zip Code)

(949) 270-9200

(Registrant’s telephone number, including area code)

Not Applicable

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

___________________________________________________

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

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

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



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

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

As of August 7, 2015, there were 189,142,731 shares of common stock of Griffin-American Healthcare REIT III, Inc. outstanding.

Table of Contents

GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

(A Maryland Corporation)

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014	4
Condensed Consolidated Statements of Equity for the Six Months Ended June 30, 2015 and 2014	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures About Market Risk	55
Item 4. Controls and Procedures	56

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	57
Item 1A. Risk Factors	57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures	60
Item 5. Other Information	60
Item 6. Exhibits	61
Signatures	62

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2015 and December 31, 2014

(Unaudited)



	June 30,			December 31,
	2015			2014
ASSETS
Real estate investments, net	$	799,519,000		$	249,029,000
Real estate notes receivable, net	61,307,000			—
Cash and cash equivalents	728,026,000			504,894,000
Accounts and other receivables, net	6,100,000			40,314,000
Restricted cash	1,755,000			245,000
Real estate and escrow deposits	7,329,000			6,250,000
Identified intangible assets, net	76,720,000			29,636,000
Other assets, net	4,516,000			1,316,000
Total assets	$	1,685,272,000		$	831,684,000

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans payable, net	$	54,014,000		$	16,959,000
Accounts payable and accrued liabilities	19,778,000			5,924,000
Accounts payable due to affiliates	783,000			577,000
Identified intangible liabilities, net	1,032,000			841,000
Security deposits, prepaid rent and other liabilities	8,988,000			1,847,000
Total liabilities	84,595,000			26,148,000

Commitments and contingencies (Note 10)

Redeemable noncontrolling interest (Note 11)	2,000			2,000

Stockholders' equity:
Preferred stock, $0.01 par value per share; 200,000,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.01 par value per share; 1,000,000,000 shares authorized; 187,987,190 and 91,623,241 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively	1,879,000			916,000
Additional paid-in capital	1,688,680,000			821,043,000
Accumulated deficit	(89,884,000		)	(16,425,000		)
Total stockholders' equity	1,600,675,000			805,534,000
Total liabilities, redeemable noncontrolling interest and stockholders' equity	$	1,685,272,000		$	831,684,000

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

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2015 and 2014

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Real estate revenue	$	15,065,000		$	24,000		$	27,828,000		$	24,000
Resident fees and services	2,819,000			—			2,819,000			—
Total revenues	17,884,000			24,000			30,647,000			24,000
Expenses:
Property operating expenses	6,663,000			5,000			10,303,000			5,000
General and administrative	2,401,000			222,000			5,168,000			268,000
Acquisition related expenses	13,267,000			324,000			22,675,000			324,000
Depreciation and amortization	8,135,000			13,000			12,808,000			13,000
Total expenses	30,466,000			564,000			50,954,000			610,000
Loss from operations	(12,582,000		)	(540,000		)	(20,307,000		)	(586,000		)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt premium)	(560,000		)	—			(957,000		)	—
Interest income	299,000			—			323,000			—
Net loss	(12,843,000		)	(540,000		)	(20,941,000		)	(586,000		)
Less: net income attributable to redeemable noncontrolling interest	—			(1,000		)	—			—
Net loss attributable to controlling interest	$	(12,843,000	)	$	(541,000	)	$	(20,941,000	)	$	(586,000	)
Net loss per common share attributable to controlling interest — basic and diluted	$	(0.07	)	$	(0.47	)	$	(0.12	)	$	(0.99	)
Weighted average number of common shares outstanding — basic and diluted	187,460,097			1,152,933			176,494,837			590,701
Distributions declared per common share	$	0.15		$	0.08		$	0.30		$	0.08

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

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)



	Common Stock
	Number of Shares		Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders' Equity
BALANCE — December 31, 2014	91,623,241		$	916,000		$	821,043,000		$	(16,425,000	)	$	805,534,000
Issuance of common stock	93,632,371		936,000			932,904,000			—			933,840,000
Offering costs — common stock	—		—			(91,133,000		)	—			(91,133,000		)
Issuance of vested and nonvested restricted common stock	7,500		—			15,000			—			15,000
Issuance of common stock under the DRIP	2,804,888		28,000			26,618,000			—			26,646,000
Repurchase of common stock	(80,810	)	(1,000		)	(802,000		)	—			(803,000		)
Amortization of nonvested common stock compensation	—		—			35,000			—			35,000
Distributions declared	—		—			—			(52,518,000		)	(52,518,000		)
Net loss	—		—			—			(20,941,000		)	(20,941,000		)
BALANCE — June 30, 2015	187,987,190		$	1,879,000		$	1,688,680,000		$	(89,884,000	)	$	1,600,675,000



	Stockholders' Equity
	Common Stock
	Number of Shares	Amount		Additional Paid-In Capital			Accumulated Deficit			Total Stockholders' Equity			Noncontrolling Interest			Total Equity
BALANCE — December 31, 2013	22,222	$	—	$	200,000		$	—		$	200,000		$	2,000		$	202,000
Issuance of common stock	4,552,960	46,000		45,377,000			—			45,423,000			—			45,423,000
Offering costs — common stock	—	—		(5,267,000		)	—			(5,267,000		)	—			(5,267,000		)
Issuance of vested and nonvested restricted common stock	10,000	—		20,000			—			20,000			—			20,000
Issuance of common stock under the DRIP	1,130	—		11,000			—			11,000			—			11,000
Amortization of nonvested common stock compensation	—	—		13,000			—			13,000			—			13,000
Reclassification of noncontrolling interest	—	—		—			—			—			(2,000		)	(2,000		)
Distributions declared	—	—		—			(171,000		)	(171,000		)	—			(171,000		)
Net loss	—	—		—			(586,000		)	(586,000		)	—			(586,000		)
BALANCE — June 30, 2014	4,586,312	$	46,000	$	40,354,000		$	(757,000	)	$	39,643,000		$	—		$	39,643,000

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

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)



	Six Months Ended June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(20,941,000	)	$	(586,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,808,000			13,000
Other amortization (including deferred financing costs, above/below market leases, leasehold interests, debt premium and real estate notes receivable loan costs)	676,000			(1,000		)
Deferred rent	(999,000		)	(1,000		)
Stock based compensation	50,000			33,000
Acquisition fees paid in stock	501,000			14,000
Share discounts	636,000			90,000
Bad debt expense	42,000			—
Change in fair value of contingent consideration	(580,000		)	—
Changes in operating assets and liabilities:
Accounts and other receivables	(4,348,000		)	(63,000		)
Other assets	(484,000		)	(187,000		)
Accounts payable and accrued liabilities	6,486,000			248,000
Accounts payable due to affiliates	620,000			—
Security deposits, prepaid rent and other liabilities	(264,000		)	(24,000		)
Net cash used in operating activities	(5,797,000		)	(464,000		)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments	(565,472,000		)	(5,502,000		)
Acquisition of real estate notes receivable	(60,217,000		)	—
Loan costs on real estate notes receivable	(1,273,000		)	—
Capital expenditures	(544,000		)	—
Restricted cash	(1,510,000		)	—
Real estate and escrow deposits	(1,079,000		)	(200,000		)
Net cash used in investing activities	(630,095,000		)	(5,702,000		)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on mortgage loans payable	(313,000		)	—
Proceeds from issuance of common stock	975,121,000			43,194,000
Deferred financing costs	(523,000		)	—
Repurchase of common stock	(803,000		)	—
Security deposits	536,000			—
Payment of offering costs	(95,404,000		)	(4,856,000		)
Distributions paid	(19,590,000		)	(13,000		)
Net cash provided by financing activities	859,024,000			38,325,000
NET CHANGE IN CASH AND CASH EQUIVALENTS	223,132,000			32,159,000
CASH AND CASH EQUIVALENTS — Beginning of period	504,894,000			202,000
CASH AND CASH EQUIVALENTS — End of period	$	728,026,000		$	32,361,000

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)



	Six Months Ended June 30,
	2015		2014
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	782,000	$	—
Income taxes	$	9,000	$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accrued capital expenditures	$	488,000	$	—
Investing Activities:
The following represents the increase in certain assets and liabilities in connection with our acquisitions of real estate investments:
Other receivables	$	41,000	$	—
Other assets	$	1,331,000	$	2,000
Mortgage loans payable, net	$	37,481,000	$	—
Accounts payable and accrued liabilities	$	830,000	$	20,000
Security deposits, prepaid rent and other liabilities	$	7,449,000	$	647,000
Financing Activities:
Issuance of common stock under the DRIP	$	26,646,000	$	11,000
Distributions declared but not paid	$	9,274,000	$	147,000
Accrued offering costs due to affiliates	$	1,000	$	201,000
Reclassification of noncontrolling interest	$	—	$	2,000
Receivable from transfer agent	$	—	$	1,915,000
Accrued deferred financing costs	$	56,000	$	—

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

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Months Ended June 30, 2015 and 2014

The use of the words “we,” “us” or “our” refers to Griffin-American Healthcare REIT III, Inc. and its subsidiaries, including Griffin-American Healthcare REIT III Holdings, LP, except where the context otherwise requires.

1. Organization and Description of Business

Griffin-American Healthcare REIT III, Inc., a Maryland corporation, was incorporated on January 11, 2013 and therefore we consider that our date of inception. We were initially capitalized on January 15, 2013. We invest in a diversified portfolio of real estate properties, focusing primarily on medical office buildings, hospitals, skilled nursing facilities, senior housing and other healthcare-related facilities. We also operate healthcare-related facilities utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a "RIDEA" structure (the provisions of the Internal Revenue Code of 1986, as amended, or the Code, authorizing the RIDEA structure were enacted as part of the Housing and Economic Recovery Act of 2008). We may also originate and acquire secured loans and real estate-related investments on an infrequent and opportunistic basis. We generally seek investments that produce current income. We believe we currently qualify, and intend to elect to be treated, as a real estate investment trust, or REIT, under the Code, for federal income tax purposes beginning with our taxable year ended December 31, 2014, and we intend to continue to be taxed as a REIT.

On February 26, 2014, we commenced a best efforts initial public offering, or our offering, in which we initially offered to the public up to $1,750,000,000 in shares of our common stock for $10.00 per share in our primary offering and up to $150,000,000 in shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, for $9.50 per share, aggregating up to $1,900,000,000. We reserved the right to reallocate the shares of common stock we offered in our offering between the primary offering and the DRIP. As such, during our offering, we reallocated an aggregate of $115,000,000 in shares from the DRIP to the primary offering. Accordingly, we offered to the public up to $1,865,000,000 in shares of our common stock in our primary offering and up to $35,000,000 in shares of our common stock pursuant to the DRIP.

On March 12, 2015, we terminated the primary portion of our offering. We continued to offer up to $35,000,000 in shares of our common stock through our offering pursuant to the DRIP until the termination of the DRIP portion of our offering and deregistration of our offering on April 22, 2015. As of April 22, 2015, we had received and accepted subscriptions in our offering for 184,930,598 shares of our common stock, or $1,842,618,000, excluding shares of our common stock issued pursuant to the DRIP. As of April 22, 2015, a total of $18,511,000 in distributions were reinvested that resulted in 1,948,563 shares of our common stock being issued pursuant to the DRIP.

On March 25, 2015, we filed a Registration Statement on Form S-3 under the Securities Act of 1933, as amended, or the Securities Act, to register a maximum of $250,000,000 of additional shares of our common stock pursuant to our distribution reinvestment plan, or the Secondary DRIP. The Registration Statement on Form S-3 was automatically effective with the Securities and Exchange Commission, or the SEC, upon its filing; however, we did not commence offering shares pursuant to the Secondary DRIP until April 22, 2015, following the deregistration of our offering. As of June 30, 2015, a total of$10,869,000 in distributions were reinvested and 1,144,117 shares of our common stock were issued pursuant to the Secondary DRIP.

We conduct substantially all of our operations through Griffin-American Healthcare REIT III Holdings, LP, or our operating partnership. We are externally advised by Griffin-American Healthcare REIT III Advisor, LLC, or Griffin-American Advisor, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our advisor. The Advisory Agreement was effective as of February 26, 2014 and had a one-year term, but was subject to successive one-year renewals upon the mutual consent of the parties. The Advisory Agreement was renewed pursuant to the mutual consent of the parties on February 24, 2015 and expires on February 26, 2016. Our advisor uses its best efforts, subject to the oversight, review and approval of our board of directors, to, among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives. Our advisor performs its duties and responsibilities under the Advisory Agreement as our fiduciary. Our advisor is 75.0% owned and managed by American Healthcare Investors, LLC, or American Healthcare Investors, and 25.0% owned by a wholly owned subsidiary of Griffin Capital Corporation, or Griffin Capital, or collectively, our co-sponsors. Effective December 8, 2014, NorthStar Asset Management Group Inc., or NSAM, through certain of its subsidiaries, and James F. Flaherty III, one of NSAM's partners, acquired ownership interests in American Healthcare Investors. Effective March 1, 2015, American Healthcare Investors is 47.1% owned by AHI Group Holdings, LLC (formerly known as American Healthcare Investors LLC), 45.1% indirectly owned by NSAM and 7.8% owned by Mr. Flaherty. We are not affiliated with Griffin Capital, Griffin Capital

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Securities, Inc., or Griffin Securities, or our dealer manager, NSAM or Mr. Flaherty; however, we are affiliated with Griffin-American Advisor and American Healthcare Investors.

We currently operate through four reportable business segments: medical office buildings, hospitals, senior housing and senior housing — RIDEA. As of June 30, 2015, we had completed 25 real estate acquisitions comprising 58 properties, or 60 buildings, and approximately 3,190,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $882,545,000. In addition, we acquired real estate-related investments for an aggregate purchase price of $60,217,000.

2. Summary of Significant Accounting Policies

The summary of significant accounting policies presented below is designed to assist in understanding our accompanying condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representations of our management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing our accompanying condensed consolidated financial statements.

Basis of Presentation

Our accompanying condensed consolidated financial statements include our accounts and those of our operating partnership, the wholly owned subsidiaries of our operating partnership and all non-wholly owned subsidiaries and any variable interest entities, or VIEs, as defined in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidation, or ASC Topic 810, which we have concluded should be consolidated pursuant to ASC Topic 810.

We operate and intend to continue to operate in an umbrella partnership REIT structure in which our operating partnership, or wholly owned subsidiaries of our operating partnership, will own substantially all of the properties acquired on our behalf. We are the sole general partner of our operating partnership, and as of June 30, 2015 and December 31, 2014, we owned greater than a 99.99% general partnership interest therein. As of June 30, 2015 and December 31, 2014, our advisor owned less than a 0.01% limited partnership interest in our operating partnership.

Because we are the sole general partner of our operating partnership and have unilateral control over its management and major operating decisions (even if additional limited partners are admitted to our operating partnership), the accounts of our operating partnership are consolidated in our condensed consolidated financial statements. All intercompany accounts and transactions are eliminated in consolidation.

Interim Unaudited Financial Data

Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable.

In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2014 Annual Report on Form 10-K, as filed with the SEC on March 19, 2015.

Use of Estimates

The preparation of our accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances.

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.

Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts

We recognize revenue in accordance with ASC Topic 605, Revenue Recognition, or ASC Topic 605. ASC Topic 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Resident fees and services revenue is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges.

In accordance with ASC Topic 840, Leases, minimum annual rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). Differences between real estate revenue recognized and cash amounts contractually due from tenants under the lease agreements are recorded to deferred rent receivable or deferred rent liability, as applicable. Tenant reimbursement revenue, which comprises additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45, Revenue Recognition — Principal Agent Consideration, or ASC Subtopic 605-45. ASC Subtopic 605-45 requires that these reimbursements be recorded on a gross basis as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk. We recognize lease termination fees at such time when there is a signed termination letter agreement, all of the conditions of such agreement have been met and the tenant is no longer occupying the property.

Tenant receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. We also maintain an allowance for deferred rent receivables arising from the straight line recognition of rents. Such allowances are charged to bad debt expense, which is included in general and administrative in our accompanying condensed consolidated statements of operations. Our determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant's financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors.

As of June 30, 2015 and December 31, 2014, we had $42,000 and $0, respectively, in allowance for uncollectible accounts, which was determined necessary to reduce receivables to our estimate of the amount recoverable. As of June 30, 2015 and December 31, 2014, we did not have any allowance for uncollectible accounts for deferred rent receivables and for the three and six months ended June 30, 2015 and 2014, we did not write-off any of our receivables or deferred rent receivables directly to bad debt expense or against the allowance for uncollectible accounts.

Real Estate Notes Receivable, Net

Real estate notes receivable, net consists of mortgage loans collateralized by interests in real property. Interest income on our real estate notes receivable is recognized on an accrual basis over the life of the investment using the interest method and is included in real estate revenue in our accompanying condensed consolidated statements of operations. Direct loan costs are amortized over the term of the loan as an adjustment to the yield on the loan. We record loans at cost. We evaluate the collectability of both interest and principal for each of our loans to determine whether they are impaired. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows using the loan's effective interest rate or to the fair value of the collateral if the loan is collateral dependent. For the three and six months ended June 30, 2015 and 2014, there were no impairment losses recorded.

Accounts Payable and Accrued Liabilities

As of June 30, 2015 and December 31, 2014, accounts payable and accrued liabilities consist primarily of distributions payable of $9,274,000 and $2,992,000, respectively, and accrued property taxes of $3,364,000 and $1,914,000, respectively.

Income Taxes

We believe we currently qualify, and intend to elect to be treated, as a REIT under the Code for federal income tax purposes beginning with our taxable year ended December 31, 2014. To maintain our qualification as a REIT, we must meet

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certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our annual taxable income, excluding net capital gains, to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.

If we fail to maintain our qualification as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service, or the IRS, grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our accompanying condensed consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of June 30, 2015 and December 31, 2014, we did not have any tax benefits and liabilities for uncertain tax positions that we believe should be recognized in our accompanying condensed consolidated financial statements.

We account for deferred income taxes using the asset and liability method and recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets reflect the impact of the future deductibility of intangible assets and operating loss carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes us to change our judgment about the realizability of the related deferred tax asset, is included in income tax expense (benefit) in our accompanying condensed consolidated statements of operations when such changes occur. Deferred tax assets, net of valuation allowances are included in other assets, net in our accompanying condensed consolidated balance sheets. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes us to change our judgment about expected future tax consequences of events, is recorded in income tax expense (benefit) in our accompanying condensed consolidated statements of operations. Deferred tax liabilities are included in security deposits, prepaid rent and other liabilities in our accompanying condensed consolidated balance sheets.

We may be subject to certain state and local income taxes on our income, property or net worth in some jurisdictions, and in certain circumstances we may also be subject to federal excise taxes on undistributed income. In addition, certain activities that we undertake are conducted by subsidiaries, which we elected to be treated as taxable REIT subsidiaries, or TRSs, to allow us to provide services that would otherwise be considered impermissible for REITs. Accordingly, we recognize income tax expense (benefit) for the federal, state and local income taxes incurred by our TRSs for our real estate investments.

See Note 15, Income Taxes, for a further discussion.

Segment Disclosure

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity's reportable segments. As of June 30, 2015, we operated through four reportable business segments: medical office buildings, hospitals, senior housing and senior housing — RIDEA. Prior to May 2015, we operated through three reportable segments; however, with the addition of our first senior housing facilities owned and operated utilizing a RIDEA structure in May 2015, we segregated our operations into four reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions. Prior to December 2014, we operated through two reportable business segments; however, with the addition of our first hospital in December 2014, we segregated our operations into three reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions. Prior to September 2014, we operated through one reportable business segment; however, with the addition of our first senior housing facility in September 2014, we segregated our operations into two reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions.

See Note 17, Segment Reporting, for a further discussion.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the

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consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 supersedes most existing revenue recognition guidance, including industry-specific revenue recognition guidance. Further, the application of ASU 2014-09 permits the use of either the full retrospective or cumulative effect transition approach. In July 2015, the FASB provided for a one-year deferral of the effective date for ASU 2014-09, which is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was interim and annual reporting periods beginning after December 15, 2016. We have not yet selected a transition method nor have we determined the impact the adoption of ASU 2014-09 on January 1, 2018 will have on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, or ASU 2015-02, which amends the consolidation analysis required under ASC Topic 810. Specifically, ASU 2015-02: (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs; (ii) eliminates the presumption that a general partner should consolidate a limited partnership; and (iii) amends the effect of fee arrangements in the primary beneficiary determination. Further, the application of ASU 2015-02 permits the use of either the full retrospective or modified retrospective adoption approach. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. We have not yet selected a transition method nor have we determined the impact the adoption of ASU 2015-02 on January 1, 2016 will have on our consolidated financial statements, if any.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03, which amends the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Amortization of such costs is required to be reported as interest expense, which is consistent with the current presentation in our consolidated financial statements. Further, the application of ASU 2015-03 requires retrospective adjustment of all prior periods presented. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. We do not believe the adoption of ASU 2015-03 on January 1, 2016 will have a material impact on our consolidated financial statements.

3. Real Estate Investments, Net

Our real estate investments, net consisted of the following as of June 30, 2015 and December 31, 2014:



	June 30,			December 31,
	2015			2014
Building and improvements	$	754,923,000		$	237,165,000
Land	51,858,000			12,988,000
Furniture, fixtures and equipment	2,076,000			—
	808,857,000			250,153,000
Less: accumulated depreciation	(9,338,000		)	(1,124,000		)
	$	799,519,000		$	249,029,000

Depreciation expense for the three and six months ended June 30, 2015 was $4,934,000 and $8,321,000, respectively. Depreciation expense for the three and six months ended June 30, 2014 was $11,000.

For the three months ended June 30, 2015, we had capital expenditures of $673,000 on our medical office buildings and $26,000 on our hospitals. We did not have any capital expenditures on our senior housing facilities or senior housing — RIDEA facilities for the three months ended June 30, 2015.

In addition to the acquisitions discussed below, for the six months ended June 30, 2015, we had capital expenditures of $1,006,000 on our medical office buildings and $26,000 on our hospitals. We did not have any capital expenditures on our senior housing facilities or senior housing — RIDEA facilities for the six months ended June 30, 2015.

We reimburse our advisor or its affiliates for acquisition expenses related to selecting, evaluating and acquiring assets. The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the contract purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our directors, including a majority of our independent directors. For the three and six months ended June 30, 2015 and 2014, such fees and expenses noted above did not exceed 6.0% of the contract purchase price of our acquisitions.

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Acquisitions in 2015

For the six months ended June 30, 2015, we completed 14 property acquisitions comprising 36 buildings from unaffiliated parties. The aggregate contract purchase price of these properties was $604,845,000 and we incurred $13,609,000 to our advisor and its affiliates in acquisition fees in connection with these property acquisitions. The following is a summary of our property acquisitions for the six months ended June 30, 2015:



Acquisition(1)	Location	Type	Date Acquired	Contract Purchase Price		Mortgage Loans Payable(2)		Acquisition Fee
Delta Valley ALF Portfolio(3)	Springdale, AR	Senior Housing	01/08/15	$	8,105,000	$	—	$	182,000	(4)
Independence MOB Portfolio	Southgate, KY; Somerville, MA; Morristown and Verona, NJ; and Bronx, NY	Medical Office	01/13/15 and 01/26/15	135,000,000		—		3,038,000		(4)
King of Prussia PA MOB	King of Prussia, PA	Medical Office	01/21/15	18,500,000		9,946,000		416,000		(4)
North Carolina ALF Portfolio	Clemmons, Mooresville, Raleigh and Wake Forest, NC	Senior Housing	01/28/15 and 06/29/15	68,856,000		—		1,549,000		(5)
Orange Star Medical Portfolio	Durango, CO; and Keller, Wharton and Friendswood, TX	Medical Office and Hospital	02/26/15	57,650,000		—		1,297,000		(6)
Kingwood MOB Portfolio	Kingwood, TX	Medical Office	03/11/15	14,949,000		—		336,000		(6)
Mt. Juliet TN MOB	Mount Juliet, TN	Medical Office	03/17/15	13,000,000		—		293,000		(6)
Homewood AL MOB	Homewood, AL	Medical Office	03/27/15	7,444,000		—		167,000		(6)
Paoli PA Medical Plaza	Paoli, PA	Medical Office	04/10/15	24,820,000		14,004,000		558,000		(6)
Glen Burnie MD MOB	Glen Burnie, MD	Medical Office	05/06/15	18,650,000		—		420,000		(6)
Marietta GA MOB	Marietta, GA	Medical Office	05/07/15	13,050,000		—		294,000		(6)
Mountain Crest Senior Housing Portfolio	Elkhart, Hobart and LaPorte, IN; and Niles, MI	Senior Housing — RIDEA	05/14/15 and 06/11/15	55,021,000		—		1,238,000		(6)
Mount Dora Medical Center	Mount Dora, FL	Medical Office	05/15/15	16,300,000		—		367,000		(6)
Nebraska Senior Housing Portfolio	Bennington and Omaha, NE	Senior Housing — RIDEA	05/29/15	66,000,000		—		1,485,000		(6)
Pennsylvania Senior Housing Portfolio	Bethlehem, Boyertown and York, PA	Senior Housing — RIDEA	06/30/15	87,500,000		12,098,000		1,969,000		(6)
Total				$	604,845,000	$	36,048,000	$	13,609,000

___________


(1)	We own 100% of our properties acquired in 2015.


(2)	Represents the principal balance of the mortgage loan payable assumed by us at the time of acquisition.


(3)	On January 8, 2015, we added one additional building to our existing Delta Valley ALF Portfolio. The other two buildings were purchased in September 2014.


(4)	Our advisor and its affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.25% of the contract purchase price, which was paid as

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follows: (i) in cash equal to 2.00% of the contract purchase price; and (ii) the remainder in shares of our common stock in an amount equal to 0.25% of the contract purchase price, at $9.00 per share, the established offering price as of the date of closing, net of selling commissions and dealer manager fees.

(5)

With respect to the acquisition of the first two buildings in North Carolina ALF Portfolio in January 2015, our advisor and its affiliates were paid an acquisition fee of 2.25% of the contract purchase price, which was paid as follows: (i) in cash equal to 2.00% of the contract purchase price; and (ii) the remainder in shares of our common stock in an amount equal to 0.25% of the contract purchase price, at $9.00 per share, the established offering price as of the date of closing, net of selling commissions and dealer manager fees. With respect to the additional two buildings added to our existing North Carolina ALF Portfolio in June 2015, our advisor was paid in cash an acquisition fee of 2.25% of the contract purchase price.


(6)	Our advisor was paid in cash, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.25% of the contract purchase price.

4. Real Estate Notes Receivable, Net

On February 4, 2015, we acquired eight promissory notes at par in the aggregate outstanding principal amount of $60,217,000, or the Notes, comprising four fixed-rate notes in the aggregate outstanding principal amount of $28,650,000, or the Fixed Rate Notes, and four floating rate notes in the aggregate outstanding principal amount of $31,567,000, or the Floating Rate Notes. The Notes evidence interests in a portion of a mezzanine loan that consisted in total of 40 promissory notes in the aggregate outstanding principal amount of $389,852,000. The mezzanine loan is secured by pledges of equity interests in the owners of a portfolio of domestic healthcare properties, which such owners are themselves owned indirectly by a non-wholly owned subsidiary of NorthStar Realty Finance Corp. The interest rate on the Fixed Rate Notes is 6.75% per annum. The interest rate on the Floating Rate Notes is equal to 6.00% per annum above the 30-day LIBOR (increasing to 6.25% per annum above the 30-day LIBOR during the second extension period, if any). As of June 30, 2015, the interest rate in effect on the Floating Rate Notes was 6.19%.

The Notes require monthly interest-only payments. The Fixed Rate Notes are scheduled to mature on December 9, 2019, at which time all unpaid principal, plus accrued and unpaid interest on the Fixed Rate Notes, shall be due in full. The Floating Rate Notes are scheduled to mature on December 9, 2016, at which time all unpaid principal, plus accrued and unpaid interest on the Floating Rate Notes, shall be due in full. The maturity date of the Floating Rate Notes may be extended by three successive one-year extension periods at the borrower’s option, subject to satisfaction of certain conditions. Our advisor was paid, as compensation for services rendered in connection with the acquisition of the Notes, an acquisition fee of $1,204,000, or 2.00% of the aggregate principal amount.

Real estate notes receivable, net consisted of the following as of June 30, 2015 and December 31, 2014:



	June 30,		December 31,
	2015		2014
Real estate notes receivable	$	60,217,000	$	—
Add: unamortized loan costs, net	1,090,000		—
Real estate notes receivable, net	$	61,307,000	$	—

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We did not have any real estate notes receivable as of June 30, 2014. The changes in the carrying amount of real estate notes receivable, net consisted of the following for the six months ended June 30, 2015:



	Amount
Real estate notes receivable, net — December 31, 2014	$	—
Additions:
Acquisition of real estate notes receivable	60,217,000
Loan costs	1,273,000
Deductions:
Amortization of loan costs	(183,000		)
Real estate notes receivable, net — June 30, 2015	$	61,307,000

Amortization expense on loan costs for the three and six months ended June 30, 2015 was $113,000 and $183,000, respectively, which was recorded against real estate revenue in our accompanying condensed consolidated statements of operations. We did not incur any amortization expense on loan costs for the three and six months ended June 30, 2014.

5. Identified Intangible Assets, Net

Identified intangible assets, net consisted of the following as of June 30, 2015 and December 31, 2014:



	June 30,		December 31,
	2015		2014
In-place leases, net of accumulated amortization of $4,530,000 and $339,000 as of June 30, 2015 and December 31, 2014, respectively (with a weighted average remaining life of 9.0 years and 15.9 years as of June 30, 2015 and December 31, 2014, respectively)	$	64,809,000	$	24,987,000
Leasehold interests, net of accumulated amortization of $58,000 and $1,000 as of June 30, 2015 and December 31, 2014, respectively (with a weighted average remaining life of 56.5 years and 75.0 years as of June 30, 2015 and December 31, 2014, respectively)	7,245,000		1,492,000
Above market leases, net of accumulated amortization of $683,000 and $145,000 as of June 30, 2015 and December 31, 2014, respectively (with a weighted average remaining life of 5.6 years and 7.0 years as of June 30, 2015 and December 31, 2014, respectively)	4,666,000		3,157,000
	$	76,720,000	$	29,636,000

Amortization expense for the three months ended June 30, 2015 and 2014 was $3,532,000 and $2,000, respectively, which included $298,000 and $0, respectively, of amortization recorded against real estate revenue for above market leases and $34,000 and $0, respectively, of amortization recorded to property operating expenses for leasehold interests in our accompanying condensed consolidated statements of operations.

Amortization expense for the six months ended June 30, 2015 and 2014 was $5,101,000 and $2,000, respectively, which included $558,000 and $0, respectively, of amortization recorded against real estate revenue for above market leases and $57,000 and $0, respectively, of amortization recorded to property operating expenses for leasehold interests in our accompanying condensed consolidated statements of operations.

The aggregate weighted average remaining life of the identified intangible assets was 13.2 years and 17.9 years as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, estimated amortization expense on the identified intangible assets for the six months ending December 31, 2015 and for each of the next four years ending December 31 and thereafter was as follows:

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Year	Amount
2015	$	13,555,000
2016	15,750,000
2017	6,926,000
2018	5,152,000
2019	4,287,000
Thereafter	31,050,000
	$	76,720,000

6. Other Assets, Net

Other assets, net consisted of the following as of June 30, 2015 and December 31, 2014:



	June 30,		December 31,
	2015		2014
Deferred financing costs, net of accumulated amortization of $266,000 and $87,000 as of June 30, 2015 and December 31, 2014, respectively	$	1,286,000	$	899,000
Prepaid expenses and deposits	1,888,000		177,000
Deferred rent receivables	1,239,000		240,000
Lease commissions, net of accumulated amortization of $1,000 and $0 as of June 30, 2015 and December 31, 2014, respectively	103,000		—
	$	4,516,000	$	1,316,000

Amortization expense on lease commissions for the three and six months ended June 30, 2015 was $1,000. We did not incur any amortization expense on lease commissions for the three and six months ended June 30, 2014.

Amortization expense on deferred financing costs for the three and six months ended June 30, 2015 was $94,000 and $179,000, respectively. We did not incur any amortization expense on deferred financing costs for the three and six months ended June 30, 2014. Amortization expense on deferred financing costs is recorded to interest expense in our accompanying condensed consolidated statements of operations.

As of June 30, 2015, estimated amortization expense on deferred financing costs and lease commissions for the six months ending December 31, 2015 and for each of the next four years ending December 31 and thereafter was as follows:



Year	Amount
2015	$	218,000
2016	437,000
2017	293,000
2018	121,000
2019	119,000
Thereafter	201,000
	$	1,389,000

7. Mortgage Loans Payable, Net

Mortgage loans payable were $52,098,000 ($54,014,000, including premium) and $16,364,000 ($16,959,000, including premium) as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, we had five fixed-rate mortgage loans with effective interest rates ranging from 4.31% to 6.29% per annum and a weighted average effective interest rate of 5.16%. As of December 31, 2014, we had two fixed-rate mortgage loans with effective interest rates ranging from 5.00% to 6.29% per annum and a weighted average effective interest rate of 5.63%.

We are required by the terms of certain loan documents to meet certain reporting requirements. As of June 30, 2015 and December 31, 2014, we were in compliance with all such requirements.

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Mortgage loans payable, net consisted of the following as of June 30, 2015 and December 31, 2014:



	Contractual Interest Rate(1)		Maturity Date	June 30, 2015		December 31, 2014
Fixed-Rate Debt:
Carolina Commons SC MOB	5.00	%	01/01/23	$	8,280,000	$	8,426,000
Premier MOB	6.29	%	01/05/17	7,872,000		7,938,000
King of Prussia PA MOB	4.50	%	12/06/22	9,886,000		—
Paoli PA Medical Plaza	4.31	%	03/05/23	13,962,000		—
Pennsylvania Senior Housing Portfolio	6.07	%	01/01/20	12,098,000		—
Total fixed-rate debt				52,098,000		16,364,000
Add: premium				1,916,000		595,000
Mortgage loans payable, net				$	54,014,000	$	16,959,000

___________


(1)	Represents the per annum interest rate in effect as of June 30, 2015.

We did not have any mortgage loans payable as of June 30, 2014. The changes in the carrying amount of mortgage loans payable, net consisted of the following for the six months ended June 30, 2015:



	Amount
Mortgage loans payable, net — December 31, 2014	$	16,959,000
Additions:
Assumption of mortgage loans payable, net	37,481,000
Deductions:
Scheduled principal payments on mortgage loans payable	(313,000		)
Amortization of premium on mortgage loans payable	(113,000		)
Mortgage loans payable, net — June 30, 2015	$	54,014,000

As of June 30, 2015, the principal payments due on our mortgage loans payable for the six months ending December 31, 2015 and for each of the next four years ending December 31 and thereafter were as follows:



Year	Amount
2015	$	525,000
2016	1,128,000
2017	8,640,000
2018	1,067,000
2019	1,122,000
Thereafter	39,616,000
	$	52,098,000

8. Line of Credit

On August 18, 2014, we, through Griffin-American Healthcare REIT III Holdings, LP, our operating partnership, and certain of our subsidiaries, or the subsidiary guarantors, entered into a credit agreement, or the Credit Agreement, with Bank of America, N.A., or Bank of America, as lender, administrative agent, swing line lender and issuer of letters of credit; Merrill Lynch, Pierce, Fenner & Smith Incorporated and KeyBanc Capital Markets as joint lead arrangers and joint bookrunners; and KeyBank, National Association, or KeyBank, as lender and syndication agent, to obtain a revolving line of credit with an aggregate maximum principal amount of $60,000,000, or our line of credit.

On August 18, 2014, we also entered into separate revolving notes, or the Revolving Notes, with each of Bank of America and KeyBank, whereby we promised to pay the principal amount of each revolving loan and accrued interest to the respective lender or its registered assigns, in accordance with the terms and conditions of the Credit Agreement. The proceeds

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of loans made under our line of credit may be used for working capital, capital expenditures and other general corporate purposes (including, without limitation, property acquisitions and repayment of debt). Our operating partnership may obtain up to $20,000,000 in the form of standby letters of credit and up to the greater of $25,000,000 or 10.0% of the maximum principal amount in the form of swingline loans. Our line of credit matures on August 18, 2017 and may be extended for two one-year periods subject to satisfaction of certain conditions, including payment of an extension fee.

The maximum principal amount of the Credit Agreement, as amended, may be increased up to a total principal amount of $350,000,000, subject to (a) the terms of the Credit Agreement, as amended, and (b) such additional financing being offered and provided by existing lenders or new lenders under the Credit Agreement, as amended.

At our option, loans under the Credit Agreement, as amended, bear interest at per annum rates equal to: (a) (i) the Eurodollar Rate plus (ii) a margin ranging from 1.95% to 2.45% based on our consolidated leverage ratio; or (b) (i) the greater of: (x) the prime rate publicly announced by Bank of America, (y) the Federal Funds Rate (as defined in the Credit Agreement, as amended,) plus 0.50% and (z) the one-month Eurodollar Rate (as defined in the Credit Agreement, as amended,) plus 1.00%, plus (ii) a margin ranging from 0.75% to 1.25% based on our consolidated leverage ratio. Accrued interest under the Credit Agreement, as amended, is payable monthly.

We are required to pay a fee on the unused portion of the lenders’ commitments under the Credit Agreement, as amended, at a per annum rate equal to 0.20% if the average daily used amount is greater than 50.0% of the commitments and 0.25% if the average daily used amount is less than or equal to 50.0% of the commitments.

The Credit Agreement, as amended, contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt by our operating partnership and its subsidiaries and limitations on secured recourse indebtedness. The Credit Agreement, as amended, imposes the following financial covenants, which are specifically defined in the Credit Agreement, as amended: (a) a maximum consolidated leverage ratio; (b) a maximum consolidated secured leverage ratio; (c) a minimum consolidated tangible net worth covenant; (d) a minimum consolidated fixed charge coverage ratio; (e) a minimum unencumbered indebtedness yield; (f) a maximum consolidated unencumbered leverage ratio; (g) a minimum consolidated unencumbered interest coverage ratio; (h) limitations on secured recourse indebtedness; and (i) limitations on consolidated unsecured indebtedness. As of June 30, 2015 and December 31, 2014, we were in compliance with all such covenants and requirements.

The Credit Agreement, as amended, requires us to add additional subsidiaries as guarantors in the event the value of the assets owned by the subsidiary guarantors falls below a certain threshold as set forth in the Credit Agreement, as amended. In the event of default, the lenders have the right to terminate their obligations under the Credit Agreement, as amended, including the funding of future loans, and to accelerate the payment on any unpaid principal amount of all outstanding loans and interest thereon. Additionally, until we achieved a consolidated total asset value of $750,000,000, we were required to enter into pledge agreements, pursuant to which we pledged the capital stock of our subsidiaries which owned the real property to be included in the Unencumbered Property Pool, as such term is defined in the Credit Agreement, as amended. The pledged collateral was released in February 2015.

Our aggregate borrowing capacity under our line of credit was $60,000,000 as of June 30, 2015 and December 31, 2014. As of June 30, 2015 and December 31, 2014, there were no borrowings outstanding and $60,000,000 remained available under our line of credit.

9. Identified Intangible Liabilities, Net

As of June 30, 2015 and December 31, 2014, identified intangible liabilities consisted of below market leases of $1,032,000 and $841,000, respectively, net of accumulated amortization of $198,000 and $35,000, respectively. Amortization expense on below market leases for the three months ended June 30, 2015 and 2014 was $109,000 and $1,000, respectively, and for the six months ended June 30, 2015 and 2014 was $188,000 and $1,000, respectively. Amortization expense on below market leases is recorded to real estate revenue in our accompanying condensed consolidated statements of operations.

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The weighted average remaining life of below market leases was 4.3 years and 4.9 years as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, estimated amortization expense on below market leases for the six months ending December 31, 2015 and for each of the next four years ending December 31 and thereafter was as follows:



Year	Amount
2015	$	170,000
2016	326,000
2017	215,000
2018	128,000
2019	67,000
Thereafter	126,000
	$	1,032,000

10. Commitments and Contingencies

Litigation

We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us, which if determined unfavorably to us, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Environmental Matters

We follow a policy of monitoring our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at our properties, we are not currently aware of any environmental liability with respect to our properties that would have a material effect on our consolidated financial position, results of operations or cash flows. Further, we are not aware of any material environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Other Organizational and Offering Expenses

Our other organizational and offering expenses incurred in connection with our offering (other than selling commissions and the dealer manager fee, which generally represent 7.0% and 3.0%, respectively, of our gross offering proceeds) were paid by our advisor or its affiliates on our behalf. These other organizational and offering expenses included all expenses to be paid by us in connection with our offering. These expenses only became our liability to the extent that other organizational and offering expenses did not exceed 2.0% of the gross offering proceeds from our offering. On March 12, 2015, we terminated the primary portion of our offering. As of June 30, 2015 and December 31, 2014, our advisor and its affiliates had not incurred expenses on our behalf in excess of 2.0% of the gross offering proceeds from our offering. When recorded by us, other organizational expenses were expensed as incurred, as applicable, and offering expenses were charged to stockholders' equity as such amounts were reimbursed to our advisor or its affiliates from the gross proceeds of our offering. See Note 13, Related Party Transactions — Offering Stage, for a further discussion of other organization and offering expenses.

Other

Our other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business, which include calls/puts to sell/acquire properties. In our view, these matters are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

11. Redeemable Noncontrolling Interest

As of June 30, 2015 and December 31, 2014, we owned greater than a 99.99% general partnership interest in our operating partnership and our advisor owned less than a 0.01% limited partnership interest in our operating partnership. The noncontrolling interest of our advisor in our operating partnership that has redemption features outside of our control is accounted for as redeemable noncontrolling interest and is presented in the mezzanine section of our accompanying condensed consolidated balance sheets. See Note 12, Equity — Noncontrolling Interest of Limited Partner in Operating Partnership, for a further discussion. In addition, see Note 13, Related Party Transactions — Liquidity Stage — Subordinated Participation

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Interest — Subordinated Distribution Upon Listing and Note 13, Related Party Transactions — Subordinated Distribution Upon Termination, for a further discussion of the redemption features of the limited partnership units.

We record the carrying amount of redeemable noncontrolling interest at the greater of: (i) the initial carrying amount, increased or decreased for the noncontrolling interest's share of net income or loss and distributions or (ii) the redemption value. The changes in the carrying amount of redeemable noncontrolling interest consisted of the following for the six months ended June 30, 2015 and 2014:



	Six Months Ended June 30,
	2015		2014
Beginning Balance	$	2,000	$	—
Reclassification from equity	—		2,000
Net income attributable to redeemable noncontrolling interest	—		—
Ending Balance	$	2,000	$	2,000

12. Equity

Preferred Stock

Our charter authorizes us to issue 200,000,000 shares of our preferred stock, par value $0.01 per share. As of June 30, 2015 and December 31, 2014, no shares of preferred stock were issued and outstanding.

Common Stock

Our charter authorizes us to issue 1,000,000,000 shares of our common stock, par value $0.01 per share. On January 15, 2013, our advisor acquired 22,222 shares of our common stock for total cash consideration of $200,000 and was admitted as our initial stockholder. We used the proceeds from the sale of shares of our common stock to our advisor to make an initial capital contribution to our operating partnership. On March 12, 2015, we terminated the primary portion of our offering. We continued to offer shares of our common stock in our offering pursuant to the DRIP until the termination of the DRIP portion of our offering and deregistration of our offering on April 22, 2015.

On March 25, 2015, we filed a Registration Statement on Form S-3 under the Securities Act to register a maximum of $250,000,000 of additional shares of our common stock pursuant to the Secondary DRIP. The Registration Statement on Form S-3 was automatically effective with the SEC upon its filing; however, we did not commence offering shares pursuant to the Secondary DRIP until April 22, 2015, following the deregistration of our offering.

Through June 30, 2015, we granted an aggregate of 22,500 shares of our restricted common stock to our independent directors. Through June 30, 2015, we had issued 184,930,598 shares of our common stock in connection with the primary portion of our offering and 3,092,680 shares of our common stock pursuant to the DRIP and the Secondary DRIP. We also repurchased 80,810 shares of our common stock under our share repurchase plan through June 30, 2015. As of June 30, 2015 and December 31, 2014, we had 187,987,190 and 91,623,241 shares of our common stock issued and outstanding, respectively.

Offering Costs

Selling Commissions

Our dealer manager received selling commissions of up to 7.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. Our dealer manager was allowed to re-allow all or a portion of these fees to participating broker-dealers. For the three and six months ended June 30, 2015, we incurred $0 and $62,362,000, respectively, in selling commissions to our dealer manager. For the three and six months ended June 30, 2014, we incurred $3,017,000 in selling commissions to our dealer manager. Such commissions were charged to stockholders' equity as such amounts were reimbursed to our dealer manager from the gross proceeds of our offering.

Dealer Manager Fee

Our dealer manager received a dealer manager fee of up to 3.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. For the three and six months ended June 30, 2015, we incurred $0 and $27,789,000, respectively, in dealer manager fees to our dealer manager. For the three and six months ended June 30, 2014, we incurred $1,339,000 in dealer manager fees to our dealer manager. Such fees

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were charged to stockholders' equity as such amounts were reimbursed to our dealer manager or its affiliates from the gross proceeds of our offering.

Noncontrolling Interest of Limited Partner in Operating Partnership

On January 15, 2013, our advisor made an initial capital contribution of $2,000 to our operating partnership in exchange for 222 limited partnership units. Upon the effectiveness of the Advisory Agreement on February 26, 2014, Griffin-American Advisor became our advisor. As our advisor, Griffin-American Advisor is entitled to special redemption rights of its limited partnership units. Therefore, as of February 26, 2014, such limited partnership units no longer meet the criteria for classification within the equity section of our accompanying condensed consolidated balance sheets and as such were reclassified to the mezzanine section of our accompanying condensed consolidated balance sheets. See Note 11, Redeemable Noncontrolling Interest, for a further discussion.

Distribution Reinvestment Plan

We adopted the DRIP that allowed stockholders to purchase additional shares of our common stock through the reinvestment of distributions at an offering price equal to 95.0% of the primary offering price of our offering, subject to certain conditions. We had registered and reserved $35,000,000 in shares of our common stock for sale pursuant to the DRIP in our offering at an offering price of $9.50 per share, which we terminated on April 22, 2015. On March 25, 2015, we filed a Registration Statement on Form S-3 under the Securities Act to register a maximum of $250,000,000 of additional shares of our common stock pursuant to the Secondary DRIP. The Registration Statement on Form S-3 was automatically effective with the SEC upon its filing; however, we did not commence offering shares pursuant to the Secondary DRIP until April 22, 2015, following the deregistration of our offering.

For the three and six months ended June 30, 2015, $16,351,000 and $26,646,000, respectively, in distributions were reinvested that resulted in 1,721,232 and 2,804,888 shares of our common stock, respectively, being issued pursuant to the DRIP and the Secondary DRIP. For the three and six months ended June 30, 2014, $11,000 in distributions were reinvested that resulted in 1,130 shares of our common stock being issued pursuant to the DRIP. As of June 30, 2015 and December 31, 2014, a total of $29,380,000 and $2,734,000, respectively, in distributions were reinvested that resulted in 3,092,680 and 287,792 shares of our common stock, respectively, being issued pursuant to the DRIP and the Secondary DRIP.

Share Repurchase Plan

Our board of directors has approved a share repurchase plan. Our share repurchase plan allows for repurchases of shares of our common stock by us when certain criteria are met. Share repurchases will be made at the sole discretion of our board of directors. Subject to the availability of the funds for share repurchases, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided, however, that shares subject to a repurchase requested upon the death of a stockholder will not be subject to this cap. Funds for the repurchase of shares of our common stock will come exclusively from the cumulative proceeds we receive from the sale of shares of our common stock pursuant to the DRIP and the Secondary DRIP.

All repurchases will be subject to a one-year holding period, except for repurchases made in connection with a stockholder’s death or “qualifying disability,” as defined in our share repurchase plan. Further, all share repurchases will be repurchased following a one-year holding period at 92.5% to 100% of each stockholder's purchase amount depending on the period of time their shares have been held. At any time we are engaged in an offering of shares of our common stock, the repurchase amount for shares repurchased under our share repurchase plan will always be equal to or lower than the applicable per share offering price. However, if shares of our common stock are repurchased in connection with a stockholder's death or qualifying disability, the repurchase price will be no less than 100% of the price paid to acquire the shares of our common stock from us. Furthermore, our share repurchase plan provides that if there are insufficient funds to honor all repurchase requests, pending requests will be honored among all requests for repurchase in any given repurchase period, as follows: first, pro rata as to repurchases sought upon a stockholder's death; next, pro rata as to repurchases sought by stockholders with a qualifying disability; and, finally, pro rata as to other repurchase requests.

For the three and six months ended June 30, 2015, we received share repurchase requests and repurchased 65,459 and 80,810 shares of our common stock, respectively, for an aggregate of $650,000 and $803,000, respectively, at an average repurchase price of $9.94 and $9.95 per share, respectively. No share repurchases were requested or made for the three and six months ended June 30, 2014. All shares were repurchased using proceeds we received from the sale of shares of our common stock pursuant to the DRIP and the Secondary DRIP.

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As of June 30, 2015, we had received share repurchase requests and had repurchased 80,810 shares of our common stock for an aggregate of $803,000 at an average price of $9.95 per share using proceeds we received from the sale of shares of our common stock pursuant to the DRIP and the Secondary DRIP. As of December 31, 2014, no share repurchases were requested or made.

2013 Incentive Plan

We adopted our incentive plan, pursuant to which our board of directors or a committee of our independent directors may make grants of options, restricted shares of common stock, stock purchase rights, stock appreciation rights or other awards to our independent directors, employees and consultants. The maximum number of shares of our common stock that may be issued pursuant to our incentive plan is 2,000,000 shares.

Through June 30, 2015, we granted an aggregate of 22,500 shares of our restricted common stock, as defined in our incentive plan, to our independent directors in connection with their initial election or re-election to our board of directors, of which 20.0% vested on the grant date and 20.0% will vest on each of the first four anniversaries of the grant date. Shares of our restricted common stock may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions expire upon vesting. Shares of our restricted common stock have full voting rights and rights to distributions.

From the applicable service inception dates to the applicable grant dates, we recognized compensation expense related to the shares of our restricted common stock based on the reporting date fair value, which was estimated at $10.00 per share, the then most recent price paid to acquire a share of common stock in our offering. Beginning on the applicable grant dates, compensation cost related to the shares of our restricted common stock is measured based on the applicable grant date fair value, which we estimated at $10.00 per share, the then most recent price paid to acquire a share of common stock in our offering. Stock compensation expense is recognized from the applicable service inception dates to the vesting date for each vesting tranche (i.e., on a tranche by tranche basis) using the accelerated attribution method.

For the three months ended June 30, 2015 and 2014, we recognized compensation expense of $36,000 and $18,000, respectively, and for the six months ended June 30, 2015 and 2014, we recognized stock compensation expense of $50,000 and $33,000, respectively. ASC Topic 718, Compensation – Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three and six months ended June 30, 2015 and 2014, we did not assume any forfeitures. Stock compensation expense is included in general and administrative in our accompanying condensed consolidated statements of operations.

As of June 30, 2015 and December 31, 2014, there was $188,000 and $88,000, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to nonvested shares of our restricted common stock. As of June 30, 2015, this expense is expected to be recognized over a remaining weighted average period of 2.08 years.

As of June 30, 2015 and December 31, 2014, the weighted average grant date fair value of the nonvested shares of our restricted common stock was $160,000 and $120,000, respectively. A summary of the status of the nonvested shares of our restricted common stock as of June 30, 2015 and December 31, 2014 and the changes for the six months ended June 30, 2015, is presented below:



	Number of Nonvested Shares of our Restricted Common Stock		Weighted Average Grant Date Fair Value
Balance — December 31, 2014	12,000		$	10.00
Granted	7,500		$	10.00
Vested	(3,500	)	$	10.00
Forfeited	—		$	—
Balance — June 30, 2015	16,000		$	10.00
Expected to vest — June 30, 2015	16,000		$	10.00

13. Related Party Transactions

Fees and Expenses Paid to Affiliates

All of our executive officers and our non-independent directors are also executive officers and employees and/or holders of a direct or indirect interest in our advisor, one of our co-sponsors or other affiliated entities. We are affiliated with our

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advisor and American Healthcare Investors; however, we are not affiliated with Griffin Capital, Griffin Securities, NSAM or Mr. Flaherty. We entered into the Advisory Agreement, which entitles our advisor and its affiliates to specified compensation for certain services, as well as reimbursement of certain expenses. In the aggregate, for the three months ended June 30, 2015 and 2014, we incurred $8,654,000 and $1,046,000, respectively, and for the six months ended June 30, 2015 and 2014, we incurred $18,160,000 and $1,220,000, respectively, in fees and expenses to our affiliates as detailed below.

Offering Stage

Other Organizational and Offering Expenses

Our other organizational and offering expenses were paid by our advisor or its affiliates on our behalf. Our advisor or its affiliates were reimbursed for actual expenses incurred up to 2.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. For the three months ended June 30, 2015 and 2014, we incurred $0 and $911,000, respectively, and for the six months ended June 30, 2015 and 2014, we incurred $519,000 and $911,000, respectively, in other organizational and offering expenses to our advisor. Other organizational expenses were expensed as incurred and offering expenses were charged to stockholders' equity as such amounts were reimbursed to our advisor from the gross proceeds of our offering.

Acquisition and Development Stage

Acquisition Fee

Our advisor or its affiliates receive an acquisition fee of up to 2.25% of the contract purchase price, including any contingent or earn-out payments that may be paid, for each property we acquire or 2.0% of the origination or acquisition price, including any contingent or earn-out payments that may be paid, for any real estate-related investment we originate or acquire. Until January 30, 2015, the acquisition fee for property acquisitions was paid as follows: (i) in cash equal to 2.00% of the contract purchase price; and (ii) the remainder in shares of our common stock in an amount equal to 0.25% of the contract purchase price, at the established offering price as of the date of closing, net of selling commissions and dealer manager fees, which was $9.00 per share. Since January 31, 2015, the acquisition fee for property acquisitions is paid in cash equal to 2.25% of the contract purchase price. Our advisor or its affiliates are entitled to receive these acquisition fees for properties and real estate-related investments we acquire with funds raised in our offering including acquisitions completed after the termination of the Advisory Agreement, or funded with net proceeds from the sale of a property or real estate-related investment, subject to certain conditions.

Acquisition fees in connection with the acquisition of properties are expensed as incurred in accordance with ASC Topic 805, Business Combinations, or ASC Topic 805, and included in acquisition related expenses in our accompanying condensed consolidated statements of operations. Acquisition fees in connection with the acquisition of real estate-related investments are capitalized as part of the associated investment in our accompanying condensed consolidated balance sheets.

For the three months ended June 30, 2015 and 2014, we incurred $7,006,000 and $126,000, respectively, and for the six months ended June 30, 2015 and 2014, we incurred $14,900,000 and $126,000, respectively, in acquisition fees to our advisor or its affiliates, which included 0 shares and 1,557 shares of our common stock issued for the three months ended June 30, 2015 and 2014, respectively, and 55,684 shares and 1,557 shares of common stock for the six months ended June 30, 2015 and 2014, respectively.

Development Fee

In the event our advisor or its affiliates provide development-related services, our advisor or its affiliates receive a development fee in an amount that is usual and customary for comparable services rendered for similar projects in the geographic market where the services are provided; however, we will not pay a development fee to our advisor or its affiliates if our advisor or its affiliates elect to receive an acquisition fee based on the cost of such development.

For the three and six months ended June 30, 2015 and 2014, we did not incur any development fees to our advisor or its affiliates.

Reimbursement of Acquisition Expenses

Our advisor or its affiliates are reimbursed for acquisition expenses related to selecting, evaluating and acquiring assets, which are reimbursed regardless of whether an asset is acquired. The reimbursement of acquisition expenses, acquisition fees and real estate commissions paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the contract purchase price or

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total development costs, unless fees in excess of such limits are approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction. For the three and six months ended June 30, 2015 and 2014, such fees and expenses did not exceed 6.0% of the contract purchase price of our acquisitions.

Reimbursements of acquisition expenses are expensed as incurred in accordance with ASC Topic 805 and included in acquisition related expenses in our accompanying condensed consolidated statements of operations. Reimbursements of acquisition expenses in connection with the acquisition of real estate-related investments are capitalized as part of the associated investment in our accompanying condensed consolidated balance sheets.

For the three and six months ended June 30, 2015, we incurred $30,000 in acquisition expenses to our advisor or its affiliates. For the three and six months ended June 30, 2014, we incurred $3,000 in acquisition expenses to our advisor or its affiliates.

Operational Stage

Asset Management Fee

Our advisor or its affiliates are paid a monthly fee for services rendered in connection with the management of our assets equal to one-twelfth of 0.75% of average invested assets, subject to our stockholders receiving distributions in an amount equal to 5.0% per annum, cumulative, non-compounded, of invested capital. For such purposes, average invested assets means the average of the aggregate book value of our assets invested in real estate properties and real estate-related investments, before deducting depreciation, amortization, bad debt and other similar non-cash reserves, computed by taking the average of such values at the end of each month during the period of calculation; and invested capital means, for a specified period, the aggregate issue price of shares of our common stock purchased by our stockholders, reduced by distributions of net sales proceeds by us to our stockholders and by any amounts paid by us to repurchase shares of our common stock pursuant to our share repurchase plan.

For the three and six months ended June 30, 2015, we incurred $1,417,000 and $2,374,000 respectively, in asset management fees to our advisor or its affiliates. We did not incur any asset management fees for the three and six months ended June 30, 2014 as a result of our advisor waiving $2,000 in asset management fees for June 2014. Our advisor agreed to waive a combination of certain acquisition fees and/or asset management fees, or collectively, the Advisory Fees, that may otherwise have been due to our advisor pursuant to our Advisory Agreement, in order to provide us with additional funds to pay distributions to our stockholders prior to our first property acquisition. As such, the asset management fees of $2,000 that would have been incurred in June 2014 were waived by our advisor and an additional $35,000 in acquisition fees and/or asset management fees were waived in subsequent months. Our advisor did not receive any additional securities, shares of our stock, or any other form of consideration or any repayment as a result of the waiver of such asset management fees.

Asset management fees are included in general and administrative in our accompanying condensed consolidated statements of operations.

Property Management Fee

Our advisor or its affiliates may directly serve as property manager of our properties or may sub-contract their property management duties to any third party and provide oversight of such third party property manager. Our advisor or its affiliates are paid a monthly management fee equal to a percentage of the gross monthly cash receipts of such property as follows: (i) a 1.0% property management oversight fee for any stand-alone, single-tenant, net leased property; (ii) a 1.5% property management oversight fee for any property that is not a stand-alone, single-tenant, net leased property and for which our advisor or its affiliates will provide oversight of a third party that performs the duties of a property manager with respect to such property; or (iii) a fair and reasonable property management fee that is approved by a majority of our directors, including a majority of our independent directors, that is not less favorable to us than terms available from unaffiliated third parties for any property that is not a stand-alone, single-tenant, net leased property and for which our advisor or its affiliates will directly serve as the property manager without sub-contracting such duties to a third party.

For the three and six months ended June 30, 2015, we incurred $175,000 and $311,000, respectively, in property management fees to our advisor or its affiliates. For the three and six months ended June 30, 2014, we did not incur any property management fees to our advisor or its affiliates. Property management fees are included in property operating expenses in our accompanying condensed consolidated statements of operations.

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Lease Fees

We pay our advisor or its affiliates a separate fee for any leasing activities in an amount not to exceed the fee customarily charged in arm's-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Such fee is generally expected to range from 3.0% to 6.0% of the gross revenues generated during the initial term of the lease. For the three and six months ended June 30, 2015, we incurred $12,000 in lease fees to our advisor or its affiliates. For the three and six months ended June 30, 2014, we did not incur any lease fees to our advisor or its affiliates. Lease fees are capitalized as lease commissions and included in other assets, net in our accompanying condensed consolidated balance sheets.

Construction Management Fee

In the event that our advisor or its affiliates assist with planning and coordinating the construction of any capital or tenant improvements, our advisor or its affiliates are paid a construction management fee of up to 5.0% of the cost of such improvements. For the three and six months ended June 30, 2015 and 2014, we did not incur any construction management fees to our advisor or its affiliates. Construction management fees are capitalized as part of the associated asset and included in real estate investments, net in our accompanying condensed consolidated balance sheets or are expensed and included in our accompanying condensed consolidated statements of operations, as applicable.

Operating Expenses

We reimburse our advisor or its affiliates for operating expenses incurred in rendering services to us, subject to certain limitations. However, we cannot reimburse our advisor or its affiliates at the end of any fiscal quarter for total operating expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of: (i) 2.0% of our average invested assets, as defined in the Advisory Agreement, or (ii) 25.0% of our net income, as defined in the Advisory Agreement, unless our independent directors determined that such excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient.

For the 12 months ended June 30, 2015, our operating expenses did not exceed this limitation. Our operating expenses as a percentage of average invested assets and as a percentage of net income were 1.3% and (37.2)%, respectively, for the 12 months ended June 30, 2015.

For the three months ended June 30, 2015 and 2014, our advisor or its affiliates incurred operating expenses on our behalf of $14,000 and $6,000, respectively, and for the six months ended June 30, 2015 and 2014, our advisor or its affiliates incurred operating expenses on our behalf of $14,000 and $180,000, respectively. Operating expenses are generally included in general and administrative in our accompanying condensed consolidated statements of operations.

Compensation for Additional Services

Our advisor and its affiliates are paid for services performed for us other than those required to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of compensation for these services has to be approved by a majority of our board of directors, including a majority of our independent directors, and cannot exceed an amount that would be paid to unaffiliated parties for similar services. For the three and six months ended June 30, 2015 and 2014, our advisor and its affiliates were not compensated for any additional services.

Liquidity Stage

Disposition Fees

For services relating to the sale of one or more properties, our advisor or its affiliates are paid a disposition fee up to the lesser of 2.0% of the contract sales price or 50.0% of a customary competitive real estate commission given the circumstances surrounding the sale, in each case as determined by our board of directors, including a majority of our independent directors, upon the provision of a substantial amount of the services in the sales effort. The amount of disposition fees paid, when added to the real estate commissions paid to unaffiliated parties, will not exceed the lesser of the customary competitive real estate commission or an amount equal to 6.0% of the contract sales price. For the three and six months ended June 30, 2015 and 2014, we did not incur any disposition fees to our advisor or its affiliates.

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Subordinated Participation Interest

Subordinated Distribution of Net Sales Proceeds

In the event of liquidation, our advisor will be paid a subordinated distribution of net sales proceeds. The distribution will be equal to 15.0% of the remaining net proceeds from the sales of properties, after distributions to our stockholders, in the aggregate, of: (i) a full return of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) plus (ii) an annual 7.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock, as adjusted for distributions of net sales proceeds. Actual amounts to be received depend on the sale prices of properties upon liquidation. For the three and six months ended June 30, 2015 and 2014, we did not incur any such distributions to our advisor.

Subordinated Distribution Upon Listing

Upon the listing of shares of our common stock on a national securities exchange, in redemption of our advisor's limited partnership units, our advisor will be paid a distribution equal to 15.0% of the amount by which (i) the market value of our outstanding common stock at listing plus distributions paid prior to listing exceeds (ii) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the amount of cash that, if distributed to stockholders as of the date of listing, would have provided them an annual 7.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the date of listing. Actual amounts to be received depend upon the market value of our outstanding stock at the time of listing, among other factors. For the three and six months ended June 30, 2015 and 2014, we did not incur any such distributions to our advisor.

Subordinated Distribution Upon Termination

Pursuant to the Agreement of Limited Partnership, as amended, of our operating partnership, upon termination or non-renewal of the Advisory Agreement, our advisor will also be entitled to a subordinated distribution in redemption of its limited partnership units from our operating partnership equal to 15.0% of the amount, if any, by which (i) the appraised value of our assets on the termination date, less any indebtedness secured by such assets, plus total distributions paid through the termination date, exceeds (ii) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the total amount of cash equal to an annual 7.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the termination date. In addition, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing or other liquidity event, including a liquidation, sale of substantially all of our assets or merger in which our stockholders receive in exchange for their shares of our common stock, shares of a company that are traded on a national securities exchange.

As of June 30, 2015 and 2014, we had not recorded any charges to earnings related to the subordinated distribution upon termination.

Stock Purchase Plans

On March 5, 2014, our Chairman of the Board of Directors and Chief Executive Officer, Jeffrey T. Hanson, our President, Chief Operating Officer and Interim Chief Financial Officer, Danny Prosky, and our Executive Vice President, General Counsel, Mathieu B. Streiff, each executed stock purchase plans, or the 2014 Stock Purchase Plans, whereby they each irrevocably agreed to invest 100% of their net after-tax base salary and cash bonus compensation earned as employees of American Healthcare Investors directly into our company by purchasing shares of our common stock. In addition, on March 5, 2014, our Chief Financial Officer, Shannon K S Johnson, our Senior Vice President — Acquisitions, Stefan K.L. Oh, our Secretary, Cora Lo, and our Vice President — Asset Management, Chris Rooney, each executed similar 2014 Stock Purchase Plans whereby they each irrevocably agreed to invest 15.0%, 15.0%, 10.0% and 15.0%, respectively, of their net after-tax base salaries that were earned as employees of American Healthcare Investors directly into our company by purchasing shares of our common stock. Such arrangements terminated on December 31, 2014.

Effective January 1, 2015, Messrs. Hanson, Prosky, Streiff, Oh and Rooney, and Mses. Johnson and Lo, each adopted a stock purchase plan, or the 2015 Stock Purchase Plans, on terms similar to each of the 2014 Stock Purchase Plans described above. The 2015 Stock Purchase Plans each terminated in connection with the termination of the primary portion of our offering.

Purchases of shares of our common stock pursuant to the 2014 Stock Purchase Plans commenced after the initial release from escrow of the minimum offering amount, beginning with the officers' regularly scheduled payroll payment on May 20,

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2014. The shares of common stock were purchased at a price of $9.00 per share, reflecting the purchase price of the shares in our offering, exclusive of selling commissions and the dealer manager fee.

For the three and six months ended June 30, 2015 and 2014, our officers invested the following amounts and we issued the following shares of our common stock pursuant to the applicable stock purchase plan:



		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Officer's Name	Title	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares
Jeffrey T. Hanson	Chairman of the Board of Directors and Chief Executive Officer	$	—	—	$	10,000	1,103	$	17,000	1,902	$	10,000	1,103
Danny Prosky	President, Chief Operating Officer, Interim Chief Financial Officer and Director	—		—	14,000		1,597	20,000		2,246	14,000		1,597
Mathieu B. Streiff	Executive Vice President, General Counsel	—		—	13,000		1,421	19,000		2,062	13,000		1,421
Shannon K S Johnson	Chief Financial Officer	—		—	3,000		290	1,000		165	3,000		290
Stefan K.L. Oh	Senior Vice President — Acquisitions	—		—	3,000		290	2,000		168	3,000		290
Cora Lo(1)	Secretary	—		—	—		—	1,000		106	—		—
Chris Rooney	Vice President — Asset Management	—		—	2,000		271	1,000		135	2,000		271
		$	—	—	$	45,000	4,972	$	61,000	6,784	$	45,000	4,972

___________


(1)	Actual investment aggregating $2,000 for 174 shares for the three and six months ended June 30, 2014 was made on July 18, 2014 pursuant to payroll procedures.

Accounts Payable Due to Affiliates

The following amounts were outstanding to our affiliates as of June 30, 2015 and December 31, 2014:



	June 30,		December 31,
Fee	2015		2014
Asset and property management fees	$	627,000	$	131,000
Acquisition fees	119,000		31,000
Acquisition expenses	28,000		—
Operating expenses	5,000		—
Lease commissions	3,000		—
Offering costs	1,000		415,000
	$	783,000	$	577,000

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14. Fair Value Measurements

Assets and Liabilities Reported at Fair Value

The table below presents our assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.



	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Contingent consideration assets	$	—	$	—	$	—	$	—
Total assets at fair value	$	—	$	—	$	—	$	—
Liabilities:
Contingent consideration obligations	$	—	$	—	$	5,280,000	$	5,280,000
Total liabilities at fair value	$	—	$	—	$	5,280,000	$	5,280,000

The table below presents our assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall.



	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities:
Contingent consideration obligations	$	—	$	—	$	1,393,000	$	1,393,000
Total liabilities at fair value	$	—	$	—	$	1,393,000	$	1,393,000

There were no transfers into and out of fair value measurement levels during the six months ended June 30, 2015 and 2014.

Contingent Consideration

Assets

As of June 30, 2015, we have not recorded any contingent consideration receivables. In connection with our purchase of King of Prussia PA MOB in January 2015, there is a contingent consideration receivable in the amount of either $0 or $1,100,000. We would receive $1,100,000 in the event that within one year of the acquisition date certain criteria are not met, including the seller leasing 4,536 square feet of GLA meeting certain lease terms, occupancy by the tenant, delivery of a signed estoppel by the tenant and our receipt of the first month’s rent under the lease. In addition, in connection with our acquisition of Mt. Juliet TN MOB in March 2015, there is a contingent consideration receivable in the range of $0 up to a maximum of $634,000. We would receive payment in the event that a tenant occupying 6,611 square feet of GLA terminates their lease early, prior to March 31, 2018, and to the extent there is a shortfall in rent from any replacement tenant. We do not believe as of June 30, 2015 that we will receive such amounts and therefore we have not recorded any contingent consideration receivables. When recorded by us, contingent consideration assets will be included in other assets, net in our accompanying condensed consolidated balance sheets.

Obligations

As of June 30, 2015 and December 31, 2014, we have accrued $5,280,000 and $1,393,000, respectively, as contingent consideration obligations in connection with our property acquisitions, which is included in security deposits, prepaid rent and other liabilities in our accompanying condensed consolidated balance sheets. Such consideration will be paid upon various conditions being met, including our tenants achieving certain operating performance metrics and sellers' leasing unoccupied space, as discussed below.

Of the amount accrued as of June 30, 2015, $4,085,000 relates to our acquisition of North Carolina ALF Portfolio in January and June 2015, $795,000 relates to our acquisition of Acworth Medical Complex in July 2014 and $400,000 relates to

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another property acquisition. Of the amount accrued as of December 31, 2014, $795,000 relates to our acquisition of Acworth Medical Complex and $598,000 relates to another property acquisition, whose contingency expired and no payment was required in 2015.

An estimated total amount of $4,085,000 related to North Carolina ALF Portfolio will be paid based upon the computation in the lease agreement and receipt of notification within three years after the applicable acquisition date that the tenant has increased its earnings before interest, taxes, depreciation, and rent cost, or "EBITDAR" as defined in the lease agreement, for the preceding three months. There is no minimum required payment but the total maximum is capped at $35,144,000 and is also limited by the tenant’s ability to increase its EBITDAR. Any payment made will result in an increase in the monthly rent charged to the tenant and additional rental revenue to us. We have assumed that we will receive notification from the tenant for a payment three years from the date of acquisition and assumed an applicable rate, as such term is used in the lease agreement, of 7.2%. In addition, we applied a discount rate of 1.32% per annum for the buildings acquired in January 2015 and 1.62% per annum for the buildings acquired in June 2015.

As of June 30, 2015, we have accrued $795,000 related to Acworth Medical Complex, and such consideration will be paid within 18 months of the acquisition date based on the seller's leasing of up to 6,767 square feet of unoccupied space and achieving certain lease criteria. The payment of such consideration will occur after a qualified tenant delivers an estoppel, has taken occupancy and has begun paying rent under the new lease. There is no minimum or maximum required payment and we have assumed that the seller will lease 4,891 square feet of the 6,767 unoccupied square feet within the specified time frame.

Unobservable Inputs and Reconciliation

The fair value of the contingent consideration is determined based on the facts and circumstances existing at each reporting date and the likelihood of the counterparty achieving the necessary conditions based on a probability weighted discounted cash flow analysis based, in part, on significant inputs which are not observable in the market. As a result, we have determined that our contingent consideration valuations are classified in Level 3 of the fair value hierarchy. Any changes in the fair value of our contingent consideration assets and obligations subsequent to their acquisition date valuations are charged to earnings. Gains and losses recognized on contingent consideration assets and obligations are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

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The following table shows quantitative information about unobservable inputs related to Level 3 fair value measurements used as of June 30, 2015 and December 31, 2014 for the contingent consideration obligations:



		Range of Inputs/Inputs				Fair Value
Acquisition	Unobservable Inputs(4)	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
North Carolina ALF Portfolio — North Raleigh and Mooresville(1)	Tenant’s Annualized EBITDAR, as defined, for the Three Months Prior to Payment	$	3,516,000	N/A		$	3,489,000	$	—
	Timing of Payment	January 27, 2018		N/A
	Applicable Rate, as Defined	7.2%		N/A
	Discount Rate per Annum	1.32%		N/A
	Percentage of Eligible Payment Requested	100%		N/A
Acworth Medical Complex(2)	Percentage of Total Unoccupied Square Footage Leased Up	72.3%		72.3%		$	795,000	$	795,000
	Rental Rate per Square Foot	$	16.00	$	16.00
	Tenant Improvement Allowance per Square Foot	$	30.00	$	30.00
DeKalb Professional Center(2)	Percentage of Total Unoccupied Square Footage Leased Up	N/A		100%		$	—	$	598,000
	Rental Rate per Square Foot	N/A		$	15.50
	Tenant Improvement Allowance per Square Foot	N/A		$	30.00
King of Prussia PA MOB(3)	Percentage of Total Unoccupied Square Footage Leased Up	100%		N/A		$	400,000	$	—
	Percentage of Allowance for Tenant Improvements and Leasing Commissions to be Paid	100%		N/A
North Carolina ALF Portfolio — Clemmons and Wake Forest(1)	Tenant’s Annualized EBITDAR, as defined, for the Three Months Prior to Payment	$	1,491,000	N/A		$	596,000	$	—
	Timing of Payment	June 28, 2018		N/A
	Applicable Rate, as Defined	7.2%		N/A
	Discount Rate per Annum	1.62%		N/A
	Percentage of Eligible Payment Requested	100%		N/A

___________


(1)	The most significant input to the valuation is the tenant’s annualized EBITDAR, as defined in the lease agreement. An increase (decrease) in the tenant’s annualized EBITDAR, as defined, would increase (decrease) the fair value.

(2)

The most significant input to the valuation is the percentage of total unoccupied square footage leased up and the rental rate per square foot. An increase (decrease) in the percentage of total unoccupied square feet leased up and rental rate per square foot would increase (decrease) the fair value. An increase (decrease) in the tenant improvement allowance per square foot would decrease (increase) the fair value.


(3)	The most significant input to the valuation is the percentage of total unoccupied square footage leased up. An increase (decrease) in the percentage of total unoccupied square feet leased up would increase (decrease) the fair value. An increase (decrease) in the percentage of allowance for tenant improvements and leasing commissions to be paid would increase (decrease) the fair value.


(4)	Significant increases or decreases in any of the unobservable inputs in isolation or in the aggregate would result in a significantly higher or lower fair value measurement to the contingent consideration obligation as of June 30, 2015 and December 31, 2014.

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The following is a reconciliation of the beginning and ending balances of our contingent consideration assets and obligations for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Contingent Consideration Assets:
Beginning balance	$	—		$	—	$	—		$	—
Additions to contingent consideration assets	—			—		—			—
Realized/unrealized (gains) losses recognized in earnings	—			—		—			—
Ending balance	$	—		$	—	$	—		$	—
Amount of total (gains) losses included in earnings attributable to the change in unrealized (gains) losses related to assets still held	$	—		$	—	$	—		$	—

Contingent Consideration Obligations:
Beginning balance	$	5,264,000		$	—	$	1,393,000		$	—
Additions to contingent consideration obligations	596,000			598,000		4,467,000			598,000
Realized/unrealized (gains) losses recognized in earnings	(580,000		)	—		(580,000		)	—
Ending balance	$	5,280,000		$	598,000	$	5,280,000		$	598,000
Amount of total (gains) losses included in earnings attributable to the change in unrealized (gains) losses related to obligations still held	$	18,000		$	—	$	18,000		$	—

Financial Instruments Disclosed at Fair Value

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial instruments, whether or not recognized on the face of the balance sheet. Fair value is defined under ASC Topic 820, Fair Value Measurements and Disclosures.

Our accompanying condensed consolidated balance sheets include the following financial instruments: real estate notes receivable, net, cash and cash equivalents, accounts and other receivables, net, restricted cash, real estate and escrow deposits, accounts payable and accrued liabilities, accounts payable due to affiliates and mortgage loans payable, net.

We consider the carrying values of real estate notes receivable, net, cash and cash equivalents, accounts and other receivables, net, restricted cash, real estate and escrow deposits and accounts payable and accrued liabilities to approximate the fair value for these financial instruments based upon an evaluation of the underlying characteristics, market data and because of the short period of time since origination of the instruments or the short period of time between origination of the instruments and their expected realization. The fair value of cash and cash equivalents is classified in Level 1 of the fair value hierarchy. The fair value of the other financial instruments is classified in Level 2 of the fair value hierarchy. The fair value of accounts payable due to affiliates is not determinable due to the related party nature of the accounts payable.

The fair value of the mortgage loans payable is estimated using a discounted cash flow analysis using borrowing rates available to us for debt instruments with similar terms and maturities. As of June 30, 2015 and December 31, 2014, the fair value of the mortgage loans payable was $54,385,000 and $17,058,000, respectively, compared to the carrying value of $54,014,000 and $16,959,000, respectively. We have determined that the mortgage loans payable valuations are classified as Level 2 within the fair value hierarchy.

15. Income Taxes

As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. We intend to elect to treat certain of our consolidated subsidiaries as TRSs pursuant to the Code. TRSs may participate in services that would otherwise be considered impermissible for REITs and are subject to federal and state income tax at regular corporate tax rates.

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We did not incur income taxes for the three and six months ended June 30, 2014. The components of income tax expense (benefit) for the three and six months ended June 30, 2015 were as follows:



	Amount
Federal deferred	$	(568,000	)
State deferred	(79,000		)
Valuation allowances	647,000
Total income tax expense (benefit)	$	—

Current Income Tax

Federal and state income taxes are generally a function of the level of income recognized by our TRSs.

Deferred Taxes

Deferred income tax is generally a function of the period’s temporary differences (primarily basis differences between tax and financial reporting for real estate assets and equity investments) and generation of tax net operating losses that may be realized in future periods depending on sufficient taxable income.

We apply the rules under ASC 740-10, Accounting for Uncertainty in Income Taxes, for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, we will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on our estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A valuation allowance is established if we believe it is more likely than not that all or a portion of the deferred tax assets are not realizable. As of June 30, 2015, our valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income. We will continue to monitor industry and economic conditions, and our ability to generate taxable income based on our business plan and available tax planning strategies, which would allow us to utilize the tax benefits of the net deferred tax assets and thereby allow us to reverse all, or a portion of, our valuation allowance in the future.

Any increases or decreases to the deferred income tax assets or liabilities are reflected in income tax expense (benefit) in our condensed consolidated statements of operations. We did not have any deferred tax assets and liabilities as of December 31, 2014. The components of deferred tax assets and liabilities as of June 30, 2015 were as follows:



	Amount
Deferred income tax assets:
Net operating loss	$	647,000
Valuation allowances	(647,000		)
Total deferred income tax assets	$	—

16. Business Combinations

2015

For the six months ended June 30, 2015, using net proceeds from our offering and the assumption of mortgage loans payable, we completed 14 property acquisitions comprising 36 buildings, which have been accounted for as business combinations. The aggregate contract purchase price for these property acquisitions was $604,845,000, plus closing costs and acquisition fees of $18,966,000, which are included in acquisition related expenses in our accompanying condensed consolidated statements of operations. See Note 3, Real Estate Investments, Net for a listing of the properties acquired, acquisition dates and mortgage loans payable assumed.

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Results of operations for the property acquisitions during the six months ended June 30, 2015 are reflected in our accompanying condensed consolidated statements of operations for the period from the date of acquisition of each property through June 30, 2015. We present separately Independence MOB Portfolio and Pennsylvania Senior Housing Portfolio, which are individually significant property acquisitions during the six months ended June 30, 2015, and aggregate the rest of the property acquisitions during the six months ended June 30, 2015. For the period from the acquisition date through June 30, 2015, we recognized the following amounts of revenue and net income (loss) for the property acquisitions:



Acquisition	Revenue		Net Income (Loss)
Independence MOB Portfolio	$	6,552,000	$	904,000
Pennsylvania Senior Housing Portfolio	$	—	$	(3,000	)
Other 2015 Acquisitions	$	9,582,000	$	1,244,000

The fair value of our 14 property acquisitions at the time of each acquisition is shown below:



	Independence MOB Portfolio			Pennsylvania Senior Housing Portfolio			Other 2015 Acquisitions
Building and improvements	$	113,727,000		$	76,970,000		$	326,134,000
Land	7,367,000			2,994,000			28,509,000
Furniture, fixtures and equipment	—			635,000			1,441,000
In-place leases	7,182,000			8,057,000			29,069,000
Above market leases	1,321,000			—			746,000
Leasehold interest	5,715,000			—			95,000
Total assets acquired	135,312,000			88,656,000			385,994,000
Mortgage loans payable, net	—			(13,254,000		)	(24,227,000		)
Below market leases	(350,000		)	—			(27,000		)
Other liabilities	—			—			(4,467,000		)	(1)
Total liabilities assumed	(350,000		)	(13,254,000		)	(28,721,000		)
Net assets acquired	$	134,962,000		$	75,402,000		$	357,273,000

___________


(1)	Included in other liabilities is $4,067,000 and $400,000 accrued for as contingent consideration obligations in connection with the purchase of North Carolina ALF Portfolio and King of Prussia PA MOB, respectively. For a further discussion, see Note 14, Fair Value Measurements — Assets and Liabilities Reported at Fair Value — Contingent Consideration.

Assuming the property acquisitions in 2015 discussed above had occurred on January 1, 2014, for the three and six months ended June 30, 2015 and 2014, unaudited pro forma revenue, net income (loss), net income (loss) attributable to controlling interest and net income (loss) per common share attributable to controlling interest — basic and diluted would have been as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2014			2015		2014
Revenue	$	27,009,000	$	20,466,000		$	55,382,000	$	40,880,000
Net income (loss)	$	647,000	$	(9,774,000	)	$	4,985,000	$	(21,531,000	)
Net income (loss) attributable to controlling interest	$	647,000	$	(9,775,000	)	$	4,985,000	$	(21,531,000	)
Net income (loss) per common share attributable to controlling interest — basic and diluted	$	—	$	(0.15	)	$	0.02	$	(0.33	)

The unaudited pro forma adjustments assume that the offering proceeds, at a price of $10.00 per share, net of offering costs, were raised as of January 1, 2014. In addition, acquisition related expenses associated with the acquisitions have been excluded from the pro forma results in 2015 and added to the 2014 pro forma results. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods

presented, nor are they necessarily indicative of future operating results.

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2014

For the six months ended June 30, 2014, using net proceeds from our offering, we completed two property acquisitions comprising two buildings, which have been accounted for as business combinations. The aggregate contract purchase price for these property acquisitions was $5,605,000, plus closing costs and acquisition fees of $226,000, which are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

Results of operations for the property acquisitions during the six months ended June 30, 2014 are reflected in our accompanying condensed consolidated statements of operations for the period from the date of acquisition of each property through June 30, 2014. For the period from the acquisition date through June 30, 2014, we recognized the following amounts of revenue and net income for the property acquisitions:



Acquisition	Revenue		Net Income
DeKalb Professional Center	$	20,000	$	2,000
Country Club MOB	$	4,000	$	3,000

The following summarizes the fair value of our 2014 property acquisitions at the time of acquisition:



	DeKalb Professional Center				Country Club MOB
Building and improvements	$	2,871,000			$	2,306,000
Land	479,000				240,000
In-place leases	172,000				190,000
Above market leases	—				21,000
Total assets acquired	3,522,000				2,757,000
Below market leases	(112,000		)		—
Other liabilities	(598,000		)	(1)	—
Total liabilities assumed	(710,000		)		—
Net assets acquired	$	2,812,000			$	2,757,000

___________


(1)	Included in other liabilities is $598,000 accrued for as a contingent consideration obligation in connection with the purchase of DeKalb Professional Center. See Note 14, Fair Value Measurements — Assets and Liabilities Reported at Fair Value — Contingent Consideration, for a further discussion.

Assuming the property acquisitions in 2014 discussed above had occurred on January 11, 2013 (Date of Inception), for the three months ended June 30, 2014 and 2013, for the six months ended June 30, 2014 and for the period from January 11, 2013 (Date of Inception) through June 30, 2013, pro forma revenue, net loss, net loss attributable to controlling interest and net loss per common share attributable to controlling interest — basic and diluted would have been as follows:



	Three Months Ended June 30,						Six Months Ended			Period from January 11, 2013 (Date of Inception) through
	2014			2013			June 30, 2014			June 30, 2013
Revenue	$	147,000		$	139,000		$	292,000		$	261,000
Net loss	$	(278,000	)	$	(18,000	)	$	(290,000	)	$	(281,000	)
Net loss attributable to controlling interest	$	(278,000	)	$	(18,000	)	$	(290,000	)	$	(281,000	)
Net loss per common share attributable to controlling interest — basic and diluted	$	(0.15	)	$	(0.03	)	$	(0.23	)	$	(0.42	)

The unaudited pro forma adjustments assume that the offering proceeds, at a price of $10.00 per share, net of offering costs, were raised as of January 11, 2013 (Date of Inception). In addition, acquisition related expenses associated with the acquisitions have been excluded from the pro forma results in 2014 and added to the 2013 pro forma results. The pro forma

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results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

17. Segment Reporting

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity's reportable segments. As of June 30, 2015, we evaluated our business and made resource allocations based on four reportable business segments: medical office buildings, hospitals, senior housing and senior housing — RIDEA. Our medical office buildings are typically leased to multiple tenants under separate leases in each building, thus requiring active management and responsibility for many of the associated operating expenses (although many of these are, or can effectively be, passed through to the tenants). In addition, our medical office buildings segment includes our real estate notes receivable. Our hospital investments are primarily single-tenant properties that lease the facilities to unaffiliated tenants under triple-net and generally master leases that transfer the obligation for all facility operating costs (including maintenance, repairs, taxes, insurance and capital expenditures) to the tenant. Our senior housing facilities are primarily single-tenant properties for which we lease the facilities to unaffiliated tenants under triple-net and generally master leases that transfer the obligation for all facility operating costs (including maintenance, repairs, taxes, insurance and capital expenditures) to the tenant. Our senior housing — RIDEA properties include senior housing facilities that are owned and operated utilizing a RIDEA structure.

We evaluate performance based upon segment net operating income. We define segment net operating income as total revenues, less property operating expenses, which excludes depreciation and amortization, general and administrative expenses, acquisition related expenses, interest expense and interest income for each segment. We believe that net income (loss), as defined by GAAP, is the most appropriate earnings measurement. However, we believe that segment net operating income serves as a useful supplement to net income (loss) because it allows investors and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies and between periods on a consistent basis.

Interest expense, depreciation and amortization and other expenses not attributable to individual properties are not allocated to individual segments for purposes of assessing segment performance.

Non-segment assets primarily consist of corporate assets including cash and cash equivalents, real estate and escrow deposits and other assets not attributable to individual properties.

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Summary information for the reportable segments during the three and six months ended June 30, 2015 and 2014 was as follows:



	Medical Office Buildings		Hospitals		Senior Housing		Senior Housing — RIDEA		Three Months Ended June 30, 2015
Revenues:
Real estate revenue	$	12,095,000	$	1,622,000	$	1,348,000	$	—	$	15,065,000
Resident fees and services	—		—		—		2,819,000		2,819,000
Total revenues	12,095,000		1,622,000		1,348,000		2,819,000		17,884,000
Expenses:
Property operating expenses	4,235,000		636,000		91,000		1,701,000		6,663,000
Segment net operating income	$	7,860,000	$	986,000	$	1,257,000	$	1,118,000	$	11,221,000
Expenses:
General and administrative									$	2,401,000
Acquisition related expenses									13,267,000
Depreciation and amortization									8,135,000
Loss from operations									(12,582,000		)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt premium)									(560,000		)
Interest income									299,000
Net loss									$	(12,843,000	)



	Medical Office Buildings		Hospitals		Senior Housing		Senior Housing — RIDEA		Three Months Ended June 30, 2014
Revenues:
Real estate revenue	$	24,000	$	—	$	—	$	—	$	24,000
Expenses:
Property operating expenses	5,000		—		—		—		5,000
Segment net operating income	$	19,000	$	—	$	—	$	—	$	19,000
Expenses:
General and administrative									$	222,000
Acquisition related expenses									324,000
Depreciation and amortization									13,000
Net loss									$	(540,000	)

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)



	Medical Office Buildings		Hospitals		Senior Housing		Senior Housing — RIDEA		Six Months Ended June 30, 2015
Revenues:
Real estate revenue	$	20,405,000	$	4,990,000	$	2,433,000	$	—	$	27,828,000
Resident fees and services	—		—		—		2,819,000		2,819,000
Total revenues	20,405,000		4,990,000		2,433,000		2,819,000		30,647,000
Expenses:
Property operating expenses	7,205,000		1,230,000		167,000		1,701,000		10,303,000
Segment net operating income	$	13,200,000	$	3,760,000	$	2,266,000	$	1,118,000	$	20,344,000
Expenses:
General and administrative									$	5,168,000
Acquisition related expenses									22,675,000
Depreciation and amortization									12,808,000
Loss from operations									(20,307,000		)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt premium)									(957,000		)
Interest income									323,000
Net loss									$	(20,941,000	)



	Medical Office Buildings		Hospitals		Senior Housing		Senior Housing — RIDEA		Six Months Ended June 30, 2014
Revenues:
Real estate revenue	$	24,000	$	—	$	—	$	—	$	24,000
Expenses:
Property operating expenses	5,000		—		—		—		5,000
Segment net operating income	$	19,000	$	—	$	—	$	—	$	19,000
Expenses:
General and administrative									$	268,000
Acquisition related expenses									324,000
Depreciation and amortization									13,000
Net loss									$	(586,000	)

Assets by reportable segment as of June 30, 2015 and December 31, 2014 were as follows:



	June 30,		December 31,
	2015		2014
Medical office buildings	$	505,170,000	$	139,425,000
Senior housing — RIDEA	210,953,000		—
Hospitals	144,539,000		129,075,000
Senior housing	93,789,000		13,580,000
Other	730,821,000		549,604,000
Total assets	$	1,685,272,000	$	831,684,000

18. Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk are primarily real estate notes receivable, cash and cash equivalents, accounts and other receivables, restricted cash and escrow deposits. Cash and cash equivalents are

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

generally invested in investment-grade, short-term instruments with a maturity of three months or less when purchased. We have cash and cash equivalents in financial institutions that are insured by the Federal Deposit Insurance Corporation, or FDIC. As of June 30, 2015 and December 31, 2014, we had cash and cash equivalents in excess of FDIC insured limits. We believe this risk is not significant. Concentration of credit risk with respect to accounts receivable from tenants is limited. We perform credit evaluations of prospective tenants, and security deposits are obtained at the time of property acquisition and upon lease execution.

Based on leases in effect as of June 30, 2015, we owned properties in two states which accounted for 10.0% or more of our annualized base rent. Properties located in Texas and Pennsylvania accounted for 28.6% and 14.0%, respectively, of our annualized base rent. Accordingly, there is a geographic concentration of risk subject to fluctuations in each state's economy.

Based on leases in effect as of June 30, 2015, our four reportable business segments, medical office buildings, senior housing — RIDEA, hospitals and senior housing, accounted for 51.1%, 23.3%, 16.6% and 9.0%, respectively, of our annualized base rent. As of June 30, 2015, one of our tenants at our properties accounted for 10.0% or more of our annualized base rent, as follows:

Tenant

Annualized
Base Rent(1)

Percentage of
Annualized
Base Rent

Acquisition

Reportable Segment

GLA
(Sq Ft)

Lease Expiration
Date

Forest Park Medical Center(2)

10,844,000

15.0

Southlake TX Hospital

Hospitals

142,000

12/31/34

___________


(1)	Annualized base rent is based on contractual base rent from leases in effect as of June 30, 2015. The loss of this tenant or its inability to pay rent could have a material adverse effect on our business and results of operations.

(2)

As of June 30, 2015, we had an outstanding receivable of $5,887,000 from Forest Park Medical Center, of which we recognized $4,074,000 in our accompanying condensed consolidated financial statements that we believe to be collectible, and payments due to us from this tenant have increased to a total aggregate outstanding amount of $7,952,000 as of August 13, 2015. As is typical in real estate leases, the tenant's lease allows for us to have the ability to pursue remedies in regards to any outstanding receivables. Due to the tenant's delinquency, we ceased accruing rental income from this tenant starting in May 2015.

19. Per Share Data

We report earnings (loss) per share pursuant to ASC Topic 260, Earnings per Share. Basic earnings (loss) per share for all periods presented are computed by dividing net income (loss) applicable to common stock by the weighted average number of shares of our common stock outstanding during the period. Net income (loss) applicable to common stock is calculated as net income (loss) attributable to controlling interest less distributions allocated to participating securities of $2,000 and $4,000, respectively, for the three and six months ended June 30, 2015. For the three and six months ended June 30, 2014, we did not allocate any distributions to participating securities. Diluted earnings (loss) per share are computed based on the weighted average number of shares of our common stock and all potentially dilutive securities, if any. Nonvested shares of our restricted common stock and redeemable limited partnership units of our operating partnership are participating securities and give rise to potentially dilutive shares of our common stock. As of June 30, 2015 and 2014, there were 16,000 and 8,000 nonvested shares, respectively, of our restricted common stock outstanding, but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during these periods. As of June 30, 2015 and 2014, there were 222 units of redeemable limited partnership units of our operating partnership outstanding, but such units were also excluded from the computation of diluted earnings per share because such units were anti-dilutive during these periods.

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GRIFFIN-AMERICAN HEALTHCARE REIT III, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

20. Subsequent Events

Property Acquisitions

Subsequent to June 30, 2015, we completed two property acquisitions comprising six buildings from unaffiliated parties. The aggregate contract purchase price of these properties was $47,951,000 and we paid $1,079,000 in acquisition fees to our advisor in connection with these acquisitions. We have not yet measured the fair value of the tangible and identified intangible assets and liabilities of the acquisitions. The following is a summary of our property acquisitions subsequent to June 30, 2015:



Acquisition(1)	Location	Type	Date Acquired	Contract Purchase Price		Mortgage Loans Payable(2)		Acquisition Fee(3)
Southern Illinois MOB Portfolio	Waterloo, IL	Medical Office	07/01/15	$	12,272,000	$	—	$	276,000
Napa Medical Center	Napa, CA	Medical Office	07/02/15	15,700,000		—		353,000
Mountain Crest Senior Housing Portfolio(4)	Mishawaka, IN	Senior Housing — RIDEA	07/14/15	19,979,000		10,318,000		450,000
				$	47,951,000	$	10,318,000	$	1,079,000

___________


(1)	We own 100% of our properties acquired subsequent to June 30, 2015.


(2)	Represents the principal balance of the mortgage loans payable assumed by us at the time of acquisition.


(3)	Our advisor was paid in cash, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.25% of the contract purchase price.


(4)	On July 14, 2015, we added one additional building to our existing Mountain Crest Senior Housing Portfolio. The other five buildings were acquired in May and June 2015.

2013 Incentive Plan Grants

On July 1, 2015, we granted 7,500 shares of our restricted common stock, as defined in our incentive plan, to our independent directors in consideration of their services previously performed. The restricted common stock awards vested 20.0% on the grant date and 20.0% will vest on each of the first four anniversaries of the grant date.

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

The following discussion should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our 2014 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 19, 2015. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of June 30, 2015 and December 31, 2014, together with our results of operations for the three and six months ended June 30, 2015 and 2014 and cash flows for the six months ended June 30, 2015 and 2014.

Forward-Looking Statements

Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “expect,” “project,” “may,” “will,” “should,” “could,” “would,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future investments on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs; the availability of capital; changes in interest rates; competition in the real estate industry; the supply and demand for operating properties in our proposed market areas; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to REITs; the availability of properties to acquire; the availability of financing; and our ongoing relationship with American Healthcare Investors, LLC, or American Healthcare Investors, and Griffin Capital Corporation, or Griffin Capital, or collectively, our co-sponsors, and their affiliates. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview and Background

Griffin-American Healthcare REIT III, Inc., a Maryland corporation, was incorporated on January 11, 2013 and therefore we consider that our date of inception. We were initially capitalized on January 15, 2013. We invest in a diversified portfolio of real estate properties, focusing primarily on medical office buildings, hospitals, skilled nursing facilities, senior housing and other healthcare-related facilities. We also operate healthcare-related facilities utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a "RIDEA" structure (the provisions of the Internal Revenue Code of 1986, as amended, or the Code, authorizing the RIDEA structure were enacted as part of the Housing and Economic Recovery Act of 2008). We may also originate and acquire secured loans and real estate-related investments on an infrequent and opportunistic basis. We generally seek investments that produce current income. We believe we currently qualify, and intend to elect to be treated, as a REIT under the Code, for federal income tax purposes beginning with our taxable year ended December 31, 2014, and we intend to continue to be taxed as a REIT.

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reinvestment plan, or the Secondary DRIP. The Registration Statement on Form S-3 was automatically effective with the SEC upon its filing; however, we did not commence offering shares pursuant to the Secondary DRIP until April 22, 2015, following the deregistration of our offering. As of June 30, 2015, a total of $10,869,000 in distributions were reinvested and 1,144,117 shares of our common stock were issued pursuant to the Secondary DRIP.

We conduct substantially all of our operations through Griffin-American Healthcare REIT III Holdings, LP, or our operating partnership. We are externally advised by Griffin-American Healthcare REIT III Advisor, LLC, or Griffin-American Advisor, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our advisor. The Advisory Agreement was effective as of February 26, 2014 and had a one-year term, but was subject to successive one-year renewals upon the mutual consent of the parties. The Advisory Agreement was renewed pursuant to the mutual consent of the parties on February 24, 2015 and expires on February 26, 2016. Our advisor uses its best efforts, subject to the oversight, review and approval of our board of directors, to, among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives. Our advisor performs its duties and responsibilities under the Advisory Agreement as our fiduciary. Our advisor is 75.0% owned and managed by American Healthcare Investors and 25.0% owned by a wholly owned subsidiary of Griffin Capital. Effective December 8, 2014, NorthStar Asset Management Group Inc., or NSAM, through certain of its subsidiaries, and James F. Flaherty III, one of NSAM's partners, acquired ownership interests in American Healthcare Investors. Effective March 1, 2015, American Healthcare Investors is 47.1% owned by AHI Group Holdings, LLC (formerly known as American Healthcare Investors LLC), 45.1% indirectly owned by NSAM and 7.8% owned by Mr. Flaherty. We are not affiliated with Griffin Capital, Griffin Capital Securities, Inc., or Griffin Securities, or our dealer manager, NSAM or Mr. Flaherty; however, we are affiliated with Griffin-American Advisor and American Healthcare Investors.

Critical Accounting Policies

The complete listing of our Critical Accounting Policies was previously disclosed in our 2014 Annual Report on Form 10-K, as filed with the SEC on March 19, 2015, and there have been no material changes to our Critical Accounting Policies as disclosed therein.

Interim Unaudited Financial Data

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements, to our accompanying condensed consolidated financial statements.

Acquisitions in 2015

For a discussion of property acquisitions in 2015, see Note 3, Real Estate Investments, Net, and Note 20, Subsequent Events — Property Acquisitions, to our accompanying condensed consolidated financial statements.

Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of properties other than those listed in Part II, Item 1A. Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2014 Annual Report on Form 10-K, as filed with the SEC on March 19, 2015.

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Revenue

The amount of revenue generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from lease terminations at the then existing rental rates. Negative trends in one or more of these factors could adversely affect our revenue in future periods.

Scheduled Lease Expirations

Excluding our properties operated utilizing a RIDEA structure, as of June 30, 2015, our properties were 95.5% leased and during the remainder of 2015, 2.3% of the leased GLA is scheduled to expire. Our senior housing — RIDEA properties were 86.8% leased as of June 30, 2015 and substantially all of our leases with residents at such properties are for a term of one year or less. Our leasing strategy focuses on negotiating renewals for leases scheduled to expire during the next twelve months. In the future, if we are unable to negotiate renewals, we will try to identify new tenants or collaborate with existing tenants who are seeking additional space to occupy.

As of June 30, 2015, our remaining weighted average lease term was 8.3 years, excluding our properties operated utilizing a RIDEA structure.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2015 and 2014

We were incorporated on January 11, 2013, but we did not commence material operations until the commencement of our offering on February 26, 2014. We purchased our first property in June 2014. Accordingly, our results of operations for the three and six months ended June 30, 2015 and 2014 are not comparable. In general, we expect all amounts to increase in the future based on a full year of operations as well as increased activity as we acquire additional real estate and real estate-related investments. Our results of operations are not indicative of those expected in future periods.

As of June 30, 2015, we operated through four reportable business segments: medical office buildings, hospitals, senior housing and senior housing — RIDEA. Prior to May 2015, we operated through three reportable business segments; however, with the addition of our first senior housing — RIDEA portfolio in May 2015, we segregated our operations into four reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions. Prior to December 2014, we operated through two reportable business segments; however, with the addition of our first hospital in December 2014, we segregated our operations into three reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions. Prior to September 2014, we operated through one reportable business segment; however, with the addition of our first senior housing facility in September 2014, we segregated our operations into two reporting segments to assess the performance of our business in the same way that management reviews our performance and makes operating decisions.

Except where otherwise noted, our results of operations are primarily due to owning 60 buildings as of June 30, 2015, as compared to owning two buildings as of June 30, 2014. As of June 30, 2015 and 2014, we owned the following types of properties:



	June 30,
	2015					2014
	Number of Buildings	Aggregate Contract Purchase Price		Leased %		Number of Buildings	Aggregate Contract Purchase Price		Leased %
Medical office buildings	41	$	443,938,000	94.4	%	2	$	5,605,000	82.6	%
Senior housing — RIDEA	10	208,521,000		(1	)	—	—		—	%
Hospitals	2	139,780,000		100	%	—	—		—	%
Senior housing	7	90,306,000		100	%	—	—		—	%
Total/weighted average(2)	60	$	882,545,000	95.5	%	2	$	5,605,000	82.6	%

___________


(1)	The leased percentage for these 1,051 resident units was 86.8% as of June 30, 2015.


(2)	Leased percentage excludes properties operated utilizing a RIDEA structure.

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Real Estate Revenue

For the three months ended June 30, 2015 and 2014, real estate revenue was $15,065,000 and $24,000, respectively, and primarily comprised base rent of $11,096,000 and $19,000, respectively, expense recoveries of $2,525,000 and $3,000, respectively, and interest income from notes receivable of $868,000 and $0, respectively.

For the six months ended June 30, 2015 and 2014, real estate revenue was $27,828,000 and $24,000, respectively, and primarily comprised base rent of $21,134,000 and $19,000, respectively, expense recoveries of $4,390,000 and $3,000, respectively, and interest income from notes receivable of $1,403,000 and $0, respectively.

Real estate revenue by operating segment consisted of the following for the periods then ended:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Medical office buildings	$	12,095,000	$	24,000	$	20,405,000	$	24,000
Hospitals	1,622,000		—		4,990,000		—
Senior housing	1,348,000		—		2,433,000		—
Total	$	15,065,000	$	24,000	$	27,828,000	$	24,000

Resident Fees and Services

For the three and six months ended June 30, 2015, resident fees and services were $2,819,000 and related to revenue earned from our operations of senior housing facilities operated utilizing a RIDEA structure. We did not own or operate any real estate investments utilizing a RIDEA structure prior to May 2015.

Property Operating Expenses

For the three months ended June 30, 2015 and 2014, property operating expenses were $6,663,000 and $5,000, respectively. For the six months ended June 30, 2015 and 2014, property operating expenses were $10,303,000 and $5,000, respectively. Property operating expenses consisted of the following for the periods then ended:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Real estate taxes	$	2,234,000	$	2,000	$	3,660,000	$	2,000
Building maintenance	1,453,000		1,000		2,244,000		1,000
Administration	1,041,000		—		1,133,000		—
Utilities	1,019,000		1,000		1,793,000		1,000
Property management fees — third party	237,000		1,000		389,000		1,000
Property management fees — affiliates	175,000		—		311,000		—
RIDEA operating management fees	130,000		—		130,000		—
Insurance	74,000		—		110,000		—
Amortization of leasehold interests	34,000		—		57,000		—
Other	266,000		—		476,000		—
Total	$	6,663,000	$	5,000	$	10,303,000	$	5,000

Property operating expenses and property operating expenses as a percentage of total revenue by operating segment consisted of the following for the periods then ended:



	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
Medical office buildings	$	4,235,000	35.0	%	$	5,000	20.8	%	$	7,205,000	35.3	%	$	5,000	20.8	%
Senior housing — RIDEA	1,701,000		60.3	%	—		—	%	1,701,000		60.3	%	—		—	%
Hospitals	636,000		39.2	%	—		—	%	1,230,000		24.6	%	—		—	%
Senior housing	91,000		6.8	%	—		—	%	167,000		6.9	%	—		—	%
Total/weighted average	$	6,663,000	37.3	%	$	5,000	20.8	%	$	10,303,000	33.6	%	$	5,000	20.8	%

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We anticipate that the percentage of property operating expenses to revenue will fluctuate based on the types of property we buy in the future. Multi-tenant medical office buildings typically have a higher percentage of property operating expenses to revenue than hospitals and senior housing facilities. In addition, the percentage of rental expenses as a percentage of revenue in 2015 was higher than in 2014 due to the acquisition of senior housing facilities operated utilizing a RIDEA structure beginning in May 2015.

General and Administrative

For the three months ended June 30, 2015 and 2014, general and administrative was $2,401,000 and $222,000, respectively. For the six months ended June 30, 2015 and 2014, general and administrative was $5,168,000 and $268,000, respectively. General and administrative consisted of the following for the periods then ended:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Asset management fees — affiliates	$	1,417,000	$	—	$	2,374,000	$	—
Transfer agent services	421,000		4,000		950,000		4,000
Professional and legal fees	248,000		32,000		605,000		36,000
Share discounts expense	—		89,000		580,000		89,000
Franchise taxes	96,000		3,000		205,000		3,000
Directors’ and officers’ liability insurance	73,000		42,000		126,000		57,000
Board of directors fees	69,000		31,000		129,000		41,000
Restricted stock compensation	36,000		18,000		50,000		33,000
Bank charges	17,000		2,000		17,000		2,000
Bad debt expense	—		—		42,000		—
Other	24,000		1,000		90,000		3,000
Total	$	2,401,000	$	222,000	$	5,168,000	$	268,000

The increase in general and administrative for the three and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014 was primarily due to the purchase of additional properties in 2015 and thus incurring asset management fees to our advisor or its affiliates and higher professional and legal fees. We did not incur any asset management fees to our advisor or its affiliates for the three and six months ended June 30, 2014 as a result of our advisor waiving $2,000 in asset management fees for June 2014. See Note 13, Related Party Transactions — Operational Stage — Asset Management Fee, for a further discussion of the waiver. In addition, we incurred higher transfer agent service fees and share discounts expense for the three and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014 due to an increase in the number of investors in connection with the increased equity raise pursuant to our offering throughout 2014 and 2015. We expect general and administrative to continue to increase in 2015 as we purchase additional properties in 2015.

Acquisition Related Expenses

For the three months ended June 30, 2015 and 2014, acquisition related expenses were $13,267,000 and $324,000, respectively, and were related primarily to expenses associated with our seven and two property acquisitions, respectively, including acquisition fees of $7,006,000 and $126,000, respectively, incurred to our advisor and its affiliates.

For the six months ended June 30, 2015 and 2014, acquisition related expenses were $22,675,000 and $324,000, respectively, and were related primarily to expenses associated with our 14 and two property acquisitions, respectively, including acquisition fees of $13,696,000 and $126,000, respectively, incurred to our advisor and its affiliates.

Depreciation and Amortization

For the three months ended June 30, 2015 and 2014, depreciation and amortization was $8,135,000 and $13,000, respectively, and consisted primarily of depreciation on our operating properties of $4,934,000 and $11,000, respectively, and amortization on our identified intangible assets of $3,200,000 and $2,000, respectively.

For the six months ended June 30, 2015 and 2014, depreciation and amortization was $12,808,000 and $13,000, respectively, and consisted primarily of depreciation on our operating properties of $8,321,000 and $11,000, respectively, and amortization on our identified intangible assets of $4,486,000 and $2,000, respectively.

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Interest Expense

For the three months ended June 30, 2015, interest expense was $560,000, which was related to interest expense on our mortgage loans payable of $480,000, $94,000 in amortization of deferred financing costs on our mortgage loans payable and revolving line of credit with Bank of America, N.A., or Bank of America, or our line of credit, and $47,000 in unused fees on our line of credit, partially offset by amortization of debt premium on mortgage loans payable of $61,000.

For the six months ended June 30, 2015, interest expense was $957,000, which was related to interest expense on our mortgage loans payable of $796,000, $179,000 in amortization of deferred financing costs on our mortgage loans payable and our line of credit with Bank of America and $95,000 in unused fees on our line of credit, partially offset by amortization of debt premium on mortgage loans payable of $113,000. See Note 7, Mortgage Loans Payable, Net, and Note 8, Line of Credit, to our accompanying condensed consolidated financial statements for a further discussion.

Interest Income

For the three and six months ended June 30, 2015, we had interest income of $299,000 and $323,000, respectively, related to interest earned on funds held in cash accounts.

Liquidity and Capital Resources

As of June 30, 2015, our cash on hand was $728,026,000. Our sources of funds will primarily be the cash on hand from the net proceeds of our offering, which we deregistered on April 22, 2015, operating cash flows and borrowings. We believe that these resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other sources within the next 12 months.

Our principal demands for funds are for the acquisition of real estate and real estate-related investments, payment of operating expenses, payment of distributions to our stockholders and interest on our current and future indebtedness. We estimate that we will require approximately $1,297,000 to pay interest on our outstanding indebtedness in the remainder of 2015, based on interest rates in effect as of June 30, 2015, and $525,000 to pay principal on our outstanding indebtedness in the remainder of 2015.

Generally, cash needs for items other than the acquisition of real estate and real estate-related investments will be met from operations, borrowings and cash on hand from the net proceeds of our offering. However, there may be a delay between the sale of shares of our common stock and our investments in real estate and real estate-related investments, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations.

Our advisor evaluates potential investments and engages in negotiations with real estate sellers, developers, brokers, investment managers, lenders and others on our behalf. Until we fully invest the proceeds of our offering in real estate and real estate-related investments, we may invest in short-term, highly liquid or other authorized investments. Such short-term investments will not earn significant returns, and we cannot predict how long it will take to fully invest the proceeds in real estate and real estate-related investments.

When we acquire a property, our advisor prepares a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit or other loans established with respect to the investment, operating cash generated by the investment, additional equity investments from us or joint venture partners or, when necessary, capital reserves. Any capital reserve would be established from the net proceeds of our offering, proceeds from sales of other investments, borrowings, operating cash generated by other investments or other cash on hand. In some cases, a lender may require us to establish capital reserves for a particular investment. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs.

Other Liquidity Needs

In the event that there is a shortfall in net cash available due to various factors, including, without limitation, the timing of distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured debt financing through one or more third parties, or our advisor or its affiliates. There are currently no limits or restrictions on the use of proceeds from our advisor or its affiliates that would prohibit us from making the proceeds available for distribution. We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties.

Based on the properties we owned as of June 30, 2015, we estimate that our expenditures for capital improvements and tenant improvements will require up to $1,463,000 for the remaining six months of 2015. As of June 30, 2015, we had

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$951,000 of restricted cash in loan impounds and reserve accounts for capital expenditures, some of which may be used to fund our estimated expenditures for capital improvements and tenant improvements. We cannot provide assurance, however, that we will not exceed these estimated expenditure and distribution levels or be able to obtain additional sources of financing on commercially favorable terms or at all.

If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewed leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of leasing activity, tenant delinquencies and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs.

Cash Flows

Operating Activities

Cash flows used in operating activities for the six months ended June 30, 2015 and 2014 were $5,797,000 and $464,000, respectively. For the six months ended June 30, 2015, cash flows used in operating activities related to the cash flows provided by our property operations, offset by the payment of acquisition related expenses and general and administrative expenses. For the six months ended June 30, 2014, cash flows used in operating activities related to the payment of acquisition related expenses and general and administrative expenses. We anticipate cash flows from operating activities to increase as we purchase additional properties.

Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2015 and 2014 were $630,095,000 and $5,702,000, respectively. For the six months ended June 30, 2015, cash flows used in investing activities related to our 14 property acquisitions in the amount of $565,472,000, our acquisition of real estate notes receivables of $60,217,000, an increase in restricted cash in the amount of $1,510,000, the payment of loan costs related to our acquisition of real estate notes receivable in the amount of $1,273,000, the payment of $1,079,000 in real estate and escrow deposits and capital expenditures of $544,000. For the six months ended June 30, 2014, cash flows used in investing activities related primarily to the acquisition of our two property acquisitions in the amount of $5,502,000 and the payment of $200,000 in real estate deposits. Cash flows used in investing activities are heavily dependent upon the investment of our offering proceeds in properties and real estate-related assets. We anticipate cash flows used in investing activities to increase as we acquire additional properties and real estate-related investments.

Financing Activities

Cash flows provided by financing activities for the six months ended June 30, 2015 and 2014 were $859,024,000 and $38,325,000, respectively. For the six months ended June 30, 2015, such cash flows primarily related to funds raised from investors in our offering in the amount of $975,121,000, partially offset by the payment of offering costs of $95,404,000 in connection with our offering, distributions to our common stockholders of $19,590,000, share repurchases of $803,000 and principal payments on our mortgage loans payable in the amount of $313,000. For the six months ended June 30, 2014, such cash flows related to funds raised from investors in our offering in the amount of $43,194,000, partially offset by the payment of offering costs of $4,856,000 in connection with our offering and distributions to our common stockholders of $13,000. Overall, we anticipate cash flows from financing activities to decrease in the future since we deregistered our offering on April 22, 2015. However, we anticipate our indebtedness to increase as we acquire additional properties and real estate-related investments.

Distributions

On April 10, 2014, our board of directors authorized a daily distribution to be paid to our stockholders of record as of the close of business on each day of the period from the date we received and accepted subscriptions aggregating at least the minimum offering of $2,000,000, or the Commencement Date, through June 30, 2014, as a result of our advisor advising us that it intended to waive a combination of certain acquisition fees and/or asset management fees, or collectively, the Advisory Fees, that may otherwise be due to our advisor pursuant to the Advisory Agreement, in order to provide us with additional funds to pay distributions to our stockholders. Our advisor agreed to waive the Advisory Fees only until such time as the amount of such waived Advisory Fees was equal to the amount of distributions payable to our stockholders for the period commencing on the Commencement Date and ending on the date we acquired our first property or real estate-related investment.

Having raised the minimum offering of $2,000,000 in shares of our common stock, or the minimum offering, on May 12, 2014, the offering proceeds were released by the escrow agent to us on May 14, 2014 and the distributions declared for

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each record date for the period from May 14, 2014 through June 30, 2014 were paid in June 2014 and July 2014 from legally available funds. We acquired our first property on June 6, 2014, and as such, our advisor waived the Advisory Fees equal to the amount of distributions payable from May 14, 2014 through June 5, 2014. Our advisor did not receive any additional securities, shares of our stock, or any other form of consideration or any repayment as a result of the waiver of such Advisory Fees.

In addition, our board of directors has authorized a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on July 1, 2014 and ending on September 30, 2015. The distributions are calculated based on 365 days in the calendar year and are equal to $0.001643836 per share of our common stock, which is equal to an annualized distribution rate of 6.0%, assuming a purchase price of $10.00 per share. The distributions are aggregated and paid monthly in arrears in cash or shares of our common stock pursuant to the DRIP and the Secondary DRIP. The distributions declared for each record date are paid only from legally available funds.

The amount of the distributions paid to our stockholders is determined quarterly by our board of directors and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to qualify and maintain our qualification as a REIT under the Code. We have not established any limit on the amount of offering proceeds that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business; (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability to qualify and maintain our qualification as a REIT.

The distributions paid for the six months ended June 30, 2015 and 2014, along with the amount of distributions reinvested pursuant to the DRIP and the Secondary DRIP, and the sources of our distributions as compared to cash flows from operations were as follows:



	Six Months Ended June 30,
	2015				2014
Distributions paid in cash	$	19,590,000			$	13,000
Distributions reinvested	26,646,000				11,000
	$	46,236,000			$	24,000
Sources of distributions:
Cash flows from operations	$	—	—	%	$	—	—	%
Offering proceeds	46,236,000		100		24,000		100
	$	46,236,000	100	%	$	24,000	100	%

Under GAAP, acquisition related expenses are expensed, and therefore, are subtracted from cash flows from operations. However, these expenses may be paid from offering proceeds or debt.

Our distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and all or any portion of a distribution to our stockholders may be paid from offering proceeds. The payment of distributions from our offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively impact the amount of income available for future distributions.

As of June 30, 2015, we had an amount payable of $782,000 to our advisor or its affiliates primarily for asset and property management fees and acquisition fees and expenses, which will be paid from cash flows from operations in the future as it becomes due and payable by us in the ordinary course of business consistent with our past practice.

As of June 30, 2015, no amounts due to our advisor or its affiliates had been deferred, waived or forgiven other than the $37,000 in asset management fees waived by our advisor discussed above. Other than the waiver of the Advisory Fees by our advisor to provide us with additional funds to pay initial distributions to our stockholders through June 5, 2014, our advisor and its affiliates, including our co-sponsors, have no obligation to defer or forgive fees owed by us to our advisor or its affiliates or to advance any funds to us. In the future, if our advisor or its affiliates do not defer, waive or forgive amounts due to them, this would negatively affect our cash flows from operations, which could result in us paying distributions, or a portion thereof, using borrowed funds. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.

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	Six Months Ended June 30,
	2015				2014
Distributions paid in cash	$	19,590,000			$	13,000
Distributions reinvested	26,646,000				11,000
	$	46,236,000			$	24,000
Sources of distributions:
FFO	$	—	—	%	$	—	—	%
Offering proceeds	46,236,000		100		24,000		100
	$	46,236,000	100	%	$	24,000	100	%

The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. For a further discussion of FFO, a non-GAAP financial measure, including a reconciliation of our GAAP net income (loss) to FFO, see Funds from Operations and Modified Funds from Operations below.

Financing

We intend to continue to finance a portion of the purchase price of our investments in real estate and real estate-related investments by borrowing funds. We anticipate that, after an initial phase of our operations (prior to the investment of all of the net proceeds of our offering) when we may employ greater amounts of leverage to enable us to purchase properties more quickly and therefore generate distributions for our stockholders sooner, our overall leverage will not exceed 45.0% of the combined market value of all of our properties and other real estate-related investments, as determined at the end of each calendar year beginning with our first full year of operations. For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal of the asset. Our policies do not limit the amount we may borrow with respect to any individual investment. As of June 30, 2015, our aggregate borrowings were 5.5% of the combined fair market value of all of our real estate and real estate-related investments.

Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300% of our net assets without the approval of a majority of our independent directors. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real estate or for working capital. We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual taxable income, excluding net capital gains, to our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we qualify and maintain our qualification as a REIT for federal income tax purposes. As of August 13, 2015 and June 30, 2015, our leverage did not exceed 300% of the value of our net assets.

Mortgage Loans Payable, Net

For a discussion of our mortgage loans payable, net, see Note 7, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial statements.

Line of Credit

For a discussion of our line of credit, see Note 8, Line of Credit, to our accompanying condensed consolidated financial statements.

REIT Requirements

In order to qualify and maintain our qualification as a REIT for federal income tax purposes, we are required to make distributions to our stockholders of at least 90.0% of our annual taxable income, excluding net capital gains. In the event that there is a shortfall in net cash available due to factors including, without limitation, the timing of such distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured

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debt financing through one or more unaffiliated parties. We may also pay distributions from cash from capital transactions including, without limitation, the sale of one or more of our properties or from the proceeds of our offering.

Commitments and Contingencies

For a discussion of our commitments and contingencies, see Note 10, Commitments and Contingencies, to our accompanying condensed consolidated financial statements.

Debt Service Requirements

Our principal liquidity need is the payment of principal and interest on our outstanding indebtedness. As of June 30, 2015, we had $52,098,000 ($54,014,000, including premium) of fixed-rate debt outstanding secured by our properties. As of June 30, 2015, there were no borrowings outstanding and $60,000,000 remained available under our line of credit.

We are required by the terms of certain loan documents to meet certain covenants, such as leverage ratios, net worth ratios, debt service coverage ratios, fixed charge coverage ratios and reporting requirements. As of June 30, 2015, we were in compliance with all such covenants and requirements on our mortgage loans payable and our line of credit and we expect to remain in compliance with all such requirements for the next 12 months. As of June 30, 2015, the weighted average effective interest rate on our outstanding debt was 5.16% per annum.

Contractual Obligations

The following table provides information with respect to: (i) the maturity and scheduled principal repayment of our secured mortgage loans payable; (ii) interest payments on our mortgage loans payable; and (iii) obligations under our ground and other leases as of June 30, 2015:



	Payments Due by Period
	Less than 1 Year (2015)		1-3 Years (2016-2017)		4-5 Years (2018-2019)		More than 5 Years (after 2019)		Total
Principal payments — fixed-rate debt	$	525,000	$	9,768,000	$	2,189,000	$	39,616,000	$	52,098,000
Interest payments — fixed-rate debt	1,297,000		4,842,000		4,095,000		3,928,000		14,162,000
Ground and other lease obligations	105,000		418,000		418,000		12,487,000		13,428,000
Total	$	1,927,000	$	15,028,000	$	6,702,000	$	56,031,000	$	79,688,000

The table above does not reflect any payments expected under our contingent consideration obligations in the estimated amount of $5,280,000, of which we expect to pay $1,195,000 in the next twelve months and $4,085,000 in 2018. For a further discussion of our contingent consideration obligations, see Note 14, Fair Value Measurements — Assets and Liabilities Reported at Fair Value — Contingent Consideration, to our accompanying condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of June 30, 2015, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

Inflation

We expect to be exposed to inflation risk as income from future long-term leases will be the primary source of our cash flows from operations. We expect there to be provisions in the majority of our tenant leases that will protect us from the impact of inflation. These provisions will include negotiated rental increases, reimbursement billings for operating expense pass-through charges, and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the anticipated leases, among other factors, the leases may not re-set frequently enough to cover inflation.

Related Party Transactions

For a discussion of related party transactions, see Note 13, Related Party Transactions, to our accompanying condensed consolidated financial statements.

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Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as 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 our net income (loss) as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. 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, which is the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since 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. In addition, we believe it is appropriate to exclude impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist, and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset, an impairment charge would be recognized. Testing for impairment charges is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property.

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 and impairments, provides a more complete understanding of our performance to investors and to our 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 (loss).

However, FFO and modified funds from operations, or MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our 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 rules under GAAP that were put into effect 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 as operating expenses under GAAP. We believe 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 publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to

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the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the 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 publicly registered, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (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 acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, 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 are acquiring 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 offering stage has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering stage and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering stage has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (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 reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); gains or losses included in net income (loss) 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; 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, 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 (loss) in calculating cash flows from operations and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. We are responsible for managing interest rate, hedge and foreign exchange risk, and we do not rely on another party to manage such risk. Inasmuch as interest rate hedges will not be a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are based on market fluctuations and may not be directly related or attributable to our operations.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses (which includes gains and losses on contingent consideration), amortization of above and below market leases, amortization of loan costs, change in deferred rent receivables and the adjustments of such items related to redeemable noncontrolling interest. The other adjustments included in the IPA’s Practice Guideline are not applicable to us for the three and six months ended June 30, 2015 and 2014. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offering to be used to fund acquisition fees and expenses. The purchase of real estate and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate operating revenues and cash flows to make distributions to our stockholders. However, we do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent redeployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our advisor or its affiliates and third parties. Such fees and expenses will not be reimbursed by our advisor or its affiliates and third parties, and therefore if there is no further cash on hand from the proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. Certain acquisition related expenses 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 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, these fees

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and expenses and other costs related to such property. In the future, we may pay acquisition fees or reimburse acquisition expenses due to our advisor and its affiliates, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties or ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offering.

Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs which intend to 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 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 publicly registered, 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 may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow 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, which is 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 measurements as an indication of our performance. MFFO has limitations as a performance measure in offerings 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 may be 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.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that 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 publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

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The following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net loss	$	(12,843,000	)	$	(540,000	)	$	(20,941,000	)	$	(586,000	)
Add:
Depreciation and amortization — consolidated properties	8,135,000			13,000			12,808,000			13,000
Less:
Net income attributable to redeemable noncontrolling interest	—			(1,000		)	—			—
Depreciation and amortization related to redeemable noncontrolling interest	—			—			—			—
FFO	$	(4,708,000	)	$	(528,000	)	$	(8,133,000	)	$	(573,000	)

Acquisition related expenses(1)	$	13,267,000		$	324,000		$	22,675,000		$	324,000
Amortization of above and below market leases(2)	189,000			(1,000		)	370,000			(1,000		)
Amortization of loan costs(3)	113,000			—			183,000			—
Change in deferred rent receivables(4)	(611,000		)	(1,000		)	(999,000		)	(1,000		)
Adjustments for redeemable noncontrolling interest(5)	—			—			—			—
MFFO	$	8,250,000		$	(206,000	)	$	14,096,000		$	(251,000	)
Weighted average common shares outstanding — basic and diluted	187,460,097			1,152,933			176,494,837			590,701
Net loss per common share — basic and diluted	$	(0.07	)	$	(0.47	)	$	(0.12	)	$	(0.99	)
FFO per common share — basic and diluted	$	(0.03	)	$	(0.46	)	$	(0.05	)	$	(0.97	)
MFFO per common share — basic and diluted	$	0.04		$	(0.18	)	$	0.08		$	(0.42	)

_________

(1)

In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition related expenses, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or its affiliates and third parties. Acquisition related expenses 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 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, these fees and expenses and other costs related to such property.

(2)

Under GAAP, above and below market leases are assumed to diminish predictably in value over time and 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, including inflation, interest rates, the business cycle, unemployment and consumer spending, we believe that by excluding charges relating to the amortization of above and below market leases, MFFO may provide useful supplemental information on the performance of the real estate.

(3)

Under GAAP, direct loan costs are amortized over the term of the notes receivable as an adjustment to the yield on the notes receivable. This may result in income recognition that is different than the contractual cash flows under the notes receivable. By adjusting for the amortization of the loan costs related to our real estate notes receivable, MFFO may provide useful supplemental information on the realized economic impact of the notes receivable terms, providing insight on the expected contractual cash flows of such notes receivable, and aligns results with our analysis of operating performance.

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(4)

Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns results with our analysis of operating performance.


(5)	Includes all adjustments to eliminate the redeemable noncontrolling interest's share of the adjustments described in Notes (1) - (4) to convert our FFO to MFFO.

Net Operating Income

Net operating income is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense and interest income. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offering to be used to fund acquisition fees and expenses. The purchase of real estate and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate operating revenues and cash flows to make distributions to our stockholders. However, we do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent re-deployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our advisor or its affiliates and third parties. Such fees and expenses are not reimbursed by our advisor or its affiliates and third parties, and therefore if there is no further cash on hand from the proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows. Acquisition related expenses 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 and accrued acquisition fees and expenses 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, these fees and expenses and other costs related to such property. In the future, we may pay acquisition fees or reimburse acquisition expenses due to our advisor and its affiliates, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties or ancillary cash flows. As a result, the amount of proceeds available for investment, operations and non-operating expenses would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offering.

Net operating income is not equivalent to our net income (loss) or income (loss) from continuing operations as determined under GAAP and may not be a useful measure in measuring operational income or cash flows. Furthermore, net operating income is not necessarily indicative of cash flow 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, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. Net operating income should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. Investors are also cautioned that net operating income should only be used to assess our operational performance in periods in which we have not incurred or accrued any acquisition related expenses.

We believe that net operating income is useful for investors as it provides an accurate measure of the operating performance of our operating assets because net operating income excludes certain items that are not associated with the management of the properties. We believe that net operating income is a widely accepted measure of comparative operating performance in the real estate community. However, our use of the term net operating income may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

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To facilitate understanding of this financial measure, the following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to net operating income for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net loss	$	(12,843,000	)	$	(540,000	)	$	(20,941,000	)	$	(586,000	)
General and administrative	2,401,000			222,000			5,168,000			268,000
Acquisition related expenses	13,267,000			324,000			22,675,000			324,000
Depreciation and amortization	8,135,000			13,000			12,808,000			13,000
Interest expense	560,000			—			957,000			—
Interest income	(299,000		)	—			(323,000		)	—
Net operating income	$	11,221,000		$	19,000		$	20,344,000		$	19,000

Subsequent Events

For a discussion of subsequent events, see Note 20, Subsequent Events, to our accompanying condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk. There were no material changes in our market risk exposures, or in the methods we use to manage market risk, from those that were provided for in our 2014 Annual Report on Form 10-K, as filed with the SEC on March 19, 2015.

Interest Rate Risk

We are exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. We are also exposed to the effects of changes in interest rates as a result of our investments in real estate notes receivable. Our interest rate risk is monitored using a variety of techniques. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow or lend at fixed or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivatives or interest rate transactions for speculative purposes.

The table below presents, as of June 30, 2015, the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.



	Expected Maturity Date
	2015			2016			2017			2018			2019			Thereafter			Total			Fair Value
Assets
Fixed-rate notes receivable — principal payments	$	—		$	—		$	—		$	—		$	28,650,000		$	—		$	28,650,000		$	29,212,000
Weighted average interest rate on maturing fixed-rate notes receivable	—		%	—		%	—		%	—		%	6.75		%	—		%	6.75		%	—
Variable rate notes receivable — principal payments	$	—		$	31,567,000		$	—		$	—		$	—		$	—		$	31,567,000		$	32,095,000
Weighted average interest rate on maturing variable rate notes receivable (based on rates in effect as of June 30, 2015)	—		%	6.19		%	—		%	—		%	—		%	—		%	6.19		%	—
Liabilities
Fixed-rate debt — principal payments	$	525,000		$	1,128,000		$	8,640,000		$	1,067,000		$	1,122,000		$	39,616,000		$	52,098,000		$	54,385,000
Weighted average interest rate on maturing debt	5.11		%	5.15		%	6.13		%	4.96		%	4.96		%	4.96		%	5.16		%	—

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Real Estate Notes Receivable, Net

As of June 30, 2015, the carrying value of our real estate notes receivable was $61,307,000, which approximates the fair value. As we expect to hold our fixed-rate notes receivable to maturity and the amounts due under such notes would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed-rate notes receivable, would have a significant impact on our operations. Conversely, movements in interest rates on our variable rate notes receivable may change our future earnings and cash flows, but not significantly affect the fair value of those instruments. The weighted average effective interest rate on our outstanding real estate notes receivable was 6.45% per annum based on rates in effect as of June 30, 2015. A decrease in the variable interest rate on our real estate notes receivable constitutes a market risk. As of June 30, 2015, a 0.50% decrease in the market rates of interest would have no impact on our future earnings and cash flows due to interest rate floors on our variable rate real estate notes receivable.

Mortgage Loans Payable, Net and Line of Credit

Mortgage loans payable were $52,098,000 ($54,014,000, including premium) as of June 30, 2015. As of June 30, 2015, we had five fixed-rate mortgage loans with effective interest rates ranging from 4.31% to 6.29% per annum and a weighted average effective interest rate of 5.16%. As of June 30, 2015, we did not have any amounts outstanding under our line of credit.

An increase in the variable interest rate on our line of credit constitutes a market risk. However, as of June 30, 2015, there were no borrowings outstanding on our line of credit.

Other Market Risk

In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2015 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of June 30, 2015, were effective at the reasonable assurance level.

(b) Changes in internal control over financial reporting. There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There were no material changes from the risk factors previously disclosed in our 2014 Annual Report on Form 10-K, as filed with the SEC on March 19, 2015, except as noted below.

We have not had sufficient cash available from operations to pay distributions, and therefore, we have paid distributions from the net proceeds of our offering, and in the future, may pay distributions from net proceeds from our offering, from borrowings in anticipation of future cash flows or from other sources. Any such distributions may reduce the amount of capital we ultimately invest in assets, may negatively impact the value of our stockholders' investment and may cause subsequent investors to experience dilution.

We have used, and in the future may use, the net proceeds from our offering, borrowed funds or other sources, to pay cash distributions to our stockholders, which may reduce the amount of proceeds available for investment and operations, cause us to incur additional interest expense as a result of borrowed funds or cause subsequent investors to experience dilution. Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our current and accumulated earnings and profits, the excess amount will be deemed a return of capital. Therefore, distributions payable to our stockholders may include a return of capital, rather than a return on capital, and it is likely that we will use offering proceeds to fund a majority of our initial distributions. We have not established any limit on the amount of proceeds from our offering that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business; or (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences. The actual amount and timing of distributions is determined by our board of directors in its sole discretion and typically depends on the amount of funds available for distribution, which will depend on items such as our financial condition, current and projected capital expenditure requirements, tax considerations and annual distribution requirements needed to qualify as a REIT. As a result, our distribution rate and payment frequency may vary from time to time.

On April 10, 2014, our board of directors authorized a daily distribution to be paid to our stockholders of record as of the close of business on each day of the period from the Commencement Date through June 30, 2014. This was the result of our advisor advising us that it intended to waive the Advisory Fees that may otherwise be due to our advisor pursuant to the Advisory Agreement in order to provide us with additional funds to pay distributions to our stockholders. Our advisor agreed to waive the Advisory Fees only until such time as the amount of such waived Advisory Fees was equal to the amount of distributions payable to our stockholders for the period commencing on the Commencement Date and ending on the date we acquired our first property or real estate-related investment.

Having raised the minimum offering on May 12, 2014, the offering proceeds were released by the escrow agent to us on May 14, 2014, and the distributions declared for each record date in the May 2014 and June 2014 periods were paid in June 2014 and July 2014, respectively, from legally available funds. We acquired our first property on June 6, 2014, and, as such, our advisor waived Advisory Fees equal to the amount of distributions payable from May 14, 2014 through June 5, 2014. Our advisor did not receive any additional securities, shares of our stock, or any other form of consideration or any repayment as a result of the waiver of such Advisory Fees.

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	Six Months Ended June 30,
	2015				2014
Distributions paid in cash	$	19,590,000			$	13,000
Distributions reinvested	26,646,000				11,000
	$	46,236,000			$	24,000
Sources of distributions:
Cash flows from operations	$	—	—	%	$	—	—	%
Offering proceeds	46,236,000		100		24,000		100
	$	46,236,000	100	%	$	24,000	100	%

Under GAAP, acquisition related expenses are expensed, and therefore, are subtracted from cash flows from operations. However, these expenses may be paid from offering proceeds or debt.

As of June 30, 2015, no amounts due to our advisor or its affiliates had been deferred, waived or forgiven other than the $37,000 in asset management fees waived by our advisor as discussed above. Other than the waiver of the Advisory Fees by our advisor to provide us with additional funds to pay initial distributions to our stockholders through June 5, 2014, our advisor and its affiliates, including our co-sponsors, have no obligation to defer or forgive fees owed by us to our advisor or its affiliates or to advance any funds to us. In the future, if our advisor or its affiliates do not defer, waive or forgive amounts due to them, this would negatively affect our cash flows from operations, which could result in us paying distributions, or a portion thereof, using borrowed funds. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.



	Six Months Ended June 30,
	2015				2014
Distributions paid in cash	$	19,590,000			$	13,000
Distributions reinvested	26,646,000				11,000
	$	46,236,000			$	24,000
Sources of distributions:
FFO	$	—	—	%	$	—	—	%
Offering proceeds	46,236,000		100		24,000		100
	$	46,236,000	100	%	$	24,000	100	%

The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. For a further discussion of FFO, a non-GAAP financial measure, including a reconciliation of our GAAP net income (loss) to FFO, see Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations and Modified Funds from Operations.

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A significant portion of our annual base rent may be concentrated in a small number of tenants. Therefore, non-renewals, terminations or lease defaults by any of these significant tenants could reduce our net income and have a negative effect on our ability to pay distributions to our stockholders.

As of June 30, 2015, we had an outstanding receivable from one of our tenants, Forest Park Medical Center, of $5,887,000, of which we recognized $4,074,000 in our accompanying condensed consolidated financial statements, and payments due to us from this tenant have increased to a total aggregate outstanding amount of $7,952,000 as of August 13, 2015. As of August 13, 2015, rental payments by Forest Park Medical Center accounted for approximately 14.1% of our tenants' aggregate annual base rent based on Forest Park Medical Center's annualized base rent of $10,844,000 as of June 30, 2015. Due to the tenant's delinquency, we ceased accruing rental income from this tenant starting in May 2015. The success of our investments materially depends upon the financial stability of the tenants leasing the properties we own. Therefore, a non-renewal after the expiration of a lease term, termination, default or other failure to meet rental obligations by a significant tenant, such as Forest Park Medical Center, would significantly lower our net income. Any of these events could have a negative effect on our results of operations, our ability to pay distributions to our stockholders or on our ability to cover distributions with cash flows from operations.

A high concentration of our properties in a particular geographic area would magnify the effects of downturns in that geographic area.

To the extent that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately effects that geographic area would have a magnified adverse effect on our portfolio. As of August 13, 2015, properties located in Texas and Pennsylvania accounted for approximately 26.8% and 13.2%, respectively, of our annualized base rent. Accordingly, there is a geographic concentration of risk subject to fluctuations in each state's economy.

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

Recent Sales of Unregistered Securities

On June 17, 2015, we issued 7,500 shares of restricted common stock to our independent directors. These shares of restricted common stock were issued pursuant to our incentive plan in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act. The restricted common stock awards vested 20.0% on the grant date and 20.0% will vest on each of the first four anniversaries of the grant date.

Use of Public Offering Proceeds

On February 26, 2014, pursuant to our Registration Statement on Form S-11 (File No. 333-186073), we commenced our offering of up to $1,750,000,000 in shares of our common stock for $10.00 per share in our primary offering and up to $150,000,000 in shares of our common stock pursuant to the DRIP for $9.50 per share. We reserved the right to reallocate the shares of common stock we offered in our offering between the primary offering and the DRIP. As such, during our offering, we reallocated an aggregate of $115,000,000 in shares from the DRIP to the primary offering. Accordingly, we offered to the public up to $1,865,000,000 in shares of our common stock in our primary offering and up to $35,000,000 in shares of our common stock pursuant to the DRIP. Griffin Securities is the dealer manager of our offering.

As of June 30, 2015, we had incurred other offering expenses of $3,493,000 to our advisor and its respective affiliates in connection with our offering. In addition, as of June 30, 2015, we had incurred selling commissions of $123,146,000 and dealer manager fees of $55,097,000 to Griffin Securities, an unaffiliated entity. Such commissions, fees and reimbursements are charged to stockholders’ equity as such amounts are reimbursed from the gross proceeds of our offering. The cost of raising funds in our offering as a percentage of gross proceeds received in our primary offering was 9.9% as of June 30, 2015. As of June 30, 2015, net offering proceeds in our offering were $1,679,393,000, including proceeds from the DRIP and after deducting offering expenses.

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the Secondary DRIP until April 22, 2015, following the deregistration of our offering. As of June 30, 2015, a total of $10,869,000 in distributions were reinvested and 1,144,117 shares of our common stock were issued pursuant to the Secondary DRIP.

As of June 30, 2015, $1,000 remained payable to our advisor or its affiliates for costs related to our offering.

As of June 30, 2015, we had used $824,668,000 in proceeds from our offering to purchase properties from unaffiliated third parties, $60,217,000 for real estate-related investments, $21,066,000 to pay acquisition fees and acquisition related expenses to affiliated parties, $7,329,000 to pay real estate deposits for proposed future acquisitions, $7,667,000 to pay acquisition related expenses to unaffiliated parties, $1,755,000 to pay for lender required restricted cash accounts to unaffiliated parties, $1,496,000 to pay for deferred financing costs to unaffiliated parties in connection with our line of credit and mortgage loans payable and $373,000 to subsequently repay borrowings from unaffiliated parties incurred in connection with our acquisitions.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

Our share repurchase plan allows for repurchases of shares of our common stock by us when certain criteria are met. Share repurchases will be made at the sole discretion of our board of directors. All repurchases are subject to a one-year holding period, except for repurchases made in connection with a stockholder’s death or “qualifying disability,” as defined in our share repurchase plan. Funds for the repurchase of shares of our common stock will come exclusively from the cumulative proceeds we receive from the sale of shares of our common stock pursuant to the DRIP and the Secondary DRIP.

The prices per share at which we will repurchase shares of our common stock will range, depending on the length of time the stockholder held such shares, from 92.5% to 100% of the price paid per share to acquire such shares from us. However, if shares of our common stock are to be repurchased in connection with a stockholder’s death or qualifying disability, the repurchase price will be no less than 100% of the price paid to acquire the shares of our common stock from us.

During the three months ended June 30, 2015, we repurchased shares of our common stock as follows:



Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased As Part of Publicly Announced Plan or Program	(d) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2015 to April 30, 2015	—	$	—	—	(1	)
May 1, 2015 to May 31, 2015	—	$	—	—	(1	)
June 1, 2015 to June 30, 2015	65,459	$	9.94	65,459	(1	)
Total	65,459	$	9.94	65,459

___________


(1)	Subject to funds being available, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided however, shares of our common stock subject to a repurchase requested upon the death of a stockholder will not be subject to this cap.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Effective on August 11, 2015, our Board of Directors appointed Danny Prosky, our President, Chief Operating Officer and director, to also serve as our Interim Chief Financial Officer and Principal Financial Officer and Principal Accounting Officer during the maternity leave of absence of Shannon K S Johnson, our Chief Financial Officer. Mr. Prosky shall serve as Interim Chief Financial Officer and Principal Financial Officer and Principal Accounting Officer until Ms. Johnson’s return from maternity leave or until his removal from office.

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Mr. Prosky, age 50, has served as our President and Chief Operating Officer since January 2013 and as one of our directors since December 2014. He is also one of the founders and owners of AHI Group Holdings, LLC, which owns 47.1% of American Healthcare Investors, LLC, one of our our co-sponsors. Since December 2014, Mr. Prosky has also served as a Managing Director of American Healthcare Investors. Mr. Prosky previously served as President, Chief Operating Officer and a director of Griffin-American Healthcare REIT II, Inc. from January 2009 to December 2014 and has also served as Executive Vice President of Griffin-American Healthcare REIT Advisor, LLC since January 2012. He served as the President and Chief Operating Officer of Grubb & Ellis Healthcare REIT Advisor, LLC from January 2009 to November 2011 and as Executive Vice President and Secretary of Grubb & Ellis Equity Advisors Property Management, Inc. from June 2011 to November 2011. He also served as the Executive Vice President, Healthcare Real Estate of Grubb & Ellis Equity Advisors, LLC from September 2009 to November 2011, having served as Executive Vice President, Healthcare Real Estate and Managing Director, Healthcare Properties of several investment management subsidiaries within the Grubb & Ellis organization from March 2006 to November 2011, and was responsible for all medical property acquisitions, management and dispositions. Mr. Prosky received a B.S. degree in Finance from the University of Colorado and an M.S. degree in Management from Boston University.

There are no arrangements or understandings between Mr. Prosky and any other person pursuant to which he was appointed to serve as our Interim Chief Financial Officer and Principal Financial Officer and Principal Accounting Officer, nor are there any family relationships between Mr. Prosky and any of our other directors or executive officers. A description of the material transactions between us and entities that may be considered to be affiliated with Mr. Prosky is provided in Note 13, Related Party Transactions, to our accompanying condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Item 6. Exhibits.

The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

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SIGNATURES

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



		Griffin-American Healthcare REIT III, Inc. (Registrant)

August 13, 2015	By:	/s/ JEFFREY T. HANSON
Date		Jeffrey T. Hanson
		Chief Executive Officer and Chairman of the Board of Directors
		(Principal Executive Officer)

August 13, 2015	By:	/s/ DANNY PROSKY
Date		Danny Prosky
		President, Chief Operating Officer and Interim Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the period ended June 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).



3.1	Articles of Amendment and Restatement of Griffin-American Healthcare REIT III, Inc. dated January 15, 2014 (included as Exhibit 3.1 to Pre-Effective Amendment No. 5 to our Registration Statement on Form S-11 (File No. 333-186073) filed January 16, 2014 and incorporated herein by reference)

3.2	Bylaws of Griffin-American Healthcare REIT III, Inc. (included as Exhibit 3.2 to our Registration Statement on Form S-11 (File No. 333-186073) filed January 17, 2013 and incorporated herein by reference)

4.1	Form of Subscription Agreement of Griffin-American Healthcare REIT III, Inc. (included as Exhibit B to Supplement No. 4 to the prospectus dated February 26, 2014 filed pursuant to Rule 424(b)(3) (File No. 333-186073) on August 28, 2014 and incorporated herein by reference)

4.2	Distribution Reinvestment Plan of Griffin-American Healthcare REIT III, Inc. (included as Exhibit 4.7 to our Registration Statement on Form S-3) (File No. 333-202975) filed on March 25, 2015 and incorporated herein by reference)

4.3	Share Repurchase Plan of Griffin-American Healthcare REIT III, Inc. (included as Exhibit D to the prospectus dated February 26, 2014 filed pursuant to Rule 424(b)(3) (File No. 333-186073) on February 26, 2014 and incorporated herein by reference)

4.4	Escrow Agreement by and between Griffin-American Healthcare REIT III, Inc., Griffin Capital Securities, Inc. and UMB Bank, N.A., dated February 26, 2014 (included as Exhibit 4.4 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed on May 7, 2014 and incorporated herein by reference)

10.1	Second Amendment to Asset Purchase Agreement by and between GAHC3 Nebraska Senior Housing Portfolio, LLC, and Dial - Ridgewood Senior Living, L.L.C. and Silvercrest Fountain View Independent Living L.P., dated April 30, 2015 (included as Exhibit 10.1 to our Current Report on Form 8-K filed on May 6, 2015 and incorporated herein by reference)

10.2	Asset Purchase Agreement by and between GAHC3 Chorus Senior Housing Portfolio, LLC, CABA SH Investors, LLC and CABA Operations, LLC, dated May 6, 2015 (included as Exhibit 10.1 to our Current Report on Form 8-K filed on May 12, 2015 and incorporated herein by reference)

10.3	Amendment to Purchase and Sale Agreement by and between GAHC3 Mountain Crest Senior Housing Portfolio, LLC, LaPorte Retirement L.L.C., Hobart Retirement L.L.C., Niles Retirement L.L.C., Elkhart Retirement L.L.C., CW LLC and Eastlake L.L.C., dated June 10, 2015 (included as Exhibit 10.1 to our Current Report on Form 8-K filed on June 16, 2015 and incorporated herein by reference)

10.4	Reinstatement of and First Amendment to Asset Purchase Agreement by and between GAHC3 Chorus Senior Housing Portfolio, LLC, CABA SH Investors, LLC and CABA Operations, LLC, dated June 24, 2015 (included as Exhibit 10.1 to our Current Report on Form 8-K filed on June 26, 2015 and incorporated herein by reference)

10.5	Third Amendment to Asset Purchase Agreement by and between GAHC3 Pennsylvania Senior Housing Portfolio, LLC, Abeking Associates, L.P., Westrum Hanover LP, One Boyertown Properties LP, and Two Boyertown Properties LP, dated June 30, 2015 (included as Exhibit 10.1 to our Current Report on Form 8-K filed on July 6, 2015 and incorporated herein by reference)

31.1*	Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

Table of Contents

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*	Filed herewith.
**	Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

Attached files

Griffin-American Healthcare REIT III, Inc. Reports

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