American Realty Capital Healthcare Trust III, Inc. - FORM 10-Q - November 7, 2016

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EX-32 - EXHIBIT 32 - American Realty Capital Healthcare Trust III, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - American Realty Capital Healthcare Trust III, Inc.ex312.htm
EX-31.1 - EXHIBIT 31.1 - American Realty Capital Healthcare Trust III, Inc.ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________
Commission file number: 333-196302
archtiiilogocolora05.jpg
American Realty Capital Healthcare Trust III, Inc.
(Exact name of registrant as specified in its charter)
Maryland
  
38-3930747
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., 14th Floor New York, NY      
  
10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of October 31, 2016, the registrant had 6,947,067 shares of common stock outstanding.

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)


 
September 30,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
10,225

 
$
10,225

Buildings, fixtures and improvements
101,187

 
101,129

Acquired intangible lease assets
18,450

 
18,450

Total real estate investments, at cost
129,862

 
129,804

Less: accumulated depreciation and amortization
(6,736
)
 
(1,818
)
Total real estate investments, net
123,126

 
127,986

Cash
16,376

 
16,808

Restricted cash
11

 
62

Straight-line rent receivable
545

 
153

Prepaid expenses and other assets
966

 
735

Deferred costs, net
10

 
—

Total assets
$
141,034

 
$
145,744

LIABILITIES AND EQUITY
 
 
 
Mortgage note payable, net of deferred financing costs
$
4,936

 
$
4,985

Mortgage premium, net
123

 
155

Market lease intangible liabilities, net
1,738

 
1,849

Accounts payable and accrued expenses (including $263 and $288 due to related parties as of September 30, 2016 and December 31, 2015, respectively)
1,793

 
1,827

Deferred rent
532

 
299

Distributions payable
889

 
904

Total liabilities
10,011

 
10,019

 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding as of September 30, 2016 and December 31, 2015
—

 
—

Common stock, $0.01 par value, 300,000,000 shares authorized, 6,931,523 and 6,792,797 shares of common stock issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
69

 
68

Additional paid-in capital
148,990

 
145,789

Accumulated deficit
(18,504
)
 
(10,604
)
Total stockholders' equity
130,555

 
135,253

Non-controlling interests
468

 
472

Total equity
131,023

 
135,725

Total liabilities and equity
$
141,034

 
$
145,744


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

3

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

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



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
2,272

 
$
733

 
$
6,817

 
$
903

Operating expense reimbursements
 
652

 
140

 
1,903

 
173

Resident services and fee income
 
749

 
311

 
2,156

 
311

Total revenues
 
3,673

 
1,184

 
10,876

 
1,387

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
1,306

 
382

 
3,847

 
418

Operating fees to related party
 
41

 
15

 
120

 
15

Acquisition and transaction related
 
104

 
1,415

 
237

 
1,888

General and administrative
 
363

 
440

 
1,584

 
975

Depreciation and amortization
 
1,502

 
464

 
4,660

 
543

Total expenses
 
3,316

 
2,716

 
10,448

 
3,839

Operating income (loss)
 
357

 
(1,532
)
 
428

 
(2,452
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(47
)
 
(25
)
 
(142
)
 
(25
)
Interest and other income
 
—

 
—

 
1

 
—

Total other expense
 
(47
)
 
(25
)
 
(141
)
 
(25
)
Income (loss) before income taxes
 
310

 
(1,557
)
 
287

 
(2,477
)
Income tax expense
 
(74
)
 
(4
)
 
(147
)
 
(4
)
Net income (loss)
 
236

 
(1,561
)
 
140

 
(2,481
)
Net income attributable to non-controlling interests
 
(4
)
 
—

 
(13
)
 
—

Net income (loss) attributable to stockholders
 
232

 
(1,561
)
 
127

 
(2,481
)
Comprehensive income (loss) attributable to stockholders
 
$
232

 
$
(1,561
)
 
$
127

 
$
(2,481
)
 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
0.03

 
$
(0.34
)
 
$
0.02

 
$
(1.08
)
Diluted net income (loss) per share
 
$
0.02

 
$
(0.34
)
 
$
—

 
$
(1.08
)
Distributions declared per share
 
$
0.39

 
$
0.39

 
$
1.17

 
$
0.86


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


4

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2016
(In thousands, except for share data)
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
Balance, December 31, 2015
6,792,797

 
$
68

 
$
145,789

 
$
(10,604
)
 
$
135,253

 
$
472

 
$
135,725

Common stock offering costs, commissions and dealer manager fees
—

 
—

 
(62
)
 
—

 
(62
)
 
—

 
(62
)
Common stock issued through distribution reinvestment plan
136,060

 
1

 
3,231

 
—

 
3,232

 
—

 
3,232

Equity-based compensation
2,666

 
—

 
32

 
—

 
32

 
—

 
32

Distributions declared
—

 
—

 
—

 
(8,027
)
 
(8,027
)
 
—

 
(8,027
)
Distributions to non-controlling interest holders
—

 
—

 
—

 
—

 
—

 
(17
)
 
(17
)
Net income
—

 
—

 
—

 
127

 
127

 
13

 
140

Balance, September 30, 2016
6,931,523

 
$
69

 
$
148,990

 
$
(18,504
)
 
$
130,555

 
$
468

 
$
131,023


The accompanying notes are an integral part of this unaudited consolidated financial statement.


5

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
140

 
$
(2,481
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
4,660

 
543

Amortization of deferred financing costs
22

 
4

Amortization of mortgage premium
(32
)
 
(6
)
Amortization of market lease and other intangibles
154

 
(5
)
Equity-based compensation
32

 
12

Changes in assets and liabilities:
 
 
 
Straight-line rent receivable
(392
)
 
(48
)
Prepaid expenses and other assets
(186
)
 
(438
)
Accounts payable and accrued expenses
116

 
508

Deferred rent
233

 
289

Restricted cash
51

 
(45
)
Net cash provided by (used in) operating activities
4,798

 
(1,667
)
Cash flows from investing activities:
 
 
 
Investments in real estate
—

 
(67,557
)
Deposits paid for real estate acquisitions
—

 
(875
)
Capital expenditures
(120
)
 
—

Net cash used in investing activities
(120
)
 
(68,432
)
Cash flows from financing activities:
 
 
 

Payments of mortgage note payable
(71
)
 
(16
)
Payments of deferred financing costs
—

 
(119
)
Proceeds from issuance of common stock
—

 
136,361

Payments of offering costs and fees related to common stock issuances
(212
)
 
(15,795
)
Distributions paid
(4,810
)
 
(979
)
Distributions to non-controlling interest holders
(17
)
 
—

Advances from related party
—

 
(1,210
)
Net cash provided by (used in) financing activities
(5,110
)
 
118,242

Net change in cash
(432
)
 
48,143

Cash, beginning of period
16,808

 
187

Cash, end of period
$
16,376

 
$
48,330


6

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
152

 
$
27

Cash paid for income taxes
129

 
—

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Receivable for sale of common stock
$
—

 
$
930

Payable and accrued offering costs
228

 
436

Unfulfilled repurchase requests included in accounts payable, accrued expenses and other liabilities
—

 
25

Assumption of mortgage note payable used to acquire investment in real estate
—

 
5,124

Premium on assumed mortgage note payable
—

 
172

Liabilities assumed in real estate acquisitions
—

 
11

Common stock issued through distribution reinvestment plan
3,232

 
989


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

7

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


Note 1 — Organization
American Realty Capital Healthcare Trust III, Inc. (including, as required by context, American Realty Capital Healthcare III Operating Partnership, L.P. (the "OP") and its subsidiaries, the "Company") was incorporated on April 24, 2014 as a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with its taxable year ended December 31, 2015. On August 20, 2014, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 125.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, for total gross proceeds of up to $3.1 billion, pursuant to a registration statement on Form S-11 (File No. 333-196302) (as amended, the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to 26.3 million shares of common stock available pursuant to a distribution reinvestment plan (the "DRIP") under which common stockholders may elect to have their distributions reinvested in additional shares of common stock.
On February 11, 2015, the Company received and accepted aggregate subscriptions in excess of the minimum offering amount for the IPO of $2.0 million in shares of common stock, broke general escrow and issued shares to its initial investors, who were admitted as stockholders of the Company. As of September 30, 2016, the Company had 6.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO of $170.4 million. Until the net asset value ("NAV") pricing date (as described below), the per share purchase price of shares issued under the DRIP will be equal to $23.75 per share, which is equal to 95% of the offering price in the IPO. Beginning with the NAV pricing date, the per share price for shares under the DRIP will vary periodically and will be equal to the Company’s per share NAV. The NAV pricing date means the date that the Company first publishes an estimated per share NAV (the "NAV Pricing Date"), which will be on or prior to July 11, 2017, which is 150 days following the second anniversary of the date that the Company broke escrow in the IPO.
On November 15, 2015, the Company suspended its IPO, which was conducted by Realty Capital Securities, LLC (the “Former Dealer Manager”), as exclusive wholesale distributor, effective December 31, 2015, and, on November 18, 2015, the Former Dealer Manager suspended sales activities it performed pursuant to the dealer manager agreement for the IPO, effective immediately. On December 31, 2015, the Company entered into a termination agreement with the Former Dealer Manager to terminate the dealer manager agreement. On January 25, 2016, the Company registered an additional 0.7 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-209117). On August 20, 2016, the IPO lapsed in accordance with its terms. The Company continues to offer shares under the DRIP.
On April 29, 2016, the Company's board of directors announced that it had initiated a strategic review process (the "Strategic Review") to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The board of directors has established a special committee (the "Special Committee") comprised of the board's independent directors, which is conducting the Strategic Review and is addressing potential conflicts of interest. The Special Committee has engaged SunTrust Robinson Humphrey, Inc. as financial advisor and retained Shapiro Sher Guinot and Sandler, P.A. as special legal counsel in connection with the Strategic Review.
On June 30, 2016, the Company announced that in response to the receipt of an unsolicited proposal (the “Proposal”) from an entity (the “Proposing Entity”) sponsored by an affiliate of American Realty Capital VII, LLC, the Company’s sponsor (the “Sponsor”), relating to a potential strategic transaction with the Proposing Entity (the “Proposed Transaction”), the Special Committee and its financial advisor had engaged in discussions with a special committee formed by the Proposing Entity (and its financial advisor) and with others. Although these discussions have progressed since the receipt of the Proposal, they have not resulted in a definitive agreement with any party. The Company’s board of directors has not made a decision to enter into any transaction at this time, and there can be no assurance that the discussions and evaluation will result in a definitive agreement or that any such transaction would be approved by the Company’s stockholders. The Company does not intend to provide updates on the discussions or negotiations regarding the Proposal unless or until it determines that further disclosure is appropriate or required based on the then-current facts and circumstances.

8

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company was formed to primarily acquire a diversified portfolio of healthcare-related assets, including medical office buildings ("MOB"), seniors housing communities and other healthcare-related facilities, for investment purposes. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate. The Company purchased its first property and commenced real estate operations in March 2015. As of September 30, 2016, the Company owned 19 properties located in 10 states, comprised of 467,932 rentable square feet.
Substantially all of the Company's business is conducted through the OP. The Company has no employees. American Realty Capital Healthcare III Advisors, LLC (the "Advisor") has been retained to manage the Company's affairs on a day-to-day basis. The Company also has retained American Realty Capital Healthcare III Properties, LLC (the "Property Manager") to serve as the Company's property manager. The Advisor and the Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of the Sponsor, as a result of which they are related parties, and each have received or will receive compensation, fees and other expense reimbursements from the Company for services related to managing the Company's business. The Advisor, Property Manager and Former Dealer Manager have received or will receive fees during the Company's offering, acquisition, operational and liquidation stages.
Note 2 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 4, 2016. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2016 other than the updates described below.
Reclassifications
Certain prior year amounts within prepaid expenses and other assets, deferred costs, net, rental income, resident services and fee income and cash flows from operating activities have been reclassified to conform with the current year presentation.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has controlling financial interests. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests as of and during the period consolidated. All inter-company accounts and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity's expected losses or receive portions of the entity's expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity ("VIE"). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity's economic performance or (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE's operations.

9

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company's ability to direct the activities that most significantly impact the entity's economic performance, its form of ownership interest, its representation on the entity's governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company is the primary beneficiary.
The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company has not yet selected a transition method and is currently evaluating the impact of this new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption was permitted provided that the guidance was applied from the beginning of the fiscal year of adoption. The Company elected to adopt this new guidance as of September 30, 2015. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The Company has elected to adopt this guidance effective January 1, 2016. The Company has evaluated the impact of the adoption of this new guidance on its consolidated financial statements and has determined that the OP is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company’s partnership interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, this standard did not have a material impact on the Company's consolidated financial statements.

10

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. The Company has elected to adopt this guidance effective January 1, 2016. The adoption of this revised guidance resulted in the reclassification of $0.1 million of deferred financing costs related to the Company's mortgage note payable from deferred costs, net to mortgage note payable, net of deferred financing costs in the Company's consolidated balance sheets as of December 31, 2015.
In September 2015, the FASB issued an update that eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted. The Company elected to adopt this guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to the Company's financial position, results of operations and cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of this new guidance.
In February 2016, the FASB issued an update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance is effective on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to the Company’s consolidated financial position, results of operations and cash flows. The Company's policy is to account for forfeitures as they occur.

11

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
Note 3 — Real Estate Investments
The Company owned 19 properties as of September 30, 2016. The following table presents the allocation of the assets acquired and liabilities assumed during the nine months ended September 30, 2015. The Company did not acquire any properties during the nine months ended September 30, 2016.
 
 
Nine Months Ended
(Dollar amounts in thousands)
 
September 30, 2015
Real estate investments, at cost:
 
 
Land
 
$
7,192

Buildings, fixtures and improvements
 
57,073

Total tangible assets
 
64,265

Acquired intangibles:
 
 
In-place leases
 
8,655

Market lease assets
 
1,362

Market lease liabilities
 
(1,418
)
Total assets acquired, net
 
72,864

Mortgage note payable assumed to acquire real estate investment
 
(5,124
)
Premium on mortgage assumed
 
(172
)
Other liabilities assumed
 
(11
)
Cash paid for acquired real estate investments
 
$
67,557

Number of properties purchased
 
13

The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter as of September 30, 2016. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
(In thousands)
 
Future Minimum Base Rent Payments
October 1, 2016 — December 31, 2016
 
$
2,201

2017
 
8,832

2018
 
8,625

2019
 
8,294

2020
 
7,824

Thereafter
 
25,264

Total
 
$
61,040


12

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table lists the tenants (including for this purpose, all affiliates of such tenants) whose annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of September 30, 2016 and 2015:
 
 
September 30,
Tenant
 
2016
 
2015
Summit Orthopedics, Ltd.
 
*
 
14.2%
United States of America
 
*
 
11.3%
_______________
*
Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified
The following table lists the states where the Company has a concentration of properties where annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015 :
 
 
September 30,
State
 
2016
 
2015
Georgia
 
11.9%
 
19.2%
Illinois
 
42.2%
 
40.6%
Minnesota
 
*
 
14.2%
_______________
*
State's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified
Intangible Assets and Liabilities
Acquired intangible assets and liabilities consisted of the following as of the periods presented:
 
 
September 30, 2016
 
December 31, 2015
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place leases
 
$
16,023

 
$
3,457

 
$
12,566

 
$
16,023

 
$
931

 
$
15,092

Intangible market lease assets
 
2,427

 
346

 
2,081

 
2,427

 
81

 
2,346

Total acquired intangible assets
 
$
18,450

 
$
3,803

 
$
14,647

 
$
18,450

 
$
1,012

 
$
17,438

Intangible market lease liabilities
 
$
1,902

 
$
164

 
$
1,738

 
$
1,902

 
$
53

 
$
1,849

The following table discloses amounts recognized within the consolidated statements of operations and comprehensive loss related to amortization of in-place lease assets, amortization and accretion of above- and below-market lease assets and liabilities, net and the accretion of above-market ground leases, for the periods presented:

13

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Amortization of in-place leases(1)
 
$
788

 
$
235

 
$
2,525

 
$
265

Amortization (accretion) of above- and below-market leases, net(2)
 
55

 
3

 
166

 
(3
)
Accretion of above-market ground leases(3)
 
(4
)
 
(2
)
 
(12
)
 
(2
)
_______________
(1)
Reflected within depreciation and amortization expense
(2)
Reflected within rental income
(3)
Reflected within property operating and maintenance expense
The following table provides the projected amortization expense and adjustments to revenues for the next five years:
(In thousands)
 
October 1, 2016 — December 31, 2016
 
2017
 
2018
 
2019
 
2020
In-place lease assets
 
$
601

 
$
2,362

 
$
2,197

 
$
2,022

 
$
1,794

Total to be added to amortization expense
 
$
601

 
$
2,362

 
$
2,197

 
$
2,022

 
$
1,794

 
 
 
 
 
 
 
 
 
 
 
Above-market lease assets
 
$
88

 
$
351

 
$
318

 
$
309

 
$
301

Below-market lease liabilities
 
(33
)
 
(132
)
 
(132
)
 
(131
)
 
(127
)
Total to be deducted from rental income
 
$
55

 
$
219

 
$
186

 
$
178

 
$
174

 
 
 
 
 
 
 
 
 
 
 
Above-market ground lease liabilities
 
$
4

 
$
16

 
$
16

 
$
16

 
$
16

Total to be deducted from property operating and maintenance expense
 
$
4

 
$
16

 
$
16

 
$
16

 
$
16

Note 4 — Mortgage Note Payable
The following table reflects the Company's mortgage note payable as of September 30, 2016 and December 31, 2015:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate
 
 
 
 
Portfolio
 
Encumbered Properties
 
September 30, 2016
 
December 31, 2015
 
 
Interest Rate
 
Maturity
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Philip Professional Center — Lawrenceville, GA
 
2
 
$
5,021

 
$
5,093

 
4.0
%
 
Fixed
 
Oct. 2019
Deferred financing costs, net of accumulated amortization
 
 
 
(85
)
 
(108
)
 
 
 
 
 
 
Mortgage note payable, net of deferred financing costs
 
 
 
$
4,936

 
$
4,985

 
 
 
 
 
 
As of September 30, 2016, the Company had pledged $9.0 million in real estate as collateral for the mortgage note payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage note payable on the property. The Company makes payments of principal and interest on its mortgage note payable on a monthly basis.

14

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table summarizes the scheduled aggregate principal payments on the Company's mortgage note payable for the five years subsequent to September 30, 2016:
(In thousands)
 
Future Principal
Payments
October 1, 2016 — December 31, 2016
 
$
24

2017
 
100

2018
 
104

2019
 
4,793

2020
 
—

Thereafter
 
—

Total
 
$
5,021

Note 5 — Fair Value of Financial Instruments
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash, restricted cash, straight-line rent receivable, prepaid expenses and other assets, deferred costs, net, accounts payable and accrued expenses, deferred rent and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair value of the Company's remaining financial instrument that is not reported at fair value on the consolidated balance sheet is reported below.
 
 
 
 
Carrying
Amount(1) at
 
Fair Value at
 
Carrying
Amount (1) at
 
Fair Value at
(In thousands)
 
Level
 
September 30,
2016
 
September 30,
2016
 
December 31,
2015
 
December 31,
2015
Mortgage note payable and premium, net
 
3
 
$
5,144

 
$
5,195

 
$
5,248

 
$
5,181

_______________
(1)
Carrying value includes gross mortgage note payable of $5.0 million and $5.1 million and mortgage premium, net of $0.1 million and $0.2 million as of September 30, 2016 and December 31, 2015, respectively.
The fair value of the mortgage note payable is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.

15

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 6 — Common Stock
The Company had 6.9 million and 6.8 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, as of September 30, 2016 and December 31, 2015, respectively. The Company had received total gross proceeds of $170.4 million and $167.2 million as of September 30, 2016 and December 31, 2015, respectively.
The Company has paid distributions on a monthly basis to stockholders of record on a daily basis at a rate equal to $0.0042808219 per day, which is equivalent to $1.56 per annum, per share of common stock, beginning on March 15, 2015. In March 2016, the Company's board of directors ratified the existing distribution amount equivalent to $1.56 per annum, and, for the calendar year 2016, affirmed a change to the daily distribution payable to stockholders of record each day during the applicable period to $0.0042691257 per day per share of common stock to accurately reflect that 2016 is a leap year. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share Repurchase Program
The Company's board of directors has adopted a Share Repurchase Program (as amended, the “SRP”) that enables stockholders to sell their shares to the Company in limited circumstances. The SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to significant conditions and limitations described below.
Prior to the time that the Company’s shares are listed on a national securities exchange and until the Company begins to calculate NAV (other than with respect to a repurchase request that is made in connection with a stockholder’s death or disability), the repurchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share, and after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations). In cases of requests for death and disability, the repurchase prices will be equal to the price actually paid for each such share.
Beginning with the NAV Pricing Date, the price per share that the Company will pay to repurchase its shares will be equal to its NAV at the time of repurchase multiplied by a percentage equal to (i) 92.5%, if the person seeking repurchase has held his or her shares for a period greater than one year and less than two years; (ii) 95.0%, if the person seeking repurchase has held his or her shares for a period greater than two years and less than three years; (iii) 97.5%, if the person seeking repurchase has held his or her shares for a period greater than three years and less than four years; or (iv) 100.0%, if the person seeking repurchase has held his or her shares for a period greater than four years. In cases of requests for death and disability, the repurchase prices will be equal to NAV at the time of repurchase. Subject to limited exceptions, stockholders who redeem their shares of our common stock within the first four months from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate NAV per share of the shares of common stock received.
Repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the board of directors. Until the First SRP Amendment (described below), the Company limited the number of shares repurchased during any calendar year to 5% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, the Company was only authorized to repurchase shares in a given quarter up to the amount of proceeds received from its DRIP in that same quarter.
On January 25, 2016, the Company's board of directors approved and amended the SRP (the "First SRP Amendment") to supersede and replace the existing SRP. Under the SRP Amendment, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year (the "Prior Year Outstanding Shares"), with a maximum for any fiscal year of 5.0% of the Prior Year Outstanding Shares. In addition, the Company is only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from its DRIP in that same fiscal semester. If the NAV Pricing Date occurs during any fiscal semester, any repurchase requests received during such fiscal semester will be paid at the applicable NAV then in effect.

16

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

On June 29, 2016, the board of directors of the Company further amended the Company’s SRP (the "Second SRP Amendment") to provide, solely for calendar year 2016, for a nine-month repurchase period ending September 30, 2016 and a three-month repurchase period ending December 31, 2016, instead of two semi-annual periods ending June 30 and December 31. The annual limit on repurchases under the SRP remains unchanged and continues to be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and is subject to the terms and limitations set forth in the SRP. Accordingly, the nine-month repurchase period ending September 30, 2016 will be limited to a maximum of 3.75% of the Prior Year Outstanding Shares and the three-month repurchase period ending December 31, 2016 will be limited to a maximum of 1.25% of the Prior Year Outstanding Shares, and in each case will continue to be subject to the terms and conditions set forth in the SRP, as amended. The Second SRP Amendment also provides, for calendar year 2016 only, that any amendments, suspensions or terminations of the SRP will become effective on the day following the Company’s public announcement of such amendments, suspension or termination. The Second SRP Amendment became effective on July 30, 2016 and will only apply to repurchase periods in calendar year 2016.
On September 21, 2016, the board of directors of the Company further amended the Company’s SRP (the "Third SRP Amendment") to provide, solely for calendar year 2016, for one twelve-month repurchase period ending December 31, 2016. The annual limit on repurchases under the SRP remains unchanged and continues to be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and is subject to the terms and limitations set forth in the SRP. Following calendar year 2016, the repurchase periods will return to two semi-annual periods and applicable limitations set forth in the SRP. The Third SRP Amendment became effective on September 22, 2016 and will only apply to repurchase periods in calendar year 2016.
When a stockholder requests a repurchase and the repurchase is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through September 30, 2016:
 
 
Number of Shares Repurchased
 
Average Price per Share
Cumulative repurchases as of December 31, 2015(1)
 
1,021

 
$
24.97

Nine months ended September 30, 2016(2)
 
—

 
—

Cumulative repurchases as of September 30, 2016(1)(2)
 
1,021

 
$
24.97

_______________
(1)
Excludes rejected repurchases of 1,336 shares for approximately $33,000 at an average price per share of $24.95, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from April 24, 2014 (date of inception) to September 30, 2016.
(2)
Excludes 0.2 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016 will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP.
The SRP will immediately terminate if the Company's shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend (in whole or in part) or terminate the SRP at any time, with effect the day following announcement of the amendment, suspension or termination, during calendar year 2016, and thereafter upon 30 days’ prior written notice to our stockholders.

17

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased under the DRIP. The shares purchased pursuant to the DRIP have the same rights and are treated in the same manner as the shares issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from reinvestment pursuant to the DRIP. On June 29, 2016, the board of directors of the Company amended the DRIP such that any amendment, suspension or termination of the DRIP will become effective immediately upon (i) the Company’s public announcement of such amendment, suspension or termination and (ii) the Company’s mailing of a notice regarding the amendment, suspension or termination to each DRIP participant. Shares issued under the DRIP are recorded to equity in the accompanying consolidated balance sheets in the period distributions are declared. During the nine months ended September 30, 2016 and 2015, respectively, the Company issued approximately 136,000 and 42,000 shares of common stock pursuant to the DRIP, generating aggregate proceeds of $3.2 million and $1.0 million.
Note 7 — Related Party Transactions and Arrangements
As of September 30, 2016 and December 31, 2015, American Realty Capital Healthcare III Special Limited Partnership, LLC (the "Special Limited Partner"), an entity controlled by the Sponsor, owned 8,888 shares of the Company's outstanding common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company. As of September 30, 2016 and December 31, 2015, the Company had $0.3 million payable to related parties.
The Former Dealer Manager served as the dealer manager of the IPO. SK Research, LLC ("SK Research") and American National Stock Transfer, LLC ("ANST"), both subsidiaries of the parent company of the Former Dealer Manager, provided other general professional services through December 2015 and January 2016, respectively. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided us with services, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global, the parent of the Company's sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name Aretec Group, Inc.
Fees Paid in Connection with the IPO
The Former Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock in the IPO. The Former Dealer Manager was paid a selling commission of up to 7.0% of the per share purchase price of the IPO proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager received up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer manager fee. The Former Dealer Manager was able to reallow its dealer manager fee to such participating broker-dealers. A participating broker dealer may have elected to receive a fee equal to 7.5% of the gross proceeds from the sale of shares (not including selling commissions and dealer manager fees) by such participating broker dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option was elected, the dealer manager fee was reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees). The following table details total selling commissions and dealer manager fees incurred from and due to the Former Dealer Manager as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable as of
(In thousands)
 
2016
 
2015
 
2016
 
2015
 
September 30, 2016
 
December 31, 2015
Total commissions and fees incurred from and due to the Former Dealer Manager
 
$
—

 
$
4,663

 
$
—

 
$
11,942

 
$
—

 
$
—


18

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Advisor, Sponsor and Former Dealer Manager and their affiliates received compensation and reimbursement for services relating to the IPO. All offering costs incurred by the Company and the Advisor, Sponsor and Former Dealer Manager and their affiliates on behalf of the Company are charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details fees and reimbursable offering costs incurred and payable as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable as of
(In thousands)
 
2016
 
2015
 
2016
 
2015
 
September 30, 2016
 
December 31, 2015
Fees and expense reimbursements incurred from and due to the Advisor and its affiliates
 
$
—

 
$
721

 
$
—

 
$
782

 
$
—

 
$
12

Fees and expense reimbursements incurred from and due to the Former Dealer Manager and its affiliates
 
—

 
422

 
—

 
1,239

 
228

 
228

Fees and expense reimbursements incurred from and due to the Sponsor
 
—

 
7

 
—

 
7

 
—

 
—

Total fees and expense reimbursements incurred from and due to the Advisor, Sponsor and Former Dealer Manager and their affiliates
 
$
—

 
$
1,150

 
$
—

 
$
2,028

 
$
228

 
$
240

The Company was responsible for offering and related costs from the IPO, excluding selling commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding selling commissions and dealer manager fees, in excess of the 2.0% limitation as of the end of the IPO are the Advisor's responsibility. The IPO lapsed in accordance with its terms on August 20, 2016. As of the end of the IPO, offering and related costs, excluding commissions and dealer manager fees, exceeded 2.0% of gross proceeds received from the IPO by $3.8 million. At the end of the IPO, the amount by which the Company was over the 2.0% limitation was netted against the offering costs that were previously charged to additional paid-in capital on the accompanying consolidated balance sheets. The Company recorded a corresponding receivable from the Advisor for this amount, which was subsequently reclassified to additional paid-in capital in the accompanying consolidated balance sheet as of September 30, 2016.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor receives an acquisition fee of 1.5% of the contract purchase price of each property acquired and 1.5% of the amount advanced for a loan or other investment. The Advisor is also reimbursed for services provided for which it incurs investment-related expense, or insourced expenses. Such insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for third party acquisition expenses. The Company also reimburses the Advisor for legal expenses it or its affiliates incur in connection with the selection, evaluation and acquisition of assets, in an amount not to exceed 0.1% of the contract purchase price of each property or 0.1% of the amount advanced for each loan or other investment. Once the proceeds from the IPO have been fully invested, the aggregate amount of acquisition fees and any financing coordination fees (as described below) may not exceed 2.0% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees payable with respect to a particular investment exceed 4.5% of the contract purchase price of the Company's portfolio to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.

19

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

For its asset management services, the Company pays the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units are intended to be profit interests and will vest, and no longer be subject to forfeiture, at such time as any one of the following events occur: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing of the Company's common stock on a national securities exchange; or (3) a transaction to which the Company or the OP is a party, as a result of which OP Units or the Company's common stock are or will be exchanged for or converted into the right, or the holders of such securities will otherwise be entitled, to receive cash, securities or other property or any combination thereof; provided that the Advisor, pursuant to the advisory agreement, is providing services to the Company immediately prior to the occurrence of an event of the type described therein (the "performance condition"). Such Class B Units will be forfeited immediately if the advisory agreement is terminated for any reason other than a termination without cause.
When and if approved by the board of directors, the Class B Units are expected to be issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter is an amount equal to: (i) the excess of (A) the product of (y) 0.1875% multiplied by (z) the cost of the Company's assets (until the NAV Pricing Date, then the lower of the cost of assets and the fair value of the Company’s assets) over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the IPO price minus the selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor will receive distributions on unvested Class B Units equal to the distribution received on the Company's common stock. Such distributions on issued Class B Units will be expensed in the consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. During the three and nine months ended September 30, 2016, the Company's board of directors approved the issuance of 9,583 and 29,115 Class B Units, respectively, to the Advisor in connection with this arrangement. During the three and nine months ended September 30, 2015, the Company's board of directors approved the issuance of 1,457 Class B Units to the Advisor in connection with this arrangement. As of September 30, 2016, the Company's board of directors had approved the issuance of 36,370 Class B Units to the Advisor in connection with this arrangement.
Unless the Company contracts with a third party, the Company will pay the Property Manager a property management fee of 1.5% of gross revenues from the Company's single-tenant net leased properties and 2.5% of gross revenues from all other types of properties. The Company will also reimburse the Property Manager for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and will pay the Property Manager an oversight fee of up to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager or any affiliates of the Property Manager both a property management fee and an oversight fee with respect to any particular property. Property management fees are recorded to operating fees to related party in the accompanying consolidated statements of operations and comprehensive loss.
SK Research and ANST, both subsidiaries of the parent company of the Former Dealer Manager, provided other general professional services through December 2015 and January 2016, respectively. The Advisor pays general and administrative expenses on behalf of the Company, for which, the Company subsequently reimburses the Advisor. These fees and reimbursements are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.

20

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table details amounts incurred, forgiven and payable in connection with the Company's operations-related services described above as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
2016
 
2015
 
2016
 
2015
 
Payable as of
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
September 30,
2016
 
December 31,
2015
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees
 
$
—

 
$
—

 
$
855

 
$
—

 
$
—

 
$
—

 
$
1,091

 
$
—

 
$
—

 
$
—

Acquisition cost reimbursements
 
—

 
—

 
285

 
—

 
—

 
—

 
364

 
—

 
—

 
—

Financing coordination fees
 
—

 
—

 
38

 
—

 
—

 
—

 
38

 
—

 
—

 
—

Ongoing fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property management fees
 
41

 
—

 
15

 
—

 
120

 
—

 
15

 
3

 
—

 
4

Professional fees and reimbursements
 
66

 
—

 
81

 
—

 
224

 
—

 
277

 
—

 
29

 
43

Distributions on Class B units
 
13

 
—

 
—

 
—

 
26

 
—

 
—

 
—

 
6

 
1

Total related party operating fees and reimbursements
 
$
120

 
$
—

 
$
1,274

 
$
—

 
$
370

 
$
—

 
$
1,785

 
$
3

 
$
35

 
$
48

The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt, impairments or other similar non-cash expenses and excluding any gain from the sale of assets for that period (the "2%/25% Limitation"), unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company will reimburse the Advisor for personnel costs in connection with other services during the operational stage; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expense reimbursements or real estate commissions or for persons serving as executive officers of the Company. No reimbursement was incurred from the Advisor for providing such services during the three and nine months ended September 30, 2016 or 2015.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. If the Advisor waives certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor in cash. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs. No expenses were absorbed by the Advisor during the three and nine months ended September 30, 2016 or 2015.
The predecessor to AR Global was party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with ANST, a subsidiary of the parent company of the Former Dealer Manager, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-party transfer agent ("DST"). AR Global received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).

21

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Fees and Participations Paid in Connection with a Listing or the Liquidation of the Company's Real Estate Assets
The Company will pay the Advisor an annual subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholder's capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, distributions or other event which results in the return on stockholder's capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and nine months ended September 30, 2016 or 2015.
The Company will pay the Advisor a real estate commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and agents and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission. Real estate commissions will only be payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three and nine months ended September 30, 2016 or 2015.
The Company will pay the Special Limited Partner a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in the net sales proceeds unless investors have received a return of their capital plus a return equal to a 6.0% cumulative non-compounded annual return on their capital contributions. No participation in net sales proceeds was incurred during the three and nine months ended September 30, 2016 or 2015.
If the Company's shares of common stock are listed on a national securities exchange, the Special Limited Partner will receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the Company's market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Company cannot assure that it will provide this 6.0% annual return but the Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distribution was incurred during the three and nine months ended September 30, 2016 or 2015. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated listing distribution.
Upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner will be entitled to receive distributions from the OP equal to 15% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Note 8 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common ownership with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

22

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 9 — Equity-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, after initial election to the board of directors and after each annual stockholder's meeting, with such shares vesting annually beginning with the one year anniversary of initial election to the board of directors and the date of the next annual meeting, respectively. Restricted shares issued to independent directors vest over a five-year period in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of common shares granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 6.3 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive common shares from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares shall be subject to the same restrictions as the underlying restricted shares. The following table reflects restricted share award activity for the period presented:
 
 
Number of
Common Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2015
 
4,799

 
$
22.50

Granted
 
2,666

 
22.50

Vested
 
(1,067
)
 
22.50

Forfeitures
 
—

 
—

Unvested, September 30, 2016
 
6,398

 
$
22.50

As of September 30, 2016, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share award grants under the Company's RSP. That cost is expected to be recognized over a weighted average period of 3.9 years. The fair value of the restricted shares is being expensed on a straight-line basis over the service period of five years. Compensation expense related to restricted shares was approximately $20,000 and $32,000 for the three and nine months ended September 30, 2016, respectively. Compensation expense related to restricted shares was approximately $6,000 and $12,000 for the three and nine months ended September 30, 2015, respectively. Compensation expense related to restricted shares is recorded as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Note 10 — Non-Controlling Interests
The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP Units"). As of September 30, 2016 and December 31, 2015, the Advisor held 90 OP Units, which represents a nominal percentage of the aggregate OP ownership.
A holder of limited partner interests has the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, as allowed by the limited partnership agreement of the OP. The remaining rights of the holders of limited partner interests in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets. No distributions were paid to OP Unit holders during the three and nine months ended September 30, 2016 or 2015.

23

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company has an investment arrangement with unaffiliated third parties whereby such investors receive an ownership interest in certain of the Company's property owning subsidiaries and are entitled to receive a proportionate share of the net operating cash flow derived from the subsidiaries' property. Upon disposition of a property subject to this investment arrangement, the investors will receive a proportionate share of the net proceeds from the sale of the property. The investors have no recourse to any other assets of the Company. Due to the nature of the Company's involvement with the arrangement and the significance of its investment in relation to the investment of the third parties, the Company has determined that it controls each entity in this arrangement and therefore the entities related to this arrangement are consolidated within the Company's financial statements. A non-controlling interest is recorded for the investor's ownership interest in the properties.
The following table summarizes the activity related to investment arrangements with the unaffiliated third party.
 
 
 
 
 
 
 
 
As of September 30, 2016
 
As of December 31, 2015
 
Distributions for the Three Months Ended September, 30
 
Distributions for the Nine Months Ended September 30,
Property Name
(Dollar amounts in thousands)
 
Investment Date
 
Third Party Net Investment Amount as of September 30, 2016
 
Non-Controlling Ownership Percentage as of September 30, 2016
 
Net Real Estate Assets Subject to Investment Arrangement
 
Mortgage Notes Payable Subject to Investment Arrangement
 
Net Real Estate Assets Subject to Investment Arrangement
 
Mortgage Notes Payable Subject to Investment Arrangement
 
2016
 
2015
 
2016
 
2015
UnityPoint Clinic - Muscatine, IA
 
Dec. 2015
 
$
286

 
5
%
 
$
5,849

 
$
—

 
$
6,024

 
$
—

 
$
10

 
—

 
$
10

 
—

UnityPoint Clinic - Moline, IL
 
Dec. 2015
 
182

 
5
%
 
3,730

 
—

 
3,846

 
—

 
7

 
—

 
7

 
—


24

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 11 — Net Income (Loss) Per Share
The following is a summary of the basic and diluted net income (loss) per share computation for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except share and per share amounts)
 
2016
 
2015
 
2016
 
2015
Computation of Basic Net Income (Loss) Per Share:
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
232

 
$
(1,561
)
 
$
127

 
$
(2,481
)
Basic weighted-average shares outstanding
 
6,908,297

 
4,614,153

 
6,857,513

 
2,291,631

Basic net income (loss) income per share
 
$
0.03

 
$
(0.34
)
 
$
0.02

 
$
(1.08
)
 
 
 
 
 
 
 
 
 
Computation of Diluted Net Income (Loss) Per Share:
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
232

 
$
(1,561
)
 
$
127

 
$
(2,481
)
Adjustments to net income (loss) for common share equivalents
 
(114
)
 
—

 
(114
)
 
—

Diluted net income (loss)
 
$
118

 
$
(1,561
)
 
$
13

 
$
(2,481
)
 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
6,908,297

 
4,614,153

 
6,857,513

 
2,291,631

Shares of unvested restricted shares (1)
 
5,900

 
—

 
5,153

 
—

OP Units
 
90

 
—

 
90

 
—

Diluted weighted-average shares outstanding
 
6,914,287

 
4,614,153

 
6,862,756

 
2,291,631

 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share
 
$
0.02

 
$
(0.34
)
 
$
—

 
$
(1.08
)
_______________
(1)
Weighted-average number of shares of unvested restricted stock outstanding for the periods presented.
The Company had the following potentially dilutive securities as of September 30, 2016 and 2015, which were excluded from the calculation of diluted net income (loss) per share attributable to stockholders as their effect would have been antidilutive:
 
 
September 30,
 
 
2016
 
2015
Unvested restricted shares
 
—

 
5,332

OP Units
 
—

 
90

Class B Units
 
36,370

 
1,457

Total potentially dilutive securities
 
36,370

 
6,879

Note 12 — Segment Reporting
During the three and nine months ended September 30, 2016 and 2015, the Company operated in three reportable business segments for management and internal financial reporting purposes: medical office buildings, triple-net leased healthcare facilities and seniors housing — operating properties.

25

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company evaluates performance and makes resource allocations based on its three business segments. The medical office building segment primarily consists of MOBs leased to healthcare-related tenants under long-term leases, which may require such tenants to pay a pro rata share of property-related expenses. The triple-net leased healthcare facilities segment primarily consists of investments in seniors housing communities, hospitals, inpatient rehabilitation facilities and skilled nursing facilities under long-term leases, under which tenants are generally responsible to directly pay property-related expenses. The SHOP segment consists of direct investments in seniors housing communities, primarily providing assisted living, independent living and memory care services, which are operated through engaging independent third-party managers. There were no intersegment sales or transfers during the periods presented.
The Company evaluates the performance of the combined properties in each segment based on net operating income ("NOI"). NOI is defined as total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss). The Company uses NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. The Company believes that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property's results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by the Company may not be comparable to NOI reported by other REITs that define NOI differently. The Company believes that in order to facilitate a clear understanding of the Company's operating results, NOI should be examined in conjunction with net income (loss) as presented in the Company's consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of the Company's performance or to cash flows as a measure of the Company's liquidity or ability to make distributions.

26

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following tables reconcile the segment activity to consolidated net loss for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
(In thousands)
 
Medical Office Buildings
 
Triple-Net Leased Healthcare Facilities
 
Seniors Housing — Operating Properties
 
Consolidated
 
Medical Office Buildings
 
Triple-Net Leased Healthcare Facilities
 
Seniors Housing — Operating Properties
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
2,168

 
$
104

 
$
—

 
$
2,272

 
$
6,504

 
$
313

 
$
—

 
$
6,817

Operating expense reimbursements
 
652

 
—

 
—

 
652

 
1,903

 
—

 
—

 
1,903

Resident services and fee income
 
—

 
—

 
749

 
749

 
—

 
—

 
2,156

 
2,156

Total revenues
 
2,820

 
104

 
749

 
3,673

 
8,407

 
313

 
2,156

 
10,876

Property operating and maintenance
 
822

 
1

 
483

 
1,306

 
2,417

 
1

 
1,429

 
3,847

NOI
 
$
1,998

 
$
103

 
$
266

 
2,367

 
$
5,990

 
$
312

 
$
727

 
7,029

Operating fees to related party
 
 
 
 
 
 
 
(41
)
 
 
 
 
 
 
 
(120
)
Acquisition and transaction related
 
 
 
 
 
 
 
(104
)
 
 
 
 
 
 
 
(237
)
General and administrative
 
 
 
 
 
 
 
(363
)
 
 
 
 
 
 
 
(1,584
)
Depreciation and amortization
 
 
 
 
 
 
 
(1,502
)
 
 
 
 
 
 
 
(4,660
)
Interest expense
 
 
 
 
 
 
 
(47
)
 
 
 
 
 
 
 
(142
)
Interest and other income
 
 
 
 
 
 
 
—

 
 
 
 
 
 
 
1

Income tax expense
 
 
 
 
 
 
 
(74
)
 
 
 
 
 
 
 
(147
)
Net income attributable to non-controlling interests
 
 
 
 
 
 
 
(4
)
 
 
 
 
 
 
 
(13
)
Net income (loss) attributable to stockholders
 
 
 
 
 
 
 
$
232

 
 
 
 
 
 
 
$
127


27

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

 
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
(In thousands)
 
Medical Office Buildings
 
Triple-Net Leased Healthcare Facilities
 
Seniors Housing — Operating Properties
 
Consolidated
 
Medical Office Buildings
 
Triple-Net Leased Healthcare Facilities
 
Seniors Housing — Operating Properties
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
690

 
$
43

 
$
—

 
$
733

 
$
860

 
$
43

 
$
—

 
$
903

Operating expense reimbursements
 
140

 
—

 
—

 
140

 
173

 
—

 
—

 
173

Resident services and fee income
 
—

 
—

 
311

 
311

 
—

 
—

 
311

 
311

Total revenues
 
830

 
43

 
311

 
1,184

 
1,033

 
43

 
311

 
1,387

Property operating and maintenance
 
184

 
—

 
198

 
382

 
220

 
—

 
198

 
418

NOI
 
$
646

 
$
43

 
$
113

 
802

 
$
813

 
$
43

 
$
113

 
969

Operating fees to related party
 
 
 
 
 
 
 
(15
)
 
 
 
 
 
 
 
(15
)
Acquisition and transaction related
 
 
 
 
 
 
 
(1,415
)
 
 
 
 
 
 
 
(1,888
)
General and administrative
 
 
 
 
 
 
 
(440
)
 
 
 
 
 
 
 
(975
)
Depreciation and amortization
 
 
 
 
 
 
 
(464
)
 
 
 
 
 
 
 
(543
)
Interest expense
 
 
 
 
 
 
 
(25
)
 
 
 
 
 
 
 
(25
)
Income tax expense
 
 
 
 
 
 
 
(4
)
 
 
 
 
 
 
 
(4
)
Net income (loss) attributable to stockholders
 
 
 
 
 
 
 
$
(1,561
)
 
 
 
 
 
 
 
$
(2,481
)
The following table reconciles the segment activity to consolidated total assets as of the periods presented:
 
 
September 30,
 
December 31,
(In thousands)
 
2016
 
2015
ASSETS
 
 
 
 
Investments in real estate, net:
 
 
 
 
Medical office buildings
 
$
108,238

 
$
112,093

Triple-net leased healthcare facilities
 
4,595

 
4,720

Seniors housing — operating properties
 
10,293

 
11,173

Total investments in real estate, net
 
123,126

 
127,986

Cash
 
16,376

 
16,808

Restricted cash
 
11

 
62

Straight-line rent receivable
 
545

 
153

Prepaid expenses and other assets
 
966

 
735

Deferred costs, net
 
10

 
—

Total assets
 
$
141,034

 
$
145,744


28

AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 13 — Commitments and Contingencies
The Company has entered into operating lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter under these arrangements. These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum Base Rental Payments
October 1, 2016 — December 31, 2016
 
$
26

2017
 
104

2018
 
105

2019
 
106

2020
 
109

Thereafter
 
3,440

Total
 
$
3,890

Total rental expense from the Company's operating leases was approximately $34,000 and $0.1 million during the three and nine months ended September 30, 2016, respectively. Total rental expense from the Company's operating leases was approximately $7,000 during the three and nine months ended September 30, 2015.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 14 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements.


29

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of American Realty Capital Healthcare Trust III, Inc. and the notes thereto. As used herein, the terms the "Company," "we," "our" and "us" refer to American Realty Capital Healthcare Trust III, Inc., a Maryland corporation, including, as required by context, American Realty Capital Healthcare III Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by American Realty Capital Healthcare III Advisors, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein, but not otherwise defined, have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the unaudited consolidated financial statements and contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We have announced that our board of directors has established a special committee (the "Special Committee") comprised of the board's independent directors to respond to the receipt of an unsolicited proposal (the “Proposal”) from an entity (the “Proposing Entity”) sponsored by an affiliate of American Realty Capital VII, LLC, the Company’s sponsor (the “Sponsor”), relating to a potential strategic transaction with the Proposing Entity (the “Proposed Transaction”). Our board of directors has not made a decision to enter into any transaction at this time, and there can be no assurance that the discussions and evaluation will result in a definitive agreement or that any such transaction would be approved by our stockholders.
•
All of our executive officers and directors are also officers, managers or holders of a direct or indirect controlling interest in the Advisor and other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of our sponsor, American Realty Capital VII, LLC (the "Sponsor"). As a result, our executive officers and directors, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by affiliates of AR Global and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions that adversely affect us.
•
Because investment opportunities that are suitable for us may also be suitable for other investment programs advised by affiliates of AR Global, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
•
No public market currently exists, or may ever exist, for shares of our common stock which are, and may continue to be, illiquid.
•
Our initial public offering of common stock (the "IPO"), which commenced on August 20, 2014 and lapsed in accordance with its terms on August 20, 2016, was a blind pool offering and investors may not have had the opportunity to evaluate our investments before making a purchase of our common stock, thus making an investment in our common stock more speculative.
•
We focus on acquiring a diversified portfolio of healthcare-related assets located in the United States and are subject to risks inherent in concentrating investments in the healthcare industry. We have only $16.4 million in cash on hand. While we may use a portion of cash on hand to consummate additional acquisitions, we generally expect to use cash on hand to fund distributions or for working capital needs.
•
We suspended our IPO, which subsequently lapsed in accordance with its terms, which was our primary source of capital to implement our investment strategy, reduce our borrowings, complete acquisitions, make capital expenditures and pay distributions, and we may not be able to obtain additional capital from other sources. As a result, we will be unable to achieve certain of our investment objectives, such as the anticipated size and diversification of our portfolio, without accessing other sources of capital.

30

•
The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of tenants to make lease payments to us.
•
We are depending on our Advisor to conduct our operations. Adverse changes in the financial condition of our Advisor or our relationship with our Advisor could adversely affect us.
•
We may be unable to pay or maintain cash distributions or increase distributions over time.
•
We are permitted to pay distributions from unlimited amounts of any source. We have used, and may continue to use, net proceeds from our IPO, which has lapsed in accordance with its terms, and may use borrowings to fund distributions until we have sufficient cash flows from operations. There are no established limits on the amount of net proceeds and borrowings that we may use to fund distribution payments, except for those imposed by our organizational documents or Maryland law.
•
We may not generate cash flows in the future sufficient to pay our distributions to stockholders and, as such, to continue to pay distributions, we may be required to fund distributions from our remaining proceeds from our IPO, which has been closed, and from borrowings, which may be at unfavorable rates and could restrict the amount we can borrow for investments and other purposes, or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations.
•
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates.
•
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.
•
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
•
We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time.
•
We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and the cash available for distributions.
•
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act.
•
Commencing on the net asset value ("NAV") pricing date, the offering price of shares sold pursuant to our distribution reinvestment plan ("DRIP") and the repurchase price for our shares under our Share Repurchase Plan (our "SRP") will be based on NAV, which may not accurately reflect the value of our assets and may not represent what stockholders may receive on a liquidation of our assets.
Overview
We were incorporated on April 24, 2014 as a Maryland corporation that elected and qualified to be taxed as a REIT beginning with our taxable year ended December 31, 2015. On August 20, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to 125.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, for total gross proceeds of up to $3.1 billion, pursuant to a registration statement on Form S-11 (File No. 333-196302) (as amended, the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covers up to 26.3 million shares of common stock available pursuant to our DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock.
On February 11, 2015, we received and accepted aggregate subscriptions in excess of the minimum offering amount for the IPO of $2.0 million in shares of common stock, broke general escrow and issued shares to our initial investors, who were admitted as stockholders. As of September 30, 2016, we had 6.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO of $170.4 million. Until the NAV pricing date (as described below) the per share purchase price of shares issued under the DRIP will be equal to $23.75 per share, which is equal to 95% of the offering price in our IPO. Beginning with the NAV pricing date, the per share price for shares under the DRIP will vary periodically and will be equal to our NAV. The NAV pricing date means the date we first publish an estimated per share NAV, which will be on or prior to July 11, 2017, which is 150 days following the second anniversary of the date that we broke escrow in our IPO.

31

On November 15, 2015, we suspended our IPO, which was conducted by Realty Capital Securities, LLC (the "Former Dealer Manager"), as exclusive wholesale distributor, effective December 31, 2015, and, on November 18, 2015, the Former Dealer Manager suspended sales activities it performed pursuant to the dealer manager agreement for the IPO, effective immediately. On December 31, 2015, we entered into a termination agreement with the Former Dealer Manager to terminate the dealer manager agreement. On January 25, 2016, we registered an additional 0.7 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-209117) (the "DRIP Registration Statement"). On August 20, 2016, the IPO lapsed in accordance with its terms. We continue to offer shares under the DRIP.
On April 29, 2016, our board of directors announced that it had initiated a strategic review process (the "Strategic Review") to identify, examine, and consider a range of strategic alternatives available to us with the objective of maximizing shareholder value. The board of directors has established the Special Committee comprised of the board's independent directors, which is conducting the Strategic Review and is addressing potential conflicts of interest. The Special Committee has engaged SunTrust Robinson Humphrey, Inc. as financial advisor and retained Shapiro Sher Guinot and Sandler, P.A. as special legal counsel in connection with the Strategic Review.
On June 30, 2016, we announced that in response to the receipt of the Proposal from the Proposing Entity relating to the Proposed Transaction, the Special Committee and its financial advisor had engaged in discussions with a special committee formed by the Proposing Entity (and its financial advisor) and with others. Although these discussions have progressed since the receipt of the Proposal, they have not resulted in a definitive agreement with any party. Our board of directors has not made a decision to enter into any transaction at this time, and there can be no assurance that the discussions and evaluation will result in a definitive agreement or that any such transaction would be approved by our stockholders. We do not intend to provide updates on the discussions or negotiations regarding the Proposal unless or until we determine that further disclosure is appropriate or required based on the then-current facts and circumstances.
We were formed to primarily acquire a diversified portfolio of healthcare-related assets including medical office buildings ("MOB"), seniors housing communities and other healthcare-related facilities for investment purposes. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced real estate operations in March 2015. As of September 30, 2016, we owned 19 properties consisting of 467,932 rentable square feet. As of September 30, 2016, we had $16.4 million in cash on hand. While we may use a portion of cash on hand to consummate additional acquisitions, we generally expect to use cash on hand to fund distributions or for working capital needs.
Substantially all of our business is conducted through the OP. We have no employees. The Advisor has been retained to manage our affairs on a day-to-day basis. We also have retained American Realty Capital Healthcare III Properties, LLC (the "Property Manager") to serve as our property manager. The Advisor and the Property Manager are under common control with AR Global, the parent of our Sponsor, as a result of which they are related parties, and each of which have received or will receive compensation, fees and other expense reimbursements from us for services related to managing our business. The Advisor, Property Manager and Former Dealer Manager have received or will receive fees during our offering, acquisition, operational and liquidation stages.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our rental income is primarily related to rent received from tenants in our MOBs and triple-net leased healthcare facility. Rent from tenants in our MOB and triple-net leased healthcare facility operating segments is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require us to record a receivable, and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.

32

Resident services and fee income primarily relates to rent and fees for ancillary services performed for residents in our seniors housing — operating property ("SHOP") held using a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA"). Rental income from residents of our SHOP operating segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed.
We defer the revenue related to lease payments received from tenants and residents in advance of their due dates.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in the allowance for uncollectible accounts on the consolidated balance sheets or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below-market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests are recorded at their estimated fair values.
We generally determine the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease including any below-market fixed rate renewal options for below-market leases.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e. location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which are calculated to account for either above- or below-market interest rates.
In allocating the fair value to non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of the carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

33

Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion.
Capitalized above-market lease values are amortized or accreted as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are accreted as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
When circumstances indicate that the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating the impact of this new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption was permitted provided that the guidance was applied from the beginning of the fiscal year of adoption. We elected to adopt this new guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to our financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. We have elected to adopt this guidance effective January 1, 2016. We have evaluated the impact of the adoption of this new guidance on our consolidated financial statements and have determined that the OP is considered a VIE. However, we meet the disclosure exemption criteria as we are the primary beneficiary of the VIE and our partnership interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, this standard did not have a material impact to our consolidated financial statements.

34

In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. We have elected to adopt this guidance effective January 1, 2016. The adoption of this revised guidance resulted in the reclassification of $0.1 million of deferred financing costs related to our mortgage note payable from deferred costs, net to mortgage note payable, net of deferred financing costs in our consolidated balance sheets as of December 31, 2015.
In September 2015, the FASB issued an update that eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted. We elected to adopt this guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to our financial position, results of operations or cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of this new guidance.
In February 2016, the FASB issued an update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance is effective on January 1, 2019. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We have adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to our consolidated financial position, results of operations and cash flows. Our policy is to account for forfeitures as they occur.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

35

Properties
The following table presents certain additional information about the properties we owned as of September 30, 2016:
Property/Portfolio
 
Acquisition Date
 
Number of Properties
 
Rentable Square Feet
 
Occupancy
 
Remaining Lease Term
 
Base Purchase Price (1)
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Medical Office Buildings:
 
 
 
 
 
 
 
 
 
 
 
 
DaVita Bay Breeze — Largo, FL
 
Mar. 2015
 
1
 
7,247

 
100.0%
 
10.7
 
$
1,650

RAI Clearwater — Clearwater, FL
 
Apr. 2015
 
1
 
14,936

 
100.0%
 
8.2
 
4,750

DaVita Hudson — Hudson, FL
 
May 2015
 
1
 
8,984

 
100.0%
 
8.0
 
2,725

Rockwall Medical Plaza — Rockwall, TX
 
Jun. 2015
 
1
 
18,176

 
100.0%
 
3.5
 
6,639

Decatur Medical Office Building — Decatur, GA
 
Jul. 2015
 
1
 
20,800

 
100.0%
 
6.1
 
5,100

Buckeye Health Center — Cleveland, OH
 
Aug. 2015
 
1
 
25,070

 
100.0%
 
3.6
 
5,550

Philip Professional Center — Lawrenceville, GA
 
Aug. 2015
 
2
 
31,483

 
93.9%
 
11.9
 
9,000

Illinois CancerCare Clinic — Galesburg, IL
 
Aug. 2015
 
1
 
9,211

 
100.0%
 
7.9
 
3,400

Galesburg VA Outpatient Clinic — Galesburg, IL
 
Aug. 2015
 
1
 
9,979

 
100.0%
 
6.8
 
2,630

Woodlake Office Center — Woodbury, MN
 
Sep. 2015
 
1
 
36,375

 
100.0%
 
6.0
 
14,900

Greenfield Medical Center — Gilbert, AZ
 
Oct. 2015
 
1
 
28,489

 
100.0%
 
3.6
 
7,000

Lee Memorial Health System Outpatient Center — Ft. Meyers, FL
 
Oct. 2015
 
1
 
24,174

 
100.0%
 
2.0
 
5,275

Beaumont Medical Center — Warren, MI
 
Dec. 2015
 
1
 
35,219

 
95.2%
 
5.3
 
13,650

Madison Medical Plaza — Joliet, IL
 
Dec. 2015
 
1
 
70,023

 
89.4%
 
4.9
 
19,500

UnityPoint Clinic — Muscatine, IA
 
Dec. 2015
 
1
 
21,767

 
100.0%
 
8.5
 
5,887

UnityPoint Clinic — Moline, IL
 
Dec. 2015
 
1
 
14,640

 
100.0%
 
7.3
 
3,767

Total Medical Office Buildings:
 
 
 
17
 
376,573

 
97.1%
 
6.2
 
111,423

Triple-Net Leased Healthcare Facility(2):
 
 
 
 
 
 
 
 
 
 
 
 
Arcadian Cove Assisted Living — Richmond, KY
 
Aug. 2015
 
1
 
34,659

 
100.0%
 
13.9
 
4,775

Seniors Housing — Operating Property:
 
 
 
 
 
 
 
 
 
 
 
 
Cedarhurst of Collinsville — Collinsville, IL
 
Aug. 2015
 
1
 
56,700

 
96.2%
 
N/A
 
11,600

Portfolio, September 30, 2016
 
 
 
19
 
467,932

 
 
 
 
 
$
127,798

_______________
(1)
Contract purchase price, excluding acquisition related costs.
(2)
Revenues for our triple-net leased healthcare facility generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the property. As of September 30, 2016, the property leased to our seniors housing — triple net leased tenant had operating occupancy of approximately 98.0%. While operating occupancy rates may affect the profitability of our tenants’ operations, they do not have a direct impact on our revenues or financial results. Operating occupancy statistics for our triple-net leased healthcare facility are compiled through reports from tenants and have not been independently validated by us.
N/A
Not applicable
Results of Operations
Comparison of the Three Months Ended September 30, 2016 to the Three Months Ended September 30, 2015
On July 1, 2015, we owned four properties (our "Same Store" properties). We acquired 15 properties from July 1, 2015 through September 30, 2016 (our "Acquisitions"). Accordingly, our results of operations for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 reflect significant increases in most categories primarily due to our acquisitions. Net income (loss) attributable to stockholders was $0.2 million and $(1.6) million for the three months ended September 30, 2016 and 2015, respectively.
Rental Income
Rental income increased $1.6 million to $2.3 million for the three months ended September 30, 2016 from $0.7 million for the three months ended September 30, 2015. The increase in rental income is a result of our acquisition of 13 MOBs and one triple-net leased healthcare facility with annualized rental income on a straight-line basis of $8.2 million between July 1, 2015 and September 30, 2016. As of September 30, 2015, we owned 11 MOBs and one triple-net leased healthcare facility with annualized straight-line rental income of $5.0 million.

36

Operating Expense Reimbursements
Operating expense reimbursements increased $0.6 million to $0.7 million for the three months ended September 30, 2016 from $0.1 million for the three months ended September 30, 2015. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of reimbursable property operating expenses, which may be subject to exclusions and expense floors, in addition to base rent, whereas under certain other lease agreements, the tenants are generally directly responsible for all operating costs of the respective properties. The increase in operating expense reimbursements was primarily related to our Acquisitions.
Resident Services and Fee Income
Resident services and fee income of increased $0.4 million to $0.7 million for the three months ended September 30, 2016 from $0.3 million for the three months ended September 30, 2015. Resident services and fee income is generated in connection with rent and services offered to residents in our SHOP depending on the level of care required, as well as fees associated with other ancillary services. The increase in resident services and fee income is directly related to our Acquisition of our first SHOP asset in August 2015.
Property Operating and Maintenance Expenses
Property operating and maintenance expenses increased $0.9 million to $1.3 million for the three months ended September 30, 2016 from $0.4 million for the three months ended September 30, 2015. These costs primarily relate to the costs associated with our properties, including real estate taxes, property insurance, utilities, repairs, maintenance and unaffiliated third party property management fees, as well as costs relating to caring for the residents of our SHOP. The increase in property operating and maintenance expenses was primarily due to our Acquisitions.
Operating Fees to Related Party
Operating fees to related party increased approximately $26,000 to approximately $41,000 for the three months ended September 30, 2016 from approximately $15,000 for the three months ended September 30, 2015. Operating fees to related party relates to fees paid to our Property Manager for property management services for managing our properties on a day-to-day basis. Property management fees will increase in direct correlation with gross revenues. The increase in property management fees primarily relates to the increase in gross revenues derived from our Acquisitions.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $0.1 million for the three months ended September 30, 2016 primarily related to costs associated with the Strategic Review. Acquisition and transaction related expenses of $1.4 million for the three months ended September 30, 2015 directly related to our acquisition of nine properties with a contract purchase price of $57.0 million. Acquisition and transaction related expenses generally increase or decrease in direct correlation with the number and contract purchase price of the properties acquired during the period and the level of activity surrounding any contemplated transaction.
General and Administrative Expenses
General and administrative expenses was $0.4 million for the three months ended September 30, 2016 and 2015, including $0.1 million reimbursed to or incurred from related parties. General and administrative expenses primarily consists of professional fees, board of director costs and directors' and officers' insurance.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $1.0 million to $1.5 million for the three months ended September 30, 2016 from $0.5 million for the three months ended September 30, 2015. The increase in depreciation and amortization expense was directly related to our Acquisitions. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and liabilities and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased approximately $22,000 to approximately $47,000 for the three months ended September 30, 2016 from approximately $25,000 for the three months ended September 30, 2015. Interest expense related to our mortgage note payable with an average monthly balance of $5.0 million during the three months ended September 30, 2016 compared to an average monthly balance of $2.6 million during the three months ended September 30, 2015.
Income Tax Expense
Income tax expense of $0.1 million and approximately $4,000 for the three months ended September 30, 2016 and 2015, respectively, related to our SHOP using a structure permitted by RIDEA, under which a REIT may lease qualified healthcare properties on an arm's length basis to a taxable REIT subsidiary ("TRS") if the property is operated on behalf of such subsidiary by an eligible third-party independent contractor.

37

Net income attributable to non-controlling interest holders
Net income attributable to non-controlling interest holders was approximately $4,000 for the three months ended September 30, 2016, which represents the portion of net income allocated to an unaffiliated third party that owns an interest in certain of our property owning subsidiaries and is entitled to receive a proportionate share of net operating cash flow derived from the subsidiaries' properties. We did not have any such non-controlling interest arrangements and therefore had no net income or net loss attributable to non-controlling interest holders during the three months ended September 30, 2015.
Comparison of the Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015
We were incorporated on April 24, 2014. We purchased our first property and commenced our real estate operations in March 2015. We acquired 19 properties from January 1, 2015 through September 30, 2016 (our "Acquisitions"). Accordingly, our results of operations for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 reflect significant increases in most categories. Net income (loss) attributable to stockholders was $0.1 million and $(2.5) million for the nine months ended September 30, 2016 and 2015, respectively.
Rental Income
Rental income increased $5.9 million to $6.8 million for the nine months ended September 30, 2016 from $0.9 million for the nine months ended September 30, 2015. The increase in rental income is a result of our acquisition of 17 MOBs and one triple-net leased healthcare facility with annualized rental income on a straight-line basis of $9.3 million. As of September 30, 2015, we owned 11 MOBs and one triple-net leased healthcare facility with annualized straight-line rental income of $5.0 million.
Operating Expense Reimbursements
Operating expense reimbursements increased $1.7 million to $1.9 million for the nine months ended September 30, 2016, from $0.2 million for the nine months ended September 30, 2015. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of reimbursable property operating expenses, which may be subject to exclusions and expense floors, in addition to base rent, whereas under certain other lease agreements, the tenants are generally directly responsible for all operating costs of the respective properties. The increase in operating expense reimbursements was directly related to our Acquisitions.
Resident Services and Fee Income
Resident services and fee income of increased $1.9 million to $2.2 million for the nine months ended September 30, 2016 from $0.3 million for the nine months ended September 30, 2015. Resident services and fee income is generated in connection with rent and services offered to residents in our SHOP depending on the level of care required, as well as fees associated with other ancillary services. The increase in resident services and fee income is directly related to our Acquisition of our first SHOP asset in August 2015.
Property Operating and Maintenance Expenses
Property operating and maintenance expenses increased $3.4 million to $3.8 million for the nine months ended September 30, 2016 from $0.4 million for the nine months ended September 30, 2015. These costs primarily relate to the costs associated with our properties, including real estate taxes, property insurance, utilities, repairs, maintenance and unaffiliated third party property management fees, as well as costs relating to caring for the residents of our SHOP. The increase in property operating and maintenance expenses was primarily due to our Acquisitions.
Operating Fees to Related Party
Operating fees to related party increased $0.1 million to $0.1 million for the nine months ended September 30, 2016 from approximately $15,000 for the nine months ended September 30, 2015. Operating fees to related party relates to fees paid to our Property Manager for property management services for managing our properties on a day-to-day basis. Property management fees will increase in direct correlation with gross revenues. The increase in property management fees primarily relates to the increase in gross revenues derived from our Acquisitions.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $0.2 million for the nine months ended September 30, 2016 primarily related to costs associated with the Strategic Review and audit fees and other costs associated with acquisitions consummated during the year ended December 31, 2015. Acquisition and transaction related expenses of $1.9 million for the nine months ended September 30, 2015 related to our acquisition of 13 properties with a contract purchase price of $72.7 million. Acquisition and transaction related expenses generally increase or decrease in direct correlation with the number and contract purchase price of the properties acquired during the period and the level of activity surrounding any contemplated transaction.

38

General and Administrative Expenses
General and administrative expenses increased $0.6 million to $1.6 million for the nine months ended September 30, 2016, including $0.3 million reimbursed to or incurred from related parties, from $1.0 million, including $0.3 million reimbursed to or incurred from related parties, for the nine months ended September 30, 2015. Professional fees increased in order to support our larger real estate portfolio.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $4.2 million to $4.7 million for the nine months ended September 30, 2016 from $0.5 million for the nine months ended September 30, 2015. The increase in depreciation and amortization expense directly related to our Acquisitions. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and liabilities and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense of $0.1 million and approximately $25,000 for the nine months ended September 30, 2016 and 2015, respectively, related to our mortgage note payable with an average monthly balance of $5.1 million during the nine months ended September 30, 2016 compared to an average monthly balance of $1.0 million during the nine months ended September 30, 2015.
Interest and Other Income            
Interest income of approximately $1,000 for the nine months ended September 30, 2016 related to interest income on cash balances and other miscellaneous income. We did not have any interest and other income during the nine months ended September 30, 2015.
Income Tax Expense
Income tax expense of $0.1 million and approximately $4,000 for the nine months ended September 30, 2016 and 2015, respectively, related to our acquisition of a SHOP using a structure permitted by RIDEA, under which a REIT may lease qualified healthcare properties on an arm's length basis to a taxable REIT subsidiary ("TRS") if the property is operated on behalf of such subsidiary by an eligible third-party independent contractor.
Net income attributable to non-controlling interest holders
Net income attributable to non-controlling interest holders was approximately $13,000 for the nine months ended September 30, 2016, which represents the portion of net income allocated to an unaffiliated third party that owns an interest in certain of our property owning subsidiaries and is entitled to receive a proportionate share of net operating cash flow derived from the subsidiaries' properties. We did not have any such non-controlling interest arrangements and therefore had no net income or net loss attributable to non-controlling interest holders during the nine months ended September 30, 2015.
Cash Flows for the Nine Months Ended September 30, 2016
During the nine months ended September 30, 2016, net cash provided by operating activities was $4.8 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows related to a net income adjusted for non-cash items of $5.0 million (net income of $0.1 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, amortization of deferred financing costs, amortization of mortgage premiums and equity-based compensation of $4.8 million), an increase in accounts payable and accrued expenses of $0.1 million related to real estate taxes for our MOBs and SHOP, a $0.2 million increase in deferred rent and a decrease in restricted cash of $0.1 million. These cash inflows were partially offset by an increase in unbilled rent receivables recorded in accordance with straight-line basis accounting of $0.4 million and an increase in prepaid expenses and other assets of $0.2 million due to tenant receivables and prepaid expenses.
The net cash used in investing activities during the nine months ended September 30, 2016 of $0.1 million related to capital expenditures.
Net cash used in financing activities of $5.1 million during the nine months ended September 30, 2016 consisted primarily of distributions to stockholders of $4.8 million, payments of offering costs of $0.2 million, principal payments made on mortgage notes payable of $0.1 million and distributions to non-controlling interest holders of approximately $17,000.

39

Cash flows for the Nine Months Ended September 30, 2015
During the nine months ended September 30, 2015, net cash used in operating activities was $1.7 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows used in operating activities during the nine months ended September 30, 2015 included $1.9 million of acquisition and transaction related costs. Cash outflows related to a net loss adjusted for non-cash items of $1.9 million (net loss of $2.5 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, amortization of deferred financing costs, amortization of mortgage premiums and equity based compensation of $0.6 million), an increase in prepaid expenses and other assets of $0.4 million due to prepaid real estate taxes and property insurance as well as increases in rent and other receivables, an increase in unbilled receivables recorded in accordance with straight-line basis accounting of approximately $48,000 and an increase in restricted cash of approximately $45,000. These cash outflows were partially offset by an increase in accounts payable and accrued expenses of $0.5 million related to professional fees, real estate taxes and property operating expenses for our MOBs and SHOP and an $0.3 million increase in deferred rent.
The net cash used in investing activities during the nine months ended September 30, 2015 of $68.4 million included $67.6 million to acquire 13 properties as well as $0.9 million in deposits for a real estate acquisition that was completed in October 2015 and for two additional potential acquisitions that were not consummated.
Net cash provided by financing activities of $118.2 million during the nine months ended September 30, 2015 consisted primarily of proceeds from the sale of common stock of $136.4 million, which was partially offset by financing costs of $0.1 million, offering costs of $15.8 million, distributions to stockholders of $1.0 million and repayments to a related party of $1.2 million previously received to fund offering costs.
Liquidity and Capital Resources
As of September 30, 2016, we had cash of $16.4 million and expect to fund our liquidity requirements over the next 12 months through a combination of cash on hand and operating cash flows. On August 20, 2016, the IPO lapsed in accordance with its terms and resulted in net proceeds raised of $170.4 million.
Our principal demands for cash will be for improvement costs for our properties, the payment of our operating and administrative expenses, distributions to our stockholders and share repurchases. We generally expect to use our remaining net proceeds from our IPO for these purposes, but we may also use a portion of these proceeds to fund additional acquisitions. As of September 30, 2016, we have primarily funded our acquisitions from the net proceeds of our IPO with a limited use of mortgage debt and have not utilized any corporate lines of credit. To the extent that we make additional acquisitions, we intend to acquire our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in OP Units, or any mix thereof.
If cash on hand and operating cash flows become insufficient to cover cash requirements, it may be necessary to obtain additional capital through equity sources. Also, we may look to generate proceeds from additional mortgage debt or obtain corporate leverage. There is no assurance that such sources of capital will be available, or, if available, that the terms will be acceptable to us.
We may borrow if we need funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding net capital gain). We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" as defined in our charter as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. However, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. In addition, it is currently our intention to limit our aggregate borrowings to 45% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation, calculated after the close of our IPO and once we have invested substantially all the proceeds of our IPO, will not apply to individual real estate assets or investments. As of September 30, 2016, our secured debt leverage ratio (total secured debt divided by total assets) was approximately 3.6% and we did not have any unsecured borrowings. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy the requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.

40

To the extent that we maintain borrowing capacity under a line of credit, if a line of credit is ever obtained, such available amount will be included in calculating our liquid assets. Our Advisor will consider various factors in determining the amount of liquid assets we should maintain, including but not limited to our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under a line of credit, if any, our receipt of proceeds from any asset sale, and the use of cash to fund repurchases. The board of directors reviews the amount and sources of liquid assets on a quarterly basis.
Our board of directors has adopted a Share Repurchase Program (as amended, the "SRP") that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash. There are limits on the number of shares we may repurchase under this program during any calendar year. We are only authorized to repurchase shares using the proceeds secured from the DRIP in any given period. The following table reflects the number of shares repurchased cumulatively through September 30, 2016:
 
 
Number of Shares Repurchased
 
Average Price per Share
Cumulative repurchases as of December 31, 2015(1)
 
1,021

 
$
24.97

Nine months ended September 30, 2016(2)
 
—

 
—

Cumulative repurchases as of September 30, 2016(2)
 
1,021

 
$
24.97

_______________
(1)
Excludes rejected repurchases of 1,336 shares for approximately $33,000 at an average price per share of $24.95, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from April 24, 2014 (date of inception) to September 30, 2016.
(2)
Excludes 0.2 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016 will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP.
Acquisitions
As of October 31, 2016, we owned 19 properties with a contract purchase price of $127.8 million. In accordance with the terms of the investment opportunity allocation agreement we have entered into with Healthcare Trust, Inc., we have been provisionally allocated MOB assets identified by our Advisor and its affiliates with an expected aggregate contract price of $0.5 million that are under contract or under executed letters of intent. Pursuant to the terms of the purchase and sale agreements and letters of intent, the obligation to close upon these acquisitions is subject to certain conditions customary to closing, including the successful completion of due diligence and fully negotiated binding agreements. There can be no assurance that we will complete these acquisitions. We intend to fund remaining acquisitions, if any, with proceeds raised from our IPO.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures including Funds from Operations, Modified Funds from Operations and Net Operating Income. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

41

We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate-related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and 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.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, has published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.
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 (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs associated with the Strategic Review), amortization of above and below and other market intangible lease assets and liabilities, amounts relating to straight line rent adjustments (in order to adjust lease and rental payments from a GAAP accrual basis to a cash basis), accretion of discounts and amortization of premiums on debt investments and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not 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 determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could 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 accordingly.

42

The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests.
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
 
September 30,
2016
Net loss attributable to stockholders (in accordance with GAAP)
 
$
(85
)
 
$
(20
)
 
$
232

 
$
127

Depreciation and amortization
 
1,577

 
1,577

 
1,499

 
4,653

Adjustments for non-controlling interests(1)
 
(5
)
 
(5
)
 
(5
)
 
(15
)
FFO attributable to stockholders
 
1,487

 
1,552

 
1,726

 
4,765

Acquisition and transaction related
 
30

 
103

 
104

 
237

Amortization of market lease and other intangibles
 
51

 
51

 
52

 
154

Straight-line rent adjustments
 
(129
)
 
(122
)
 
(118
)
 
(369
)
Amortization of mortgage premium
 
(11
)
 
(10
)
 
(11
)
 
(32
)
Adjustments for non-controlling interests(1)
 
1

 
1

 
—

 
2

MFFO attributable to stockholders
 
$
1,429

 
$
1,575

 
$
1,753

 
$
4,757

_______________
(1)
Represents the portion of the adjustments allocable to non-controlling interests.
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate. NOI is equal to total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property's results of operations. For example, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to make distributions.

43

The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of NOI for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
 
September 30,
2016
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(85
)
 
$
(20
)
 
$
232

 
$
127

Operating fees to related party
 
40

 
39

 
41

 
120

Acquisition and transaction related
 
30

 
103

 
104

 
237

General and administrative
 
676

 
545

 
363

 
1,584

Depreciation and amortization
 
1,577

 
1,581

 
1,502

 
4,660

Interest expense
 
48

 
47

 
47

 
142

Interest and other income
 
—

 
(1
)
 
—

 
(1
)
Income tax expense
 
45

 
28

 
74

 
147

Net income attributable to non-controlling interests
 
4

 
5

 
4

 
13

NOI
 
$
2,335

 
$
2,327

 
$
2,367

 
$
7,029

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
2015
 
June 30,
2015
 
September 30,
2015
 
September 30,
2015
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(319
)
 
$
(601
)
 
$
(1,561
)
 
$
(2,481
)
Operating fees to related party
 
—

 
—

 
15

 
15

Acquisition and transaction related
 
48

 
425

 
1,415

 
1,888

General and administrative
 
276

 
259

 
440

 
975

Depreciation and amortization
 
4

 
75

 
464

 
543

Interest expense
 
—

 
—

 
25

 
25

Income tax expense
 
—

 
—

 
4

 
4

NOI
 
$
9

 
$
158

 
$
802

 
$
969

Refer to Note 12 — Segment Reporting for a reconciliation of NOI to net income (loss) attributable to stockholders by reportable segment.
Distributions
On January 29, 2015, our board of directors authorized, and we declared, distributions payable to stockholders of record each day during the applicable period equal to $0.0042808219 per day, which is equivalent to $1.56 per annum, per share of common stock, beginning March 15, 2015. In March 2016, our board of directors ratified the existing distribution amount equivalent to $1.56 per annum, and, for the calendar year 2016, affirmed a change to the daily distribution payable to stockholders of record each day during the applicable period to $0.0042691257 per day per share of common stock to accurately reflect that 2016 is a leap year. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.

44

During the nine months ended September 30, 2016, distributions paid to common stockholders totaled $8.0 million, including $3.2 million which was reinvested through our DRIP. During the nine months ended September 30, 2016, cash used to pay distributions was generated from cash flows provided by operations, offering proceeds from issuance of common stock and proceeds received from common stock issued under the DRIP.
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted shares, but excluding distributions related to unvested performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units" as these distributions are recorded as expenses in the consolidated statements of operations and comprehensive loss, for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
September 30, 2016
(In thousands)
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
Distributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions to stockholders
 
$
2,645

 
 
 
$
2,689

 
 
 
$
2,708

 
 
 
$
8,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
—

 
—
%
 
$
656

 
24.4
%
 
$
1,224

 
45.2
%
 
$
1,880

 
23.4
%
Offering proceeds from issuance of common stock
 
1,808

 
68.4
%
 
800

 
29.8
%
 
322

 
11.9
%
 
2,930

 
36.4
%
Proceeds received from common stock issued under the DRIP
 
837

 
31.6
%
 
1,233

 
45.8
%
 
1,162

 
42.9
%
 
3,232

 
40.2
%
Proceeds from financings
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Total source of distribution coverage
 
$
2,645

 
100.0
%
 
$
2,689

 
100.0
%
 
$
2,708

 
100.0
%
 
$
8,042

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations (in accordance with GAAP)
 
$
1,834

 
 
 
$
1,740

 
 
 
$
1,224

 
 
 
$
4,798

 
 
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(85
)
 
 
 
$
(20
)
 
 
 
$
232

 
 
 
$
127

 
 
For the nine months ended September 30, 2016, cash flows provided by operations were $4.8 million. As shown in the table above, we funded distributions with cash flows provided by operations, proceeds from our IPO and proceeds from our IPO which were reinvested in common stock issued under our DRIP. To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted.
We may not generate sufficient cash flow from operations in 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. With limited operating history, we cannot assure our stockholders that we will be able to continue to pay distributions or that distributions will increase over time. We cannot give any assurance that future acquisitions of real properties, if any, will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand, which represents the remaining proceeds we received in our IPO, and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.

45

The following table compares cumulative distributions paid to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) for the period from April 24, 2014 (date of inception) through September 30, 2016:
 
 
For the Period
from April 24, 2014
(date of inception) to
(In thousands)
 
September 30, 2016
Distributions to stockholders(1)
 
$
12,344

 
 
 
Reconciliation of net loss:
 
 
Revenues
 
$
15,019

Acquisition and transaction related
 
(4,984
)
Depreciation and amortization
 
(6,397
)
Other operating expenses
 
(8,462
)
Other non-operating expenses
 
(214
)
Income tax expense
 
(231
)
Net income attributable to non-controlling interests
 
(2
)
Net loss (in accordance with GAAP)(2)
 
$
(5,271
)
 
 
 
Cash flow provided by operations
 
$
1,880

 
 
 
FFO attributable to stockholders
 
$
1,104

_____________________
(1)
Distributions paid to common stockholders include $5.4 million of proceeds received pursuant to the DRIP.
(2)
Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.
Loan Obligations
The payment terms of our loan obligation requires principal and interest amounts to be paid monthly with all unpaid principal and interest due at maturity.
Our Advisor may, with approval from our independent directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings, including advances under a line of credit, if a line of credit is ever obtained, as an efficient and accretive means of acquiring real estate.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of September 30, 2016. The minimum base rental cash payments due for leasehold interests exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of September 30, 2016, the outstanding mortgage note payable had a weighted average effective interest rate of 4.0%.
 
 
 
 
 
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
October 1, 2016 — December 31, 2016
 
2017 — 2018
 
2019 — 2020
 
Thereafter
Principal on mortgage note payable
 
$
5,021

 
$
24

 
$
204

 
$
4,793

 
$
—

Interest on mortgage note payable
 
600

 
50

 
392

 
158

 
—

Lease rental payments due
 
3,890

 
26

 
209

 
215

 
3,440

 
 
$
9,511

 
$
100

 
$
805

 
$
5,166

 
$
3,440


46

Election as a REIT 
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2015. Commencing with such taxable year, we were organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner but no assurance can be given that we will operate in a manner so as to remain qualified for taxation as a REIT. In order continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please See Note 7 — Related Party Transactions and Arrangements of the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at a fixed rate. As of September 30, 2016, we did not have any derivative financial instruments. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of September 30, 2016, our debt included a fixed-rate secured mortgage financing with a carrying value of $5.1 million and a fair value of $5.2 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the note, but it has no impact on interest due on the note. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $0.1 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $0.1 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of September 30, 2016 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.

47

Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the nine months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

48

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material pending legal proceedings.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Item 1A. Risk Factors," disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. The following additional risk factors should be considered regarding our potential risks and uncertainties:
We may be unable to maintain distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders, including the amount of cash flow from operations and FFO. In the past, we have not generated, and may not in the future generate, operating cash flows sufficient to continue to pay dividends to our stockholders at the current rate. Our cash flows provided by operations were $4.8 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we paid distributions of $8.0 million, of which $2.9 million, or 36.4%, was funded from proceeds from our IPO, $3.2 million, or 40.2%, was funded from proceeds from our IPO which were reinvested in common stock issued under our DRIP and $1.9 million, or 23.4%, was funded from cash flows provided by operations. During the nine months ended September 30, 2016, cash flow from operations included an increase in accounts payable and accrued expenses of $0.1 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the nine months ended September 30, 2016, there would have been $0.1 million less in cash flow from operations available to pay distributions. Using offering proceeds to pay distributions, especially if the distributions are not reinvested through our DRIP, reduces cash available for investment in assets or other purposes, and reduces our per share stockholders' equity. We may continue to use net offering proceeds to fund distributions.
We do not expect to generate sufficient cash flow from operations during the remainder of 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. With limited operating history, we cannot assure our stockholders that we will be able to continue to pay distributions or that distributions will increase over time. We cannot give any assurance that rents from the properties we have acquired will increase, or that future acquisitions of real properties will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand, which represents the remaining proceeds we received in our IPO, and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.
Funding distributions from any of these sources may reduce the amount of capital we ultimately invest in properties and other permitted investments, have available for other purposes and may negatively impact the value of an investment in our common stock, especially if a substantial portion of our distributions is paid from offering proceeds. There is no guarantee that we will pay any particular amount of distributions, if at all. There is no assurance that we will be able to obtain funds from such sources, or pay or maintain our current level of dividends.
Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of our IPO may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
We may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status, which may materially adversely affect an investment in our common stock.

49

Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with our IPO. We have not established any limit on the amount of proceeds from our IPO 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: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
We rely significantly on five major tenants (including, for this purpose, all affiliates of such tenants) and therefore are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.
We generated 5% or more of our total annualized rental income on a straight-line basis for the fiscal year ended September 30, 2016 from the following five major tenants, including, for this purpose, all affiliates of such tenants:
Tenant
 
Percentage of Straight-Line Rental Income
Beaumont Health
 
6.0%
Northside Hospital
 
5.2%
Presence Health
 
7.5%
Summit Orthopedics, Ltd.
 
8.8%
United States of America
 
7.0%
Therefore, the financial failure of any of these tenants could have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment is driven by the credit quality of the underlying tenant, and an adverse change in either the tenant's financial condition or a decline in the credit rating of such tenant may result in a decline in the value of our investments.
Our property portfolio has a high concentration of properties located in five states. Our properties may be adversely affected by economic cycles and risks inherent to those states.
The following five states represented 5% or more of our consolidated annualized rental income on a straight-line basis for the fiscal year ended September 30, 2016:
State
 
Percentage of Straight-Line Rental Income
Florida
 
8.5%
Georgia
 
11.9%
Illinois
 
42.2%
Michigan
 
9.8%
Minnesota
 
8.8%
Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term. Declines in the economy or a decline in the real estate market in these states could hurt our financial performance and the value of our properties. Factors that may negatively affect economic conditions in these states include:
•
business layoffs or downsizing;
•
industry slowdowns;
•
relocations of businesses;
•
changing demographics;
•
increased telecommuting and use of alternative work places;
•
infrastructure quality;
•
any oversupply of, or reduced demand for, real estate;
•
concessions or reduced rental rates under new leases for properties where tenants defaulted;

50

•
increased insurance premiums;
•
state budgets and payment to providers under Medicaid or other state healthcare programs; and
•
changes in reimbursement for healthcare services from commercial insurers.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
Unregistered Sales of Equity Securities
We did not sell any equity securities that were not registered under the Securities Act during the nine months ended September 30, 2016.
Use of Proceeds of Registered Securities
On August 20, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to a maximum of $3.1 billion of common stock, consisting of up to 125.0 million shares, pursuant to the Registration Statement initially filed on May 28, 2014 with the SEC under the Securities Act of 1933, as amended. The Registration Statement, which was declared effective by the SEC on August 20, 2014, also covers 26.3 million shares of common stock pursuant to the DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock. As of September 30, 2016, we have issued 6.9 million shares of our common stock, including unvested restricted shares and shares issued pursuant to the DRIP, and received $170.4 million of offering proceeds. On August 20, 2016, the IPO lapsed in accordance with its terms. We continue to offer shares under the DRIP.
The following table reflects the offering costs associated with the issuance of common stock:
 
 
Period from
April 24, 2014
(date of inception) to
(In thousands)
 
September 30, 2016
Selling commissions and dealer manager fees
 
$
14,368

Other offering costs(1)
 
7,071

Total offering costs
 
21,439

_______________
(1)
Includes $3.8 million of other offering costs that are in excess of the limitation of 2.0% of gross proceeds received from the IPO, as described below.
As of September 30, 2016, we have incurred $21.4 million of cumulative offering costs in connection with registering and selling shares of our common stock. As of September 30, 2016, cumulative offering costs included $4.1 million of offering cost reimbursements incurred from the Advisor, Dealer Manager and Sponsor, excluding commissions and dealer manager fees.
We were responsible for offering and related costs from the IPO, excluding selling commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding selling commissions and dealer manager fees, in excess of the 2.0% limitation as of the end of the IPO are the Advisor's responsibility. The IPO lapsed in accordance with its terms on August 20, 2016. As of the end of the IPO, offering and related costs, excluding commissions and dealer manager fees, exceeded 2.0% of gross proceeds received from the IPO by $3.8 million. At the end of the IPO, the amount by which we were over the 2.0% limitation was netted against the offering costs that were previously charged to additional paid-in capital on the accompanying consolidated balance sheets. We recorded a corresponding receivable from the Advisor for this amount, which was subsequently reclassified to additional paid-in capital in the accompanying consolidated balance sheet as of September 30, 2016. Cumulative offering proceeds from the sale of common stock exceeded cumulative offering costs by $149.0 million as of September 30, 2016.
We have used and expect to continue to use substantially all of the net proceeds from our IPO to primarily acquire a diversified portfolio of income producing real estate properties, focusing predominantly on MOBs and healthcare-related facilities. We may also originate or acquire first mortgage loans secured by real estate. As of September 30, 2016, we have used the net proceeds from our IPO to purchase 19 properties with an aggregate purchase price of $127.8 million.

51

Issuer Purchases of Equity Securities
The following table reflects the number of shares repurchased cumulatively through September 30, 2016:
 
 
Number of Shares Repurchased
 
Average Price per Share
Cumulative repurchases as of December 31, 2015(1)
 
1,021

 
$
24.97

Nine months ended September 30, 2016(2)
 
—

 
—

Cumulative repurchases as of September 30, 2016(2)
 
1,021

 
$
24.97

_______________
(1)
Excludes rejected repurchases of 1,336 shares for approximately $33,000 at an average price per share of $24.95, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from April 24, 2014 (date of inception) to September 30, 2016.
(2)
Excludes 0.2 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016 will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

52

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AMERICAN REALTY CAPITAL HEALTHCARE TRUST III, INC.
 
By:
/s/ W. Todd Jensen
 
 
W. Todd Jensen
 
 
Interim Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
By:
/s/ Katie P. Kurtz
 
 
Katie P. Kurtz
 
 
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)

Dated: November 7, 2016

53
EXHIBITS INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
  
Description
3.2 (1)
 
Amendment No. 1 to Bylaws of American Realty Capital Healthcare Trust III, Inc.
31.1*
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 (1)
 
Amendment to Amended and Restated Share Repurchase Program
101*
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Healthcare Trust III, Inc.'s Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
____________________
*     Filed herewith.
(1)
Filed as an exhibit to American Realty Capital Healthcare Trust III, Inc.'s Current Report on Form 8-K filed with the SEC on September 22, 2016.


54

American Realty Capital Healthcare Trust III, Inc. Reports