Attached files
file | filename |
---|---|
EX-32 - Sentio Healthcare Properties Inc | v194033_ex32.htm |
EX-31.1 - Sentio Healthcare Properties Inc | v194033_ex31-1.htm |
EX-31.2 - Sentio Healthcare Properties Inc | v194033_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2010
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 000-53969
CORNERSTONE
HEALTHCARE PLUS REIT, INC.
(Exact
name of registrant as specified in its charter)
MARYLAND
|
20-5721212
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
1920
MAIN STREET, SUITE 400, IRVINE, CA
|
92614
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
949-852-1007
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
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
As of
August 13, 2010, there were 8,957,494 shares of common stock of Cornerstone
Healthcare Plus REIT, Inc. outstanding.
PART
I - FINANCIAL INFORMATION
FORM
10-Q
Cornerstone
Healthcare Plus REIT, Inc.
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements:
|
||
Condensed
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
(unaudited)
|
3
|
||
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2010 and 2009 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Equity for the Six Months Ended June 30, 2010
and 2009 (unaudited)
|
5
|
||
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (unaudited)
|
6
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
|
Item
4.
|
Controls
and Procedures
|
25
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1A.
|
Risk
Factors
|
25
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
|
Item
6.
|
Exhibits
|
27
|
|
SIGNATURES
|
28
|
2
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June
30, 2010
|
December
31, 2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
28,695,000
|
$
|
14,900,000
|
||||
Investments
in real estate
|
||||||||
Land
|
10,491,000
|
7,370,000
|
||||||
Buildings
and improvements, net
|
50,740,000
|
30,640,000
|
||||||
Furniture,
fixtures and equipment, net
|
1,399,000
|
1,009,000
|
||||||
Development
costs and construction in progress
|
3,722,000
|
—
|
||||||
Intangible
lease assets, net
|
2,808,000
|
1,869,000
|
||||||
69,160,000
|
40,888,000
|
|||||||
Deferred
financing costs, net
|
787,000
|
228,000
|
||||||
Tenant
and other receivables
|
358,000
|
481,000
|
||||||
Deferred
costs and other assets
|
972,000
|
338,000
|
||||||
Restricted
cash
|
1,116,000
|
364,000
|
||||||
Goodwill
|
2,072,000
|
1,141,000
|
||||||
Total
assets
|
$
|
103,160,000
|
$
|
58,340,000
|
||||
LIABILITIES
AND EQUITY
|
||||||||
Liabilities:
|
||||||||
Notes
payable
|
$
|
38,638,000
|
$
|
20,260,000
|
||||
Accounts
payable and accrued liabilities
|
1,943,000
|
932,000
|
||||||
Payable
to related parties
|
879,000
|
1,734,000
|
||||||
Prepaid
rent and security deposits
|
994,000
|
911,000
|
||||||
Distributions
payable
|
485,000
|
305,000
|
||||||
Total
liabilities
|
42,939,000
|
24,142,000
|
||||||
Commitments
and contingencies (Note 13)
|
||||||||
Equity:
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
stock, $0.01 par value; 20,000,000 shares authorized; no shares were
issued or outstanding at June 30, 2010 and December 31,
2009
|
—
|
—
|
||||||
Common
stock, $0.01 par value; 580,000,000 shares authorized; 8,191,386 and
4,993,751 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively
|
82,000
|
50,000
|
||||||
Additional
paid-in capital
|
65,497,000
|
39,551,000
|
||||||
Accumulated
deficit
|
(7,894,000
|
)
|
(5,403,000
|
)
|
||||
Total
stockholders’ equity
|
57,685,000
|
34,198,000
|
||||||
Noncontrolling
interests
|
2,536,000
|
—
|
||||||
Total
equity
|
60,221,000
|
34,198,000
|
||||||
Total
liabilities and equity
|
$
|
103,160,000
|
$
|
58,340,000
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
3
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Rental
revenues
|
$
|
3,373,000
|
$
|
1,250,000
|
$
|
5,810,000
|
$
|
2,031,000
|
||||||||
Other
income
|
698,000
|
395,000
|
1,303,000
|
669,000
|
||||||||||||
4,071,000
|
1,645,000
|
7,113,000
|
2,700,000
|
|||||||||||||
Expenses:
|
||||||||||||||||
Property
operating and maintenance
|
2,642,000
|
1,312,000
|
4,502,000
|
2,192,000
|
||||||||||||
General
and administrative
|
568,000
|
268,000
|
1,151,000
|
628,000
|
||||||||||||
Asset
management fees
|
139,000
|
54,000
|
249,000
|
91,000
|
||||||||||||
Real
estate acquisition costs
|
881,000
|
344,000
|
1,339,000
|
849,000
|
||||||||||||
Depreciation
and amortization
|
930,000
|
351,000
|
1,570,000
|
552,000
|
||||||||||||
5,160,000
|
2,329,000
|
8,811,000
|
4,312,000
|
|||||||||||||
Loss
from operations
|
(1,089,000
|
)
|
(684,000
|
)
|
(1,698,000
|
)
|
(1,612,000
|
)
|
||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
9,000
|
2,000
|
12,000
|
3,000
|
||||||||||||
Interest
expense
|
(546,000
|
)
|
(276,000
|
)
|
(883,000
|
)
|
(467,000
|
)
|
||||||||
Net
loss
|
(1,626,000
|
)
|
(958,000
|
)
|
(2,569,000
|
)
|
(2,076,000
|
)
|
||||||||
Less:
Net loss attributable to the noncontrolling interests
|
(82,000
|
)
|
(24,000
|
)
|
(78,000
|
)
|
(34,000
|
)
|
||||||||
Net
loss attributable to common stockholders
|
$
|
(1,544,000
|
)
|
$
|
(934,000
|
)
|
$
|
(2,491,000
|
)
|
$
|
(2,042,000
|
)
|
||||
Basic
and diluted net loss per common share attributable to common
stockholders
|
$
|
(0.22
|
)
|
$
|
(0.51
|
)
|
$
|
(0.42
|
)
|
$
|
(1.43
|
)
|
||||
Weighted
average number of common shares
|
7,099,586
|
1,838,828
|
5,959,909
|
1,432,557
|
||||||||||||
Distribution
declared, per common share
|
$
|
0.19
|
$
|
0.20
|
$
|
0.38
|
$
|
0.42
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
4
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
For
the Six Months Ended June 30, 2010 and 2009
(Unaudited)
Common
Stock
|
||||||||||||||||||||||||||||
Number
of
Shares
|
Common
Stock
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
Noncontrolling
Interests
|
Total
Equity
|
||||||||||||||||||||||
Balance
- December 31, 2009
|
4,993,751
|
$
|
50,000
|
$
|
39,551,000
|
$
|
(5,403,000
|
)
|
$
|
34,198,000
|
$
|
—
|
$
|
34,198,000
|
||||||||||||||
Issuance
of common stock
|
3,221,344
|
32,000
|
32,125,000
|
—
|
32,157,000
|
—
|
32,157,000
|
|||||||||||||||||||||
Redeemed
shares
|
(23,709
|
)
|
—
|
(220,000
|
)
|
—
|
(220,000
|
)
|
—
|
(220,000
|
)
|
|||||||||||||||||
Noncontrolling
interest contribution
|
—
|
—
|
—
|
—
|
—
|
2,621,000
|
2,621,000
|
|||||||||||||||||||||
Offering
costs
|
—
|
—
|
(3,567,000
|
)
|
—
|
(3,567,000
|
)
|
—
|
(3,567,000
|
)
|
||||||||||||||||||
Distributions
|
—
|
—
|
(2,392,000
|
)
|
—
|
(2,392,000
|
)
|
(7,000
|
)
|
(2,399,000
|
)
|
|||||||||||||||||
Net
loss
|
—
|
—
|
—
|
(2,491,000
|
)
|
(2,491,000
|
)
|
(78,000
|
)
|
(2,569,000
|
)
|
|||||||||||||||||
Balance
– June 30, 2010
|
8,191,386
|
$
|
82,000
|
$
|
65,497,000
|
$
|
(7,894,000
|
)
|
$
|
57,685,000
|
$
|
2,536,000
|
$
|
60,221,000
|
Common
Stock
|
||||||||||||||||||||||||||||
Number
of
Shares
|
Common
Stock
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
Noncontrolling
Interests
|
Total
Equity
|
||||||||||||||||||||||
Balance
- December 31, 2008
|
1,058,252
|
$
|
11,000
|
$
|
6,597,000
|
$
|
(1,239,000
|
)
|
$
|
5,369,000
|
$
|
—
|
$
|
5,369,000
|
||||||||||||||
Issuance
of common stock
|
|
13,000
|
|
—
|
12,835,000
|
—
|
12,835,000
|
|||||||||||||||||||||
Redeemed
shares
|
(17,245
|
)
|
—
|
(172,000
|
)
|
—
|
(172,000
|
)
|
—
|
(172,000
|
)
|
|||||||||||||||||
Offering
costs
|
—
|
—
|
(1,437,000
|
)
|
—
|
(1,437,000
|
)
|
—
|
(1,437,000
|
)
|
||||||||||||||||||
Distributions
|
—
|
—
|
(598,000
|
)
|
—
|
(598,000
|
)
|
(7,000
|
)
|
(605,000
|
)
|
|||||||||||||||||
Net
loss
|
—
|
—
|
—
|
(2,042,000
|
)
|
(2,042,000
|
)
|
(34,000
|
)
|
(2,076,000
|
)
|
|||||||||||||||||
Balance
– June 30, 2009
|
2,325,944
|
$
|
24,000
|
$
|
17,212,000
|
$
|
(3,281,000
|
)
|
$
|
13,955,000
|
$
|
(41,000
|
)
|
$
|
13,914,000
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
5
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six
months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$
|
(2,569,000
|
)
|
$
|
(2,076,000
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating activities (net of
acquisitions):
|
||||||||
Amortization
of deferred financing costs
|
26,000
|
48,000
|
||||||
Depreciation
and amortization
|
1,570,000
|
552,000
|
||||||
Straight-line
rent amortization
|
(146,000
|
)
|
—
|
|||||
Change
in operating assets and liabilities:
|
||||||||
Tenant
and other receivables
|
266,000
|
—
|
||||||
Deferred
costs and other assets
|
(517,000
|
)
|
(9,000)
|
|||||
Prepaid
rent and security deposits
|
83,000
|
71,000
|
||||||
Payable
to related parties
|
(180,000
|
)
|
(30,000
|
)
|
||||
Accounts
payable and accrued liabilities
|
918,000
|
382,000
|
||||||
Net
cash used in operating activities
|
(549,000
|
)
|
(1,062,000
|
)
|
||||
Cash
flows from investing activities:
|
||||||||
Real
estate acquisitions
|
(12,363,000
|
)
|
(24,793,000
|
)
|
||||
Additions
to real estate
|
(49,000
|
)
|
(8,000
|
)
|
||||
Increase
to restricted cash
|
(752,000
|
)
|
(360,000
|
)
|
||||
Development
of real estate
|
(4,058,000
|
)
|
—
|
|||||
Escrow
deposits
|
(106,000
|
)
|
386,000
|
|||||
Net
cash used in investing activities
|
(17,328,000
|
)
|
(24,775,000
|
)
|
||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of common stock
|
31,074,000
|
12,309,000
|
||||||
Redeemed
shares
|
(220,000
|
)
|
(172,000
|
)
|
||||
Proceeds
from note payable to related party
|
—
|
14,000,000
|
||||||
Repayment
of notes payable
|
(137,000
|
)
|
—
|
|||||
Proceeds
from notes payable
|
5,613,000
|
2,760,000
|
||||||
Offering
costs
|
(4,148,000
|
)
|
(1,841,000
|
)
|
||||
Deferred
financing costs
|
(260,000
|
)
|
(102,000
|
)
|
||||
Noncontrolling
interest contribution
|
886,000
|
—
|
||||||
Distributions
paid to stockholders
|
(1,129,000
|
)
|
(254,000
|
)
|
||||
Distributions
paid to noncontrolling interests
|
(7,000
|
)
|
(7,000
|
)
|
||||
Net
cash provided by financing activities
|
31,672,000
|
26,693,000
|
||||||
Net
increase in cash and cash equivalents
|
13,795,000
|
856,000
|
||||||
Cash
and cash equivalents - beginning of period
|
14,900,000
|
7,449,000
|
||||||
Cash
and cash equivalents - end of period
|
$
|
28,695,000
|
$
|
8,305,000
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest
|
$
|
652,000
|
$
|
332,000
|
||||
Supplemental
disclosure of non-cash financing and investing activities:
|
||||||||
Distributions
declared not paid
|
$
|
485,000
|
$
|
134,000
|
||||
Distribution
reinvested
|
$
|
1,083,000
|
$
|
271,000
|
||||
Loan
assumed at property acquisition
|
$
|
12,902,000
|
$
|
—
|
||||
Receivable
from transfer agent
|
$
|
—
|
$
|
265,000
|
||||
Payable
to related parties
|
$
|
—
|
$
|
40,000
|
||||
Accrued
offering costs
|
$
|
149,000
|
$
|
—
|
||||
Assets
contributed by noncontrolling interest
|
$
|
1,735,000 |
$
|
—
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
6
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(UNAUDITED)
1.
|
Organization
|
Cornerstone
Healthcare Plus REIT, Inc. (formerly known as Cornerstone Growth & Income
REIT, Inc.), a Maryland corporation, was formed on October 16, 2006 under the
General Corporation Law of Maryland for the purpose of engaging in the business
of investing in and owning commercial real estate. As used in this
report, the “Company”, “we”, “us” and “our” refer to Cornerstone Healthcare Plus
REIT, Inc. and its consolidated subsidiaries, except where context otherwise
requires. Subject to certain restrictions and limitations, our
business is managed by an affiliate, Cornerstone Leveraged Realty Advisors, LLC,
a Delaware limited liability company that was formed on October 16, 2006 (the
“Advisor”), pursuant to an advisory agreement.
Cornerstone
Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the
“Operating Partnership”) was formed on October 17, 2006. At June 30,
2010, we owned approximately a 99.8% general partner interest in the Operating
Partnership while the Advisor owned approximately a 0.2% limited partnership
interest. In addition, the Advisor owned approximately a 0.9% limited
partnership interest in CGI Healthcare Operating Partnership, L.P., a subsidiary
of the Operating Partnership. We anticipate that we will conduct all or a
portion of our operations through the Operating Partnership. Our financial
statements and the financial statements of the Operating Partnership are
consolidated in the accompanying condensed consolidated financial
statements. All intercompany accounts and transactions have been
eliminated in consolidation.
For
federal income tax purposes, we have elected to be taxed as a real estate
investment trust (“REIT”), under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the “Code”) beginning with
our taxable year ending December 31, 2008. REIT status imposes
limitations related to operating assisted-living properties. Generally, to
qualify as a REIT, we cannot directly operate assisted-living facilities.
However, such facilities may generally be operated by a taxable REIT subsidiary
(“TRS”) pursuant to a lease with the REIT. Therefore, we have formed
Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of CGI Healthcare
Operating Partnership, LP, to lease any assisted-living properties we acquire
and to operate the assisted-living properties pursuant to contracts with
unaffiliated management companies. Master TRS and the REIT have made
the applicable election for Master TRS to qualify as a TRS. Under the management
contracts, the management companies will have direct control of the daily
operations of these assisted-living properties.
2.
|
Public
Offering
|
On
November 14, 2006, Terry G. Roussel, our President and CEO, purchased 100 shares
of common stock for $1,000 and became our initial stockholder. Our articles of
incorporation authorize 580,000,000 shares of common stock with a par value of
$0.01 and 20,000,000 shares of preferred stock with a par value of $0.01. We are
offering a maximum of 50,000,000 shares of common stock, consisting of
40,000,000 shares for sale to the public (the “Primary Offering”) and 10,000,000
shares for sale pursuant to the distribution reinvestment plan (collectively,
the “Offering”).
On June
20, 2008, the Securities and Exchange Commission (the "SEC") declared our
amended registration statement (SEC Registration No. 333-139704) effective, and
we began accepting subscriptions for shares under our Offering. We retained
Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor, to serve
as our dealer manager for the Offering. PCC is responsible for marketing our
shares being offered pursuant to the Offering.
As of
June 30, 2010, we had sold a total of approximately 8.0 million shares of our
common stock for aggregate gross proceeds of approximately $80.1 million. We
intend to use the net proceeds of the Offering to invest in real estate
including healthcare, multi-tenant industrial, net-leased retail properties and
other real estate investments where we believe there are opportunities to
enhance cash flow and value.
On July
7, 2010, we filed a registration statement on Form S-11 with the SEC to register
a follow-on public offering. Pursuant to the registration
statement, we propose to register up to 44,000,000 shares of common stock in a
primary offering for $10.00 per share, with discounts available to certain
categories of purchasers. We will also register approximately 11,000,000 shares
pursuant to our dividend reinvestment plan at a purchase price equal to the
higher of $9.50 per share or 95% of the fair market value of a share of our
common stock. We expect to commence our follow-on offering during the
first quarter of 2011. We intend to cease offering shares of common
stock in our Offering upon the earlier February 6, 2011 or the date the
registration statement relating to our proposed follow-on offering, is declared
effective by the Securities and Exchange Commission.
7
3.
|
Summary
of Significant Accounting Policies
|
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more information
regarding our critical accounting policies and estimates please refer to
"Summary of Significant Accounting Policies" contained in our Annual Report on
Form 10-K for the year ended December 31, 2009. There have been no material
changes to the critical accounting policies previously disclosed in that report
except as discussed below.
Interim
Financial Information
The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC. Certain information and note
disclosures required for annual financial statements have been condensed or
excluded pursuant to SEC rules and regulations. Accordingly, the
interim condensed consolidated financial statements do not include all of the
information and notes required by GAAP for complete financial
statements. The accompanying financial information reflects all
adjustments which are, in the opinion of our management, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Operating
results for the six months ended June 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2010. Our consolidated financial statements include any variable
interest entities (“VIEs”) in which we are deemed the primary beneficiary.
Our accompanying interim condensed consolidated financial statements should be
read in conjunction with our audited consolidated financial
statements and the notes thereto included on our Annual Report on Form 10-K for
the year ended December 31, 2009, as filed with the SEC.
Fair
Value of Financial Instruments
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
825-10, Financial
Instruments, requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.
We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are
significantly affected by the assumptions used, including the discount rate,
credit spreads, and estimates of future cash flow.
Our
condensed consolidated balance sheets include the following financial
instruments: cash and cash equivalents, tenant and other receivables, deferred
costs and other assets, payable to related parties, prepaid rent and security
deposits, accounts payable and accrued liabilities, distributions payable,
deferred financing costs, and restricted cash. We consider the
carrying values to approximate fair value for these financial instruments
because of the short period of time between origination of the instruments and
their expected settlement.
The fair
value of notes payable is estimated using lending rates available to us for
financial instruments with similar terms and maturities. As of June 30, 2010 and
December 31, 2009, the fair value of notes payable was approximately $38.2
million and $20.1 million, respectively, compared to the carrying value of
approximately $38.6 million and $20.3 million, respectively.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 167, “Amendments to FASB
Interpretation No. 46(R),” which was primarily codified into ASC Topic
810 – Consolidation. The
new guidance impacts the consolidation guidance applicable to variable interest
entities, or VIEs, and among other things requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE, continuous
assessments of whether a company is the primary beneficiary of a VIE and
enhanced disclosures about a company’s involvement with a VIE. We adopted this
guidance on January 1, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”), 2010-02,
Consolidation – Accounting and
Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification, to address implementation issues associated with the
accounting for decreases in the ownership of a subsidiary. The new
guidance clarified the scope of the entities covered by the guidance related to
accounting for decreases in the ownership of a subsidiary and specifically
excluded in-substance real estate or conveyances of oil and gas mineral rights
from the scope. Additionally, the new guidance expands the disclosures
required for a business combination achieved in stages and deconsolidation of a
business or nonprofit activity. The new guidance became effective for
interim and annual periods beginning on or after December 31, 2009 and must
be applied on a retrospective basis to the first period that an entity adopted
the new guidance related to noncontrolling interests. We adopted this
guidance on January 1, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
8
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures -
Improving Disclosures about Fair Value Measurements (amendments to ASC
Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06
amends the disclosure requirements related to recurring and nonrecurring
measurements. The guidance requires new disclosures on the transfer
of assets and liabilities between Level 1 (quoted prices in active market for
identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons and the
timing of the transfers. Additionally, the guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). The guidance is effective for interim and annual
periods beginning after December 15, 2009. We adopted this guidance on January
1, 2010.
In
February 2010, FASB issued Accounting Standard Update (“ASU”) 2010-09, Subsequent Events: Amendments to Certain
recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent Events). ASU 2010-09 clarifies that subsequent events
should be evaluated through the date the financial statements are issued. In
addition, this update no longer requires a filer to disclose the date through
which subsequent events have been evaluated. This guidance is effective for
financial statements issued subsequent to February 24, 2010. We adopted this
guidance on February 24, 2010.
Consolidation
Considerations for Our Investments in Joint Ventures
ASC
810-10, Consolidation,
which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity. We analyze our joint ventures in
accordance with this accounting standard to determine whether they are VIEs and,
if so, whether we are the primary beneficiary. Our judgment with respect to our
level of influence or control over an entity and whether we are the primary
beneficiary of a VIE involves consideration of various factors including the
form of our ownership interest, our voting interest, the size of our investment
(including loans) and our ability to participate in major policy-making
decisions. Our ability to correctly assess our influence or control over an
entity affects the presentation of these investments in our condensed
consolidated financial statements.
4.
|
Investment
in Real Estate
|
The
following table provides summary information regarding our current property
portfolio.
Property
|
Location
|
Date
Purchased
|
Gross
Square Feet
|
Purchase
Price
|
Debt
|
June
30, 2010
% Occupancy
|
||||||||||||||
Caruth
Haven Court
|
Highland
Park, TX
|
01/22/09
|
74,647
|
$
|
20,500,000
|
$
|
9,955,000
|
91.20
|
%
|
|||||||||||
The
Oaks Bradenton
|
Bradenton,
FL
|
05/01/09
|
18,172
|
$
|
4,500,000
|
$
|
2,757,000
|
98.60
|
%
|
|||||||||||
GreenTree
at Westwood
|
Columbus,
IN
|
12/30/09
|
50,249
|
$
|
5,150,000
|
$
|
—
|
93.10
|
%
|
|||||||||||
Mesa
Vista Inn Health Center
|
San
Antonio, TX
|
12/31/09
|
55,525
|
$
|
13,000,000
|
$
|
7,432,000
|
(1)
|
||||||||||||
Rome
LTACH Project (2)
|
Rome,
GA
|
01/12/10
|
—
|
$
|
—
|
$
|
515,000
|
(2)
|
||||||||||||
Oakleaf
Village Portfolio
|
$
|
17,979,000
|
||||||||||||||||||
Oakleaf Village
at - Lexington
|
Lexington,
SC
|
04/30/10
|
67,000
|
$
|
14,512,000
|
$
|
—
|
91.11
|
%
|
|||||||||||
Oakleaf
Village at - Greenville
|
Greer,
SC
|
04/30/10
|
65,000
|
$
|
12,488,000
|
$
|
—
|
74.44
|
%
|
(1)
|
Mesa
Vista Inn Health Center is 100% net-leased to a single
tenant
|
|
(2)
|
Refer
to Note 5 for further discussion
|
9
As of
June 30, 2010, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
Buildings
and
improvements
|
Site
improvements
|
Furniture,
fixtures
and
equipment
|
Intangible
lease assets
|
|||||||||||||
Cost
|
$
|
50,737,000
|
$
|
914,000
|
$
|
1,591,000
|
$
|
4,640,000
|
||||||||
Accumulated
depreciation and amortization
|
(880,000
|
)
|
(31,000
|
)
|
(192,000
|
)
|
(1,832,000
|
)
|
||||||||
Net
|
$
|
49,857,000
|
$
|
883,000
|
$
|
1,399,000
|
$
|
2,808,000
|
As of
December 31, 2009, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:
Buildings
and
improvements
|
Site
improvements
|
Furniture,
fixtures
and
equipment
|
Intangible
lease assets
|
|||||||||||||
Cost
|
$
|
30,630,000
|
$
|
415,000
|
$
|
1,076,000
|
$
|
2,764,000
|
||||||||
Accumulated
depreciation and amortization
|
(394,000
|
)
|
(11,000
|
)
|
(67,000
|
)
|
(895,000
|
)
|
||||||||
Net
|
$
|
30,236,000
|
$
|
404,000
|
$
|
1,009,000
|
$
|
1,869,000
|
Depreciation
expense associated with buildings and improvements, site improvements and
furniture, fixtures and equipment for the three months ended June 30, 2010 and
2009 was approximately $371,000 and $121,000,
respectively. Depreciation expense associated with buildings and
improvements, site improvements and furniture, fixtures and equipment for the
six months ended June 30, 2010 and 2009 was approximately $631,000 and $208,000,
respectively.
Amortization
associated with the intangible assets for the three months ended June 30, 2010
and 2009 was $558,000 and $230,000, respectively. Amortization
associated with the intangible assets for the six months ended June 30, 2010 and
2009 was $937,000 and $344,000, respectively.
Estimated
amortization for July 1, 2010 through December 31, 2010 and each of the two
subsequent years is as follows:
Intangible assets
|
||||
July
2010 – December 2010
|
$
|
1,223,000
|
||
2011
|
$
|
1,512,000
|
||
2012
|
$
|
73,000
|
The
estimated useful lives for intangible assets range from approximately one to two
and a half years. As of June 30, 2010, the weighted-average amortization period
for intangible assets was 1.8 years.
5.
|
Variable
Interest Entities
|
We
analyze our joint ventures in accordance with ASC 810-10 to determine whether
they are VIEs and, if so, whether we are the primary beneficiary. Our judgment
with respect to the level of our influence or control over an entity and whether
we are the primary beneficiary of a VIE involves consideration of various
factors including the form of our ownership interest, our voting interest, the
size of our investment (including loans) and our ability to participate in major
policy-making decisions. Our ability to correctly assess our influence or
control over an entity affects the presentation of these investments in our
condensed consolidated financial statements.
Included
within our condensed consolidated financial statements are two joint venture
entities that are deemed VIEs and for which we are the primary beneficiary, and
thus are consolidated in our condensed financial statements. Both of these
entities have been established to own and operate healthcare-related properties.
Our involvement with these entities is through our joint venture interest and
ability to control the operations of properties. These entities were deemed VIEs
primarily based on the fact that the voting rights of the joint venture partners
are not proportional to their obligation to absorb expected losses or receive
the expected residual returns of the entities. We determined that we are the
primary beneficiary of these VIEs as a result of our power to direct the
activities of VIEs and right to receive the majority of the returns and absorb
the majority of the losses.
Following
are two joint ventures that are deemed VIEs and for which we are the primary
beneficiary:
10
Rome
LTACH Project
On
January 12, 2010, we contributed $2.7 million to acquire a 75% equity interest
in the Rome LTACH Project, which was formed to develop a long-term acute
hospital in Rome, Georgia with a projected development cost of $16.3 million.
This property is currently under development as of June 30, 2010 and the
estimated completion date for the project is March 31, 2011. As of June 30,
2010, we recorded approximately $3.7 million of development costs and
construction in progress and $0.5 million for a construction loan related to
this joint venture. See Note 10 for further details on the construction loan.
Under the operating agreement of Rome LTACH Project, we may be required to fund
additional capital contributions as deemed necessary in order to fund additional
construction costs.
Oakleaf
Village Portfolio
On April
30, 2010, we invested approximately $21.6 million to acquire 80% equity
interests in Royal Cornerstone South Carolina Portfolio, LLC (“Portfolio LLC”)
and Royal Cornerstone South Carolina Tenant Portfolio, LLC (“Tenant LLC”)
(collectively, we refer to the Portfolio LLC and the Tenant LLC as the “Oakleaf
Joint Venture”). The Oakleaf Joint Venture was designed to own and
operate two assisted living properties located in Lexington and Greenville,
South Carolina. As of June 30, 2010, total assets were approximately
$26.7 million, which includes approximately $25.8 million of real estate
assets and total liabilities were approximately $18.4 million, which includes an
approximately $18.0 million of secured mortgage debt. See Note 10 for further
details on the mortgage debt. The operations of this VIE are funded
with cash flows generated from the properties. We may be required to fund
additional capital contributions, which consist primarily of funding any capital
expenditures, which are deemed necessary to continue to operate the entity, and
any operating cash shortfalls that the entity may experience. The fair
value of noncontrolling interest is based on the noncontrolling interest’s
proportionate interest in the fair value of the acquisition less liabilities
acquired and assumed. The fair value of the acquisition was based on
income approach, which includes significant inputs such as future cash flows,
discount rate and exit capitalization rate. As of June 30, 2010, the fair
value of the noncontrolling interest in the Oakleaf Joint Venture was
approximately $1.7
million which is the
total fair value consideration transferred by the noncontrolling
interest.
The
classification of these assets is primarily within real estate and the
classification of liabilities is primarily within notes payables in our
condensed consolidated balance sheet as of June 30, 2010.
6.
|
Allowance
for Doubtful Accounts
|
As of
June 30, 2010 and December 31, 2009, no allowance for doubtful accounts was
recorded.
7.
|
Concentration
of Credit Risks
|
Financial
instruments that potentially subject the Company to a concentration of credit
risk are primarily cash investments; cash is generally invested in
investment-grade short-term instruments. Currently, the Federal Deposit
Insurance Corporation, or FDIC, generally insures amounts up to $250,000 per
depositor per insured bank. This amount is scheduled to be reduced to $100,000
after December 31, 2013. As of June 30, 2010 we had cash accounts in
excess of FDIC insured limits.
8.
|
Income
Taxes
|
For
federal income tax purposes, we have elected to be taxed as a REIT, under
Sections 856 through 860 of the Code beginning with our taxable year ended
December 31, 2008, which imposes limitations related to operating
assisted-living properties. As of June 30, 2010, we had acquired six
assisted-living facilities and formed five wholly owned taxable REIT
subsidiaries, or TRSs. The properties will be operated pursuant to leases
with our TRSs. Our TRSs have engaged unaffiliated management companies to
operate the assisted-living facilities. Under the management contracts, the
managers have direct control of the daily operations of the properties. The TRSs
are wholly owned subsidiaries of Master TRS.
We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider all
available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax planning
strategies and recent financial operations. In the event we were to
determine that we would not be able to realize our deferred income tax assets in
the future in excess of their net recorded amount, we would make an adjustment
to the valuation allowance which would reduce the provision for income
taxes.
Our
Master TRS was formed in 2009 and recorded a net taxable loss of $94,000 for the
year ended December 31, 2009. At that time, we could not predict with
certainty that it was more likely than not that the benefit from such net
operating loss would be realized. Accordingly, we provided a valuation
allowance in the full amount of the deferred tax asset associated with such
loss. In the event we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of the net recorded
amount, we would make an adjustment to the valuation allowance which would
reduce the provision for income taxes. During the first two quarters
of 2010, our TRS reported net taxable income of approximately
$139,000. Based on the weight of available evidence, including
cumulative losses in the past year and the start-up activity of the new property
acquisitions, we
concluded that we would make an adjustment to the valuation allowance which
would reduce our provision for income taxes.
11
9.
|
Payable
to Related Parties
|
Payable
to related parties at June 30, 2010 and December 31, 2009 consists of offering
costs, acquisition fees, expense reimbursement payable, sales commissions and
dealer manager fees incurred to our Advisor and PCC.
10.
|
Notes
Payable
|
Caruth
Haven Court
On
January 22, 2009, in connection with the acquisition of the Caruth Haven Court,
we entered into a $14.0 million acquisition bridge loan with Cornerstone
Operating Partnership, L.P. Cornerstone Operating Partnership, L.P. is a
wholly owned subsidiary of Cornerstone Core Properties REIT, Inc., a publicly
offered, non-traded REIT sponsored by affiliates of our sponsor. The
loan, which bore interest at a variable rate of 300 basis points over prime
rate, was repaid on December 16, 2009 using cash from our ongoing offering
proceeds and from a new $10.0 million first mortgage loan.
The $10.0
million first mortgage loan has a 10-year term, maturing on December 16, 2019
and bears interest at a fixed rate of 6.43% per annum, with fixed monthly
payments of approximately $63,000 based on a 30-year amortization
schedule. The loan is secured by a deed of trust on Caruth Haven
Court, and by an assignment of the leases and rents payable to the
borrower.
As of
June 30, 2010 and December 31, 2009, the first mortgage loan had a balance of
approximately $10.0 million.
The
Oaks Bradenton
On May 1,
2009, in connection with the acquisition of The Oaks Bradenton, we entered into
two loan agreements totaling $2.76 million with an unaffiliated financial
institution. Both loans mature on May 1, 2014 with no option to
extend. The $2.4 million loan bears interest at a fixed rate of 6.25%
per annum and the $360,000 bears interest at a variable rate equivalent to
prevailing market certificate deposits rate plus a 1.5% margin. We
may repay the loan, in whole or in part, on or before May 1, 2014, subject to
prepayment premiums. Monthly payments for the first twelve months of
the loan are interest only. Beginning the thirteenth month, monthly
payments will include interest and principal based on a 25-year amortization
period. The loan agreement contains various covenants including financial
covenants with respect to debt service coverage ratios, fixed charge coverage
ratio and tenant rent coverage ratio. As of June 30, 2010, we were in
compliance with these financial covenants.
As of
June 30, 2010 and December 31, 2009, the fixed rate loan agreement had a balance
of approximately $2.4 million and the variable rate loan agreement had a balance
of $360,000.
Mesa
Vista Inn Health Center
On
December 31, 2009, in connection with the acquisition of the Mesa Vista Inn
Health Center, we entered into an assumption and amendment of an existing
mortgage loan with an unaffiliated financial institution. Pursuant to
the assumption agreement, we assumed the outstanding principal balance of $7.5
million. The loan matures on January 5, 2015 and bears interest at a fixed rate
of 6.50% per annum. We may repay the loan, in whole or in part,
on or before January 5, 2015 without incurring any prepayment
penalty. Principal and interest on the loan are due and payable in
monthly installments of approximately $56,000 until the maturity date, when the
entire remaining balance of principal and accrued interest is due, assuming no
prior principal prepayment.
As of
June 30, 2010 and December 31, 2009, this loan had a balance of approximately
$7.4 million and $7.5 million, respectively.
Rome
LTACH Project
On
January 12, 2010, in connection with our investment in this development joint
venture, the joint venture entered a construction loan upto $12.75 million
construction loan with an unaffiliated financial institution. The
loan will mature on December 18, 2012, subject to two one-year extension
options, which are dependent on meeting certain financial
covenants. The loan bears a variable interest rate with a spread of
300 basis points over one-month LIBOR with a floor of
6.15%. Monthly payments for the first twenty four months will
be interest-only. Monthly payments beginning the twenty-fifth month
will include interest and principal based on a 25-year amortization
period.
As of
June 30, 2010, the construction loan had a balance of $515,000. The construction
loan is secured by the development project.
Oakleaf
Village
On April
30, 2010, through wholly-owned indirect subsidiaries, we acquired an 80%
interest in a joint venture entity that owns a portfolio of two assisted living
facilities located in South Carolina. Oakleaf Village at Lexington and Oakleaf
Village at Greenville (together, “Oakleaf Village”) have a total of 180 units,
of which 132 are dedicated to assisted-living and 48 are committed to memory
care. Royal Senior Care, LLC, an unaffiliated company that
currently owns both properties, will be our joint venture partner in the $27.0
million transaction.
12
We
acquired our interest in the Oakleaf Village Joint Venture subject to existing
indebtedness encumbering the Oakleaf Village properties. On April 30,
2010, two wholly-owned subsidiaries of the joint venture entered into an Amended
and Restated Loan Agreement with an unaffiliated financial institution for a
loan in the aggregate amount of $18 million secured by security interests in the
Oakleaf Village property (the “Senior Loan”). The aggregate amount of
the Senior Loan was composed of a restatement date balance of $12.9 million
outstanding with respect to a prior $13.5 million loan (the “Initial Loan”), and
an additional amount of $5.1 million disbursed on the loan restatement date (the
“Restatement Date Loan”). The Senior Loan will mature on April 30,
2015.
The
Restatement Date Loan bears interest at a variable rate equal to 5.45% per annum
plus the greater of 1.0% or the 3 month LIBOR rate, determined as set forth in
the loan agreement (the “Contract Rate”). The outstanding balance of the Initial
Loan bears interest at a rate of 6.62% per annum until January 2011 and
thereafter at the Contract Rate. From June 1, 2010 through the maturity date
payments on the Restatement Date Loan are due monthly and consist of accrued
interest at the Contract Rate, plus principal amortization payments based upon a
30 year amortization schedule. From June 1, 2010 through January 10, 2011,
payments on the Initial Loan are due monthly and consist of accrued interest at
6.62% per annum, plus principal amortization payments based upon a 25 year
amortization schedule, thereafter through maturity, payments on the Initial loan
are due monthly and consist of accrued interest at the Contract Rate, plus
principal amortization payments based upon a 30-year amortization
schedule.
As of
June 30, 2010, this loan had a balance of approximately $18.0
million.
The
principal payments due on our notes payable for July 1, 2010 to December 31,
2010 and each of the subsequent years is as follows:
Year
|
Principal
amount
|
|||
July
1, 2010 to December 31, 2010
|
$
|
302,000
|
||
2011
|
558,000
|
|||
2012
|
1,101,000
|
|||
2013
|
628,000
|
|||
2014
|
3,215,000
|
|||
2015
and thereafter
|
32,834,000
|
Interest
Expense and Deferred Financing Cost
The
following table sets forth our gross interest expense and deferred financing
cost amortization for the three and six months ended June 30, 2010 and 2009. The
capitalized amount is a cost of development and increases the carrying value of
construction in progress.
Three
months ended
|
Six
months ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Gross
interest expense and deferred financing cost amortization
|
$ | 578,000 | $ | 276,000 | $ | 948,000 | $ | 467,000 | ||||||||
Capitalized
interest expense and deferred financing cost amortization
|
(32,000 | ) | — | (65,000 | ) | — | ||||||||||
Interest
Expense
|
$ | 546,000 | $ | 276,000 | $ | 883,000 | $ | 467,000 |
In
connection with our notes payable, we had incurred financing costs totaling
approximately $988,000 and $339,000, as of June 30, 2010 and December 31, 2009,
respectively.
11.
|
Stockholders’
Equity
|
Common
Stock
Our
articles of incorporation authorize the issuance of 580,000,000 shares of common
stock with a par value of $0.01 and 20,000,000 shares of preferred stock with a
par value of $0.01. As of June 30, 2010, including distributions
reinvested, we had issued approximately 8.2 million shares of common stock for
total gross proceeds of approximately $82.1 million. As of
December 31, 2009, including distributions reinvested, we had issued
approximately 5.0 million shares of common stock for a total of approximately
$50.0 million of gross proceeds.
13
Distributions
We have
adopted a distribution reinvestment plan that allows our stockholders to have
dividends and other distributions otherwise distributable to them invested in
additional shares of our common stock. We have registered 10,000,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan. The purchase price per share is 95% of the price paid by the
purchaser for our common stock, but not less than $9.50 per share. As
of June 30, 2010 and December 31, 2009, approximately 213,000 and 99,000 shares,
respectively, had been issued under the distribution reinvestment
plan.
The
following are the distributions declared during the six months ended June 30,
2010 and 2009:
Distribution
Declared
|
||||||||||||
Period
|
Cash
|
Reinvested
|
Total
|
|||||||||
First
quarter 2009 (1)
|
$
|
116,000
|
$
|
122,000
|
$
|
238,000
|
||||||
Second
quarter 2009 (1)
|
$
|
170,000
|
$
|
190,000
|
$
|
360,000
|
||||||
First
quarter 2010
|
$
|
525,000
|
$
|
506,000
|
$
|
1,031,000
|
||||||
Second
quarter 2010
|
$
|
696,000
|
$
|
665,000
|
$
|
1,361,000
|
(1)
|
Distributions
declared represented a return of capital for tax purposes. In order to
meet the requirements for being treated as a REIT under the Internal
Revenue Code, we must pay distributions to our shareholders each taxable
year equal to at least 90% of our net ordinary taxable
income. Some of our distributions have been paid from sources
other than operating cash flow, such as offering
proceeds. Until proceeds from our offering are fully invested
and generating operating cash flow sufficient to fully cover distributions
to stockholders, we intend to pay all or a portion of our distributions
from the proceeds of our offering or from borrowings in anticipation of
future cash flow.
|
The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis. The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deems relevant. We may amend or
terminate the distribution reinvestment plan for any reason at any time upon 10
days prior written notice to participants.
Stock
Repurchase Program
We have
adopted a stock repurchase program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death. Under our current stock repurchase program, the
repurchase price will vary depending on the purchase price paid by the
stockholder and the number of years the shares are held. Our board of
directors may amend, suspend or terminate the program at any time on 30 days
prior notice to stockholders. We have no obligation to repurchase our
stockholders’ shares. Our board of directors waived the one-year
holding period in the event of the death of a stockholder and adjusted the
redemption price to 100% of such stockholders purchase price if the stockholder
held the shares for less than three years. Our board of directors reserves the
right in its sole discretion at any time and from time to time, upon 30 days
prior notice to our stockholders, to adjust the redemption price for our shares
of stock, or suspend or terminate our stock repurchase program.
During
this offering and each of the first seven years following the closing of this
offering, (i) we will have no obligation to redeem shares if the redemption
would cause total redemptions to exceed the proceeds from our distribution
reinvestment plan in the prior calendar year, and (ii) we may not,
except to repurchase the shares of a deceased stockholder, redeem more
than 5% of the number of shares outstanding at the end of the prior
calendar year. With respect to redemptions requested within two years of the
death of a stockholder, we may, but will not be obligated to, redeem shares even
if such redemption causes the number of shares redeemed to exceed 5% of the
number of shares outstanding at the end of the prior calendar
year. Beginning seven years after termination of this primary
offering, unless we have commenced another liquidity event, such as an orderly
liquidation or listing of our shares on a national securities exchange, we will
modify our stock repurchase program to permit us to redeem up to 10% of the
number of shares outstanding at the end of the prior year, using proceeds from
any source, including the sale of assets.
14
During
the six months ended June 30, 2010 and 2009, we redeemed shares pursuant to our
stock repurchase program as follows:
Period
|
Total
Number of Shares Redeemed (1)
|
Average
Price Paid per Share
|
||||||
January
2010
|
7,425
|
$
|
9.55
|
|||||
February
2010
|
2,784
|
$
|
9.93
|
|||||
March
2010
|
—
|
$
|
—
|
|||||
April
2010
|
—
|
$
|
—
|
|||||
May
2010
|
10,000
|
$
|
9.00
|
|||||
June
2010
|
3,500
|
$
|
8.99
|
|||||
23,709
|
Period
|
Total
Number of Shares Redeemed (1)
|
Average
Price Paid per Share
|
||||||
January
2009
|
—
|
$
|
—
|
|||||
February
2009
|
—
|
$
|
—
|
|||||
March
2009
|
—
|
$
|
—
|
|||||
April
2009
|
—
|
$
|
—
|
|||||
May
2009
|
—
|
$
|
—
|
|||||
June
2009
|
17,245
|
$
|
9.99
|
|||||
17,245
|
(1)
|
As
long as our common stock is not listed on a national securities exchange
or traded on an over -the-counter market, our stockholders who have held
their stock for at least one year may be able to have all or any portion
of their shares redeemed in accordance with the procedures outlined in the
prospectus relating to the shares they
purchased.
|
Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.
12.
|
Related
Party Transactions
|
The
Company has no employees. Our Advisor is primarily responsible for managing our
business affairs and carrying out the directives of our board of
directors. We have an advisory agreement with the Advisor and a dealer
manager agreement with PCC which entitle the Advisor and PCC to specified fees
upon the provision of certain services with regard to the Offering and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the Advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the Advisor in providing services to us.
Advisory
Agreement
Under the
terms of the advisory agreement, the Advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors. The advisory agreement
calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of
directors, and to perform other duties.
The fees
and expense reimbursements payable to the Advisor under the advisory agreement
are described below.
Organizational and Offering
Costs. Organizational and offering costs of the Offering paid
by the Advisor on our behalf and are being reimbursed to the Advisor from the
proceeds of the Offering. Organizational and offering costs consist of all
expenses (other than sales commissions and the dealer manager fee) to be paid by
us in connection with the Offering, including our legal, accounting, printing,
mailing and filing fees, charges of our escrow holder and other accountable
offering expenses, including, but not limited to, (i) amounts to reimburse the
Advisor for all marketing related costs and expenses such as salaries and direct
expenses of employees of the Advisor and its affiliates in connection with
registering and marketing our shares (ii) technology costs associated with the
offering of our shares; (iii) our costs of conducting our training and education
meetings; (iv) our costs of attending retail seminars conducted by participating
broker-dealers; and (v) payment or reimbursement of bona fide due diligence
expenses. At times during our offering stage, the amount of
organization and offering expenses that we incur, or that the Advisor and its
affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds
then raised, but our Advisor has agreed to reimburse us to the extent that our
organization and offering expenses exceed 3.5% of aggregate gross offering
proceeds at the conclusion of our offering. In addition, the Advisor will also
pay any organization and offering expenses to the extent that such expenses,
plus sales commissions and the dealer manager fee (but not the acquisition fees
or expenses) are in excess of 13.5% of gross offering proceeds. In no event will
we have any obligation to reimburse the Advisor for organizational and offering
costs totaling in excess of 3.5% of the gross proceeds from the Primary
Offering. As of June 30, 2010, the Advisor and its affiliates had incurred on
our behalf organizational and offering costs totaling approximately $3.6
million, including approximately $0.1 million of organizational costs that have
been expensed and approximately $3.7 million of offering costs which reduce net
proceeds of our offering. As of December 31, 2009, the Advisor and
its affiliates had incurred on our behalf organizational and offering costs
totaling approximately $3.3 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $3.2 million of
offering costs which reduce net proceeds of our offering.
15
Acquisition Fees and
Expenses. The advisory agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2.0% of the investments acquired,
including any debt attributable to such investments. A portion of the
acquisition fees will be paid upon receipt of the offering proceeds, and the
balance will be paid at the time we acquire a property. However, if
the advisory agreement is terminated or not renewed, the Advisor must return
acquisition fees not yet allocated to one of our
investments. In addition, we are required to reimburse the
Advisor for direct costs the Advisor incurs and amounts the Advisor pays to
third parties in connection with the selection and acquisition of a property,
whether or not ultimately acquired. For the three months ended June
30, 2010 and 2009, the Advisor earned approximately $0.5 million and $0.2
million in acquisition fees, respectively. For the six months ended June 30,
2010 and 2009, the Advisor earned approximately $0.9 million and $0.5 million in
acquisition fees, respectively.
Management
Fees. The advisory agreement requires us to pay the Advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
basis book carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with GAAP. In addition, we reimburse the Advisor for the
direct and indirect costs and expenses incurred by the Advisor in providing
asset management services to us, including personnel and related employment
costs related to providing asset management services on our behalf and amounts
paid by our Advisor to Servant Investments, LLC and Servant Healthcare
Investments, LLC for portfolio management services provided on our
behalf. These fees and expenses are in addition to management fees
that we expect to pay to third party property managers. For the three
months ended June 30, 2010 and 2009, the Advisor was reimbursed approximately
$139,000 and $54,000 of management fees, respectively, which were
expensed. For the three months ended June 30, 2010 and 2009, the
Advisor incurred $70,000 and $0, respectively, of such direct and indirect costs
and expenses on our behalf, which are included in general and administrative
expenses in the condensed consolidated statement of operations. For
the six months ended June 30, 2010 and 2009, the Advisor was
reimbursed approximately $250,000 and $91,000 of management fees,
respectively, which were expensed. For the six months ended June 30,
2010 and 2009, the Advisor incurred $124,000 and $0, respectively, of such
direct and indirect costs and expenses incurred on our behalf, which are
included in general and administrative expenses in the condensed consolidated
statement of operations.
Operating Expenses.
The advisory agreement provides for reimbursement of the Advisor’s direct and
indirect costs of providing administrative and management services to
us. For the three months ended June 30, 2010 and 2009, approximately
$281,000 and $127,000 of such costs, respectively, were reimbursed and included
in general and administrative expenses on our condensed consolidated statement
of operations. For the six months ended June 30, 2010 and 2009,
approximately $486,000 and $253,000 of such costs, respectively, were reimbursed
and included in general and administrative expenses on our condensed
consolidated statement of operations. The Advisor must pay or reimburse us
the amount by which our aggregate annual operating expenses exceed the greater
of 2% of our average invested assets or 25% of our net income unless a majority
of our independent directors determine that such excess expenses were justified
based on unusual and non-recurring factors. Commencing four fiscal quarters
after the acquisition of our first real estate asset, our advisor must reimburse
us the amount by which our total operating expenses for the four quarters then
ended exceed the greater of 2% of our average invested assets or 25% of our net
income unless a majority of our independent directors has determined that such
excess expenses were justified based on unusual and non-recurring
factors.
Disposition
Fee. The advisory agreement provides that if the Advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the Advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties. This disposition fee may be
paid in addition to real estate commissions paid to non-affiliates, provided
that the total real estate commissions (including such disposition fee) paid to
all persons by us for each property shall not exceed an amount equal to the
lesser of (i) 6% of the aggregate contract sales price of each property or (ii)
the competitive real estate commission for each property. We will pay the
disposition fees for a property at the time the property is sold.
Subordinated Participation
Provisions. The Advisor is entitled to receive a
subordinated participation upon the sale of our properties, listing of our
common stock or termination of the Advisor, as follows:
·
|
After
we pay stockholders cumulative distributions equal to their invested
capital plus a 6% cumulative, non-compounded return, the Advisor will be
paid a subordinated participation in net sale proceeds ranging from a low
of 5% of net sales provided investors have earned annualized return of 6%
to a high of 15% of net sales proceeds if investors have earned annualized
returns of 10% or more.
|
16
·
|
Upon
termination of the advisory agreement, the Advisor will receive the
subordinated performance fee due upon
termination. This fee ranges from a low of 5% of
the amount by which the sum of the appraised value of our assets minus our
liabilities on the date the advisory agreement is terminated plus total
distributions (other than stock distributions) paid prior to termination
of the advisory agreement exceeds the amount of invested capital plus
annualized returns of 6%, to a high of 15% of the amount by which the sum
of the appraised value of our assets minus its liabilities plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 10% or
more.
|
·
|
In
the event we list our stock for trading, the Advisor will receive a
subordinated incentive listing fee instead of a subordinated participation
in net sales proceeds. This fee ranges from a low of 5% of the
amount by which the market value of our common stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 6%, to a high of 15% of the
amount by which the sum of the market value of our stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 10% or
more.
|
Dealer
Manager Agreement
PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in the Primary Offering. PCC is also entitled to
receive a dealer manager fee equal to up to 3% of gross proceeds from sales in
the Primary Offering. PCC is also entitled to receive a reimbursement
of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales
in the Primary Offering. The advisory agreement requires the Advisor to
reimburse us to the extent that offering expenses including sales commissions,
dealer manager fees and organization and offering expenses (but excluding
acquisition fees and acquisition expenses discussed above) are in excess of
13.5% of gross proceeds from the Offering. For the three months ended June 30,
2010 and 2009, our dealer manager earned sales commission and dealer manager fee
of approximately $1.7 million and $0.8 million, respectively. For the
six months ended June 30, 2010 and 2009, our dealer manager earned sales
commission and dealer manager fee of approximately $3.0 million and $1.3
million, respectively. Dealer manager fees and sales commissions paid to
PCC are a cost of capital raised and, as such, are included as a reduction of
additional paid in capital in the accompanying condensed consolidated balance
sheets.
13.
|
Commitments
and Contingencies
|
We
monitor our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows. Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.
Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business. In the opinion
of management, these matters are not expected to have a material impact on our
condensed consolidated financial position, cash flows and results of
operations. We are not presently subject to any material litigation
nor, to our knowledge, are any material litigation threatened against the
Company which if determined unfavorably to us would have a material adverse
effect on our cash flows, financial condition or results of
operations.
14.
|
Business
Combinations
|
On April
30, 2010, we completed the purchase of Oakleaf Village Portfolio. The following
summary provides the preliminary allocation of the assets acquired
and liabilities assumed for Oakleaf Village Portfolio as of the dates of
acquisition. We have accounted for the acquisition of Oakleaf Village Portfolio
as a business combination under U.S. GAAP. Under business combination
accounting, the assets and liabilities of Oakleaf Village Portfolio were
recorded as of the acquisition date, at their respective fair values, and
consolidated in our condensed consolidated financial statements. The break-down
of the purchase price of Oakleaf Village Portfolio is as follows:
17
Six Months
Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
Land
|
$ | 3,121,000 | $ | 4,646,000 | ||||
Buildings &
improvements
|
20,058,000 | 16,604,000 | ||||||
Site
improvements
|
499,000 | 201,000 | ||||||
Furniture &
fixtures
|
515,000 | 384,000 | ||||||
In place lease
value
|
1,658,000 | 2,025,000 | ||||||
Tenant
relationship
|
219,000 | 118,000 | ||||||
Other
assets
|
- | 295,000 | ||||||
Loan assumed at property
acquisition
|
(12,902,000 | ) | - | |||||
Security deposits and other
liabilities
|
- | (249,000 | ) | |||||
Assets
contributed by noncontrolling interest
|
(1,735,000 | ) | - | |||||
Goodwill
|
930,000 | 769,000 | ||||||
Real estate
acquisition
|
$ | 12,363,000 | $ | 24,793,000 | ||||
Acquisition
expenses
|
$ | 306,000 | $ | 382,000 |
On
January 22, 2009, we completed the purchase of Caruth Haven Court, on May 1,
2009, we completed the purchase of The Oaks Bradenton, and on April 30, 2010 we
completed the purchase of Oakleaf Village. The following unaudited pro forma
information for the three and six months ended June 30, 2009 has been prepared
to reflect the incremental effect of the acquisitions as if such transactions
had occurred on January 1, 2009. As these acquisitions are assumed to
have been made on January 1, 2009, the shares raised during our offering needed
to purchase the properties are assumed to have been sold and outstanding as of
January 1, 2009 for purposes of calculating per share data.
The
Company recorded revenues of $1.4 million for the three and six months ended
June 30, 2010 related to the Oakleaf Village Portfolio acquisition. The Company
recorded net income of $0.5 million for the three and six months ended June 30,
2010 related to the Oakleaf Village Portfolio acquisition.
Three
Months ended June 30,
|
Six
Months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$
|
4,652,000
|
$
|
4,141,000
|
$
|
9,438,000
|
$
|
8,633,000
|
||||||||
Net
loss attributable to common stockholders
|
$
|
(1,635,000
|
)
|
$
|
(1,357,000
|
)
|
$
|
(2,569,000
|
)
|
$
|
(2,831,000
|
)
|
||||
Basic
and diluted net loss per common share attributable to common
stockholders
|
$
|
(0.18
|
)
|
$
|
(0.36
|
)
|
$
|
(0.31
|
)
|
$
|
$(0.81
|
)
|
15.
|
Subsequent
Events
|
Global
Rehab Inpatient Rehab Facility
On July
19, 2010, through a wholly-owned subsidiary, we entered into a definitive
purchase and sale agreement (the “Agreement”) in connection with the acquisition
of the Global Rehab Inpatient Rehab Facility (the “Facility”), located in
Dallas, TX from The Cirrus Group, a non-related party, for a purchase price of
approximately $15.0 million. Except with respect to specific
contingencies, we do not have the right to terminate the agreement without
penalty.
The
40,000 square foot, 42 bed Facility was constructed in 2008 and is master-leased
until 2024 to GlobalRehab LP through February 2024, with two additional five
year renewal options. The Facility is GlobalRehab’s second Inpatient
Rehabilitation Facility (“IRF”) and currently has approximately 30 physician
partner owners and over 150 physicians on staff actively referring
patients.
Carriage
Court of Hilliard
On July
20, 2010, through a wholly-owned subsidiary, we entered into a definitive
purchase and sale agreement in connection with the acquisition of Carriage Court
of Hilliard (the “Carriage Court”), located in Hilliard, OH from an affiliate of
Wilkinson Real Estate, a non-related party, for an approximate
purchase price of $17.5 million. Except with respect to
specific contingencies, we do not have the right to terminate the agreement
without seller’s consent.
Carriage
Court is an assisted living facility with a total of 102 units, including 64
assisted living units and 38 memory care units, in an approximately
70,000 square feet building that was constructed in
1998. The property is located in Columbus, Ohio, in the western
suburb of Hilliard. Columbus is the state capital of Ohio and the
state’s third largest city, with over 2,000,000 residents.
18
Terrace
at Mountain Creek
Also on
July 20, 2010, through a wholly-owned subsidiary, we entered into a definitive
purchase and sale agreement in connection with the acquisition of Terrace at
Mountain Creek, located in Chattanooga, TN from an affiliate of Wilkinson Real
Estate, a non-related party, for an approximate purchase price of $8.5 million.
Except with respect to specific contingencies, we do not have the right to
terminate the agreement without seller’s consent.
The
Terrace at Mountain Creek is an assisted living facility consisting
of 116 units, including 42 independent living units, 61 assisted living
units and 13 memory care units, in an approximately 110,000 square foot building
that was constructed in 1995. The property is located near Signal
Mountain, just west across the Tennessee River from downtown Chattanooga,
Tennessee.
Although
most contingencies have been satisfied and we expect to complete the
acquisitions of the facility, Carriage Court and Terrace at Mountain Creek in
accordance with the terms of the respective agreements, we can provide no
assurance that the remaining contingencies will be satisfied or that events will
not arise that could prevent us from acquiring any or all of these
properties.
Sale
of Shares of Common Stock
As of
August 13, 2010, we had raised approximately $87.8 million through the issuance
of approximately 8.8 million shares of our common stock under our Offering,
excluding, approximately 266,000 shares that were issued pursuant to our
distribution reinvestment plan reduced by approximately 105,000 shares redeemed
pursuant to our stock repurchase program.
Filing
of Registration Statement Related to Follow-on Offering
On July
7, 2010, we filed a registration statement on Form S-11 with the SEC to register
a follow-on public offering. Pursuant to the registration
statement, we propose to register up to 44,000,000 shares of common stock in a
primary offering for $10.00 per share, with discounts available to certain
categories of purchasers. We will also register approximately 11,000,000 shares
pursuant to our dividend reinvestment plan at a purchase price equal to the
higher of $9.50 per share or 95% of the fair market value of a share of our
common stock.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report. This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based. These forward-looking statements generally are
identified by the words “believes,” “project,” “expects,” “anticipates,”
“estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,”
“will continue,” “will likely result,” and similar
expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements. Forward-looking statements that were true at the
time made may ultimately prove to be incorrect or false. We undertake
no obligation to update or revise publicly any forward–looking statements,
whether as a result of new information, future events or otherwise. All
forward-looking statements should be read in light of the risks identified in
Part I, Item 1A of our annual report on Form 10-K for the year ended December
31, 2009 as filed with the SEC, and the risks identified in Part II, Item 1A of
this quarterly report.
Overview
We were
incorporated on October 16, 2006 for the purpose of engaging in the business of
investing in and owning commercial real estate. We intend to invest
the net proceeds from the Offering primarily in investment real estate including
health care, multi-tenant industrial, net-leased retail properties and other
real estate related assets located in major metropolitan markets in the United
States. As of June 30, 2010, we raised approximately $80.1 million of
gross proceeds from the sale of approximately 8.0 million shares of our common
stock.
Our
revenues, which will be comprised largely of rental income, will include rents
reported on a straight-line basis over the initial term of the lease. Our growth
depends, in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels; (ii)
maximize tenant recoveries given the underlying lease structures; and (iii)
control operating and other expenses. Our operations are impacted by property
specific, market specific, general economic and other conditions.
19
Market
Outlook – Real Estate and Real Estate Finance Markets
In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.
As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults have risen, while
demand for commercial real estate space is contracting, resulting a highly
competitive leasing environment, downward pressure on both occupancy and rental
rates, and an increase in leasing incentives. Mortgage delinquencies and
defaults have trended upward, with many industry analysts predicting significant
credit defaults, foreclosures and principal losses.
From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.
Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.
Despite
the economic conditions discussed above the demand for health care services is
projected to reach unprecedented levels in the near future. The Centers for
Medicare and Medicaid Services projects that national health expenditures will
rise to $3.4 trillion in 2015 or 17.7% of gross domestic product (“GDP”), up
from $2 trillion or 15.7% of GDP in 2005. The elderly are an important component
of health care utilization, especially independent living services, assisted
living services, skilled nursing services, inpatient and outpatient hospital
services and physician ambulatory care. The elderly population aged 65 and over
is projected to increase by 76.6% through 2030. Most health care services are
provided within a health care facility such as a hospital, a physician’s office
or a senior housing facility.
Our cash
position remains strong. Despite the current economic crisis, we expect to have
sufficient cash available from operations and the proceeds of our offerings and
borrowings to fund distributions and capital improvements in the next twelve
months.
Critical
Accounting Policies
There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC except as discussed under Note 3 of the accompanying
condensed consolidated financial statements.
Results
of Operations
We began
accepting subscriptions for shares under our initial public offering on June 20,
2008. We purchased our first property in January
2009. Our second property was acquired in May 2009. The
third and fourth properties were acquired at the end of December
2009. In January 2010, we acquired a 75% interest in a joint venture
formed to develop a long term acute care hospital. In April 2010, we
acquired an 80% interest in a joint venture formed to own two assisted-living
properties. Operating results in future periods will depend on the
results of the operation of the real estate properties that we
acquire. During the six months ended June 30, 2010, we owned six real
estate properties and have one development project under
construction. During the six months ended June 30, 2009, we owned two
properties. Accordingly, the results of our operations for the three
and six months ended 2010 and 2009 are not directly comparable.
Comparison
of the Three Months Ended June 30, 2010 and 2009
Revenues
increased to $4.1 million from $1.6 million for the comparable 2009
period. The increase is primarily due to approximately $1.6 million
in revenues related to the additional properties acquired during the fourth
quarter of 2009 and second quarter of 2010 and approximately $0.4 million in
increased revenue from the existing properties as a result of higher
occupancy.
20
Property
operating and maintenance expenses increased to $2.6 million from $1.3 million
for the comparable 2009 period. The increase is primarily due to the additional
properties acquired in the fourth quarter of 2009 and second quarter of
2010.
General
and administrative expenses increased to $0.6 million from $0.3 million for the
comparable 2009 period. The increase is primarily due to an increase in
reimbursements to the Advisor for direct and indirect costs of providing
administrative and management services and higher professional fees, including
audit, tax and legal fees, all of which are increases resulting from
the higher level of investment and asset management activities in
2010.
Asset
management fees increased to $0.1 million from $54,000 for the comparable 2009
period. The increase is due primarily to fees earned from the additional
properties acquired during the fourth quarter of 2009 and second quarter of
2010.
Real
estate acquisition costs increased to $0.9 million from $0.3 million for the
comparable 2009 period. The increase is due primarily to increased equity raised
in our public offering and acquisition activity in the second quarter of
2010.
Depreciation
and amortization increased to $0.9 million from $0.4 million for the comparable
2009 period. The increase is due primarily to the additional properties acquired
in the fourth quarter of 2009 and second quarter of 2010.
Interest
expense increased to $0.5 million from $0.3 million for the comparable 2009
period. The increase is due primarily to the amortization of debt financing fees
and higher debt outstanding associated with one property acquired in the fourth
quarter of 2009 and two properties acquired in the second quarter of
2010.
Comparison
of the Six Months Ended June 30, 2010 to the Six Months Ended June 30,
2009
We owned
six properties and one development project during the six months ended June 30,
2010 and two properties during the six months ended June 30, 2009.
Revenues
increased to $7.1 million from $2.7 million for the comparable 2009
period. The increase is primarily due to approximately $3.0 million
in revenues related to the additional properties acquired during the fourth
quarter of 2009 and second quarter of 2010 and approximately $1.4 million in
increased revenue from the existing properties as a result of higher
occupancy.
Property
operating and maintenance expenses increased to $4.5 million from $2.2 million
for the comparable 2009 period. The increase is primarily due to an increase in
reimbursements to the Advisor for direct and indirect costs of providing
administrative and management services for the additional properties
acquired in the fourth quarter of 2009 and second quarter of 2010.
General
and administrative expenses increased to $1.2 million from $0.6 million for the
comparable 2009 period. The increase is primarily due to an increase in
reimbursements to the Advisor for direct and indirect costs of providing
administrative and management services and higher accounting fees and higher
board of director fees associated with increased operating activities in
2010.
Asset
management fees increased to $0.3 million from $0.1 million for the comparable
2009 period. The increase is due primarily to fees earned from the additional
properties acquired during the fourth quarter of 2009 and second quarter of
2010.
Real
estate acquisition costs increased to $1.3 million from $0.8 million for the
comparable 2009 period. The increase is due to the fund raising and
acquisition activities that occurred in the second half of 2009 and first half
of 2010.
Depreciation
and amortization increased to $1.6 million from $0.6 million for the comparable
2009 period. The increase is due primarily to the additional properties acquired
in the fourth quarter of 2009 and second quarter of 2010.
Interest
expense increased to $0.9 million from $0.5 million for the comparable period of
2009. The increase is due primarily to the amortization of debt
financing fees and higher debt outstanding associated with one property acquired
in the fourth quarter of 2009 and two properties acquired in the second quarter
of 2010.
Liquidity
and Capital Resources
We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations. We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements, operating
expenses, interest expense on any outstanding indebtedness, capital
expenditures, debt repayment and payment of distributions.
21
As of
June 30, 2010, we had approximately $28.7 million in cash and cash equivalents
on hand. Our liquidity will increase as additional subscriptions for
shares are accepted in our Offering and decrease as net offering proceeds are
expended in connection with the acquisition and operation of
properties.
As of
June 30, 2010, the Advisor had incurred approximately $3.7 million in
organization and offering expenses on our behalf, including approximately $0.1
million of organizational costs that have been expensed. Of this
amount, we have reimbursed $3.1 million to the Advisor. The Advisor
may advance us money for these organization and offering expenses or may pay
these expenses on our behalf. The Advisor does not charge us interest
on these advances. We will repay these advances and reimburse the
Advisor for expenses paid on our behalf using the gross proceeds of our
Offering, but in no event will we have any obligation to reimburse the Advisor
for these costs totaling in excess of 3.5% of the gross proceeds from our
Primary Offering. At times during our offering stage, the amount of organization
and offering expenses that we incur, or that the Advisor and its affiliates
incur on our behalf, may exceed 3.5% of the gross offering proceeds then raised,
but our Advisor has agreed to reimburse us to the extent that our organization
and offering expenses exceed this 3.5% limitation at the conclusion of our
Primary Offering. At June 30, 2010, organization and offering costs reimbursed
to the Advisor are approximately 3.7% of the gross proceeds of our Primary
Offering. In addition, the Advisor will pay all of our organization
and offering expenses that, when combined with the sales commissions and dealer
manager fees that we incur exceed 13.5% of the gross proceeds from our
Offering.
We will
not rely on advances from the Advisor to acquire properties but the Advisor and
its affiliates may loan funds to special purposes entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our
initial public offering to purchase the properties from the special purpose
entity.
We intend
to own our core plus properties with low to moderate levels of debt financing.
We will incur moderate to high levels of indebtedness when acquiring our
value-added and opportunistic properties and possibly other real estate
investments. The debt levels on core plus properties during the offering period
may exceed the long-term target range of debt percentages on these types of
properties. However, we intend to reduce the percentage to fall
within the 40% to 50% range no later than the end of our offering stage. To the
extent sufficient proceeds from our public offering, debt financing, or a
combination of the two are unavailable to repay acquisition debt financing down
to the target ranges within a reasonable time as determined by our board of
directors, we will endeavor to raise additional equity or sell properties to
repay such debt so that we will own our properties with low to moderate levels
of permanent financing. In the event that our Offering is not fully sold, our
ability to diversify our investments may be diminished.
There may
be a delay between the sale of our shares and the purchase of
properties. During this period, our Offering net proceeds will be
temporarily invested in short-term, liquid investments that could yield lower
returns than investments in real estate.
Until
proceeds from our public offering are invested and generating operating cash
flow sufficient to fully fund distributions to stockholders, we intend to pay
all or a portion of our distributions from the proceeds of our Offering or from
borrowings in anticipation of future cash flow. For the six months
ended June 30, 2010, cash distributions to stockholders were paid from net
proceeds raised from our Offering.
Potential
future sources of capital include proceeds from future equity offerings,
proceeds from secured or unsecured financings from banks or other lenders,
proceeds from the sale of properties and undistributed funds from operations. If
necessary, we may use financings or other sources of capital at the discretion
of our board of directors.
Financial
markets have been experiencing unusual volatility and uncertainty. Liquidity has
tightened in all financial markets, including the debt and equity
markets. Our ability to fund property acquisitions or
development projects, as well as our ability to repay or refinance debt
maturities could be adversely affected by an inability to secure financing at
reasonable terms, if at all.
Funds
from Operations and Modified Funds from Operations
Funds
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance. We compute FFO
in accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures, noncontrolling interests and
subsidiaries. Our FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do. We believe that FFO is helpful to investors and our management as
a measure of operating performance because it excludes depreciation and
amortization, gains and losses from property dispositions, and extraordinary
items, and as a result, when compared year to year, reflects the impact on
operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income. Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate diminishes predictably over time. Since
real estate values have historically risen or fallen with market conditions,
many industry investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting
alone to be insufficient. As a result, our management believes that
the use of FFO, together with the required GAAP presentations, provide a more
complete understanding of our performance. Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on
cash held in accounts pending investment, income from portfolio properties and
other portfolio assets, interest rates on acquisition financing and operating
expenses. FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions.
22
Changes
in the accounting and reporting rules under GAAP have prompted a significant
increase in the amount of non-cash and non-operating items included in FFO, as
defined. Therefore, we use modified funds from operations (“MFFO”), which
excludes from FFO acquisition expenses to further evaluate our operating
performance. We believe that MFFO is helpful as a measure of operating
performance because it excludes costs that management considers more reflective
of investing activities or non-operating changes. We believe that MFFO reflects
the overall operating performance of our real estate portfolio, which is not
immediately apparent from reported net loss. As such, we believe MFFO, in
addition to net loss and cash flows from operating activities, each as defined
by GAAP, is a meaningful supplemental performance measure and is useful in
understanding how our management evaluates our ongoing operating
performance.
Our
calculations of FFO and MFFO for the three and six months ended June 30, 2010
and 2009 are presented below:
Three
months ended
|
Six
months ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (1,626,000 | ) | $ | (958,000 | ) | $ | (2,569,000 | ) | $ | (2,076,000 | ) | ||||
Adjustments:
|
||||||||||||||||
Net
loss attributable to noncontrolling interests
|
82,000 | 24,000 | 78,000 | 34,000 | ||||||||||||
Depreciation
and amortization
|
930,000 | 351,000 | 1,570,000 | 552,000 | ||||||||||||
Funds
from operations (FFO) (1)
|
$ | (614,000 | ) | $ | (583,000 | ) | $ | (921,000 | ) | $ | (1,490,000 | ) | ||||
Add
back: Real estate acquisition costs
|
881,000 | 344,000 | 1,339,000 | 849,000 | ||||||||||||
Modified
funds from operation (MFFO) (1)
|
$ | 267,000 | $ | (239,000 | ) | $ | 418,000 | $ | (641,000 | ) | ||||||
Weighted
average shares outstanding
|
7,099,586 | 1,838,828 | 5,959,909 | 1,432,557 | ||||||||||||
Modified funds from operation per weighted common shares outstanding | $ | 0.04 | $ | (0.13 | ) | $ | 0.07 | $ | (0.45 | ) |
(1)
|
Reported
amounts are attributable to our common
stockholders
|
In
addition, FFO may be used to fund all or a portion of certain capitalizable
items that are excluded from FFO, such as capital expenditures and payments of
principal on debt, each of which may impact the amount of cash available for
distribution to our stockholders.
Some or
all of our distributions have been paid from sources other than operating cash
flow, such as offering proceeds and proceeds from loans including those secured
by our assets. Currently, we make cash distributions to our
stockholders at an annualized rate of 7.5%, based on a $10.00 per share purchase
price. Until proceeds from our public offering are invested and generating
operating cash flow sufficient to make distributions to stockholders, we intend
to pay all or a substantial portion of our distributions from the proceeds of
our public offering or from borrowings in anticipation of future cash flow,
reducing the amount of funds that would otherwise be available for
investment.
Distributions
Declared
|
Cash
Flow from
|
|||||||||||||||||||||||
Period
|
Cash
|
Reinvested
|
Total
|
Operations
|
FFO
|
MFFO
|
||||||||||||||||||
First
quarter 2009
|
$
|
116,000
|
$
|
122,000
|
$
|
238,000
|
$
|
(601,000
|
)
|
$
|
(907,000
|
)
|
$
|
(402,000
|
)
|
|||||||||
Second
quarter 2009
|
$
|
170,000
|
$
|
190,000
|
$
|
360,000
|
$
|
(461,000
|
)
|
$
|
(583,000
|
)
|
$
|
(239,000
|
)
|
|||||||||
First
quarter 2010
|
$
|
525,000
|
$
|
506,000
|
$
|
1,031,000
|
$
|
48,000
|
$
|
(307,000
|
)
|
$
|
151,000
|
|||||||||||
Second
quarter 2010
|
$
|
696,000
|
$
|
665,000
|
$
|
1,361,000
|
$
|
(597,000
|
)
|
$
|
(614,000
|
)
|
$
|
267,000
|
Contractual
Obligations
The
following table reflects our contractual obligations as of June 30, 2010,
specifically our obligations under long-term debt agreements and purchase
obligations:
23
Payment
due by period
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||||||
Long-Term
Debt Obligations (1)
|
$
|
38,638,000
|
$
|
577,000
|
$
|
1,690,000
|
$
|
27,026,000
|
$
|
9,345,000
|
||||||||||
Interest
expense related to long term debt (2)
|
$
|
12,713,000
|
$
|
2,360,000
|
$
|
4,123,000
|
$
|
3,540,000
|
$
|
2,690,000
|
||||||||||
Payable
to related parties (3)
|
$
|
879,000
|
$
|
879,000
|
$
|
—
|
$
|
—
|
$
|
—
|
(1) These
obligations represent six loans outstanding as of June 30,
2010: (1) a $10.0 million first mortgage loan related to
Caruth Haven Court (2) a $2.4 million mortgage loan related to The Oaks
Bradenton (3) a $0.36 million certificate of deposit loan related to The Oaks
Bradenton, (4) a $7.4 million mortgage loan related to Mesa Vista Inn Health
Center,(5) an approximate $0.5 million construction loan related to the Rome
LTACH development project, and (6) a total of $18.0 million mortgage loans
related to Oakleaf Village Portfolio, which consists of a $12.9 million and a
$5.1 million loan.
(2) Interest
expense related to the $10.0 million first mortgage loan bears a fixed rate of
6.43% per annum calculated based on an actual over 360 schedule multiplied by
the loan balances outstanding. Interest expense related to $2.4 million mortgage
loan agreement bears a fixed rate of 6.25% per annum. Monthly
payments for the first twelve months are interest-only. Monthly payments
beginning the thirteenth month will include interest and principal based on a
25-year amortization period. Interest expense related to the $0.36
million loan is calculated based on a variable interest rate equivalent to
prevailing market certificate deposits rate of 1.45% at December 31, 2009 plus a
margin of 1.5%. Interest expense related to the $7.4 million mortgage
loan is calculated based on a fixed rate of 6.50% per annum. Interest
expense related to the construction loan bears a variable interest rate with a
spread of 300 basis points over one-month LIBOR with a floor of 6.15%. Monthly
payments for the first twenty-four months will be interest only. Interest rate
related to the $13.5 million loan bears interest at a variable rate equal to
5.45% per annum plus the greater of 1.0% or the 3 month LIBOR rate and the
interest rate related to the $5.1 million bears interest at a rate of 6.62% per
annum until January 2011 and thereafter at 5.45% per annum plus the greater of
1.0% or the 3 months LIBOR rate.
(3) Payable
to related parties consists of offering costs, acquisition fees, expense
reimbursement payable, sales commissions and dealer manager fees to our Advisor
and PCC.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. We invest our cash and cash
equivalents in government backed securities and FDIC insured savings account
which, by its nature, are subject to interest rate
fluctuations. However, we believe that the primary market risk to
which we will be exposed is interest rate risk relating the variable portion of
the loan related to The Oaks Bradenton.
The Oaks
Bradenton loans are comprised of a $2.4 million fixed rate portion and a $0.36
million variable rate portion. The variable rate portion bears a
variable interest rate equivalent to prevailing market certificate deposits rate
plus a 1.5% margin.
An
increase in the variable interest rate constitutes a market risk. Based on the
outstanding balance as of the date of this filing, a 1.0% change in certificate
of deposit rates would result in a change in annual interest expense of
approximately $4,000 per year.
The
Oakleaf Village Portfolio loans are comprised of a $12.9 million of fixed rate
portion and a $5.1 million variable rate portion. The variable rate
portion bears a variable interest rate equal to 5.45% per annum plus the greater
of 1.0% or the 3-month LIBOR rate.
An
increase in the variable interest rate constitutes a market risk. Based on the
outstanding balance as of the date of this filing, a 1.0% change in 3-Month
LIBOR would result in a change in annual interest expense of approximately
$51,000 per year.
Our
interest rate risk management objectives will be to monitor and manage the
impact of interest rate changes on earnings and cash flows by using certain
derivative financial instruments such as interest rate swaps and caps in order
to mitigate our interest rate risk on variable rate debt. We will not
enter into derivative or interest rate transactions for speculative
purposes.
In
addition to changes in interest rates, the fair value of our real estate is
subject to fluctuations based on changes in the real estate capital markets,
market rental rates for office space, local, regional and national economic
conditions and changes in the credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if
necessary.
24
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Our Chief Executive Officer and our Chief
Financial Officer have reviewed the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1A. Risk Factors
The
following risk supplements the risks disclosed in Part I, Item 1A if our annual
report on Form 10-K for the fiscal year ended December 31, 2009.
We
have, and may in the future, pay distributions from sources other than cash
provided from operations.
Until
proceeds from this offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a substantial
portion of our distributions from the proceeds of our offerings or from
borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced. The
distributions paid for the four quarters ended June 30, 2010 were approximately
$3.4 million. Of this amount approximately $1.7 million was reinvested through
our dividend reinvestment plan and approximately $1.7 million was paid in cash
to stockholders. For the four quarters ended June 30, 2010 cash flows used in
operations and loss of FFO were approximately $2.4 million and $2.2 million,
respectively. Accordingly, for the four quarters ended June 30, 2010, total
distributions exceeded cash flows from operations and FFO for the same
period. During the four quarters ended June 30, 2010, we used offering
proceeds to pay cash distributions.
To
maintain our REIT status, we may be forced to forego otherwise attractive
opportunities, which may delay or hinder our ability to meet our investment
objectives and reduce your overall return.
To
qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning,
among other things, the sources of our income, nature of our assets and the
amounts we distribute to our stockholders. In order to meet these
tests, we may be required to forego attractive business or investment
opportunities. Overall, no more than 25% of the value of our assets may consist
of securities of one or more taxable REIT subsidiaries, and no more than 25% of
the value of our assets may consist of securities that are not qualifying assets
under the test requiring that 75% of a REIT’s assets consist of real estate and
other related assets. Further, a taxable REIT subsidiary may not directly or
indirectly operate or manage a healthcare facility. For purposes of this
definition a “healthcare facility” means a hospital, nursing facility, assisted
living facility, congregate care facility, qualified continuing care facility,
or other licensed facility which extends medical or nursing or ancillary
services to patients and which is operated by a service provider that is
eligible for participation in the Medicare program under Title XVIII of the
Social Security Act with respect to the facility. Thus, compliance with the REIT
requirements may limit our flexibility in executing our business
plan.
We may be
required to make distributions to stockholders at times when it would be more
advantageous to reinvest cash in our business or when we do not have funds
readily available for distribution. Compliance with the REIT
requirements may hinder our ability to operate solely on the basis of maximizing
profits and the value of your investment.
25
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a)
|
We
did not sell any equity securities that we did not registered under the
Securities Act of 1933 during the period covered by this Form
10-Q.
|
(b)
|
On
August 10, 2007, our Registration Statement on Form S-11 (File No.
333-139704), covering a public offering of up to 40,000,000 shares of
common stock for an aggregate offering amount of $400.0 million was
declared effective under the Securities Act of 1933. The offering has not
terminated yet. As of June 30, 2010, we had sold approximately
8.0 million shares of common stock in our ongoing public offering and
raised gross offering proceeds of approximately $80.1
million. From this amount, we incurred approximately $7.9
million in selling commissions and dealer manager fees payable to our
dealer manager and approximately $2.3 million in acquisition fees payable
to the Advisor. We had acquired six properties and one
development project as of June 30,
2010.
|
(c)
|
During
the six months ended June 30, 2010, we redeemed shares pursuant to our
stock repurchase program as
follows:
|
Period
|
Total
Number of Shares Redeemed (1)
|
Average
Price Paid per Share
|
||||||
January
|
7,425
|
$
|
9.55
|
|||||
February
|
2,784
|
$
|
9.93
|
|||||
March
|
—
|
$
|
—
|
|||||
April
|
—
|
$
|
—
|
|||||
May
|
10,000
|
$
|
9.00
|
|||||
June
|
3,500
|
$
|
8.99
|
|||||
23,709
|
(1)
|
As
long as our common stock is not listed on a national securities exchange
or traded on an over -the-counter market, our stockholders who have held
their stock for at least one year may be able to have all or any portion
of their shares redeemed in accordance with the procedures outlined in the
prospectus relating to the shares they
purchased.
|
26
Item
6. Exhibits
3.1
|
Articles
of Amendment and Restatement of the Registrant (incorporated by reference
to the Registrant’s annual report on Form 10-K for the fiscal year ended
December 31, 2009).
|
|
3.2
|
Articles
of Amendment of the Registrant, dated as of December 29, 2009
(incorporated by reference to the Registrant’s annual report on Form 10-K
for the fiscal year ended December 31, 2009).
|
|
3.3
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-11
(No. 333-139704), filed on March 21, 2007).
|
|
4.1
|
Subscription
Agreement (incorporated by reference to Appendix A to the Registrant’s
prospectus filed dated April 2, 2010).
|
|
4.2
|
Statement
regarding restrictions on transferability of shares of common stock (to
appear on stock certificate or to be sent upon request and without charge
to stockholders issued shares without certificates) (incorporated by
reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-139704) filed on June 15,
2007).
|
|
4.3
|
Distribution
Reinvestment Plan (incorporated by reference to Appendix B to the
Registrant’s prospectus dated April 2, 2010).
|
|
10.1
|
Membership
Interests Sales and Purchase Agreement by and between Royal Senior Care,
LLC and Cornerstone Oakleaf Village, LLC, dated as of March 5, 2010
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed May 5, 2010)
|
|
10.2
|
Amended
and Restated Limited Liability Company Agreement of Royal Cornerstone
South Carolina Portfolio, LLC, by and among Cornerstone Oakleaf Village,
LLC, and RSC South Carolina Interests, LLC, dated as of April 30, 2010
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed May 5, 2010)
|
|
10.3
|
Amended
and Restated Limited Liability Company Agreement of Royal Cornerstone
South Carolina Tenant Portfolio, LLC, by and among Cornerstone Oakleaf
Village TRS, LLC, and RSC South Carolina Interests, LLC, dated as of April
30, 2010 (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed May 5, 2010)
|
|
10.4
|
Amended
and Restated Loan Agreement among RSC Oakleaf Greenville, LLC, RSC Oakleaf
Lexington, LLC and General Electric Capital Corporation, dated as of April
30, 2010 (incorporated by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed May 5, 2010)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Sec.1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
27
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 16th day of August
2010.
CORNERSTONE
HEALTHCARE PLUS REIT, INC.
|
||
By:
|
/s/
TERRY G. ROUSSEL
|
|
Terry
G. Roussel, Chief
Executive Officer
|
||
By:
|
/s/
SHARON C. KAISER
|
|
Sharon
C. Kaiser, Chief
Financial Officer
|
||
(Principal
Financial Officer and
|
||
Principal
Accounting Officer)
|
28