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EX-31.2 - EX-31.2 - Sentio Healthcare Properties Inc | a59046exv31w2.htm |
EX-32.1 - EX-32.1 - Sentio Healthcare Properties Inc | a59046exv32w1.htm |
EX-21.1 - EX-21.1 - Sentio Healthcare Properties Inc | a59046exv21w1.htm |
EX-31.1 - EX-31.1 - Sentio Healthcare Properties Inc | a59046exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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, California 92614
(Address of Principal Executive Offices)
(Address of Principal Executive Offices)
949-852-1007
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filed, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No þ
As of June 30, 2010 (the last business day of the registrants second fiscal quarter), there
were 8,191,386 shares of common stock held by non-affiliates of the registrant having an aggregate
market value of $81,913,860.
As of March 17, 2011, there were approximately 12,711,681 shares of common stock of Cornerstone
Healthcare Plus REIT, Inc. outstanding. The Registrant incorporates by reference portions of its
Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which is expected to be
filed no later than April 30, 2011, into Part III of this Form 10-K to the extent stated herein.
CORNERSTONE HEALTHCARE PLUS REIT, INC.
(A Maryland Corporation)
(A Maryland Corporation)
TABLE OF CONTENTS
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PART I
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. A detailed discussion of the
risks and uncertainties that could cause actual results and events to differ materially from such
forward-looking statements is included in the section entitled Risk Factors in Item 1A of this
report. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Accordingly, there can be no
assurance that our expectations will be realized.
ITEM 1. BUSINESS
Our Company
Cornerstone Healthcare Plus REIT, Inc., (formerly Cornerstone Growth & Income REIT, Inc.) a
Maryland corporation (the Company), 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. We have qualified, and intend to continue to qualify, as a real estate investment trust
(REIT) for federal tax purposes.
We are structured as an umbrella partnership REIT, referred to as an UPREIT, under which
substantially all of our current and future business is, and will be, conducted through a majority
owned subsidiary, Cornerstone Healthcare Plus Operating Partnership, L.P., a Delaware limited
partnership, formed on October 17, 2006. We are the sole general partner of the operating
partnership and have control over its affairs.
Our external advisor, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited liability
company (our Advisor), was formed on October 16, 2006 for the purpose of acting as our Advisor.
The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and
making acquisitions and investments on our behalf under the terms of an advisory agreement. Our
Advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms
of the advisory agreement, our Advisor will use commercially reasonable efforts to present to us
investment opportunities and to provide a continuing and suitable investment program consistent
with the investment policies and objectives adopted by our board of directors. Currently, we have
no direct employees and all management and administrative personnel responsible for conducting our
business are employed by our Advisor and its affiliates.
Our Advisor has entered into agreements with Servant Investments, LLC and Servant Healthcare
Investments, LLC, (collectively Servant) two Florida based real estate operating companies. Under
the terms of these agreements Servant will provide real estate acquisition and portfolio management
services to our Advisor in connection with healthcare and net-leased retail properties acquired by
the Company in specified geographic areas.
On June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common
stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000
shares for sale pursuant to our distribution reinvestment plan. We stopped making offers under our
initial public offering on February 3, 2011 upon raising gross offering proceeds of approximately
$123.9 million from the sale of approximately 12.4 million shares, including shares sold under the
distribution reinvestment plan. On February 4, 2011, the Securities and Exchange Commission
(SEC) declared our follow-on offering effective and we commenced a follow-on offering of up to
55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a
primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan.
We retained Pacific Cornerstone Capital, Inc. (PCC), an affiliate of the Advisor, to serve as our
dealer manager for our offerings. PCC is responsible for marketing our shares being offered
pursuant to the offerings. We used a majority of the net proceeds from our initial public offering
to invest primarily in investment real estate in major metropolitan markets in the United States.
We intend to use the net proceeds from our follow-on offering to acquire additional real estate
investments. As of December 31, 2010, a total of 11.3 million shares of our common stock had been
sold under our initial public offering for gross proceeds of approximately
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$112.9 million, excluding approximately 0.4 million shares that were issued pursuant to our distribution
reinvestment plan, reduced by approximately 0.1 million shares repurchased pursuant to our stock
repurchase program.
Investment Objectives
Our investment objectives are to:
| preserve stockholder capital by acquiring and operating real estate; | ||
| realize growth in the value of your investment by: |
| purchasing stabilized, income-producing properties with the potential for capital appreciation and | ||
| profiting from the purchase and development or repositioning of other properties; |
| provide stockholders with current income from the operations of the properties we acquire, including the income from properties we develop or reposition (redevelop or employ other asset-management strategies to enhance existing cash flow) once they are stabilized (no longer in the lease-up stage following development or redevelopment and substantially leased); and | ||
| provide long-term liquidity to our stockholders within seven years of the termination of our initial public offering after accomplishing the above objectives by: |
| liquidating our assets, | ||
| listing our shares on a national securities exchange, | ||
| another liquidity event such as a merger with another company or | ||
| expanding our proposed stock repurchase program to redeem upon stockholder request up to 10% of our prior-year outstanding shares utilizing proceeds from the sale of our properties or other sources of funds irrespective of the amount of proceeds raised under our distribution reinvestment plan. |
We intend to use the net proceeds of our offering to primarily invest in existing leased properties
as well as other properties where we believe there are opportunities to enhance cash flow and
value. We cannot assure you that we will attain these objectives or that our capital will not
decrease. We may not change our investment policies or the investment restrictions described below
except upon approval of the independent directors committee. Decisions relating to the purchase or
sale of properties will be made by our Advisor, subject to approval by our board of directors.
We currently own two completed properties and two development properties through joint ventures and
we may acquire additional properties through joint venture investments in the future. This is one
of the ways we anticipate diversifying the portfolio of properties we own in terms of geographic
region, property type and tenant industry group. Joint ventures will also allow us to acquire an
interest in a property without requiring that we fund the entire purchase price. In determining
whether to recommend a particular joint venture investment, our Advisor will evaluate the structure
of the joint venture, the real property that the joint venture owns or will acquire using the same
criteria for the selection of our other real estate investments.
Investment Strategy
Our independent directors committee will review our investment policies at least annually to
determine whether these policies continue to be in the best interest of our stockholders. We may
change our investment policies without stockholder approval. Our Advisor will recommend property
acquisitions to our investment committee, which will approve or reject proposed acquisitions.
Our objective is to acquire a long-term stabilized portfolio of real estate properties from the
proceeds of our offering that consists of at least 50% core plus properties. We may acquire
value-added and opportunistic properties. We may utilize our offering proceeds to acquire more
value-added and opportunistic properties than core plus properties, with a view to achieving a more
balanced portfolio of properties through a combination of development efforts, refinancings and
subsequent acquisitions.
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We intend for our investments in real estate assets to be primarily concentrated in the healthcare
and in industrial and net-leased retail sectors. To date, our investments have focused in the
healthcare sector.
Healthcare real estate includes a variety of property types, including senior housing facilities,
medical office buildings, hospital facilities, skilled nursing facilities and outpatient centers.
According to The National Coalition on Healthcare, by 2016 nearly $1 in every $5 in the U.S. will
be spent on healthcare, and the aging US population is expected to continue to fuel the need for
healthcare services. The over age 65 population of the United States is projected to grow 36%
between 2010 and 2020, compared with 9% for the general population, according to the US Census
Bureau. Presently, the healthcare real estate market is fragmented, with a local or regional focus,
offering opportunities for consolidation and market dominance. A diversified portfolio of
healthcare property types minimizes risks associated with third-party payors, such as Medicare and
Medicaid.
Multi-tenant industrial properties generally offer a combination of both warehouse and office space
adaptable to a broad range of tenants and uses, and typically cater to local and regional
businesses. Multi-tenant industrial properties comprise one of the major segments of the commercial
real estate market and tenants in these properties come from a broad spectrum of industries
including light manufacturing, assembly, distribution, import/export, general contractors,
telecommunications, general office/warehouse, wholesale, service, high-tech and other fields. These
properties diversify revenue by generating rental income from multiple businesses in a variety of
industries.
Net-leased retail real estate includes restaurant and retail petroleum properties. These real
estate investments offer attractive returns while mitigating investor risk by targeting established
brands, seasoned operators and locations priced at or below replacement costs. Extensive
pre-acquisition due diligence focuses on strong unit-level economics and in-depth market studies to
categorize default risk. Credit enhancements, combined with aggressive risk and asset management,
further mitigate investment risk.
Our Advisor believes that investment opportunities in healthcare, multi-tenant industrial and
net-leased retail properties are ordinarily not readily available to investors other than large
institutional investors and experienced real estate operators with specialized knowledge,
experience in specific geographic areas, industry expertise and established relationships with
operators of these property types.
Although we intend to focus on acquiring and developing a portfolio of healthcare, industrial and
net-leased retail properties, we may also invest in other real estate-related assets that we
believe may assist us in meeting our investment objectives. Our charter limits our investments in
unimproved real property or mortgage loans on unimproved real property to 10% of our total assets,
but we are not otherwise restricted in the proportion of net proceeds from this offering that we
must allocate to investment in any specific type of property. We do not expect to engage in the
underwriting of securities of other issuers.
Acquisition Policies
Core Plus Properties
We expect to use a significant portion of the net proceeds from our offering to invest in core
plus investment grade properties that are:
| owned and operated with a low to moderate level of permanent mortgage financing; | ||
| of a high-quality and currently producing income; | ||
| located in U.S. real estate markets with barriers to entry for new competitive product; | ||
| leased to a diversified tenant base, though we are not restricted from investing in properties occupied by a single tenant if the property meets other key investment criteria or to a single tenant/operator for certain healthcare and net-leased retail properties; and | ||
| leased on terms that generally allow for annual rental increases. |
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Value-Added and Opportunistic Properties
Value-Added Properties
We may acquire value-added properties, which include properties that are currently under
construction and/or have existing building structures in need of redevelopment, re-leasing or
repositioning. We may acquire properties with low occupancy rates or vacant properties when we
believe our leasing or development efforts could add significant value. We expect most of our
value-added properties will be located in in-fill locations within our target markets with high
barriers to entry. We may seek to acquire a portion of our value-added properties through joint
ventures with large institutional partners, but we are not obligated to do so. Our value-added
properties will employ moderate to high levels of indebtedness, which will be determined on a
property-by-property basis. Our long-term investment objective for investment in value-added
properties is to develop and transform these properties into the same type of core plus property
investments with low to moderate levels of permanent mortgage indebtedness as described above.
Opportunistic Properties
We also may acquire opportunistic properties. We define opportunistic properties primarily as
unimproved land that we will develop. We will construct or develop the property through the use of
third-parties or through developers affiliated with our Advisor. If an affiliated developer is
used, we may coinvest with institutional investors. However, we have no agreements with
institutional investors to acquire any opportunistic properties at this time. We will invest in
opportunistic properties with a view of developing a core plus property. Similar to our value-added
properties, we expect to incur a moderate to high level of indebtedness when acquiring
opportunistic properties, but with the long-term goal of developing the property into a core plus
property with a low to moderate level of permanent mortgage indebtedness. The development of
properties is subject to risks relating to a builders ability to control construction costs or to
build in conformity with plans, specifications and timetables. We may help ensure performance by
the builders of properties that are under construction at the price contracted by obtaining either
a performance bond or completion bond. As an alternative to a performance bond or completion bond,
we may rely upon the substantial net worth of the contractor or developer or a personal guarantee
provided by a high net worth affiliate of the person entering into the construction or development
contract. Our opportunistic property acquisitions will generally be located in growth areas within
our target markets.
Target Market Criteria
We intend to acquire properties located in markets with strong fundamentals and strong supply and
demand dynamics throughout the United States. Among the most important criteria we expect to use
in evaluating the markets in which we purchase properties are:
| historic and projected population growth; | ||
| historically high levels of tenant demand and lower historic investment volatility for the type of property being acquired; | ||
| markets with historic and growing numbers of qualified and affordable workforce; | ||
| historic and projected employment growth; | ||
| historic market liquidity for buying and selling of commercial real estate; | ||
| markets with high levels of insured populations; | ||
| stable household income and economic conditions; and | ||
| sound real estate fundamentals, such as high occupancy rates and potential for increasing rental rates. |
Leases and Tenant Improvements
We expect that a portion of any tenant improvements to be funded by us for newly acquired
properties will be funded from the net proceeds of the offering or through borrowings.
Additionally, when a tenant or resident at one of our properties vacates its space, it is likely
that we will be required to expend funds for tenant improvements and refurbishments to the vacated
space in order to attract new tenants. If we do not have adequate cash on hand to fund tenant improvements and
refurbishments, we may use debt financing in order to fulfill our obligations under lease
agreements with new tenants.
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Mortgages, Debt Securities and Other Real Estate-Related Investments
Although we expect that substantially all of our acquisitions will be of the types of properties
described above, we may acquire other investments, including mortgages and other illiquid real
estate-related securities. To the extent that our Advisor determines that it is advantageous for us
to make or acquire mortgage loans or other real estate-related investments, we will seek to obtain
fixed income through the receipt of payments from these investments. If we invest in mortgages and
other real estate-related investments, we do not expect that we would invest more than 20% of our
long-term stabilized asset portfolio in such investments.
Our charter does not limit the amount of gross offering proceeds that we may apply to mortgage
loans or other real estate-related investments and during the early stages of this offering, the
percentage of our assets invested in these investments may exceed 20% of our total assets. While
we have no intention of becoming a mortgage REIT, we may acquire or make the following:
| first and second mortgages; | ||
| convertible mortgages; | ||
| construction loans on real estate; | ||
| mortgage loan participation investments; | ||
| common, preferred and convertible preferred equity securities issued by real estate companies; | ||
| mezzanine and bridge loans; and | ||
| other illiquid real estate-related securities. |
Joint Ventures and Other Arrangements
We currently own two completed properties and two development properties through joint ventures and
we may acquire additional properties through joint venture investments in the future, including
ventures with affiliates of our Advisor. See Conflicts of Interest. Among other reasons, we
anticipate acquiring properties through joint ventures in order to diversify our portfolio of
properties in terms of geographic region, property type and tenant industry group. Joint ventures
may also allow us to acquire an interest in a property without requiring that we fund the entire
purchase price. In addition, certain properties may be available to us only through joint
ventures. In determining whether to recommend a particular joint venture, the advisor will
evaluate the structure of the joint venture, the real property that such joint venture owns or is
being formed to own under the same criteria described elsewhere in this prospectus. These entities
may employ debt financing consistent with our borrowing policies. See Borrowing Policies below.
Our joint ventures may take the form of equity joint ventures with one or more large institutional
partners. They may also include ventures with developers who contribute land, development services
and expertise rather than equity. Prior Cornerstone programs managed and operated by affiliates of
our advisor have entered into joint ventures with institutional investors and various
high-net-worth individuals. Currently, we have no commitments or agreements to acquire any
additional properties or enter into any additional joint ventures and we have not established the
specific terms we will require in the joint venture agreements we may enter. We will establish the
terms with respect to any particular joint venture agreement on a case-by-case basis.
We may enter into joint ventures with affiliates of our Advisor for the acquisition of properties,
but only if the independent directors committee (by majority vote) approves the transaction as
being fair and reasonable to us and on substantially the same terms and conditions as those
received by the affiliated equity joint venturers. If such a joint venture also involves a third
party that negotiated the terms of its participation on an arms-length basis, then our investment
must be either on terms and conditions no worse than those received by the affiliate or on terms
and conditions no worse than those received by a third-party equity joint venturer that negotiated
the terms of its participation on an arms-length basis.
Borrowing Policies
Debt Financing
When we refer to debt financing, we are referring to all types of debt financing at fixed or
variable interest rates or some combination of both. For our stabilized core plus properties, our
long-term goal will be to use low to moderate levels of debt financing with leverage ranging from
40% to 60% of the cost of the asset. For the value-added and opportunistic properties, our goal
will be to acquire and develop or redevelop these properties using moderate to high levels of debt
financing with leverage ranging from 65% to 75% of the cost of the asset. We may exceed these debt
levels on an individual property basis. Once these value-added and opportunistic properties are
developed, redeveloped and stabilized with tenants, we plan to reduce the levels of debt to fall
within target debt ranges appropriate for core plus properties. While we seek to fall within the
outlined targets on a portfolio basis, for any specific property we may exceed these estimates.
While we do not expect to utilize debt financing in excess of 300% of our net assets (equivalent to
75% of the cost of our tangible assets), upon the vote of a majority of our independent directors,
we will be able to
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temporarily exceed this debt limitation. It is likely that our debt financing
will be secured by the underlying property, but it will not necessarily be the case each time. We
may enter into interest rate protection agreements to mitigate interest rate fluctuation exposure
if we believe the benefit of such contracts outweigh the costs of purchasing these instruments.
Other Indebtedness
We may also incur indebtedness for working capital requirements, tenant improvements, capital
improvements, leasing commissions and, if necessary, to make distributions, including those
necessary to maintain our qualification as a REIT for federal income tax purposes. We will
endeavor to borrow such funds on an unsecured basis but we may secure indebtedness with properties
if our independent directors committee determines that it is in our best interests.
Our Advisor may also create an affiliated entity that will purchase properties using debt financing
and hold them for us pending our ability to acquire the properties at a low to moderate level of
indebtedness. Any properties that we purchase from the affiliated acquisition holding company will
meet our core plus investment criteria and be approved by our independent directors committee. Our
purchase price for the property would reflect the costs associated with holding the property. In
no event will we acquire the property at an amount in excess of its current appraised value as
determined by an independent expert selected by our independent directors not otherwise interested
in the transaction.
Competition
We compete with a considerable number of other real estate companies seeking to acquire and lease
space, most of which may have greater marketing and financial resources than we do. Principal
factors of competition in our business are the quality of properties (including the design and
condition of improvements), leasing terms (including rent and other charges and allowances for
tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant
services provided and reputation as an owner and operator of quality properties in the relevant
market. Our ability to compete also depends on, among other factors, trends in the national and
local economies, financial condition and operating results of current and prospective tenants,
availability and cost of capital, construction and renovation costs, taxes, governmental
regulations, legislation and population trends.
We may hold interests in properties located in the same geographic locations as other entities
managed by our Advisor or our Advisors affiliates. Our properties may face competition in these
geographic regions from such other properties owned, operated or managed by other entities managed
by our Advisor or our Advisors affiliates. Our Advisor or its affiliates have interests that may
vary from those we may have in such geographic markets.
Government Regulations
We, the properties that we own, and the properties we expect to own are subject to federal, state
and local laws and regulations relating to environmental protection and human health and safety.
Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental
Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal
Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the
Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such
matters as wastewater discharges, air emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and
hazardous materials and the remediation of contamination associated with disposals. Some of these
laws and regulations impose joint and several liabilities on tenants, owners or operators for the
costs to investigate or remediate contaminated properties, regardless of fault or whether the acts
causing the contamination were legal. Compliance with these laws and any new or more stringent laws
or regulations may require us to incur material expenditures. Future laws, ordinances or
regulations may impose material environmental liability. In addition, there are various federal,
state and local fire, health, life-safety and similar regulations with which we may be required to
comply, and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties. The presence of hazardous substances, or the
failure to properly remediate these substances, may make it difficult or impossible to sell or rent
such property.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous real property owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on, under or in such property. These costs could be substantial. Such
laws often impose liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions
on the manner in which property may be used or businesses may be operated, and these restrictions
may require substantial expenditures or prevent us from entering into leases with prospective
tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance
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and may be enforced by governmental agencies or, in certain circumstances, by private
parties. Certain environmental laws and common law principles could be used to impose liability for
release of and exposure to hazardous substances, including asbestos-containing materials into the
air. Third parties may seek recovery from real property owners or operators for personal injury or
property damage associated with exposure to released hazardous substances. The cost of defending
against claims of liability, of complying with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could be substantial.
The healthcare industry is highly regulated by federal, state and local licensing requirements,
facility inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and rules. In addition,
regulators require compliance with a variety of safety, health, staffing and other requirements
relating to the design and conditions of the licensed facility and quality of care provided.
Additional laws and regulations may be enacted or adopted that could require changes in the design
of properties and certain operations of our tenants and third-party operators. The failure of any
tenant or operator to comply with such laws, requirements and regulations could affect a tenants
or operators ability to operate the facilities that we own.
One of our properties is a skilled nursing facility where the property operator receives most of
its revenues from Medicare and Medicaid, with the balance representing private pay, including
private insurance. Consequently, changes in federal or state reimbursement policies may also
adversely affect an operators ability to cover its expenses, including our rent or debt service.
Skilled nursing facilities and hospitals are subject to periodic pre- and post-payment reviews and
other audits by federal and state authorities. A review or audit of claims of a property operator
could result in recoupments, denials or delays of payments in the future, which could have a
material adverse effect on the operators ability to meet its obligations to us.
Acquisition Activity
At December 31, 2010, we owned thirteen properties. All of these properties are consolidated into
our accompanying consolidated financial statements and included in the properties summary as
provided under Item 2 Properties referenced below.
We have acquired our properties to date with a combination of the proceeds from our public offering
and debt incurred upon the acquisition of such properties.
As of December 31, 2010, we operated in three reportable business segments: senior living
operations, triple-net leased properties, and medical office building. Financial Information by
segment is presented in Note 12 to our accompanying consolidated financial statements, which begin
on page F-1 of this Form 10-K.
Employees
We have no employees and our executive officers are all employees of our Advisors affiliates.
Substantially all of our work is performed by employees of our Advisors affiliates. We are
dependent on our Advisor and Pacific Cornerstone Capital, Inc., our dealer manager, for certain
services that are essential to us, including the sale of shares in our ongoing public offering; the
identification, evaluation, negotiation, purchase and disposition of properties; the management of
the daily operations of our real estate portfolio; and other general and administrative
responsibilities. In the event that these companies are unable to provide the respective services,
we will be required to obtain such services from other sources.
Available Information
Information about us is available on our website (http://www.crefunds.com). We make available, free
of charge, on our Internet website, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such
material with the SEC. These materials are also available at no cost in print to any person who
requests it by contacting our Investor Services Department at 1920 Main Street, Suite 400, Irvine,
California 92614; telephone (877) 805-3333. Our filings with the SEC are available to the public
over the Internet at the SECs website at http://www.sec.gov. You may read and copy any filed
document at the SECs public reference room in Washington, D.C. at 100 F Street, N.E., Room 1580,
Washington D.C. Please call the SEC at (800) SEC-0330 for further information about the public
reference rooms.
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ITEM 1A. RISK FACTORS
The risks and uncertainties described below can adversely affect our business, operating results,
prospects and financial condition. These risks and uncertainties could cause our actual results to
differ materially from those presented in our forward looking statement.
General
Disruptions in the financial markets and continuing poor economic conditions could adversely affect
the values of our investments and our ongoing results operations.
Disruptions in the capital markets during the past several years have constrained equity and debt
capital available for investment in commercial real estate, resulting in fewer buyers seeking to
acquire commercial properties and consequent reductions in property values. Furthermore, the
current state of the economy and the implications of future potential weakening may negatively
impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our future portfolio. The current downturn may impact our current and future
tenants financial resources directly, reducing their ability to pay base rent, percentage rent or
other charges due to us.
Liquidity in the global credit market has been and may continue to be adversely impacted by market
disruptions in recent years, making it more costly to obtain acquisition financing, new lines of
credit or refinance existing debt, when debt financing is available at all. We rely on debt
financing to acquire our properties and we expect to continue to use debt to acquire properties and
other real estate-related investments.
The occurrence of these events could have the following negative effects on us:
| the values of our investments in commercial properties could decrease below the amounts we paid for the investments; | ||
| revenues from our properties could decrease due to lower occupancy rates, reduced rental rates and potential increases in uncollectible receivables; | ||
| we may not be able to refinance our indebtedness or to obtain additional debt financing on attractive terms. |
These factors could impair our ability to make distributions to and decrease the value of our
stockholders investment in us.
Financial markets are still recovering from a period of disruption and recession, and we are unable
to predict if and when the economy will stabilize or improve.
The financial markets are still recovering from a recession, which created volatile market
conditions, resulted in a decrease in availability of business credit and led to the insolvency,
closure or acquisition of a number of financial institutions. While the markets showed signs of
stabilizing throughout 2010, it remains unclear when the economy will fully recover to
pre-recession levels. Continued economic weakness in the U.S. economy generally or a new recession
would likely adversely affect our financial condition and that of our tenants, residents and or
operators and could impact their ability to pay rent to us.
Our tenants may be affected by the financial deterioration, insolvency and/or bankruptcy of other
significant operators in the healthcare industry.
Certain companies in the healthcare industry, including some key senior housing operators, none of
which are currently our tenants, are experiencing considerable financial, legal and/or regulatory
difficulties which have resulted or may result in financial deterioration and, in some cases,
insolvency and/or bankruptcy. The adverse effects on these companies could have a significant
impact on the industry as a whole, including but not limited to negative public perception by
investors, lenders and consumers. As a result, our tenants could experience the damaging financial
effects of a weakened industry driven by negative industry headlines, ultimately making them unable
to meet their obligations to us, and our business could be adversely affected.
Our limited operating history makes it difficult for you to evaluate us. In addition, as a company
in its early stages of operations we have incurred losses in the past and may continue to incur
losses.
We have a limited operating history. As a consequence, our past performance and the past
performance of other real estate investment programs sponsored by affiliates of our advisor may not
be indicative of the performance we will achieve. We were formed on
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October 16, 2006 in order to invest primarily in healthcare, industrial and net-leased retail real
estate. We have acquired thirteen properties as of the date of this report and generated limited
income, cash flow, funds from operations or funds from which to make distributions to our
shareholders. In addition, as a company in its early stages of operations, we have incurred losses
since our inception and we may continue to incur losses.
Because there is no public trading market for our stock, it will be difficult for our stockholders
to sell their stock. If our stockholders are able to sell their stock, it may be at a substantial
discount.
There is no current public market for our stock and there is no assurance that a public market will
ever exist for our stock. Our charter contains restrictions on the ownership and transfer of our
stock, and these restrictions may inhibit the ability of our stockholders to sell their stock. Our
charter prevents any one person from owning more than 9.8% in number of shares or value, whichever
is more restrictive, of the outstanding shares of any class or series of our stock unless exempted
by our board of directors. Our charter also limits the ability or our stockholders to transfer the
stock to prospective stockholders unless (i) they meet suitability standards regarding income or
net worth, and (ii) the transfer complies with minimum purchase requirements. We have adopted a
stock repurchase program, but it is limited in terms of the number of shares of stock which may be
redeemed annually. Our board of directors may also limit, suspend or terminate our stock
repurchase program at any time. We have no obligations to repurchase our stockholders stock if
redemption would violate restrictions on cash distribution under Maryland law.
It may be difficult for our stockholders to sell their stock promptly or at all. If our
stockholders are able to sell shares of stock, they may only be able to sell them at a substantial
discount from the price they paid. This may be the result, in part, of the fact that the amount of
funds available for investment is expected to be reduced by sales commissions, dealer manager fees,
organization and offering expenses, and acquisition fees and expenses. If our offering expenses are
higher than we anticipate, we will have a smaller amount available for investment. Unless our
aggregate investments increase in value to compensate for these up-front fees and expenses, it is
unlikely that our stockholders will be able to sell their stock, whether pursuant to our stock
repurchase program or otherwise, without incurring a substantial loss.
Competition with third parties for properties and other investments may result in our paying higher
prices for properties which could reduce our profitability and the return on investment.
We compete with many other entities engaged in real estate investment activities, including
individuals, corporations, banks, insurance companies, other REITs, and real estate limited
partnerships, many of which have greater resources than we do. Some of these investors may enjoy
significant competitive advantages that result from, among other things, a lower cost of capital
and enhanced operating efficiencies. In addition, the number of entities and the amount of funds
competing for suitable investments may increase. Any such increase would result in increased demand
for these assets and increased prices. If competitive pressures cause us to pay higher prices for
properties, our ultimate profitability may be reduced and the value of our properties may not
appreciate or may decrease significantly below the amount paid for such properties. At the time we
elect to dispose of one or more of our properties, we will be in competition with sellers of
similar properties to locate suitable purchasers, which may result in us receiving lower proceeds
from the disposal or result in us not being able to dispose of the property due to the lack of an
acceptable return. This may cause our stockholders to experience a lower return on their
investments in us.
If we are unable to find or experience delays in finding suitable investments, we may experience a
delay in the commencement of distributions and a lower rate of return to investors.
Our ability to achieve our investment objectives and to make distributions depends upon the
performance of our Advisor in the acquisition and operation of our investments, and upon the
performance of property managers and leasing agents in the management of our properties and the
identification of prospective tenants. We may be delayed in making investments in properties due to
delays in the sale of our stock, delays in negotiating or obtaining the necessary purchase
documentation for properties, delays in locating suitable investments or other factors. We cannot
be sure that our Advisor will be successful in obtaining suitable investments on financially
attractive terms or that our investment objectives will be achieved. We may also make other real
estate investments, such as investments in public and private real estate companies which own real
estate properties and make real estate investments. Until we make real estate investments, we will
hold the proceeds from our offering in an interest-bearing account or invest the proceeds in
short-term, investment-grade securities. We expect the rates of return on these short-term
investments to be substantially less than the returns we make on real estate investments. If we are
unable to invest the proceeds from this offering in properties or other real estate investments for
an extended period of time, distributions to our stockholders may be delayed and may be lower and
the value of our stockholders investment could be reduced.
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If we do not raise substantial funds in our public offerings, we will be limited in the number and
type of investments we may make, and the value of our stockholders investment in us will fluctuate
with the performance of the specific properties we acquire.
Our ongoing follow-on public offering is being made on a best efforts basis and no individual,
firm or corporation has agreed to purchase any of our stock. The amount of proceeds we raise in the
follow-on offering may be substantially less than the amount we would need to achieve a broadly
diversified property portfolio. If we raise substantially less than the maximum offering amount, we
will make fewer investments resulting in less diversification in terms of the number of investments
owned and the geographic regions in which our investments are located. In that case, the likelihood
that any single propertys performance would materially reduce our overall profitability will
increase. We are not limited in the number or size of our investments or the percentage of net
proceeds we may dedicate to a single investment. In addition, any inability to raise substantial
funds would increase our fixed operating expenses as a percentage of gross income, and our net
income and the distributions we make to stockholders would be reduced.
The cash distributions our stockholders receive may be less frequent or lower in amount than
expected.
We currently expect to make distributions to our stockholders quarterly, if not more frequently.
Historically, we have paid distributions on a monthly basis. All expenses we incur in our
operations are deducted from cash funds generated by operations prior to computing the amount of
cash available to be paid as distributions to our stockholders. Our directors will determine the
amount and timing of distributions. Our directors will consider all relevant factors, including the
amount of cash available for distribution, capital expenditure and reserve requirements and general
operational requirements. We cannot determine with certainty how long it may take to generate
sufficient available cash flow to make distributions or that sufficient cash will be available to
make distributions to our stockholders. We may borrow funds, return capital or sell assets to make
distributions. With no prior operations, we cannot predict the amount of distributions our
stockholders may receive. We may be unable to pay or maintain cash distributions or increase
distributions over time, and we may need to cease distributions to stockholders.
We have, and may in the future, pay distributions from sources other than cash provided from
operations.
Until proceeds from our offerings are invested and generating operating cash flow sufficient to
support 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. Our
organizational documents do not limit the amount of distributions we can fund from sources other
than from operating 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. For the
four quarters ended December 31, 2010 our negative cash flow
from operations was approximately $3.1 million. During that period we paid distributions to investors of
approximately $5.7 million, of which approximately $2.8 million was reinvested pursuant to our
distribution reinvestment plan and approximately $2.9 million was paid to investors in cash from
our offering proceeds.
Our investments will be concentrated in the healthcare and in the industrial and net-leased retail
sectors and our business would be adversely affected by an economic downturn affecting one or more
of these sectors.
We intend for our investments in real estate assets to be primarily concentrated in the healthcare,
and in the industrial and net-leased retail sectors. This may expose us to the risk of economic
downturns in these sectors to a greater extent than if our business activities included a more
significant portion of other sectors of the real estate industry.
We may be unable to complete development and re-development projects on advantageous terms.
As part of our investment plan, we intend to develop new and re-develop existing properties. Such
activities involve significant risks that could adversely affect our financial condition, results
of operations, cash flow and ability to make distributions on our common stock, which include:
| we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; | ||
| we may not be able to obtain financing for development projects on favorable terms and complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties and generating cash flow; and | ||
| the properties may perform below anticipated levels, producing cash flow below budgeted amounts and limiting our ability to sell such properties to third parties or affiliates. |
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Newly developed and acquired properties may not produce the cash flow that we expect, which could
adversely affect our overall financial performance.
We intend to acquire and develop real estate properties. In deciding whether to acquire or develop
a particular property, we make assumptions regarding the expected future performance of that
property. If our estimated return on investment proves to be inaccurate, it may fail to perform as
we expected. With certain properties we plan to acquire, our business plan contemplates
repositioning or redeveloping that property with the goal of increasing its cash flow, value or
both. Our estimate of the costs of repositioning or redeveloping an acquired property may prove to
be inaccurate, which may result in our failure to meet our profitability goals. Additionally, we
may acquire new properties not fully leased, and the cash flow from existing operations may be
insufficient to pay the operating expenses and debt service associated with that property until the
property is more fully leased. If one or more of these new properties do not perform as expected
or we are unable to successfully integrate new properties into our existing operations, our
financial performance and our ability to make distributions may be adversely affected.
If we borrow money to meet the REIT minimum distribution requirement or for other working capital
needs, our expenses will increase, our net income will be reduced by the amount of interest we pay
on the money we borrow and we will be obligated to repay the money we borrow from future earnings
or by selling assets, which will decrease future distributions to stockholders.
If we fail for any reason to distribute at least 90% of our REIT taxable income (excluding net
capital gains), then we would not qualify for the favorable tax treatment accorded to REITs (unless
we were able to avail ourselves of certain relief provisions). It is possible that such 90% of our
income would exceed the cash we have available for distributions due to, among other things,
differences in timing between the actual receipt of income and actual payment of deductible
expenses and the inclusion/deduction of such income/expenses when determining our taxable income,
nondeductible capital expenditures, the creation of reserves, the use of cash to purchase stock
under our stock repurchase program, and required debt amortization payments. We may decide to
borrow funds in order to meet the REIT minimum distribution requirements even if our management
believes that the then prevailing market conditions generally are not favorable for such borrowings
or that such borrowings would not be advisable in the absence of such tax considerations.
Distributions made in excess of our net income will generally constitute a return of capital to
stockholders.
The healthcare properties we own may derive a substantial portion of their income from third-party
payors.
Most of our healthcare facilities will be directly affected by risks associated with the healthcare
industry. Many of our lessees and mortgagors will derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and Medicaid programs. These
programs are highly regulated by federal, state and local laws, rules and regulations and are
subject to frequent and substantial change. There are no assurances that payments from
governmental payors will remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients eligible for reimbursement under these
programs.
Failure
to comply with government regulations could adversely affect our
healthcare tenants and
operators.
The healthcare industry is highly regulated by federal, state and local licensing requirements,
facility inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and rules. In addition,
regulators require compliance with a variety of safety, health, staffing and other requirements
relating to the design and conditions of the licensed facility and quality of care provided.
Additional laws and regulations may be enacted or adopted that could require changes in the design
of properties and certain operations of our tenants and third-party operators. The failure of any
tenant or operator to comply with such laws, requirements and regulations could affect a tenants
or operators ability to operate the facilities that we own.
In some states, advocacy groups have been created to monitor the quality of care at health care
facilities, and these groups have brought litigation against operators. Additionally, in some
instances, private litigation by patients has succeeded in winning large demand awards for alleged
abuses. The effect of this litigation and potential litigation has increased the costs of
monitoring and reporting quality of care compliance incurred by our tenants. In addition, the cost
of liability and medical malpractice insurance has increased and may continue to increase as long
as the present litigation environment affecting the operations of health care facilities continues.
Continued cost increases could cause our tenants to be unable to pay their lease payments,
decreasing our cash flow available for distribution.
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The inability of our Advisor to retain or obtain key personnel, property managers and leasing
agents could delay or hinder implementation of our investment strategies, which could impair our
ability to make distributions and could reduce the value of our stockholders investment.
Our success depends to a significant degree upon the contributions of Terry G. Roussel, the
President and Chief Executive Officer of our Advisor. Neither we nor our Advisor have an employment
agreement with Mr. Roussel or with any of the other executive officers. If Mr. Roussel was to cease
his affiliation with our Advisor, our Advisor may be unable to find a suitable replacement, and our
operating results could suffer. We believe that our future success depends, in large part, upon our
Advisors, property managers and leasing agents ability to hire and retain highly skilled
managerial, operational and marketing personnel. Competition for highly skilled personnel is
intense, and our Advisor and any property managers we retain may be unsuccessful in attracting and
retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled
personnel, property managers or leasing agents, our ability to implement our investment strategies
could be delayed or hindered, and the value of our stockholders investments may decline.
We are dependent upon our Advisor, its affiliates and Servant to conduct our operations. Any
adverse changes in the financial health of our Advisor, its affiliates or Servant, or our
relationship with any of them them could hinder our operating performance and the return on your
investment. If our Advisor became unable to conduct organization and offering activities on our
behalf , we may sell fewer shares in our offering, we may be unable to acquire a diversified
portfolio of properties, our operating expenses may be a larger percentage of our revenue and our
net income may be lower.
We are dependent on our Advisor to manage our operations and our portfolio of real estate assets.
Our Advisor has limited operating history and it will depend upon the fees and other compensation
that it will receive from us in connection with the purchase, management and sale of our properties
to conduct its operations. To date, the fees we pay to our Advisor have been inadequate to cover
its operating expenses. To cover its operational shortfalls, our Advisor has relied on cash raised
in private offerings of its sole member. A FINRA inquiry concluded in December 2009, which relates
to such private offerings, could adversely affect the success of such private offerings or future
private capital-raising efforts. If our Advisor is unable to secure additional capital, it may
become unable to meet its obligations and we might be required to find alternative service
providers, which could result in a significant disruption of our business and may adversely affect
the value of our stockholders investments in us. We also rely upon Servant, which provides
certain acquisition and portfolio management services on our behalf pursuant to a strategic
alliance with our sponsor. An adverse change in our relationship with our sponsor could hinder our
ability to obtain such services from Servant. Furthermore, to the extent that our Advisor is
unable to raise adequate funds to support our organization and offering activities, our ability to
raise money in this offering could be adversely affected. If we sell fewer shares in this
offering, we may be unable to acquire a diversified portfolio of properties, our operating expenses
may be a larger percentage of our revenue and our net income may be lower.
We are dependent on our affiliated dealer manager to raise funds in our follow-on public offering.
Events that prevent our dealer manager from serving in that capacity would jeopardize the success
of our offering and could reduce the value of our stockholders investments in us.
The success of our follow-on public offering depends to a large degree on the capital-raising
efforts of our affiliated dealer manager. If we were unable to raise significant capital in our
offering, our general and administrative costs would be likely to continue to represent a larger
portion of our revenues than would otherwise be the case, which would likely adversely affect the
value of our stockholders investments in us. In addition, lower offering proceeds would limit the
diversification of our portfolio, which would cause the value of investments in us to be more
dependent on the performance of any one of our properties. Therefore, the value of our
stockholders investments in us could depend on the success of our offering.
We believe that it could be difficult to secure the services of another dealer manager for a public
offering of our shares should our affiliated dealer manager be unable to serve in that capacity.
Therefore, any event that hinders the ability of our dealer manager to conduct offerings on our
behalf would jeopardize the success of our offering and, as described above, could adversely affect
the value of investments in us. A number of outcomes could impair our dealer managers ability to
successfully serve in that capacity.
Our dealer manager has limited capital. In order to conduct its operations, our dealer manager
depends on transaction-based compensation that it earns in connection with offerings in which it
participates. If our dealer manager does not earn sufficient revenues from the offerings that it
manages, it may not have sufficient resources to retain the personnel necessary to market and sell
large amounts of shares on our behalf. In addition, our dealer manager has also relied on our
affiliates in order to fund its operations, and our affiliates have relied on private offerings in
order to make such equity investments in our dealer manager. Should our affiliates become unable
or unwilling to make further equity investments in our dealer manager, our dealer managers
operations and its ability to conduct a successful public offering for us could suffer.
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Our dealer manager operates in a highly regulated area and must comply with a complex scheme
of federal and state securities laws and regulations as well as the rules imposed by FINRA. In some
cases, there may not be clear authority regarding the interpretation of regulations applicable to
our dealer manager. In such an environment, the risk of sanctions by regulatory authorities is
heightened. Although these risks are also shared by other dealer managers of public offerings, the
risks may be greater for our dealer manager because of the limited financial resources of our
dealer manager and its affiliates. Limited financial resources may make it more difficult for our
dealer manager to endure regulatory sanctions and to continue to serve effectively as the dealer
manager of our offering.
Risks Related to Conflicts of Interest
Our Advisor will face conflicts of interest relating to the purchase and leasing of properties, and
such conflicts may not be resolved in our favor, which could limit our investment opportunities,
impair our ability to make distributions and reduce the value of our stockholders investments in
us.
We rely on our Advisor to identify suitable investment opportunities. We may be buying properties
at the same time as other entities that are affiliated with or sponsored by our Advisor. Other
programs sponsored by our Advisor or its affiliates also rely on our Advisor for investment
opportunities. Many investment opportunities would be suitable for us as well as other programs.
Our Advisor could direct attractive investment opportunities or tenants to other entities. Such
events could result in our investing in properties that provide less attractive returns, thus
reducing the level of distributions which we may be able to pay to stockholders and the value of
their investments in us.
If we acquire properties from affiliates of our Advisor, the price may be higher than we would pay
if the transaction was the result of arms-length negotiations.
The prices we pay to affiliates of our Advisor for our properties will be equal to the prices paid
by them, plus the costs incurred by them relating to the acquisition and financing of the
properties or if the price to us is in excess of such cost, substantial justification for such
excess will exist and such excess will be reasonable and consistent with current market conditions
as determined by a majority of our independent directors. Substantial justification for a higher
price could result from improvements to a property by the affiliate of our Advisor or increases in
market value of the property during the period of time the property is owned by the affiliates of
our Advisor as evidenced by an appraisal of the property. These prices will not be the subject of
arms-length negotiations, which could mean that the acquisitions may be on terms less favorable to
us than those negotiated in an arms-length transaction. Even though we will use an independent
third-party appraiser to determine fair market value when acquiring properties from our Advisor and
its affiliates, we may pay more for particular properties than we would have in an arms-length
transaction, which would reduce our cash available for investment in other properties or
distribution to our stockholders.
We may purchase properties from persons with whom our Advisor or its affiliates have prior business
relationships and our Advisors interest in preserving its relationship with these persons could
result in us paying a higher price for the properties than we would otherwise pay.
We may have the opportunity to purchase properties from third parties, including affiliates of our
directors who have prior business relationships with our Advisor or its affiliates. If we purchase
properties from such third parties, our Advisor may experience a conflict between our interests and
its interest in preserving any ongoing business relationship with these sellers.
Our Advisor will face conflicts of interest relating to joint ventures that we may form with
affiliates of our Advisor, which conflicts could result in a disproportionate benefit to the other
venture partners at our expense.
We may enter into joint venture agreements with third parties (including entities that are
affiliated with our Advisor or our independent directors) for the acquisition or improvement of
properties. Our Advisor may have conflicts of interest in determining which program should enter
into any particular joint venture agreement. The co-venturer may have economic or business
interests or goals that are or may become inconsistent with our business interests or goals. In
addition, our Advisor may face a conflict in structuring the terms of the relationship between our
interests and the interest of the affiliated co-venturer and in managing the joint venture. Since
our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain
extent, us, agreements and transactions between the co-venturers with respect to any such joint
venture will not have the benefit of arms-length negotiation of the type normally conducted
between unrelated co-venturers. Co-venturers may thus benefit to our and our stockholders
detriment.
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Our Advisor and its affiliates receive commissions, fees and other compensation based upon the
sale of our stock, our property acquisitions, the property we own and the sale of our properties
and therefore our Advisor and its affiliates may make recommendations to us that we buy, hold or
sell property in order to increase their compensation. Our Advisor will have considerable
discretion with respect to the terms and timing of our acquisition, disposition and leasing
transactions.
Our Advisor and its affiliates receive commissions, fees and other compensation based upon the sale
of our stock and based on our investments. Therefore, our Advisor may recommend that we purchase
properties that generate fees for our Advisor, but are not necessarily the most suitable investment
for our portfolio. In some instances our Advisor and its affiliates may benefit by us retaining
ownership of our assets, while our stockholders may be better served by sale or disposition. In
other instances they may benefit by us selling the properties which may entitle our Advisor to
disposition fees and possible success-based sales fees. In addition, our Advisors ability to
receive asset management fees and reimbursements depends on our continued investment in properties
and in other assets which generate fees to them. Therefore, the interest of our Advisor and its
affiliates in receiving fees may conflict with our interests.
Our Advisor and its affiliates, including our officers, one of whom is also a director, will face
conflicts of interest caused by compensation arrangements with us and other Cornerstone-sponsored
programs, which could result in actions that are not in the long-term best interests of our
stockholders.
Our Advisor and its affiliates will receive substantial fees from us that are partially tied to the
performance of our stockholders investment. These fees could influence our Advisors advice to
us, as well as the judgment of the affiliates of our Advisor who serve as our officers, one of whom
is also a director. Among other matters, the compensation arrangements could affect their judgment
with respect to:
| property acquisitions from other Advisor-sponsored programs, which might entitle our Advisor to disposition fees and possible success-based sale fees in connection with its services for the seller; | ||
| whether and when we seek to list our common stock on a national securities exchange, which listing could entitle our Advisor to a success-based listing fee but could also adversely affect its sales efforts for other programs if the price at which our stock trades is lower than the price at which we offered stock to the public; and | ||
| whether and when we seek to sell the company or its assets, which sale could entitle our Advisor to success-based fees but could also adversely affect its sales efforts for other programs if the sales price for the company or its assets resulted in proceeds less than the amount needed to preserve our stockholders capital. |
Considerations relating to their compensation from other programs could result in decisions that
are not in the best interests of our stockholders, which could hurt our ability to make
distributions to our stockholders or result in a decline in the value of their investments in us.
If the competing demands for the time of our Advisor, its affiliates and our officers result in
them spending insufficient time on our business, we may miss investment opportunities or have less
efficient operations, which could reduce our profitability and result in lower distributions to our
stockholders.
We do not have any employees. We rely on the employees of our Advisor and its affiliates for the
day-to-day operation of our business. We estimate that over the life of the company, our Advisor
and its affiliates will dedicate, on average, less than half of their time to our operations. The
amount of time that our Advisor and its affiliates spend on our business will vary from time to
time and is expected to be more while we are raising money and acquiring properties. Our Advisor
and its affiliates, including our officers, have interests in other programs and engage in other
business activities. As a result, they will have conflicts of interest in allocating their time
between us and other programs and activities in which they are involved. Because these persons have
competing interests on their time and resources, they may have conflicts of interest in allocating
their time between our business and these other activities. During times of intense activity in
other programs and ventures, they may devote less time and fewer resources to our business than are
necessary or appropriate to manage our business. We expect that as our real estate activities
expand, our Advisor will attempt to hire additional employees who would devote substantially all of
their time to our business. There is no assurance that our Advisor will devote adequate time to our
business. If our Advisor suffers or is distracted by adverse financial or operational problems in
connection with its operations unrelated to us, it may allocate less time and resources to our
operations. If any of these things occur, the returns on our investments, our ability to make
distributions to stockholders and the value of their investments in us may suffer.
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Our officers, one of whom is also a director, face conflicts of interest related to the positions
they hold with our Advisor and its affiliates, which could hinder our ability to successfully
implement our business strategy and to generate returns to our stockholders.
Our officers, one of whom is also a director, are also officers of our Advisor, our dealer manager
and other affiliated entities. As a result, they owe fiduciary duties to these various entities and
their stockholders and members, which fiduciary duties may from time to time conflict with the
fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities
could result in actions or inactions that are detrimental to our business, which could harm the
implementation of our business strategy and our investment, property management and leasing
opportunities. If we do not successfully implement our business strategy, we may be unable to
generate cash needed to make distributions our stockholders and to maintain or increase the value
of our assets.
Our boards possible loyalties to existing Advisor-sponsored programs (and possibly to future
Advisor-sponsored programs) could result in our board approving transactions that are not in our
best interest and that reduce our net income and lower our distributions to stockholders.
Our officers, one of whom is also a director, are also officers of our Advisor, which is an
affiliate of the managing member of another affiliate-sponsored program. The loyalties of these
officers to the other affiliate-sponsored program may influence the judgment of our board when
considering issues for us that may affect the other affiliate-sponsored program, such as the
following:
| We could enter into transactions with the other program, such as property sales or acquisitions, joint ventures or financing arrangements. Decisions of our board regarding the terms of those transactions may be influenced by our boards loyalties to the other program. | ||
| A decision of our board regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of the other program. | ||
| A decision of our board regarding the timing of property sales could be influenced by concerns that the sales would compete with those of the other program. | ||
| We could also face similar conflicts and some additional conflicts if our Advisor or its affiliates sponsor additional REITs, assuming some of our directors are also directors of the additional REITs. | ||
| Our independent directors must evaluate the performance of our Advisor with respect to whether our Advisor is presenting to us our fair share of investment opportunities. If our Advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other Advisor-sponsored entities or if our Advisor is giving preferential treatment to other Advisor-sponsored entities in this regard, our independent directors may not be well suited to enforce our rights under the terms of the Advisory agreement or to seek a new Advisor. |
Risks Related to the Ongoing follow-on Offering and Our Corporate Structure
To the extent offering proceeds are used to pay fees to our advisor or its affiliates or to fund
distributions, our investors will realize dilution and later investors may also realize a lower
rate of return than investors who invest earlier in this offering.
Our advisor and its affiliates provide services for us in connection with, among other things, the
offer and sale of our shares, the selection and acquisition of our investments, the management and
leasing of our properties, and the disposition of our assets. We pay them substantial upfront
fees for some of these services, which reduces the amount of cash available for investment in real
estate or distribution to you. Largely as a result of these substantial fees, we expect that for
each share sold in the our primary offering, assuming we sell the maximum primary offering, no more
than $8.73 will be available for investment in real estate, depending primarily upon the number of
shares we sell.
In addition, we have used offering proceeds to fund distributions, and later investors who did not
receive those distributions will therefore experience additional immediate dilution of their
investment. Also, to the extent we incur debt to fund distributions earlier in our public
offerings, the amount of cash available for distributions in future periods will be decreased by
the repayment of such debt.
The use of offering proceeds to pay fees to our advisor and its affiliates or to fund distributions
increases the risk that the amount available for distribution to stockholders upon a liquidation of
our portfolio would be less than the purchase price of the shares in our
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offering.
As of December 31, 2010, our net tangible book value per share was $6.05. Ignoring
discounts for certain categories of purchase, shares in our primary
offering are being sold at $10.00
per share.
A limit on the percentage of our securities a person may own may discourage a takeover or business
combination, which could prevent our stockholders from realizing a premium price for their stock.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially
owned, directly or indirectly, by five or fewer individuals (including certain types of entities)
at any time during the last half of each taxable year beginning after our first taxable year. To
assure that we do not fail to qualify as a REIT under this test, our charter restricts direct or
indirect ownership by one person or entity to no more than 9.8% in number of shares or value,
whichever is more restrictive, of the outstanding shares of any class or series of our stock unless
exempted by our board of directors. This restriction may have the effect of delaying, deferring or
preventing a change in control of us, including an extraordinary transaction (such as a merger,
tender offer or sale of all or substantially all of our assets) that might provide a premium price
to our stockholders.
Our charter permits our board of directors to issue stock with terms that may subordinate the
rights of our common stockholders or discourage a third party from acquiring us in a manner that
could result in a premium price to our stockholders.
Our board of directors may increase or decrease the aggregate number of shares of stock or the
number of shares of stock of any class or series that we have authority to issue and classify or
reclassify any unissued common stock or preferred stock and establish the preferences, conversion
or other rights, voting powers, restrictions, limitations as to distributions, qualifications and
terms or conditions of redemption of any such stock. Our board of directors could authorize the
issuance of preferred stock with terms and conditions that could have priority as to distributions
and amounts payable upon liquidation over the rights of the holders of our common stock. Such
preferred stock could also have the effect of delaying, deferring or preventing a change in control
of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price to holders of our common stock.
The payment of the subordinated performance fee due upon termination of the Advisor, and the
purchase of interests in the operating partnership held by our Advisor and its affiliates as
required in our Advisory agreement, may discourage a takeover attempt that could have resulted in a
premium price to our stockholders.
If we engage in a merger in which we are not the surviving entity and our Advisory agreement is
terminated, our Advisor and its affiliates may be entitled to the subordinated performance fee due
upon termination and to require that we purchase all or a portion of the operating partnership
units they hold at any time thereafter for cash, or our stock, as determined by the seller. The
subordinated performance fee is a cumulative fee due upon termination and provides for payments
based on the excess of enterprise value plus distributions we have made to the date of termination
over the sum of invested capital plus an amount necessary for stockholders to reach one of three
threshold returns. The three threshold returns are 6%, 8%, and 10%. At each threshold return
level, subordinated performance fee due upon termination would be either 5%, 10%, or 15% of that
excess enterprise value plus distributions over the sum of invested capital plus the threshold
return. The existence of this fee may deter a prospective acquirer from bidding on our company,
which may limit the opportunity for stockholders to receive a premium for their stock that might
otherwise exist if an investor attempted to acquire us through a merger.
Our stockholders will have limited control over changes in our policies and operations, which
increases the uncertainty and risks of an investment in us.
Our board of directors determines our major policies, including our policies regarding financing,
growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend
or revise these and other policies without a vote of the stockholders. Under Maryland General
Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our
boards broad discretion in setting policies and our stockholders inability to exert control over
those policies increases the uncertainty and risks of an investment on us.
A stockholders interest in us may be diluted if we issue additional stock.
Our stockholders do not have preemptive rights to any stock we issue in the future. Therefore, in
the event that we (1) sell stock in the future, including stock issued pursuant to our distribution
reinvestment plan, (2) sell securities that are convertible into stock, (3) issue stock in a
private offering, (4) issue stock upon the exercise of the options granted to our independent
directors, employees of our Advisor or others, or (5) issue stock to sellers of properties acquired
by us in connection with an exchange of limited partnership interests in our operating partnership,
investors purchasing stock in this offering will experience dilution of their percentage ownership
in us. Depending on the terms of such transactions, most notably the price per share, which may be
less than the price paid per share in
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the offerings, and the value of our properties, investors in our follow-on offering might also
experience a dilution in the book value per share of their stock.
A stockholders interest in us may be diluted if we acquire properties for units in our operating
partnership.
Holders of units of our operating partnership will receive distributions per unit in the same
amount as the distributions we pay per share to our stockholders and will generally have the right
to exchange their units of our operating partnership for cash or shares of our stock (at our
option). In the event we issue units in our operating partnership in exchange for properties,
investors purchasing stock in the offerings will experience potential dilution in their percentage
ownership interest in us. Depending on the terms of such transactions, most notably the price per
unit, which may be less than the price paid per share in the offerings, the value of our properties
and the value of the properties we acquire through the issuance of units of limited partnership
interests in our operating partnership, investors in this offering might also experience a dilution
in the book value per share of their stock.
Although we are not currently afforded the protection of the Maryland General Corporation Law
relating to business combinations our board of directors could opt into these provisions of
Maryland law in the future, which may discourage others from trying to acquire control of us and
may prevent our stockholders from receiving a premium price for their stock in connection with a
business combination.
Under Maryland law, business combinations between a Maryland corporation and certain interested
stockholders or affiliates of interested stockholders are prohibited for five years after the most
recent date on which the interested stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange, or, in circumstances specified in the
statute, an asset transfer or issuance or reclassification of equity securities. Also under
Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have
no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter. Shares owned by the acquirer, by officers or by directors who are employees of
the corporation are not entitled to vote on the matter. Should our board opt into these provisions
of Maryland law, it may discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland
General Corporation Law could provide similar anti-takeover protection.
If we sell substantially less than all of the shares we are offering, the costs we incur to comply
with the rules of the Securities and Exchange Commission regarding internal control over financial
reporting will be a larger percentage of our net income and will reduce the return on our
stockholders investments in us.
We expect to incur significant costs in maintaining adequate internal control over our financial
reporting for the company and that our management will spend a significant amount of time assessing
the effectiveness of our internal control over financial reporting. We do not anticipate that these
costs or the amount of time our management will be required to spend will be significantly less if
we sell substantially less than all of the shares we are offering.
Our stockholders and our rights to recover claims against our independent directors are limited,
which could reduce our stockholders and our recovery against our independent directors if they
negligently cause us to incur losses.
Our charter provides that no independent director shall be liable to us or our stockholders for
monetary damages and that we will generally indemnify them for losses unless they are grossly
negligent or engage in willful misconduct. As a result, our stockholders and we may have more
limited rights against our independent directors than might otherwise exist under common law, which
could reduce our stockholders and our recovery from these persons if they act in a negligent
manner. In addition, we may be obligated to fund the defense costs incurred by our independent
directors (as well as by our other directors, officers, employees and agents) in some cases, which
would decrease the cash otherwise available for distributions to our stockholders.
Stockholders may not be able to sell their stock under our stock repurchase program.
Our board of directors could choose to amend the terms of our stock repurchase program without
stockholder approval. Our board is also free to terminate the program at any time upon 30 days
written notice to our stockholders. In addition, the stock repurchase program includes numerous
restrictions that would limit our stockholders ability to sell stock.
The offering price was not established on an independent basis and stockholders may be paying more
for our stock than its value or the amount our stockholders would receive upon liquidation.
The offering price of our shares of stock bears no relationship to our book or asset value or to
any other established criteria for valuing stock. The board of directors considered the following
factors in determining the offering price for our common stock:
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| the offering prices of comparable non-traded REITs; and | ||
| the recommendation of the dealer manager. |
However, the offering price is likely to be higher than the price at which our stockholders could
resell their shares because (1) our public offering involves the payment of underwriting
compensation and other directed selling efforts, which payments and efforts are likely to produce a
higher sales price than could otherwise be obtained, and (2) there is no public market for our
shares. Moreover, the offering price is likely to be higher than the amount our stockholders would
receive per share if we were to liquidate at this time because of the up-front fees that we pay in
connection with the issuance of our shares as well as the recent reduction in the demand for real
estate as a result of the recent credit market disruptions and economic slowdown.
Because the dealer manager is one of our affiliates, investors in our stock will not have the
benefit of an independent review of us or our prospectus customarily undertaken in underwritten
offerings.
The dealer manager of our offering, Pacific Cornerstone Capital, Inc., is an affiliate of our
advisor and will not make an independent review of us or the offering. Accordingly, investors in
our stock do not have the benefit of an independent review of the terms of our offering. Further,
the due diligence investigation of us by the dealer manager cannot be considered to be an
independent review and, therefore, may not be as meaningful as a review conducted by an
unaffiliated broker-dealer or investment banker.
Payment of fees to our Advisor and its affiliates will reduce cash available for investment and
distribution.
Our Advisor and its affiliates will perform services for us in connection with the offer and sale
of our stock, the selection and acquisition of our properties, and possibly the management and
leasing of our properties. They will be paid significant fees for these services, which will reduce
the amount of cash available for investment in properties and distribution to stockholders. The
fees to be paid to our Advisor and its affiliates were not determined on an arms-length basis. We
cannot be sure that a third-party unaffiliated with our Advisor would not be willing to provide
such services to us at a lower price.
We may also pay significant fees during our listing/liquidation stage. Although most of the fees
payable during our listing/liquidation stage are contingent on our investors first enjoying
agreed-upon investment returns, affiliates of our Advisor could also receive significant payments
even without our reaching the investment-return thresholds should we seek to become self-managed.
Due to the apparent preference of the public markets for self-managed companies, a decision to list
our shares on a national securities exchange might well be preceded by a decision to become
self-managed. And given our Advisors familiarity with our assets and operations, we might prefer
to become self-managed by acquiring entities affiliated with our Advisor. Such an internalization
transaction could result in significant payments to affiliates of our Advisor irrespective of
whether our stockholders enjoyed the returns on which we have conditioned other performance-based
compensation.
These fees increase the risk that the amount available for payment of distributions to our
stockholders upon a liquidation of our portfolio would be less than the purchase price of the
shares of stock in the offering. Substantial up-front fees also increase the risk that our
stockholders will not be able to resell their shares of stock at a profit, even if our stock is
listed on a national securities exchange.
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders
could be reduced and the value of our investments could decline.
If we need additional capital in the future to improve or maintain our properties or for any other
reason, we will have to obtain financing from other sources, such as cash flow from operations,
borrowings, property sales or future equity offerings. These sources of funding may not be
available on attractive terms or at all. If we cannot procure additional funding for capital
improvements, our investments may generate lower cash flows or decline in value, or both.
Our Advisor does not have as strong an economic incentive to avoid losses as do sponsors who have
made significant equity investments in the companies they sponsor.
Our Advisor has invested $200,000 in our operating partnership. Therefore, if we are successful in
raising enough proceeds to be able to reimburse our Advisor for our significant organization and
offering expenses, our Advisor has little exposure to losses in the value of our stock. Without
this exposure, our investors may be at a greater risk of loss because our Advisor and its
affiliates do not have as
much to lose from a decrease in the value of our stock as do those sponsors who make more
significant equity investments in the companies they sponsor.
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General Risks Related to Investments in Real Estate and Real-Estate Related Investments
Economic and regulatory changes that impact the real estate market may reduce our net income and
the value of our properties.
By owning our stock, stockholders will be subjected to the risks associated with owning real
estate. The performance of an investment in us is subject to, among other things, risks related to
the ownership and operation of real estate, including but not limited to:
| worsening general or local economic conditions and financial markets could cause lower demand, tenant defaults, and reduced occupancy and rental rates, some or all of which would cause an overall decrease in revenue from rents; | ||
| increases in competing properties in an area which could require increased concessions to tenants and reduced rental rates; | ||
| increases in interest rates or unavailability of permanent mortgage funds which may render the sale of a property difficult or unattractive; and | ||
| changes in laws and government regulations, including those governing real estate usage, zoning and taxes. |
Some or all of the foregoing factors may affect our properties, which would reduce our net income,
and our ability to make distributions to our stockholders.
If we internalize our management functions, your interest in us could be diluted, and we could
incur other significant costs associated with being self-managed.
We may decide to internalize our management functions and, should we do so, we may elect to
negotiate to acquire our advisors assets and personnel. Under our advisory agreement, we are
restricted from hiring or soliciting any employee of our advisor or its affiliates for three years
from the termination of the agreement. This restriction could make it difficult to internalize our
management functions without acquiring assets and personnel from our advisor and its affiliates for
consideration that would be negotiated at that time. At this time, we cannot be sure of the form
or amount of consideration or other terms relating to any such acquisition. Such consideration
could take many forms, including cash payments, promissory notes and shares of our stock. The
payment of such consideration could result in dilution of your interests as a stockholder and could
reduce the net income per share and funds from operations per share attributable to your
investment. In addition, we may incur costs defending against stockholder lawsuits initiated
against us in response to our decision to internalize our management functions. Such lawsuits could
result in awards of damages, payment of attorneys fees and substantial litigation costs, which
would reduce the amount of cash available for investments and stockholder distributions.
In addition, while we would no longer bear the costs of the various fees and expenses we expect to
pay to our advisor under the advisory agreement if we internalize, our direct expenses would
include general and administrative costs, including legal, accounting and other expenses related to
corporate governance and SEC reporting and compliance. We would also incur the compensation and
benefits costs of our officers and other employees and consultants that we now expect will be paid
by our advisor or its affiliates. In addition, we may issue equity awards to officers, employees
and consultants, which awards would decrease net income and funds from operations and may further
dilute your investment. We cannot reasonably estimate the amount of fees to our advisor we would
save and the costs we would incur if we became self-managed. If the expenses we assume as a result
of an internalization are higher than the expenses we avoid paying to our advisor, our net income
per share and funds from operations per share would be lower as a result of the internalization
than it otherwise would have been, potentially decreasing the amount of funds available to
distribute to our stockholders and the value of our shares.
As currently organized, we will not directly employ any employees. If we elect to internalize our
operations, we would employ personnel and would be subject to potential liabilities commonly faced
by employers, such as workers disability and compensation claims, potential labor disputes and
other employee-related liabilities and grievances. Nothing in our charter prohibits us from
entering into the transaction described above.
If we internalize our management functions, we could have difficulty integrating these functions as
a stand-alone entity. As of the date of this prospectus, certain personnel of our advisor and its
affiliates perform asset management and general and administrative
functions, including accounting and financial reporting, for multiple entities. We could fail to
properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone
entity. An inability to manage an internalization transaction effectively could thus result in our
incurring excess costs and/or suffering deficiencies in our disclosure controls and procedures or
our internal control
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over financial reporting. Such deficiencies could cause us to incur
additional costs, and our managements attention could be diverted from effectively managing our
portfolio of investments.
Reduced occupancy level could reduce our revenues from rents and our distributions to our
stockholders and cause the value of our stockholders investment in us to decline
The success of our investments depends upon the occupancy levels, rental income and operating
expenses of our properties and our company. In the event of tenant default or bankruptcy, we may
experience delays in enforcing our rights as landlord and may incur costs in protecting our
investment and re-leasing our property. In the event of tenant default or bankruptcy, or lease
termination or expiration, we may be unable to re-lease the property for the rent previously
received. We may be unable to sell a property with low occupancy without incurring a loss. These
events and others could cause us to reduce the amount of distributions we make to stockholders and
the value of our stockholders investment in us to decline.
Rising expenses at both the property and the company level could reduce our net income and our cash
available for distribution to stockholders.
Our properties are subject to operating risks common to real estate in general, any or all of which
may reduce our net income. If any property is not substantially occupied or if rents are being paid
in an amount that is insufficient to cover operating expenses, we could be required to expend funds
with respect to that property for operating expenses. The properties are subject to increases in
tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses. If we are unable to lease properties on a basis requiring the tenants to
pay such expenses, we would be required to pay some or all of those costs which would reduce our
income and cash available for distribution to stockholders.
Costs incurred in complying with governmental laws and regulations may reduce our net income and
the cash available for distributions.
Our company and the properties we own are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Federal laws such as the National
Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability
Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the
Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right
to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air
emissions, the operation and removal of underground and above-ground storage tanks, the use,
storage, treatment, transportation and disposal of solid and hazardous materials and the
remediation of contamination associated with disposals. The properties we own and those we expect
to acquire are subject to the Americans with Disabilities Act of 1990 which generally requires that
certain types of buildings and services be made accessible and available to people with
disabilities. These laws may require us to make modifications to our properties. Some of these laws
and regulations impose joint and several liability on tenants, owners or operators for the costs to
investigate or remediate contaminated properties, regardless of fault or whether the acts causing
the contamination were legal. Compliance with these laws and any new or more stringent laws or
regulations may require us to incur material expenditures. Future laws, ordinances or regulations
may impose material environmental liability. In addition, there are various federal, state and
local fire, health, life-safety and similar regulations with which we may be required to comply,
and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties. The presence of hazardous substances, or the
failure to properly remediate these substances, may make it difficult or impossible to sell or rent
such property. Any material expenditures, fines, or damages we must pay will reduce our ability to
make distributions and may reduce the value of our stockholders investments in us.
Discovery of environmentally hazardous conditions may reduce our cash available for distribution to
our stockholders.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous real property owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on, under or in such property. These costs could be substantial. Such
laws often impose liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions
on the manner in which property may be used or businesses may be operated, and these restrictions
may require substantial expenditures or prevent us from entering into leases with prospective
tenants that may be impacted by such laws. Environmental laws provide for sanctions for
noncompliance
and may be enforced by governmental agencies or, in certain circumstances, by private parties.
Certain environmental laws and common law principles could be used to impose liability for release
of and exposure to hazardous substances, including asbestos-containing materials into the air.
Third parties may seek recovery from real property owners or operators for personal injury or
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property damage associated with exposure to released hazardous substances. The cost of defending
against claims of liability, of complying with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could be substantial and
reduce our ability to make distributions and the value of our stockholders investments in us.
Any uninsured losses or high insurance premiums will reduce our net income and the amount of our
cash distributions to stockholders.
Our Advisor will attempt to obtain adequate insurance to cover significant areas of risk to us as a
company and to our properties. However, there are types of losses at the property level, generally
catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods,
hurricanes, pollution or environmental matters, which are uninsurable or not economically
insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We
may not have adequate coverage for such losses. If any of our properties incurs a casualty loss
that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In
addition, other than any working capital reserve or other reserves we may establish, we have no
source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we
must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would
result in lower distributions to stockholders.
We may have difficulty selling real estate investments, and our ability to distribute all or a
portion of the net proceeds from such sale to our stockholders may be limited.
Equity real estate investments are relatively illiquid. Therefore, we will have a limited ability
to vary our portfolio in response to changes in economic or other conditions. In addition, the
liquidity of real estate investments has been further reduced by the recent turmoil in the capital
markets, which has constrained equity and debt capital available for investment in commercial real
estate, resulting in fewer buyers seeking to acquire commercial properties and consequent
reductions in property values. As a result of these factors we will also have a limited ability to
sell assets in order to fund working capital and similar capital needs. When we sell any of our
properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds
from the sale of properties to our stockholders; for example, we may use such proceeds to:
| purchase additional properties; | ||
| repay debt, if any; | ||
| buy out interests of any co-venturers or other partners in any joint venture in which we are a party; | ||
| create working capital reserves; or | ||
| make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties. |
Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that
is imposed on gain recognized by a REIT from the sale of property characterized as dealer property.
In order to ensure that we avoid such characterization, we may be required to hold our properties
for a minimum period of time, generally two years, and comply with certain other requirements in
the Internal Revenue Code.
Real estate market conditions at the time we decide to dispose of a property may be unfavorable
which could reduce the price we receive for a property and lower the return on our stockholders
investments in us.
We intend to hold the properties in which we invest until we determine that selling or otherwise
disposing of properties would help us to achieve our investment objectives. General economic
conditions, availability of financing, interest rates and other factors, including supply and
demand, all of which are beyond our control, affect the real estate market. We may be unable to
sell a property for the price, on the terms, or within the time frame we want. Accordingly, the
gain or loss on our stockholders investments in us could be affected by fluctuating market
conditions.
As part of otherwise attractive portfolios of properties, we may acquire some properties with
existing lock-out provisions, which may inhibit us from selling a property, or may require us to
maintain specified debt levels for a period of years on some properties.
Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing
properties. These provisions would affect our ability to turn our investments into cash and thus
affect cash available for distributions to our stockholders. Loan provisions
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may prohibit us from
reducing the outstanding indebtedness with respect to properties, refinancing such indebtedness on
a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such
properties.
Loan provisions could impair our ability to take actions that would otherwise be in the best
interests of our stockholders and, therefore, may have an adverse impact on the value of our stock,
relative to the value that would result if the loan provisions did not exist. In particular, loan
provisions could preclude us from participating in major transactions that could result in a
disposition of our assets or a change in control even though that disposition or change in control
might be in the best interests of our stockholders.
If we sell properties by providing financing to purchasers of our properties, distribution of net
sales proceeds to our stockholders would be delayed and defaults by the purchasers could reduce our
cash available for distribution to stockholders.
If we provide financing to purchasers, we will bear the risk that the purchaser may default.
Purchaser defaults could reduce our cash distributions to our stockholders. Even in the absence of
a purchaser default, the distribution of the proceeds of sales to our stockholders, or their
reinvestment in other assets, will be delayed until the promissory notes or other property we may
accept upon a sale are actually paid, sold, refinanced or otherwise disposed of or completion of
foreclosure proceedings.
Actions of our joint venture partners could subject us to liabilities in excess of those
contemplated or prevent us from taking actions which are in the best interests of our stockholders
which could result in lower investment returns to our stockholders.
We are likely to enter into joint ventures with affiliates and other third parties to acquire or
improve properties. We may also purchase properties in partnerships, co-tenancies or other
co-ownership arrangements. Such investments may involve risks not otherwise present when acquiring
real estate directly, including, for example:
| joint venturers may share certain approval rights over major decisions; | ||
| that such co-venturer, co-owner or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation of the joint venture; | ||
| the possibility that our co-venturer, co-owner or partner in an investment might become insolvent or bankrupt; | ||
| the possibility that we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner; | ||
| that such co-venturer, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT; | ||
| disputes between us and our joint venturers may result in litigation or arbitration that would increase our expenses and prevent its officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture to additional risk; or | ||
| that under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached which might have a negative influence on the joint venture. |
These events might subject us to liabilities in excess of those contemplated and thus reduce our
stockholders investment returns. If we have a right of first refusal or buy/sell right to buy out
a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes
exercisable or we may be required to purchase such interest at a time when it would not otherwise
be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have
sufficient cash, available borrowing capacity or other capital resources to allow us to elect to
purchase an interest of a co-venturer subject to the buy/sell right, in which case we may be forced
to sell our interest as the result of the exercise of such right when we would otherwise prefer to
keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire
to exit the venture.
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If we make or invest in mortgage loans as part of our plan to acquire the underlying property, our
mortgage loans may be affected by unfavorable real estate market conditions, including interest
rate fluctuations, which could decrease the value of those loans and the return on our
stockholders investments in us.
If we make or invest in mortgage loans, we will be at risk of defaults by the borrowers on those
mortgage loans as well as interest rate risks. To the extent we incur delays in liquidating such
defaulted mortgage loans; we may not be able to obtain sufficient proceeds to repay all amounts due
to us under the mortgage loan. Further, we will not know whether the values of the properties
securing the mortgage loans will remain at the levels existing on the dates of origination of those
mortgage loans. If the values of the underlying properties fall, our risk will increase because of
the lower value of the security associated with such loans. In addition, interest rate
fluctuations could reduce our returns as compared to market interest rates and reduce the value of
the mortgage loans in the event we sell them.
Second mortgage loan investments involve a greater risk of loss in the event of default than
traditional mortgage loans.
If we decide to invest in second mortgages, our subordinated priority to the senior lender or
lenders will place our investment at a greater risk of loss than a traditional mortgage. In the
event of default, any recovery of our second mortgage investment will be subordinate to the senior
lender. Further, it is likely that any investments we make in second mortgages will be placed
with private entities and not insured by a government sponsored entity, placing additional credit
risk on the borrower which may result in a loss to our portfolio.
Construction loan investments involve a greater risk of loss of investment and reduction of return
than traditional mortgage loans.
If we decide to invest in construction loans, the nature of these loans pose a greater risk of loss
than traditional mortgages. Since construction loans are made generally for the express purpose of
either the original development or redevelopment of a property, the risk of loss is greater than a
traditional mortgage because the underlying properties subject to construction loans are generally
unable to generate income during the period of the loan. Construction loans may also be
subordinate to the first lien mortgages. Any delays in completing the development or redevelopment
project may increase the risk of default or credit risk of the borrower which may increase the risk
of loss or risk of a lower than expected return to our portfolio.
Bridge loan investments involve a greater risk of loss of investment and reduction of return than
traditional mortgage loans.
If we decide to acquire or make bridge loans secured by first lien mortgages on properties to
borrowers who are typically seeking short-term capital to be used in an acquisition or renovation
of real estate, these loans pose a greater risk than traditional mortgages. Borrowers usually
identify undervalued assets that have been under-managed or are located in recovering markets. If
the market in which the asset is located fails to recover according to the borrowers projections,
or if the borrower fails to improve the quality of the assets management or the value of the
asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan,
and we may not recover some or all of our investment.
In addition, owners usually borrow funds under a conventional mortgage loan to repay a bridge loan.
We may therefore be dependent on a borrowers ability to obtain permanent financing to repay our
bridge loan, which could depend on market conditions and other factors. Bridge loans are also
subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that
are not covered by standard hazard insurance. In the event of any default under bridge loans held
by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of
any deficiency between the value of the mortgage collateral and the principal amount of the bridge
loan. To the extent we suffer such losses with respect to our investments in bridge loans; the
value of our company may be adversely affected.
Mezzanine loan investments involve a greater risk of loss of investment and reductions of return
than senior loans secured by income producing properties.
If we invest in mezzanine loans, they may take the form of subordinated loans secured by second
mortgages on the underlying real property or loans secured by a pledge of the ownership interests
of either the entity owning the real property or the entity that owns the interest in the entity
owning the real property. These types of investments involve a higher degree of risk than long-term
senior mortgage lending secured by income-producing real property because the investment may become
unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the
entity providing the pledge of its ownership interests as security, we may not
have full recourse to the assets of such entity, or the assets of the entity may not be sufficient
to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the
senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine
loans may
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have higher loan-to-value ratios than conventional mortgage loans, resulting in less
equity in the real property and increasing the risk of loss of principal.
Investments in real estate-related securities may be illiquid, and we may not be able to adjust our
portfolio in response to changes in economic and other conditions.
If we invest in certain real estate-related securities that we may purchase in connection with
privately negotiated transactions, they will not be registered under the relevant securities laws,
resulting in a prohibition against their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of, or is otherwise in accordance
with, those laws. As a result, our ability to vary our long-term stabilized portfolio in response
to changes in economic and other conditions may be relatively limited. The mezzanine and bridge
loans we may purchase will be particularly illiquid investments due to their short life. Moreover,
in the event of a borrowers default on an illiquid real estate security, the unsuitability for
securitization and potential lack of recovery of our investment could pose serious risks of loss to
our investment portfolio.
Delays in restructuring or liquidating non-performing real estate-related securities could reduce
the return on our stockholders investment.
If we invest in real estate-related securities, they may become non-performing after acquisition
for a wide variety of reasons. Such non-performing real estate investments may require a
substantial amount of workout negotiations and/or restructuring, which may entail, among other
things, a substantial reduction in the interest rate and a substantial write-down of such loan or
asset. However, even if a restructuring is successfully accomplished, upon maturity of such real
estate security, replacement takeout financing may not be available. We may find it necessary or
desirable to foreclose on some of the collateral securing one or more of our investments.
Intercreditor provisions may substantially interfere with our ability to do so. Even if foreclosure
is an option, the foreclosure process can be lengthy and expensive. Borrowers often resist
foreclosure actions by asserting numerous claims, counterclaims and defenses, including, without
limitation, lender liability claims and defenses, in an effort to prolong the foreclosure action.
In some states, foreclosure actions can take up to several years or more to litigate. At any time
during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the
effect of staying the foreclosure action and further delaying the foreclosure process. Foreclosure
litigation tends to create a negative public image of the collateral property and may result in
disrupting ongoing leasing and management of the property. Foreclosure actions by senior lenders
may substantially affect the amount that we may receive from an investment.
If a significant portion of our assets are deemed investment securities, we may become subject to
the Investment Company Act of 1940 which would restrict our operations and we could not continue
our business.
If we fail to qualify for an exemption or exception from the Investment Company Act of 1940, we
would be required to comply with numerous additional regulatory requirements and restrictions which
could adversely restrict our operations and force us to discontinue our business. Our intended
investments in real estate will represent the substantial majority of our total asset mix, which
would not subject us to the Investment Company Act. If, however, in the future we acquire mortgage
loans, debt securities and investments in joint ventures (not structured in compliance with the
Investment Company Act) and other investments assets that are deemed by the SEC or the courts to be
investment securities and these assets exceed 40% of the value of our total assets, we could be
deemed to be an investment company and subject to these additional regulatory and operational
restrictions.
Even if otherwise deemed an investment company, we may qualify for an exception or exemption from
the Investment Company Act. For example, under the real estate/mortgage exception, entities that
are primarily engaged in the business of purchasing and otherwise acquiring mortgages and interests
in real estate are exempt from registration under the Investment Company Act. Under the real estate
mortgage exception, the SEC Staff has provided guidance that would require us to maintain 55% of
our assets in qualifying real estate interests. In order for an asset to constitute a qualifying
real estate interest or qualifying asset, the interest must meet various criteria. Fee interests in
real estate and whole mortgage loans are generally considered qualifying assets. If we were
required to register as an investment company but failed to do so, we would be prohibited from
engaging in our business, and criminal and civil actions could be brought against us. In addition,
our contracts would be unenforceable unless a court required enforcement, and a court could appoint
a receiver to take control of us and liquidate our business.
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Risks Associated with Debt Financing
We will use debt financing to acquire properties and otherwise incur other indebtedness, which will
increase our expenses and could subject us to the risk of losing properties in foreclosure if our
cash flow is insufficient to make loan payments.
We have and expect to continue to acquire properties using debt financing. We intend to incur
indebtedness up to 300% of our net assets (equivalent to 75% of the cost of our tangible assets),
but upon a vote of the majority of our independent directors we may exceed this level of
indebtedness. We may borrow funds for working capital requirements, tenant improvements, capital
improvements, and leasing commissions. We may also borrow funds to make distributions including but
not limited to funds to satisfy the REIT tax qualification requirement that we distribute at least
90% of our annual REIT taxable income (excluding net capital gains) to our stockholders. We may
also borrow if we otherwise deem it necessary or advisable to ensure that we maintain our
qualification as a REIT for federal income tax purposes or to avoid taxation on undistributed
income or gain. To the extent we borrow funds; we may raise additional equity capital or sell
properties to pay such debt.
If there is a shortfall between the cash flow from a property and the cash flow needed to service
acquisition financing on that property, then the amount available for distributions to stockholders
may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on
indebtedness secured by a property may result in lenders initiating foreclosure actions. In that
case, we could lose the property securing the loan that is in default, thus reducing the value of
our stockholders investment. For tax purposes, a foreclosure of any of our properties would be
treated as a sale of the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our
tax basis in the property, we would recognize taxable income on foreclosure, but we would not
receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to
the entities that own our properties. When we give a guaranty on behalf of an entity that owns one
of our properties, we will be responsible to the lender for satisfaction of the debt if it is not
paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions,
a default on a single property could affect multiple properties. If any of our properties are
foreclosed upon due to a default, the value of our stockholders investments in us will be reduced.
Liquidity in the global credit markets has been significantly contracted by market disruptions
during the past two years, making it costly to obtain new debt financing, when debt financing is
available at all. To the extent that market conditions prevent us from obtaining temporary
acquisition financing on financially attractive terms, our ability to make suitable investments in
commercial real estate could be delayed or limited. If we are unable to invest the proceeds from
this offering in suitable real estate investments for an extended period of time, distributions to
our stockholders may be suspended and may be lower and the value of investments in our shares could
be reduced.
Lenders may require us to enter into restrictive covenants relating to our operations, which could
limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and
operating policies and our ability to incur additional debt. Loan documents we enter into may
contain covenants that limit our ability to further mortgage the property, discontinue insurance
coverage, or replace our Advisor. These or other limitations may limit our flexibility and prevent
us from achieving our operating plans.
High levels of debt or increases in interest rates could increase the amount of our loan payments,
reduce the cash available for distribution to stockholders and subject us to the risk of losing
properties in foreclosure if our cash flow is insufficient to make loan payments.
Our policies do not limit us from incurring debt. High debt levels would cause us to incur higher
interest charges, would result in higher debt service payments, and could be accompanied by
restrictive covenants. Interest we pay could reduce cash available for distribution to
stockholders. Additionally, if we incur variable rate debt, increases in interest rates would
increase our interest costs, which would reduce our cash flows and our ability to make
distributions to our stockholders. In addition, if we need to repay existing debt during periods of
rising interest rates, we could be required to liquidate one or more of our investments in
properties at times which may not permit realization of the maximum return on such investments and
could result in a loss.
High mortgage rates may make it difficult for us to finance or refinance properties, which could
reduce the number of properties we can acquire, our cash flows from operations and the amount of
cash distributions we can make
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of
properties. If we place mortgage debt on properties, we run the risk of being unable to refinance
the properties when the debt becomes due or of being unable to refinance on favorable terms. If
interest rates are higher when we refinance the properties, our income could be reduced. We may be
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unable to refinance properties. If any of these events occurs, our cash flow would be reduced.
This, in turn, would reduce cash available for distribution to you and may hinder our ability to
raise capital by issuing more stock or borrowing more money.
Federal Income Tax Risks
If we fail to qualify as a REIT, we will be subjected to tax on our income and the amount of
distributions we make to our stockholders will be less.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended,
commencing with the year ended December 31, 2008. Under the Internal Revenue Code, we are not
subject to federal income tax on income that we distribute to our stockholders. Qualification as a
REIT involves the application of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The determination of various factual matters
and circumstances not entirely within our control may affect our ability to continue to qualify as
a REIT. In addition, new legislation, regulations, administrative interpretations or court
decisions could significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification.
If we fail to qualify as a REIT in any taxable year:
| we would not be allowed to deduct our distributions to our stockholders when computing our taxable income; | ||
| we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates; | ||
| we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions; | ||
| we would have less cash to make distributions to our stockholders; and | ||
| we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification. |
Even if maintain our status as a REIT, we may be subject to federal and state income and excise
taxes in certain events, which would reduce our cash available for distribution to our
stockholders.
Net income from a prohibited transaction will be subject to a 100% tax. We may not be able to
pay sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to
retain income we earn from the sale or other disposition of our property and pay income tax
directly on such income. In that event, our stockholders would be treated as if they earned that
income and paid the tax on it directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed payment of such tax
liability. We may also be subject to state and local taxes on our income or property, either
directly or at the level of our operating partnership or at the level of the other companies
through which we indirectly own our assets. Any federal or state taxes we pay will reduce the cash
available to make distributions to our stockholders.
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 the overall return to
our stockholders.
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. 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 our stockholders investments in us.
If our operating partnership is classified as a publicly-traded partnership under the Internal
Revenue Code, it could be subjected to tax on its income and the amount of distributions we make to
our stockholders will be less.
We structured the operating partnership so that it would be classified as a partnership for federal
income tax purposes. In this regard, the Internal Revenue Code generally classifies publicly
traded partnerships (as defined in Section 7704 of the Internal Revenue Code) as associations
taxable as corporations (rather than as partnerships), unless substantially all of their taxable
income consists of specified types of passive income. In order to minimize the risk that the
Internal Revenue Code would classify the operating partnership as a publicly traded partnership
for tax purposes, we placed certain restrictions on the transfer and/or redemption of
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partnership
units in our operating partnership. If the Internal Revenue Service were to assert successfully
that our operating partnership is a publicly traded partnership, and substantially all of the
operating partnerships gross income did not consist of the specified types of passive income, the
Internal Revenue Code would treat our operating partnership as an association taxable as a
corporation. In such event, the character of our assets and items of gross income would change and
would likely prevent us from qualifying and maintaining our status as a REIT. In addition, the
imposition of a corporate tax on our operating partnership would reduce the amount of cash
distributable to us from our operating partnership and therefore would reduce our amount of cash
available to make distributions to our stockholders.
Distributions payable by REITs do not qualify for the reduced tax rates under recently enacted tax
legislation.
Recently enacted tax legislation generally reduces the maximum tax rate for dividend distributions
payable by corporations to individuals meeting certain requirements to 15% through 2010.
Distributions payable by REITs, however, generally continue to be taxed at the normal rate
applicable to the individual recipient, rather than the 15% preferential rate. Although this
legislation does not adversely affect the taxation of REITs or distributions paid by REITs, the
more favorable rates applicable to regular corporate distributions could cause investors who are
individuals to perceive investments in REITs to be relatively less attractive than investments in
the stocks of non-REIT corporations that make distributions, which could reduce the value of the
stock of REITs, including our stock.
Distributions to tax-exempt investors may be classified as unrelated business taxable income and
tax-exempt investors would be required to pay tax on the unrelated business taxable income and to
file income tax returns.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the
sale of stock should generally constitute unrelated business taxable income to a tax-exempt
investor. However, there are certain exceptions to this rule. In particular:
| under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if our stock is predominately held by qualified employee pension trusts, such that we are a pension-held REIT (which we do not expect to be the case); | ||
| part of the income and gain recognized by a tax exempt investor with respect to our stock would constitute unrelated business taxable income if such investor incurs debt in order to acquire the common stock; and | ||
| part or all of the income or gain recognized with respect to our stock held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Code may be treated as unrelated business taxable income. |
Foreign investors may be subject to FIRPTA tax on the sale of our stock if we are unable to qualify
as a domestically controlled REIT.
A foreign person disposing of a U.S. real property interest, including stock of a U.S. corporation
whose assets consist principally of U.S. real property interests is generally subject to a tax,
known as the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) tax, on the gain
recognized on the disposition. Distributions that are attributable to gains from the disposition of
US real property interests by a REIT are subject to FIRPTA tax for foreign investors as though they
were engaged in a trade or business and the distribution constitutes income which is effectively
connected with such a business. Such FIRPTA tax does not apply, if the REIT is domestically
controlled. A REIT is domestically controlled if less than 50% of the REITs capital stock, by
value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during
a continuous five-year period ending on the date of disposition or, if shorter, during the entire
period of the REITs existence.
We cannot be sure that we will qualify as a domestically controlled REIT. If we were to fail to
so qualify, gain realized by foreign investors on a sale of our stock would be subject to FIRPTA
tax, unless our stock were traded on an established securities market and the foreign investor did
not at any time during a specified testing period directly or indirectly own more than 5% of the
value of our outstanding common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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ITEM 2. PROPERTIES
As of December 31, 2010, our portfolio consists of thirteen healthcare facilities. The following
table provides summary information regarding our facilities.
Percentage | Gross | |||||||||||||||||||||||||
Equity | Date | Square | Purchase | Approximate | ||||||||||||||||||||||
Property Name | Location | Property Type | Ownership | Acquired | Feet | Price | Debt | Occupancy | ||||||||||||||||||
Senior Living Operations |
||||||||||||||||||||||||||
Caruth Haven Court |
Highland Park, Texas | Assisted- Living Facility | 100 | % | 01/22/09 | 74,647 | $ | 20,500,000 | $ | 9,904,000 | 93.4 | % | ||||||||||||||
The Oaks Bradenton |
Bradenton, Florida | Assisted- Living Facility | 100 | % | 05/01/09 | 18,172 | 4,500,000 | 2,738,000 | 100.0 | % | ||||||||||||||||
GreenTree at Westwood |
Columbus, Indiana | Assisted- Living Facility | 100 | % | 12/30/09 | 50,249 | 5,150,000 | | 84.5 | % | ||||||||||||||||
Oakleaf Village Portfolio |
80 | % | 04/30/10 | 27,000,000 | 17,849,000 | |||||||||||||||||||||
Oakleaf
Village at Lexington |
Lexington, South Carolina | Assisted- Living Facility | 67,000 | 90.0 | % | |||||||||||||||||||||
Oakleaf Village at Greenville |
Greenville, South Carolina | Assisted- Living Facility | 65,000 | 65.6 | % | |||||||||||||||||||||
Terrace at Mountain Creek |
Chattanooga, Tennessee | Assisted- Living Facility | 100 | % | 09/03/10 | 109,643 | 8,500,000 | 5,700,000 | 95.2 | % | ||||||||||||||||
Carriage Court of Hilliard |
Hilliard, Ohio | Assisted- Living Facility | 100 | % | 12/22/10 | 69,184 | 17,500,000 | 13,586,000 | 100.0 | % | ||||||||||||||||
Rivers Edge of Yardley |
Yardley, Pennsylvania | Dementia and Memory Care Facility | 100 | % | 12/22/10 | 26,146 | 4,500,000 | 2,500,000 | 94.4 | % | ||||||||||||||||
Triple Net Leased |
||||||||||||||||||||||||||
Mesa Vista Inn Health Center |
San Antonio, Texas | Skilled Nursing Facility | 100 | % | 12/31/09 | 55,525 | 13,000,000 | 7,336,000 | 100.0 | % | ||||||||||||||||
Global Rehab Inpatient Facility |
Dallas, Texas | Inpatient Rehabilitation Facility | 100 | % | 08/19/10 | 40,000 | 14,800,000 | 7,530,000 | 100.0 | % | ||||||||||||||||
Rome LTACH Project (1) |
Rome, Georgia | Long-Term Acute Care Hospital | 75 | % | 01/12/10 | 53,000 | (2) | | 8,588,000 | | ||||||||||||||||
Littleton Specialty Rehabilitation Facility |
Littleton, Colorado | Inpatient Rehabilitation Facility | 90 | % | 12/16/10 | 26,808 | (2) | | (3) | 1,000 | | |||||||||||||||
Medical Office Building |
||||||||||||||||||||||||||
Hedgcoxe Health Plaza |
Plano, Texas | Medical Office Building | 100 | % | 12/22/10 | 32,109 | 9,094,000 | 5,060,000 | 94.9 | % | ||||||||||||||||
Total |
687,483 | $ | 124,544,000 | $ | 80,792,000 | |||||||||||||||||||||
(1) | Development joint venture. The projected development cost was $16.3 million and we received the Certificate of Occupancy in January 2011. | |
(2) | Represents estimated gross square footage upon completion of development. | |
(3) | Development joint venture. The projected development cost is $7.3 million and is expected to be completed in the second quarter of 2012. |
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ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we may become subject to legal proceeding,
claims, or disputes. As of the date hereof, we are not a party to any pending legal proceedings.
ITEM 4. REMOVED AND RESERVED
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
During the period covered by this report, there was no established public trading market for our
shares of common stock.
In order for FINRA members to participate in the offering and sale of shares of common stock
pursuant to our ongoing public offering, we are required to disclose in each annual report
distributed to stockholders a per share estimated value of the shares, the method by which it was
developed and the date of the data used to develop the estimated value. In addition, we prepare
annual statements of estimated share values to assist fiduciaries of retirement plans subject to
the annual reporting requirements of ERISA in the preparation of their reports relating to an
investment in our shares. For these purposes, the deemed value of a share of our common stock is
$10.00 per share as of December 31, 2010.
The basis for this valuation is that the current public offering price of a share of our common
stock is $10.00 per share (ignoring purchase price discounts for certain categories of purchasers).
However, this estimated value is likely to be higher than the price at which our stockholders
could resell our stockholders shares because (1) our public offering involves the payment of
underwriting compensation and other directed selling efforts, which payments and efforts are likely
to produce a higher sales price than could otherwise be obtained, and (2) there is no public market
for our shares. Moreover, this estimated value is likely to be higher than the amount our
stockholders would receive per share if we were to liquidate at this time because of the up-front
fees that we pay in connection with the issuance of our shares as well as the recent reduction in
the demand for real estate as a result of the recent credit market disruptions and economic
slowdown. We expect to continue to use the most recent public offering price for a share of our
common stock as the estimated per share value reported in our annual reports on Form 10-K until 18
months have passed since the last sale of a share of common stock in a public offering, excluding
public offerings conducted on behalf of selling stockholders or offerings related to a dividend
reinvestment plan, employee benefit plan, or the redemption of interests in our operating
partnership.
After the 18-month period described above, we expect the estimated share values reported in our
annual reports will be based on estimates of the values of our assets net of our liabilities. We
do not currently anticipate that our Advisor will obtain new or updated appraisals for our
properties in connection with such estimates, and accordingly, these estimated share values should
not be viewed as estimates of the amount of net proceeds that would result from a sale of our
properties at that time. We expect that any estimates of the value of our properties will be
performed by our Advisor; however, our board of directors could direct our Advisor to engage one or
more third-party valuation firms in connection with such estimates.
Stock Repurchase Program
Our board of directors has adopted a stock repurchase program that enables our stockholders to sell
their stock to us in limited circumstances.
As long as our common stock is not listed on a national securities exchange, our stockholders who
have held their stock for at least one year may be able to have all or any portion of their shares
of stock redeemed. At that time, we may, subject to the conditions and limitations described below,
redeem the shares of stock presented for redemption for cash to the extent that we have sufficient
funds available to us to fund such redemption. Currently, amount that we may pay to redeem stock
will be the redemption price set forth in the following table which is based upon the number of
years the stock is held:
Number Years Held | Redemption Price | |
Less than 1
|
No Redemption Allowed | |
1 or more but less than 2
|
90% of purchase price | |
2 or more but less than 3
|
95% of purchase price | |
Less than 3 in the event of death
|
100% of purchase price | |
3 or more but less than 5
|
100% of purchase price | |
5 or more
|
Estimated liquidation value |
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The estimated liquidation value for the repurchase of shares of stock held for 5 or more years will
be determined by our Advisor or another person selected for such purpose and will be approved by
our board of directors. The stock repurchase price is subject to adjustment as determined from time
to time by our board of directors. At no time will the stock repurchase price exceed the price at
which we are offering our common stock for sale at the time of the repurchase.
Our board of directors intends to waive the one-year holding period in the event of the death of a
stockholder and adjust 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. We would notify our stockholders of such developments (i) in the annual
or quarterly reports or (ii) by means of a separate mailing to our stockholders, accompanied by
disclosure in a current or periodic report under the Securities Exchange Act of 1934. During the
offerings, we would also include this information in a prospectus supplement or post-effective
amendment to the registration statement, as then required under federal securities laws.
During our initial public offering and each of the first seven years following the closing of the
offering, we do not intend to redeem more than the lesser of (i) the number of shares that could be
redeemed using the proceeds from our reinvestment plan in the prior calendar year, and or (ii) 5%
of the number of shares outstanding at the end of the prior calendar year.
During the twelve months ended December 31, 2010, we redeemed shares pursuant to our stock
repurchase program as follows:
Approximate Dollar Value of Shares | ||||||||||||
Total Number of | Average Price Paid | Available That May Yet Be | ||||||||||
Period | Shares Redeemed(1) | per Share | Redeemed Under the Program (1) | |||||||||
January |
7,425 | $ | 9.55 | $ | 808,000 | |||||||
February |
2,784 | $ | 9.93 | $ | 780,000 | |||||||
March |
| $ | | $ | 780,000 | |||||||
April |
| $ | | $ | 780,000 | |||||||
May |
10,000 | $ | 9.00 | $ | 690,000 | |||||||
June |
3,500 | $ | 8.99 | $ | 659,000 | |||||||
July |
58,504 | $ | 9.99 | $ | 74,000 | |||||||
August |
4,196 | $ | 9.74 | $ | 33,000 | |||||||
September |
8,678 | $ | 9.56 | $ | | |||||||
October |
| $ | | $ | | |||||||
November |
| $ | | $ | | |||||||
December |
| $ | | $ | | |||||||
95,087 | ||||||||||||
(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. 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 these shares were held. 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 program in the prior calendar year, and (ii) we may not, except to repurchase the shares of a deceased shareholder, 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. |
During the year ended December 31, 2010, we redeemed an aggregate of 95,087 shares of common stock
for approximately $928,000 ($9.76 per share). During the year ended December 31, 2010, we received
requests to repurchase a total of 88,571 shares pursuant to the program. Stock redemption requests
related to 3,692 shares were not fulfilled because such shares were not eligible for redemption
under the terms of the program. We have funded and intend to continue funding share redemptions
with proceeds from our initial public offering.
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One of the limitations of our stock repurchase program is that during any calendar year we may
redeem only the number of shares that we can purchase with the amount of the net proceeds from the
issuance of shares under the distribution reinvestment plan during the prior calendar year. During
the year ended December 31, 2009, we issued shares under our distribution reinvestment plan for
gross offering proceeds of approximately $0.9 million, and, therefore, our redemptions in 2010 were
limited to the shares that we could purchase with this amount.
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.
Stockholders
As of March 17, 2011, we had approximately 12.7 million shares of common stock outstanding held by
approximately 3,562 stockholders of record.
Distributions
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. Until proceeds from our offerings 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 offering and or from borrowings in
anticipation of future cash flow. Our board generally declares distributions on a quarterly basis,
which is paid on a monthly basis. Monthly distributions are paid based on daily record and
distribution declaration dates so our investor will be entitled to be paid distributions beginning
on the day that they purchase shares.
During the years ended December 31, 2010 and 2009, we paid distributions, including any
distributions reinvested, aggregating approximately $5.7 million and $1.7 million, respectively to
our stockholders. From October 16, 2006 (date of inception) to December 31, 2010, distribution
declared was approximately $8.3 million. Since inception, we had experienced a cumulative negative
cash flow from operation of approximately $7.4 million.
The following table shows the distributions declared on daily record dates for each day during the
period from January 1, 2009 through December 31, 2010, aggregated by quarter as follows:
Distributions Declared | Cash Flow from | |||||||||||||||
Period | Cash | Reinvested | Total | Operations | ||||||||||||
First quarter 2009 |
$ | 116,000 | $ | 122,000 | $ | 238,000 | $ | (601,000 | ) | |||||||
Second quarter 2009 |
170,000 | 190,000 | 360,000 | (461,000 | ) | |||||||||||
Third quarter 2009 |
266,000 | 284,000 | 550,000 | (321,000 | ) | |||||||||||
Fourth quarter 2009 |
414,000 | 401,000 | 815,000 | (1,540,000 | ) | |||||||||||
$ | 966,000 | $ | 997,000 | $ | 1,963,000 | $ | (2,923,000 | ) | ||||||||
First quarter 2010 |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | $ | 48,000 | ||||||||
Second quarter 2010 |
696,000 | 665,000 | 1,361,000 | (597,000 | ) | |||||||||||
Third quarter 2010 |
857,000 | 834,000 | 1,691,000 | 436,000 | ||||||||||||
Fourth quarter 2010 |
1,017,000 | 1,011,000 | 2,028,000 | (2,981,000 | ) | |||||||||||
$ | 3,095,000 | $ | 3,016,000 | $ | 6,111,000 | $ | (3,094,000 | ) | ||||||||
Since our inception in 2006, we have paid aggregate distributions of approximately $7.5 million.
Of this amount approximately $3.7 million has been reinvested through our dividend reinvestment
plan and approximately $3.8 million has been paid in cash to stockholders. For the corresponding
period our aggregate cash flow used in operating activities was approximately $7.4 million.
Accordingly, from our inception to date, our total distributions have exceeded our cash flows from
operations. Currently, we make cash distributions to our stockholders from capital at an annualized
rate of 7.5%, based on a $10.00 per share purchase price. These distributions are being paid in
anticipation of future cash flow from our investments. Until proceeds from our 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 offering
or from borrowings in anticipation of future cash flow, reducing the amount of funds that would
otherwise be available for investment.
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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.
Recent Sales of Unregistered Securities
We did not sell any equity securities that were not registered under the Securities Act of 1933
during the period covered by this Form 10-K.
Use of Proceeds from Registered Securities
Our registration statement (SEC File No. 333-139704) for our initial public offering of up to
40,000,000 shares of our common stock at $10.00 per share and up to 10,000,000 additional shares at
$9.50 per share pursuant to our distribution reinvestment plan was declared effective on August 10,
2007. On June 20, 2008, we filed a post-effective amendment to the registration statement. Upon
the effective date of the post-effective amendment, we began accepting subscriptions for shares of
our common stock into escrow.
We ceased offering shares of common stock in our initial public offering on February 3, 2011 prior
to the sale of all shares registered. As of December 31, 2010, we had sold approximately 11.3
million shares of common stock, excluding sales under our distribution reinvestment plan, raising
gross proceeds of approximately $112.9 million. In addition, as of December 31, 2010, we have
issued approximately 0.4 million shares under our distribution reinvestment plan. From inception
to December 31, 2010, we incurred approximately $11.0 million in selling commissions and dealer
manager fees payable to our dealer manager and approximately $3.6 million in acquisition fees
payable to our Advisor. We used approximately $54.0 million of the net offering proceeds to
acquire properties as of December 31, 2010.
As of December 31, 2010, our Advisor had incurred approximately $4.6 million in organization and
offering expenses, including approximately $0.1 million of organizational costs that has been
expensed. Of this amount, we have reimbursed $4.6 million to our Advisor. Our Advisor may advance
us money for these organization and offering expenses or pays these expenses on our behalf. Our
Advisor does not charge us interest on these advances. At times during our offering stage, before
the maximum amount of gross proceeds has been raised, the amount of organization and offering
expenses that we incur, or that our advisor and its affiliates incur on our behalf, may exceed 3.5%
of the gross offering proceeds then raised. However, 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. Our Advisor will pay all of our organization and offering
expenses described above that are in excess of this 3.5% limitation. At December 31, 2010,
organization and offering costs reimbursed to our Advisor are approximately 3.6% of the gross
proceeds of our initial public offering. In addition, our 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.
On July 7, 2010, we filed a registration statement on Form S-11 with the SEC to register a
follow-on public offering. We subsequently amended the registration statement on November 29,
2010, January 13, 2011 and January 27, 2011. Pursuant to the registration statement, as amended,
we registered 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 also registered 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. On
February 4, 2011, the SEC declared our follow-on offering effective and we commenced our follow-on
offering.
Equity Compensation Plans
Information about securities authorized for issuance under our equity compensation plans required
for this item is incorporated by reference from our definitive Proxy Statement to be filed in
connection with our 2011 annual meeting of stockholders.
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ITEM 6. SELECTED FINANCIAL DATA
The following should be read with the sections titled Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and the
notes thereto.
October 16 | ||||||||||||||||||||
(date of inception to | ||||||||||||||||||||
December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | December 31, 2006) | ||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Total assets |
$ | 170,356,000 | $ | 58,340,000 | $ | 7,972,000 | $ | 158,000 | $ | 201,000 | ||||||||||
Investments in real estate, net |
$ | 128,868,000 | $ | 40,888,000 | $ | | $ | | $ | | ||||||||||
Notes payable |
$ | 80,792,000 | $ | 20,260,000 | $ | | $ | | $ | | ||||||||||
Stockholders equity (deficit) |
$ | 82,764,000 | $ | 34,198,000 | $ | 5,369,000 | $ | (5,000 | ) | $ | 201,000 |
October 16 | ||||||||||||||||||||
(date of inception to | ||||||||||||||||||||
December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | December 31, 2006) | ||||||||||||||||
Operating Data: |
||||||||||||||||||||
Revenues |
$ | 17,822,000 | $ | 6,661,000 | $ | | $ | | $ | | ||||||||||
Property operating and maintenance |
$ | 11,133,000 | $ | 5,172,000 | $ | | $ | | $ | | ||||||||||
General and administrative expense |
$ | 2,396,000 | $ | 1,100,000 | $ | 875,000 | $ | 209,000 | $ | | ||||||||||
Net loss |
$ | (6,471,000 | ) | $ | (4,149,000 | ) | $ | (1,227,000 | ) | $ | (206,000 | ) | $ | | ||||||
Noncontrolling interest |
$ | (152,000 | ) | $ | 15,000 | $ | (121,000 | ) | $ | (73,000 | ) | $ | | |||||||
Net loss attributable to common stockholders |
$ | (6,319,000 | ) | $ | (4,164,000 | ) | $ | (1,106,000 | ) | $ | (133,000 | ) | $ | | ||||||
Net loss per common share attributable to common
stockholders, basic and diluted (1) |
$ | (0.89 | ) | $ | (2.08 | ) | $ | (12.90 | ) | $ | (1,330.00 | ) | $ | | ||||||
Dividends declared |
$ | 6,111,000 | $ | 1,963,000 | $ | 185,000 | $ | | $ | | ||||||||||
Dividends per common share (2) |
$ | 0.75 | $ | 0.75 | $ | 0.29 | $ | | $ | | ||||||||||
Weighted
average number of shares outstanding (1): |
||||||||||||||||||||
Basic and diluted |
7,090,146 | 1,999,747 | 85,743 | 100 | 100 | |||||||||||||||
Other Data: |
||||||||||||||||||||
Cash flows used in operating activities |
$ | (3,094,000 | ) | $ | (2,923,000 | ) | $ | (1,270,000 | ) | $ | (116,000 | ) | $ | | ||||||
Cash flows used in investing activities |
$ | (66,844,000 | ) | $ | (34,348,000 | ) | $ | (385,000 | ) | $ | | $ | | |||||||
Cash flows provided by financing activities |
$ | 84,857,000 | $ | 44,722,000 | $ | 9,019,000 | $ | | $ | 201,000 |
(1) | Net loss and dividends per share are based upon the weighted average number of shares of common stock outstanding. | |
(2) | Dividend per common share for 2008 is calculated based on days outstanding during the year. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements
and notes appearing elsewhere in this Form 10-K. See also Special Note about Forward Looking
Statements preceding Item 1 of this 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 our offerings
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 December 31, 2010, we raised approximately $112.9 million of gross proceeds
from the sale of approximately 11.3 million shares of our common stock in our initial public
offering, and we had acquired thirteen real estate properties.
Our revenues, which are comprised largely of rental income, 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.
Highlights for the Twelve Months Ended December 31, 2010
| We acquired interests in nine properties during 2010 as follows: |
ü Three wholly-owned assisted living facilities; | |||
ü An 80% interest in two assisted living facilities owned through a joint venture; | |||
ü A 75% interest in a long term acute care hospital and a 90% interest in a
specialty rehabilitation facility, both owned through joint ventures and both
development properties; |
|||
ü An inpatient rehabilitation facility; | |||
ü A medical office building. |
| We obtained acquisition financing of approximately $61.0 million at an average interest rate of approximately 6.0% as of December 31, 2010. | ||
| We entered into an agreement with KeyBank National Association for a $25.0 million credit facility at an interest rate equal to the one-month LIBOR plus a margin of 400 basis points, with a floor margin of 200 basis points. This loan may be increased in the future in incremental amounts of at least $25.0 million at our request, subject to attaining certain portfolio size targets. | ||
| 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, as amended, we registered 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, and 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. On February 4, 2011, the SEC declared our registration effective and we commenced our follow-on offering. We ceased offering shares of common stock in our initial public offering on February 3, 2011. |
2010 Transaction Overview
Rome LTACH Project, Georgia
On January 12, 2010, we invested in a joint venture along with Cornerstone Private Equity Fund
Operating Partnership, LP, an affiliate of the Companys sponsor and affiliates of The Cirrus
Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the
campus of the Floyd Medical Center in Rome, Georgia. The property which was 100% preleased,
comprises approximately 53,000 square feet. We own a 75% equity interest in this joint venture.
The development received a certificate of occupancy in January 2011 and lease payments commenced in
February 2011. At December 31, 2010, approximately $13.5 million of development costs had been
incurred. Project funding was provided by approximately $3.5 million of initial capital invested by
the joint venture partners, of which, approximately $2.7 million was contributed by us, $0.5
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million was contributed by Cornerstone Private Equity Fund Operating Partnership, LP , and $0.3
million by affiliates of The Cirrus Group with a $12.75 million construction loan commitment from
an unaffiliated lender.
Oakleaf Village, South Carolina
On April 30, 2010, we acquired an 80% interest in a joint venture that will own a portfolio of two
assisted living facilities located in South Carolina for $21.6 million. Oakleaf Village at
Lexington and Oakleaf Village at Greenville (together, Oakleaf Village) have a total of 132,000
square feet, with 180 units, of which 132 are dedicated to assisted-living and 48 are committed to
memory care. Royal Senior Care, LLC, an unaffiliated company, is our joint venture partner in the
$27.0 million transaction. The acquisition was funded with a loan from an unaffiliated lender and
with proceeds from our initial public offering.
Global Rehab Inpatient Rehab Facility, Texas
On August 19, 2010, we purchased an inpatient rehabilitation facility, Global Rehab Inpatient
Rehabilitation Facility, located in Dallas, TX from The Cirrus Group, a non-related party, for a
purchase price of approximately $14.8 million. The property is approximately 40,000 square feet,
with 42 beds and is triple net leased to GlobalRehab, LP through February 2024, with two additional
five year renewal options. The acquisition was funded with a loan from an unaffiliated lender and
with proceeds from our initial public offering. On December 23, 2010, we executed a loan agreement
with an unaffiliated financial institution to secure financing in the amount of approximately $7.5
million for our Global Rehab inpatient rehabilitation facility in Dallas, Texas, as anticipated at
acquisition of the facility.
Terrace at Mountain Creek, Tennessee
On September 3, 2010, we purchased an assisted living facility, Terrace at Mountain Creek, located
in Chattanooga, TN. The facility was purchased, from an affiliate of Wilkinson Real Estate, a
non-related party, for a purchase price of approximately $8.5 million. The acquisition includes a
$1.0 million earn-out provision. The earn-out payment is contingent upon the net operating income
of the property reaching a specific threshold level during the three-years following the
acquisition. The maximum aggregate amount that the seller may receive under the earn-out provision
is $1.0 million. As of December 31, 2010, we had accrued approximately $1.0 million, representing
the present value of our estimated liability under this earn-out provision. The Terrace at Mountain
Creek facility is approximately 110,000 square feet, consisting of 116 units, including 42
independent living units, 61 assisted living units and 13 memory care units. The acquisition was
funded with a loan from an unaffiliated lender and with proceeds from our initial public offering.
Specialty Rehabilitation Facility Project, Colorado
On December 16, 2010, we invested in a joint venture with affiliates of The Cirrus Group, an
unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in Littleton, CO.
We own a 90% interest in this joint venture.
The facility, which is 100% preleased to CareMeridian, LLC on a triple-net basis, and is expected
to open in the second quarter of 2012. It is planned to comprise approximately 26,808 square feet
with 36 beds. As of December 31, 2010, we had funded approximately $0.8 million of the $1.8
million joint venture capital commitment and $1,000 of the $5.5 million construction loan
commitment had been funded.
Rivers Edge of Yardley, Pennsylvania
On December 22, 2010, we purchased a dementia and memory care facility, Sunrise at Floral Vale,
located in Yardley, Pennsylvania. The property was purchased from Sunrise Floral Vale Senior
Living, LP, a non-related party, for a purchase price of $4.5 million. The property has been
rebranded as Rivers Edge of Yardley (the Rivers Edge). Rivers Edge is a 36 unit, purpose built
dementia and memory care facility. The acquisition was funded with our revolving credit facility
from KeyBank National Association and with proceeds from our initial public offering.
Hedgcoxe Health Plaza, Texas
On December 22, 2010, we purchased a medical office building, Hedgcoxe Health Plaza, located in
Plano, TX. The property was purchased from an affiliate of Caddis Partners, LLC, a non-related
party, for a purchase price of approximately $9.0 million. Hedgcoxe Health Plaza consists of seven
office suites, six of which are currently leased to healthcare providers. The acquisition was
funded with our revolving credit facility from KeyBank National Association and with proceeds from
our initial public offering.
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Carriage Court of Hilliard, Ohio
On December 22, 2010, we purchased an assisted living property, Carriage Court of Hilliard
(Carriage Court), located in Hilliard, Ohio. The property was purchased from an affiliate of
Wilkinson Real Estate, a non-related party, for a purchase price of approximately $17.5 million.
The acquisition includes a $0.5 million hold back to which we may be entitled based on quarterly
and annual thresholds defined in the purchase and sale agreement. 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. The acquisition was funded with proceeds
raised from our ongoing public offering and assumption of a mortgage loan from an unaffiliated
lender.
Results of Operations
As of December 31, 2010, we operated in three reportable business segments: senior living
operations, triple-net leased properties, and medical office building (MOB) properties. Our
senior living operations segment invests in and operates assisted living, memory care and other
senior housing communities located in the United States. We engage independent third party managers
to operate these properties. Our triple-net leased properties segment invests in healthcare
properties in the United States leased under long term triple-net or absolute-net leases, which
require the tenants to pay all property-related expenses. Our MOB segment invests in medical office
buildings and leases those properties to healthcare providers under long term full service leases
which require tenants to reimburse expenses related to us.
We began accepting subscriptions for shares under our initial public offering on June 20, 2008.
We purchased our first senior housing property in January 2009, and at December 31, 2010, we owned
13 properties. These properties included eight assisted living facilities which comprise our
senior housing segment, one medical office building, which comprises our MOB segment, one skilled
nursing facility, one inpatient rehabilitation facility and two development projects, which
comprise our triple-net leased segment. As of December 30, 2009, we owned three assisted living
facilities which comprised our senior housing segment and one skilled nursing facility, which
comprise our triple-net leased properties segment and at December 31, 2008 we owned no properties.
Accordingly, the results of our operations for the years ended December 31, 2010, 2009, and 2008
are not directly comparable.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) |
||||||||||||||||
Senior living operations |
$ | 4,361,000 | $ | 1,489,000 | $ | 2,872,000 | 193 | |||||||||
Triple-net leased properties |
2,302,000 | | 2,302,000 | N/A | ||||||||||||
Medical office building |
26,000 | | 26,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 6,689,000 | $ | 1,489,000 | $ | 5,200,000 | 349 | |||||||||
Reconciliation to net loss: |
||||||||||||||||
Net operating income, as defined (1) |
$ | 6,689,000 | $ | 1,489,000 | $ | 5,200,000 | 349 | |||||||||
Unallocated (expenses) income: |
||||||||||||||||
General and administrative expenses |
(2,396,000 | ) | (1,100,000 | ) | 1,296,000 | 118 | ||||||||||
Asset management fees and expenses |
(1,030,000 | ) | (317,000 | ) | 713,000 | 225 | ||||||||||
Real estate acquisitions costs |
(3,273,000 | ) | (1,814,000 | ) | 1,459,000 | 80 | ||||||||||
Depreciation and amortization |
(4,072,000 | ) | (1,367,000 | ) | 2,705,000 | 198 | ||||||||||
Interest income |
17,000 | 13,000 | 4,000 | 31 | ||||||||||||
Other expense |
(33,000 | ) | | (33,000 | ) | N/A | ||||||||||
Interest expense |
(2,373,000 | ) | (1,053,000 | ) | 1,320,000 | 125 | ||||||||||
Net loss |
$ | (6,471,000 | ) | $ | (4,149,000 | ) | $ | 2,322,000 | 56 | |||||||
(1) | Net operating income is defined as total revenue less property operating and maintenance expenses. |
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Senior Living Operations
Total revenue for senior living operations includes rental revenue and resident fees and service
income. Property operating and maintenance expenses include labor, food, utilities, marketing,
management and other property operating costs. Net operating income for the year ended December
31, 2010 increased to $4.4 million from $1.5 million for the year ended December 31, 2009. The
increase is primarily due to acquisitions completed during 2010.
Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Senior Living Operations Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 12,150,000 | $ | 4,964,000 | $ | 7,186,000 | 145 | |||||||||
Resident services and fee income |
2,738,000 | 1,697,000 | 1,041,000 | 61 | ||||||||||||
Tenant reimbursement and other income |
305,000 | | 305,000 | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
10,832,000 | 5,172,000 | 5,660,000 | 109 | ||||||||||||
Total portfolio net operating income |
$ | 4,361,000 | $ | 1,489,000 | $ | 2,872,000 | 193 | |||||||||
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements
from tenants. Property operating and maintenance expenses include insurance and property taxes and
other operating expenses reimbursed by our tenants. Net operating income increased to $2.3
million for the year ended December 31, 2010 compared to $0 for the year ended December 31, 2009
due to the acquisitions completed in 2010 and one acquisition completed on December 31, 2009.
|
||||||||||||||||
Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties Net operating
income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 2,321,000 | $ | | $ | 2,321,000 | N/A | |||||||||
Tenant reimbursement and other income |
279,000 | 279,000 | N/A | |||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
298,000 | | 298,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 2,302,000 | $ | | $ | 2,302,000 | N/A | |||||||||
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from
tenants. Property operating and maintenance expenses include utilities, repairs and maintenance,
insurance and property taxes. Net operating income increased to $26,000 for the year ended December
31, 2010 from $0 compared to the year ended December 31, 2009, due to acquisitions completed in
December 2010.
|
||||||||||||||||
Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Medical Office Buildings Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 23,000 | $ | | $ | 23,000 | N/A | |||||||||
Tenant reimbursement and other income |
6,000 | | 6,000 | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
3,000 | | 3,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 26,000 | $ | | $ | 26,000 | N/A | |||||||||
Unallocated (expenses) income
General and administrative expenses increased to $2.4 million for the year ended December 31, 2010
from $1.1 million for the year ended December 31, 2009. The increase is primarily due to an
increase in reimbursements to the Advisor for the direct and indirect
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costs of providing administrative and management services and higher professional fees, including
audit, tax and legal fees, all of which resulted from the higher level of investment and asset
management activities in 2010.
As a result of the acquisitions in 2010, asset management fees and expenses for the years ended
December 31, 2010 and 2009 increased to $1.0 million from $0.3 million and depreciation and
amortization for the same periods increased to $4.1 million from $1.4 million.
For the years ended December 31, 2010 and 2009 real estate acquisition costs, consisting of fees
paid to the Advisor and third-party expenses, were $3.3 million and $1.8 million, respectively. The
2010 increase in acquisition fees is due to higher offering proceeds and increased acquisition
activity in 2010 compared to 2009. A portion of acquisition fees due to our Advisor are paid upon
receipt of offering proceeds and the balance is paid at the time of investment acquisition.
Interest expense for the year ended December 31, 2010 increased to $2.4 million from $1.1 million
for the year ended December 31, 2009 due to increased real estate acquisition financing in 2010.
Interest and other income are comparable for years ended December 31, 2010 and 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) |
||||||||||||||||
Senior living operations |
$ | 1,489,000 | $ | | $ | 1,489,000 | N/A | |||||||||
Total portfolio net operating income |
$ | 1,489,000 | $ | | $ | 1,489,000 | N/A | |||||||||
Reconciliation to net loss: |
||||||||||||||||
Net operating income, as defined (1) |
$ | 1,489,000 | $ | | $ | 1,489,000 | N/A | |||||||||
Unallocated (expenses) income: |
||||||||||||||||
General and administrative expenses |
(1,100,000 | ) | (875,000 | ) | 225,000 | 26 | ||||||||||
Asset management fees |
(317,000 | ) | | 317,000 | N/A | |||||||||||
Real estate acquisitions costs |
(1,814,000 | ) | (358,000 | ) | 1,456,000 | 407 | ||||||||||
Depreciation and amortization |
(1,367,000 | ) | | 1,367,000 | N/A | |||||||||||
Interest income |
13,000 | 7,000 | (6,000 | ) | 86 | |||||||||||
Interest expense |
(1,053,000 | ) | (1,000 | ) | 1,052,000 | 1,052 | ||||||||||
Net loss |
$ | (4,149,000 | ) | $ | (1,227,000 | ) | $ | 2,922,000 | 238 | |||||||
(1) | Net operating income is defined as total revenue less property operating and maintenance expenses. |
Senior Living Operations
Total revenue includes rental revenue and resident fees and service income. Property operating and
maintenance includes expenses such as labor, food, utilities, marketing, management and other
property operating costs. Net operating income increased to $1.5 million for the year ended
December 31, 2009 compared to $0 for the comparable period of 2008. The increase is primarily due
to new acquisitions completed during the year ended December 31, 2009.
Years Ended December 31, |
||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
Senior Living Operations Net operating income |
||||||||||||||||
Total revenues |
||||||||||||||||
Rental revenue |
$ | 4,964,000 | $ | | $ | 4,964,000 | N/A | |||||||||
Resident services and fee income |
1,697,000 | | 1,697,000 | N/A | ||||||||||||
Tenant reimbursement and other income |
| | | N/A | ||||||||||||
Less: |
||||||||||||||||
Property operating and maintenance expenses |
5,172,000 | | 5,172,000 | N/A | ||||||||||||
Total portfolio net operating income |
$ | 1,489,000 | $ | | $ | 1,489,000 | N/A | |||||||||
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Triple-Net Leased Properties
Total revenue includes rental revenue and expense reimbursements from tenants. During the twelve
months ended December 31, 2009 and 2008, we had no net operating income for this segment.
Unallocated (expenses) income
General and administrative expenses increased to $1.1 million for the year ended December 31, 2009
from $0.9 million for the 2008 year, primarily due to increased tax and accounting fees, higher
board of director fees associated with increased operating activity in 2009 and reimbursement of
operating costs to the advisor related to the services performed on our behalf.
Interest expense for the year ended December 31, 2009 increased to $1.1 million from $1,000 for the
year ended December 31, 2008 due to financing of three real estate acquisitions in 2009.
Interest and other income are comparable for years ended December 31, 2009 and 2008.
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, for the payment
of operating expenses, including interest expense on any outstanding indebtedness, reducing
outstanding indebtedness and for the payment of distributions.
As of December 31, 2010, we had approximately $29.8 million in cash and cash equivalents on hand.
Our liquidity will increase as additional subscriptions for shares are accepted in our follow-on
public offering and decrease as net offering proceeds are expended in connection with the
acquisition, operation of properties and distributions made in excess of cash available from
operating cash flows.
As of December 31, 2010, a total of approximately 11.3 million shares of our common stock had been
sold in our initial public offering for aggregate gross proceeds of approximately $112.9 million.
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 60% 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 public offering is not fully sold, our ability to diversify our investments may be
diminished.
On November 19, 2010, we entered into an agreement with KeyBank National Association, an
unaffiliated financial institution, to obtain a $25.0 million revolving credit facility (the
Facility). The Facility may be increased in the future in incremental amounts of at least $25.0
million at our request subject to attaining certain portfolio size targets. The initial term of the
Facility is 24 months, maturing on November 18, 2012, and may be extended by six months subject to
satisfaction of certain conditions, including payment
of an extension fee. The actual amount of credit available under the Facility is a function of
certain loan to cost, loan to value and debt service coverage ratios contained in the Facility. The
Facility will be secured by first priority liens on our eligible real property assets that make up
the borrowing base (as such term is defined) for the Facility. The interest rate for this Facility
is one-month LIBOR plus a margin of 400 basis points, with a floor of 200 basis points for
one-month LIBOR. The Facility also requires payment of a fee of up to 25 basis points related to
unused credit available to us under the Facility. We are entitled to prepay the obligations at any
time without penalty.
We will not rely on advances from our Advisor to acquire properties but our 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 offerings to purchase the properties from the
special purpose entity.
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There may be a delay between the sale of our shares and the purchase of properties. During this
period, our public offering net offering 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 a portion of our distributions from
the proceeds of our offering or from borrowings in anticipation of future cash flow. Distributions
paid to stockholders for the twelve months ended December 31, 2010 were approximately $5.7 million.
Of this amount, approximately $2.8 million was reinvested through our distribution reinvestment
plan and approximately $2.9 million was paid in cash to stockholders. For the twelve months ended
December 31, 2010, all distributions to stockholders were paid from proceeds of our offering in
anticipation of future cash flow. 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.
Financial markets have recently experienced 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.
Election as a REIT
For federal income tax purposes, we have elected to be taxed as a 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. Under the Internal Revenue Code of 1986, we are not subject to federal
income tax on income that we distribute to our stockholders. REITs are subject to numerous
organizational and operational requirements in order to avoid taxation as a regular corporation,
including a requirement that they generally distribute at least 90% of their annual ordinary
taxable income to their stockholders. If we fail to qualify for taxation as a REIT in any year,
our income will be taxed at regular corporate rates, and we may be precluded from qualifying for
treatment as a REIT for the four-year period following our failure to qualify. Our failure to
qualify as a REIT could result in us having a significant liability for taxes.
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 qualified 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.
Other Liquidity Needs
Property Acquisitions
We expect to purchase properties and have expenditures for capital improvements and tenant
improvements in the next twelve months; however, those amounts cannot be estimated at this time. We
cannot be certain however, that we will have sufficient funds to make any acquisitions or related
capital expenditures.
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Debt Service Requirements
A number of the properties in which we have made equity investments are currently subject to senior
mortgage loans and other indebtedness as described in the following table:
Outstanding | ||||||||||
Principal Balance | ||||||||||
Interest | as of December 31, | |||||||||
Property Name | Payment Type | Rate | 2010(1) | Maturity Date | ||||||
Carriage Court of Hilliard
|
Principal and interest at a 35-year amortization rate | 5.40% fixed | $ | 13,586,000 | August 1, 2044 | |||||
Caruth Haven Court
|
Principal and interest at a 30-year amortization rate | 6.43% fixed | $ | 9,904,000 | December 16, 2019 | |||||
Global Rehab Inpatient Rehab
Facility
|
Principal and interest at a 30-year amortization rate | 6.25% fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR + 3.25% | $ | 7,530,000 | December 22, 2016 | |||||
Hedgcoxe Health Plaza
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,060,000 | November 18, 2012 | |||||
Mesa Vista Inn Health Center
|
Principal and interest at a 20-year amortization rate | 6.50% fixed | $ | 7,336,000 | January 5, 2015 | |||||
Oakleaf Village Portfolio
|
(1) | (1) | $ | 17,849,000 | April 30, 2015 | |||||
Oakleaf Village at Lexington
|
| | | |||||||
Oakleaf Village at Greenville
|
| | | |||||||
Rivers Edge of Yardley
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,500,000 | November 18, 2012 | |||||
Rome LTACH Project
|
Month 1-24 Interest-only Month 25 on Principal and interest at a 25-year amortization rate | 1Mo LIBOR + 3.00% with a 6.15% floor | $ | 8,588,000 | December 18, 2012 | |||||
Littleton Specialty Rehabilitation Facility |
Month 1-18 Interest-only Month 19 on Principal and interest at a 20-year amortization rate | 6.0% fixed | $ | 1,000 | December 22, 2015 | |||||
The Oaks Bradenton
|
(2) | (2) | $ | 2,738,000 | May 1, 2014 | |||||
Terrace at Mountain Creek
|
Month 1-24 interest only. Month 25 to 36 Principal and interests at a 25-year amortization rate | 3Mo LIBOR + 3.50% with a 5.5% floor | $ | 5,700,000 | September 1, 2013 |
(1) | The aggregate loan amount is composed of a restatement date balance of approximately $12.9 million outstanding with respect to a prior loan (the Initial Loan), and an additional amount of approximately $5.1 million disbursed on the closing date (the Restatement Date Loan). From June 1, 2010 through the maturity date, payments on the Restatement Date Loan are due monthly and based upon a 30-year amortization schedule. From June 1, 2010 through January 10, 2011, payments on the Initial Loan are due monthly based upon a 25-year amortization schedule, thereafter through maturity, payments on the Initial Loan are due monthly based upon a 30-year amortization schedule. 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 (the Contract Rate). The outstanding balance of the Initial Loan bears interest at a rate of 6.62% per annum until January 10, 2011 and thereafter at the contract rate. | |
(2) | Of the total loan amount, $2.4 million bears a fixed interest rate of 6.25% per annum. The remaining $0.36 million bears a variable interest rate equivalent to the prevailing market certificate of deposit rate plus a 1.5% margin. Monthly payments for the first twelve months will be interest-only. Monthly payments beginning the thirteenth month will include interest and principal based on a 25-year amortization period. |
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Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2010, specifically our
obligations under long-term debt agreements and purchase obligations:
Payment due by period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Notes payable (1) |
$ | 80,792,000 | $ | 793,000 | $ | 23,569,000 | $ | 27,355,000 | $ | 29,075,000 | ||||||||||
Interest expense related to long term debt (2) |
31,626,000 | 4,132,000 | 7,161,000 | 5,144,000 | 15,189,000 | |||||||||||||||
Payable to related parties (3) |
65,000 | 65,000 | | | | |||||||||||||||
Acquisition of Forestview Manor (4) |
10,800,000 | 10,800,000 | | | | |||||||||||||||
Total |
$ | 123,283,000 | $ | 15,790,000 | $ | 30,730,000 | $ | 32,499,000 | $ | 44,264,000 | ||||||||||
(1) | Represents principal amount owed on all outstanding debt as of December 31, 2010. | |
(2) | Represents interest expense related to various loan agreements in connection with all acquisitions as of December 31, 2010. The information in the table above reflects our projected interest rate obligations for these loan agreements based on the contract interest rates, interest payment dates, and scheduled maturity dates. | |
(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. | |
(4) | On December 30, 2010, we became obligated under a purchase and sale agreement to acquire Forestview Manor. |
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have, a current or future material effect on
our financial condition, changes in the financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Inflation
Although the real estate market has not been affected significantly by inflation in the recent past
due to the relatively low inflation rate, we expect that the majority of our tenant leases will
include provisions that would protect us to some extent from the impact of inflation. Where
possible, our leases will include provisions for rent escalations and partial reimbursement to us
of expenses. Our ability to include provisions in the leases that protect us against inflation is
subject to competitive conditions that vary from market to market.
Subsequent Events
Forest View Manor Acquisition
On January 14, 2011, we purchased an assisted living property, Forestview Manor, from 153 Parade
Road, LLC, a non-related party, for a purchase price of approximately $10.8 million. The
acquisition was funded with our revolving credit facility from KeyBank National Association and
with proceeds from our initial public offering.
Forestview Manor is a 69 unit assisted living and memory care facility. Built in 1997 and
renovated in 2009, it is located in Meredith, New Hampshire, a popular tourist destination in New
England situated approximately 90 miles north of Boston, MA and in close proximity to Interstate
93. The property is managed by Woodbine Senior Living, LLC.
Greentree at Westwood Financing
In December 2009, we acquired Greentree at Westwood from GreenTree at Westwood, LLC, an
unaffiliated party, for a purchase price of approximately $5.2 million. In February 2011, we
financed Greentree at Westwood with our revolving credit facility from
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KeyBank National Association
in the amount of approximately $2.8 million. The loan will mature on November 18, 2012 and bears a
variable rate is based on a 30-day LIBOR plus 4.00% with a 2% LIBOR floor.
Sale of Shares of Common Stock
As of March 17, 2011, we had raised approximately $123.3 million through the issuance of
approximately12.4 million shares of our common stock under our Offering, excluding, approximately
509,000 shares that were issued pursuant to our distribution reinvestment plan reduced by
approximately 157,000 shares pursuant to our stock repurchase program.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States of America, or GAAP, requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We believe that our critical accounting policies are those that
require significant judgments and estimates such as those related to fair value, real estate
purchase price allocation, evaluation of possible impairment of real property assets, revenue
recognition and valuation of receivables, income taxes, and uncertain tax positions. These
estimates are made and evaluated on an on-going basis using information that is currently available
as well as various other assumptions believed to be reasonable under the circumstances. Actual
results could vary from those estimates, perhaps in material adverse ways, and those estimates
could be different under different assumptions or conditions.
Investments in Real Estate
Upon acquisition of a property, we allocate the purchase price of the property based upon the fair
value of the assets acquired, which generally consist of land, buildings, site improvements, tenant
improvements, intangible lease assets or liabilities including in-place leases, above market and
below market leases, tenant relationships and goodwill. We allocated the purchase price to the
fair value of the tangible assets of an acquired property by valuing the property as if it were
vacant. The value of the building and improvements are depreciated over an estimated useful life of
15 to 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease and our overall relationship with the respective tenant.
Acquired above and below market leases are valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our consolidated statements of operations.
We consider any bargain periods in our calculation of fair value of below-market leases and to
amortize our below-market leases over the remaining non-cancelable lease term plus any bargain
renewal periods in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 840-20-20, as determined by our management at the time
we acquire real property with an in-place lease. The renewal option rates for our acquired leases
do not include any fixed rate options and, instead, contain renewal options that are based on fair
value terms at the time of renewal. Accordingly, no fixed rate renewal options were included in the
fair value of below-market leases acquired and the amortization period is based on the acquired
non-cancelable lease term.
Should a significant tenant terminate their lease, the unamortized portion of intangible assets or
liabilities is charged to revenue.
Fair Value of Financial Instruments
FASB 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 consolidated balance sheets include the following financial instruments: cash and cash
equivalents, tenant and other receivables, deferred costs and other assets, deferred financing
costs, payable to related parties, prepaid rent and security deposits, accounts payable and
accrued liabilities and distributions payable. We consider the carrying values to approximate fair
value for these financial
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instruments because of the short period of time between origination of
the instruments and their expected payment. The fair value of the note payable to related party is
not determinable due to the related party nature of the note payable.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of December 31, 2010 and December 31, 2009, the
fair value of notes payable was approximately $81.7 million and $20.3 million, compared to the
carrying value of approximately $80.8 million and $20.3 million, respectively.
Impairment of Real Estate Assets and Goodwill
Real Estate Assets
Rental properties, properties undergoing development and redevelopment, land held for development
and intangibles are individually evaluated for impairment in accordance with ASC 360-10, Property,
Plant & Equipment when conditions exist which may indicate that it is probable that the sum of
expected future undiscounted cash flows is less than the carrying amount. We assess the expected
undiscounted cash flows based upon numerous factors, including, but not limited to, appropriate
capitalization rates, construction costs, available market information, historical operating
results, known trends and market/economic conditions that may affect the property and our
assumptions about the use of the asset, including, if necessary, a probability-weighted approach if
multiple outcomes are under consideration. Upon determination that impairment has occurred and
that the future undiscounted cash flows are less than the carrying amount, a write-down will be
recorded to reduce the carrying amount to its estimated fair value.
In accordance with ASC 360 Accounting for the Impairment or Disposal of Long-lived Assets, we
assess whether there has been impairment in the value of its investments in real estate whenever
events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Our portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential
impairment include the following:
| Change in strategy resulting in a decreased holding period; | ||
| Decreased occupancy levels; | ||
| Deterioration of the rental market as evidenced by rent decreases over numerous quarters; | ||
| Properties adjacent to or located in the same submarket as those with recent impairment issues; | ||
| Significant decrease in market price; and/or | ||
| Tenant financial problems. |
During 2010 and 2009, we did not record any impairment charges related to our investments in real
estate.
Goodwill
We review goodwill for impairment annually and whenever events or changes in circumstances indicate
the carrying value of goodwill may not be recoverable. The guidance on goodwill impairment requires
us to perform a two-step impairment test. In the first step, we compare the fair value of each
reporting unit to its carrying value. We determine the fair value of our reporting unit based on
the income approach. Under the income approach, we calculate the fair value of a reporting unit
based on the present value of estimated future cash flows. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired. If
the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the
reporting unit, then the second step of the impairment test is performed in order to determine the
implied fair value of the reporting units goodwill. If the carrying value of a reporting units
goodwill exceeds its implied fair value, then the company records an impairment loss equal to the
difference.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and assumptions include revenue growth rates
and operating margins used to calculate projected future cash flows, discount rates and future
economic and market conditions. Our estimates are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable. These valuations require the use of
managements assumptions, which would not reflect unanticipated events and circumstances that may
occur.
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The annual goodwill impairment analysis, which we performed during the fourth quarter of 2010, did
not result in an impairment charge.
Revenue Recognition
Revenue is
recorded in accordance with ASC 840-10, Leases, and SEC Staff Accounting Bulletin No.
104, Revenue Recognition in Financial Statements, as amended (SAB 104). Revenue is recognized
when four basic criteria are met: persuasive evidence of an arrangement, the rendering of service,
fixed and determinable income and reasonably assured collectability. Leases with fixed annual
rental escalators are generally recognized on a straight-line basis over the initial lease period,
subject to a collectability assessment. Rental income related to leases with contingent rental
escalators is generally recorded based on the contractual cash rental payments due for the period.
Because our leases may provide for free rent, lease incentives, or other rental increases at
specified intervals, we straight-line the recognition of revenue, which results in the recording of
a receivable for rent not yet due under the lease terms. Our revenues are comprised largely of
rental income and other income collected from tenants.
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 variable interest entities 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 variable interest entity 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. Please refer to Note 10. Investments in Joint
Venture of the accompanying
consolidated financial statements.
Income Taxes
As part of the process of preparing our condensed consolidated financial statements, significant
management judgment is required to evaluate our compliance with REIT requirements. Our
determinations are based on interpretation of tax laws, and our conclusions may have an impact on
the income tax expense recognized. Adjustments to income tax expense may be required as a result
of: (i) audits conducted by federal and state tax authorities, (ii) our ability to qualify as a
REIT and (iii) changes in tax laws.
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 December 31, 2010, we had acquired eight
assisted-living facilities and formed seven wholly owned taxable REIT subsidiaries, or TRSs, which
includes a Master TRS that consolidates our wholly owned TRSs. The properties are operated pursuant
to leases with our TRSs. Our TRSs have engaged qualified 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.
We are subject to state and local income taxes in some jurisdictions, and in certain circumstances
we may also be subject to federal excise taxes on undistributed income. In addition, certain of our
activities must be conducted by subsidiaries which elect to be treated as TRSs. TRSs are subject to
both federal and state income taxes. We recognize tax penalties relating to unrecognized tax
benefits as additional tax expense. Interest relating to unrecognized tax benefits is recognized as
interest expense. Under section 857(b), an excise tax of 100% is imposed on any excessive amount of
rental income received by the REIT in connection with services performed by its TRS to a tenant of
the REIT and the deductions of the TRS for payments made to the REIT if rental income and
deductions are not at arms length. Several safe harbors are provided for rental income received by
the REIT, any of which, if met, prohibit the imposition of the 100% excise tax.
Recently Issued Accounting Pronouncements
Reference is made to Notes to our Consolidated Financial Statements, which begin on page F-1 of
this Form 10-K.
ITEM 7A. 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
48
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the primary market risk to which we will be exposed to is interest rate risk
relating the variable portion of our debt financing. As of December 31, 2010, we had approximately
$34.8 million of variable rate debt, the majority of which is at a rate tied to the 3-month LIBOR.
A 1.0% change in 3-Month LIBOR would result in a change in annual interest expense of approximately
$348,000 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. Exhibits, Financial Statement Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports we file or submit under the Securities and Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
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.
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on their evaluation as of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer have concluded that we maintained effective internal control
over financial reporting as of December 31, 2010.
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.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding control over financial reporting. Managements report was not subject to
attestation by our independent registered public accounting firm pursuant to the Dodd-Frank Wall
Street and Consumer Protection Act, which exempts non-accelerated filers from the auditor
attestation requirement of Section 404 (b) of the Sarbanes-Oxley Act.
ITEM 9B. OTHER INFORMATION
None.
49
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from our definitive proxy
statement to be filed with the SEC no later than April 30, 2011.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our definitive proxy
statement to be filed with the SEC no later than April 30, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference from our definitive proxy
statement to be filed with the SEC no later than April 30, 2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from our definitive proxy
statement to be filed with the SEC no later than April 30, 2011.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from our definitive proxy
statement to be filed with the SEC no later than April 30, 2011.
50
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements |
The following financial statements are included in a separate section of this Annual Report on
Form 10-K commencing on the page numbers specified below: |
Report of Independent Registered Public Accounting Firm |
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009 |
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008 |
Consolidated Statements of Equity for the Years Ended December 31, 2010, 2009, and 2008 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008 |
Notes to Consolidated Financial Statements |
(2) Financial Statement Schedules |
Schedule II Valuation and Qualifying Accounts |
Schedule III Real Estate and Accumulated Depreciation |
(3) Exhibits |
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this annual report
51
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cornerstone Healthcare Plus REIT, Inc.
Cornerstone Healthcare Plus REIT, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone Healthcare Plus
REIT, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, equity (deficit) and cash flows for each of the three years
in the period ended December 31, 2010. Our audit also included the financial statement schedules
listed in the index at Item 15. These financial statements and financial statement schedules are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Cornerstone Healthcare Plus REIT, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 23, 2011
March 23, 2011
F-2
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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 29,819,000 | $ | 14,900,000 | ||||
Investments in real estate |
||||||||
Land |
18,949,000 | 7,370,000 | ||||||
Buildings and improvements, net |
87,933,000 | 30,640,000 | ||||||
Furniture, fixtures and equipment, net |
2,410,000 | 1,009,000 | ||||||
Development costs and construction in progress |
13,669,000 | | ||||||
Intangible lease assets, net |
5,907,000 | 1,869,000 | ||||||
128,868,000 | 40,888,000 | |||||||
Deferred financing costs, net |
1,382,000 | 228,000 | ||||||
Tenant and other receivable, net |
1,462,000 | 481,000 | ||||||
Deferred costs and other assets |
554,000 | 338,000 | ||||||
Restricted cash |
2,942,000 | 364,000 | ||||||
Goodwill |
5,329,000 | 1,141,000 | ||||||
Total assets |
$ | 170,356,000 | $ | 58,340,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Notes payable |
$ | 80,792,000 | $ | 20,260,000 | ||||
Accounts payable and accrued liabilities |
4,886,000 | 932,000 | ||||||
Payable to related parties |
65,000 | 1,734,000 | ||||||
Prepaid rent and security deposits |
1,127,000 | 911,000 | ||||||
Distributions payable |
722,000 | 305,000 | ||||||
Total liabilities |
87,592,000 | 24,142,000 | ||||||
Commitments and contingencies (Note 14) |
||||||||
Equity: |
||||||||
Preferred stock, $0.01 par value; 20,000,000
shares authorized; no shares were issued or
outstanding at December 31, 2010 and 2009 |
| | ||||||
Common stock, $0.01 par value; 580,000,000 shares
authorized; 11,592,883 shares and 4,993,751 shares
issued and outstanding at December 31, 2010 and 2009,
respectively |
116,000 | 50,000 | ||||||
Additional paid-in capital |
91,588,000 | 39,551,000 | ||||||
Accumulated deficit |
(11,722,000 | ) | (5,403,000 | ) | ||||
Total stockholders equity |
79,982,000 | 34,198,000 | ||||||
Noncontrolling interests |
2,782,000 | | ||||||
Total equity |
82,764,000 | 34,198,000 | ||||||
Total liabilities and equity |
$ | 170,356,000 | $ | 58,340,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues: |
||||||||||||
Rental revenues |
$ | 14,494,000 | $ | 4,964,000 | $ | | ||||||
Resident services and fee income |
2,738,000 | 1,697,000 | | |||||||||
Tenant reimbursements and other income |
590,000 | | | |||||||||
17,822,000 | 6,661,000 | | ||||||||||
Expenses: |
||||||||||||
Property
operating and maintenance expenses |
11,133,000 | 5,172,000 | | |||||||||
General and
administrative expenses |
2,396,000 | 1,100,000 | 875,000 | |||||||||
Asset management fees and expenses |
1,030,000 | 317,000 | | |||||||||
Real estate acquisition costs |
3,273,000 | 1,814,000 | 358,000 | |||||||||
Depreciation and amortization |
4,072,000 | 1,367,000 | | |||||||||
21,904,000 | 9,770,000 | 1,233,000 | ||||||||||
Loss from operations |
(4,082,000 | ) | (3,109,000 | ) | (1,233,000 | ) | ||||||
Other income (expense): |
||||||||||||
Interest income |
17,000 | 13,000 | 7,000 | |||||||||
Other expense |
(33,000 | ) | | | ||||||||
Interest expense |
(2,373,000 | ) | (1,053,000 | ) | (1,000 | ) | ||||||
Net loss |
(6,471,000 | ) | (4,149,000 | ) | (1,227,000 | ) | ||||||
Net
(loss) income attributable to the noncontrolling interests |
(152,000 | ) | 15,000 | (121,000 | ) | |||||||
Net loss attributable to common stockholders |
$ | (6,319,000 | ) | $ | (4,164,000 | ) | $ | (1,106,000 | ) | |||
Basic and diluted net loss per common share attributable
to common stockholders |
$ | (0.89 | ) | $ | (2.08 | ) | $ | (12.90 | ) | |||
Basic and diluted weighted average number of common shares |
7,090,146 | 1,999,747 | 85,743 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2010, 2009 and 2008
Common Stock | ||||||||||||||||||||||||||||
Additional | Total | |||||||||||||||||||||||||||
Number | Common Stock | Paid-In | Accumulated | Stockholders | Noncontrolling | |||||||||||||||||||||||
of Shares | Par Value | Capital | Deficit | Equity | Interests | Total Equity | ||||||||||||||||||||||
Balance December
31, 2007 |
100 | $ | | $ | 1,000 | $ | (133,000 | ) | $ | (132,000 | ) | $ | 127,000 | $ | (5,000 | ) | ||||||||||||
Issuance of
common stock |
1,058,152 | 11,000 | 10,568,000 | | 10,579,000 | | 10,579,000 | |||||||||||||||||||||
Redeemed shares |
| | | | | | | |||||||||||||||||||||
Offering costs |
| | (3,787,000 | ) | | (3,787,000 | ) | | (3,787,000 | ) | ||||||||||||||||||
Distributions |
| | (185,000 | ) | | (185,000 | ) | (6,000 | ) | (191,000 | ) | |||||||||||||||||
Net loss |
| | | (1,106,000 | ) | (1,106,000 | ) | (121,000 | ) | (1,227,000 | ) | |||||||||||||||||
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 |
3,953,744 | 39,000 | 39,451,000 | | 39,490,000 | | 39,490,000 | |||||||||||||||||||||
Redeemed shares |
(18,245 | ) | | (182,000 | ) | | (182,000 | ) | | (182,000 | ) | |||||||||||||||||
Offering costs |
| | (4,352,000 | ) | | (4,352,000 | ) | | (4,352,000 | ) | ||||||||||||||||||
Distributions |
| | (1,963,000 | ) | | (1,963,000 | ) | (15,000 | ) | (1,978,000 | ) | |||||||||||||||||
Net loss |
| | | (4,164,000 | ) | (4,164,000 | ) | 15,000 | (4,149,000 | ) | ||||||||||||||||||
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 |
6,694,219 | 67,000 | 66,530,000 | | 66,597,000 | | 66,597,000 | |||||||||||||||||||||
Redeemed shares |
(95,087 | ) | (1,000 | ) | (927,000 | ) | | (928,000 | ) | | (928,000 | ) | ||||||||||||||||
Noncontrolling
interest
contribution |
| | | | 2,949,000 | 2,949,000 | ||||||||||||||||||||||
Offering costs |
| | (7,455,000 | ) | | (7,455,000 | ) | (7,455,000 | ) | |||||||||||||||||||
Distributions |
| | (6,111,000 | ) | | (6,111,000 | ) | (15,000 | ) | (6,126,000 | ) | |||||||||||||||||
Net loss |
| | | (6,319,000 | ) | (6,319,000 | ) | (152,000 | ) | (6,471,000 | ) | |||||||||||||||||
Balance December
31, 2010 |
11,592,883 | $ | 116,000 | 91,588,000 | $ | (11,722,000 | ) | $ | 79,982,000 | $ | 2,782,000 | $ | 82,764,000 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
For the Years Ended December 31, 2010, 2009 and 2008
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (6,471,000 | ) | $ | (4,149,000 | ) | $ | (1,227,000 | ) | |||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||||||
Amortization of deferred financing costs |
104,000 | 111,000 | | |||||||||
Depreciation and amortization |
4,072,000 | 1,367,000 | | |||||||||
Straight-line rent amortization |
(387,000 | ) | | | ||||||||
Provision for bad debt |
35,000 | 11,000 | | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Tenant and other receivables |
(246,000 | ) | (492,000 | ) | | |||||||
Deferred costs and deposits |
(270,000 | ) | (127,000 | ) | | |||||||
Restricted cash |
(823,000 | ) | | | ||||||||
Prepaid expenses and other assets |
| (14,000 | ) | (24,000 | ) | |||||||
Prepaid rent and tenant security deposits |
167,000 | 78,000 | | |||||||||
Payable to related parties |
(301,000 | ) | 239,000 | 32,000 | ||||||||
Accounts payable and accrued expenses |
1,026,000 | 53,000 | (51,000 | ) | ||||||||
Net cash used in operating activities |
(3,094,000 | ) | (2,923,000 | ) | (1,270,000 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Real estate acquisitions |
(53,895,000 | ) | (34,278,000 | ) | | |||||||
Additions to real estate |
(121,000 | ) | (91,000 | ) | | |||||||
Restricted cash |
(856,000 | ) | (364,000 | ) | | |||||||
Development of real estate |
(11,872,000 | ) | | | ||||||||
Acquisition deposits |
(100,000 | ) | 385,000 | (385,000 | ) | |||||||
Net cash used in investing activities |
(66,844,000 | ) | (34,348,000 | ) | (385,000 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock |
63,792,000 | 38,621,000 | 10,516,000 | |||||||||
Redeemed shares |
(928,000 | ) | (182,000 | ) | | |||||||
Proceeds from note payable to related party |
| 14,000,000 | | |||||||||
Repayment of note payable to related party |
| (14,000,000 | ) | | ||||||||
Proceeds from notes payable |
34,477,000 | 12,760,000 | | |||||||||
Repayment of note payable |
(433,000 | ) | | | ||||||||
Noncontrolling interest contribution |
1,069,000 | | | |||||||||
Offering costs |
(8,827,000 | ) | (5,283,000 | ) | (1,389,000 | ) | ||||||
Deferred financing costs |
(1,390,000 | ) | (339,000 | ) | (41,000 | ) | ||||||
Distributions paid |
(2,888,000 | ) | (840,000 | ) | (61,000 | ) | ||||||
Distributions paid to noncontrolling interest |
(15,000 | ) | (15,000 | ) | (6,000 | ) | ||||||
Net cash provided by financing activities |
84,857,000 | 44,722,000 | 9,019,000 | |||||||||
Net increase in cash and cash equivalents |
14,919,000 | 7,451,000 | 7,364,000 | |||||||||
Cash and cash equivalents beginning of period |
14,900,000 | 7,449,000 | 85,000 | |||||||||
Cash and cash equivalents end of period |
$ | 29,819,000 | $ | 14,900,000 | $ | 7,449,000 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 1,938,000 | $ | 941,000 | $ | | ||||||
Supplemental disclosure of non-cash financing and
investing activities: |
||||||||||||
Distributions declared not paid |
$ | 722,000 | $ | 305,000 | $ | 61,000 | ||||||
Distributions reinvested |
$ | 2,805,000 | $ | 879,000 | $ | 63,000 | ||||||
Offering costs payable to related parties |
$ | | $ | 82,000 | $ | 2,398,000 | ||||||
Accrued real estate addition |
$ | | $ | 2,000 | $ | | ||||||
Note payable assumed at property acquisition |
$ | 26,488,000 | $ | 7,500,000 | $ | | ||||||
Deferred
financing amortization capitalized to real estate development |
$ | 233,000 | $ | | $ | | ||||||
Assets acquired at property acquisition |
$ | | $ | 71,000 | $ | | ||||||
Liabilities assumed at property acquisition |
$ | 298,000 | $ | 1,594,000 | $ | | ||||||
Assets contributed by noncontrolling interest |
$ | 1,880,000 | $ | | $ | | ||||||
Assumed earn-out at acquisition |
$ | 1,000,000 | $ | | $ | | ||||||
Assumed holdback at acquisition |
$ | 316,000 | $ | | $ | | ||||||
Accrued
development of real estate |
$ | 1,679,000 | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010, 2009 and 2008
For the Years Ended December 31, 2010, 2009 and 2008
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. We are newly formed and are subject to the general risks associated with a start-up
enterprise, including the risk of business failure. 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 December 31, 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 June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common
stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000
shares for sale pursuant to our distribution reinvestment plan. We stopped making offers under our
initial public offering on February 3, 2011 upon raising gross offering proceeds of approximately
$116.6 million from the sale of approximately 11.7 million shares, including shares sold under the
distribution reinvestment plan. On February 4, 2011, the Securities and Exchange Commission
(SEC) declared our follow-on offering effective and we commenced a follow-on offering of up to
55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a
primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan.
We retained Pacific Cornerstone Capital, Inc. (PCC), an affiliate of the Advisor, to serve as our
dealer manager for our offerings. PCC is responsible for marketing our shares being offered
pursuant to the offerings. We used the net proceeds from our initial public offering to invest
primarily in investment real estate in major metropolitan markets in the United States. We intend
to use the net proceeds from our follow-on offering to acquire additional real estate investments.
As of December 31, 2010, a total of 11.3 million shares of our common stock had been sold under our
initial public offering for gross proceeds of approximately $112.9 million. In addition, as of
December 31, 2010, approximately 0.4 million shares had been issued related to our distribution
reinvestment plan, and approximately 0.1 million shares had been redeemed pursuant to our stock
repurchase program.
3. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our consolidated financial statements. Such financial statements and accompanying
notes are the representations of our management, who is responsible for their integrity and
objectivity. These accounting policies conform to accounting principles generally accepted in the
United States of America, or GAAP, in all material respects, and have been consistently applied in
preparing the accompanying consolidated financial statements.
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Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a
maturity of three months or less at the time of purchase to be cash equivalents.
Restricted Cash
Restricted cash represents cash held in interest bearing accounts and amounts related to impound
reserve accounts for property taxes and insurance as required under the terms of mortgage loan
agreements. Based on the intended use of the restricted cash, we have classified changes in
restricted cash within the statements of cash flows as operating or investing activities.
Real Estate Purchase Price Allocation
In December 2007, the Financial Accounting Standards Board (the FASB) issued Accounting Standard
Codification (ASC) ASC 805-10, Business Combinations". In summary, ASC 805-10 requires the
acquirer of a business combination to measure at fair value the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited
exceptions. In addition, this standard requires acquisition costs to be expensed as incurred. The
standard is effective for fiscal years beginning after December 15, 2008, and is to be applied
prospectively, with no earlier adoption permitted. We adopted this standard on January 1, 2009 and
have expensed acquisition costs accordingly.
We allocate the purchase price of our properties in accordance with ASC 805-10. Upon acquisition of
a property, we allocate the purchase price of the property based upon the fair value of the assets
acquired, which generally consist of land, buildings, site improvements, tenant improvements,
intangible lease assets or liabilities including in-place leases, above market and below market
leases, tenant relationships and goodwill. We allocated the purchase price to the fair value of the
tangible assets of an acquired property by valuing the property as if it were vacant. We are
required to make subjective assessments as to the useful lives of our depreciable assets. We
consider the period of future benefit of the asset to determine the appropriate useful lives.
Depreciation of our assets is being charged to expense on a straight-line basis over the assigned
useful lives. The value of the building and improvements are depreciated over an estimated useful
life of 15 to 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease and our overall relationship with the respective tenant.
Acquired above and below market leases are valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our consolidated statements of operations.
We amortize the value of in-place leases and above and below market leases over the initial term of
the respective leases. Should a tenant terminate its lease, the unamortized portion of the tenant
improvements, intangible lease assets or liabilities and the in-place lease value will be
immediately charged to expense.
Goodwill represents the excess of acquisition cost over the fair value of identifiable net assets
of the business acquired.
Impairment of Real Estate Assets and Goodwill
Real Estate Assets
In accordance with ASC 360 Accounting for the Impairment or Disposal of Long-lived Assets, we
assess whether there has been impairment in the value of its investments in real estate whenever
events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Our portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential
impairment include the following:
| Change in strategy resulting in a decreased holding period; | ||
| Decreased occupancy levels; | ||
| Deterioration of the rental market as evidenced by rent decreases over numerous quarters; |
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| Properties adjacent to or located in the same submarket as those with recent impairment issues; | ||
| Significant decrease in market price; and/or | ||
| Tenant financial problems. |
During 2010 and 2009, we did not record any impairment charges related to our investments in real
estate. The assessment as to whether our investments in real estate are impaired is highly
subjective. The calculations, which are primarily based on discounted cash flow analyses, involve
managements best estimate of the holding period, market comparables, future occupancy levels,
rental rates, capitalization rates, lease-up periods and capital requirements for each property. A
change in any one or more of these factors could materially impact whether a property is impaired
as of any given valuation date.
Goodwill
Goodwill and intangibles with infinite lives must be tested for impairment annually or more
frequently if events or changes in circumstances indicate that the related asset might be impaired.
Management uses all available information to make these fair value determinations, including the
present values of expected future cash flows using discount rates commensurate with the risks
involved in the assets. Impairment testing entails estimating future net cash flows relating to the
asset, based on managements estimate of market conditions including market capitalization rate,
future rental revenue, future operating expenses and future occupancy percentages. Determining the
fair value of goodwill involves management judgment and is ultimately based on managements
assessment of the value of the assets and, to the extent available, third party assessments. We
perform our annual impairment test as of December 31 of each year. We completed the required annual
impairment test and none of our reporting units are at risk and no impairment was recognized based
on the results of the annual goodwill impairment test.
Refer to Note 12 for the roll forward of goodwill for the years ended
December 31, 2010 and 2009.
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.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities.
We record net deferred tax assets to the extent we believe these assets will more likely than not
be realized. In making such determination, we consider all available positive and negative
evidence, including future reversals of existing taxable temporary differences, projected future
taxable income, tax planning strategies and recent financial operations. In the event we were to
determine that we would not be able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes.
Uncertain Tax Positions
In
accordance with the requirements of ASC 740-10, Income
Taxes, favorable tax positions are
included in the calculation of tax liabilities if it is more likely than not that the Companys
adopted tax position will prevail if challenged by tax authorities. As a result of our REIT status,
we are able to claim a dividends-paid deduction on our tax return to deduct the full amount of
common dividends paid to stockholders when computing our annual taxable income. A REIT is subject
to a 100% tax on the net income from prohibited transactions. A prohibited transaction is the
sale or other disposition of property held primarily for sale to customers in the ordinary course
of a trade or business. There is a safe harbor which, if met, expressly prevents the IRS from
asserting the prohibited transaction test. As we have not had any sales of properties to date,
the prohibited transaction tax is not applicable. We have no income tax expense,
deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions
for the operations of any entity included in the consolidated results of operations.
Tenant and Other Receivables
Tenant and other receivables are comprised of rental and reimbursement billings due from tenants.
Tenant receivables are recorded at the original amount earned, less an allowance for any doubtful
accounts. Management assesses the realizability of tenant receivables on an ongoing tenant by
tenant basis and provides for allowances as such balances, or portions thereof, become
uncollectible. For the year ended December 31, 2010 and December 31, 2009 provisions for bad debts
amounted to approximately $35,000 and $11,000
respectively, which is included in property operating and maintenance expenses in the accompanying
consolidated statements of operations.
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Deferred Costs and Other Assets
Deferred costs and other assets consist primarily of prepaid expenses, real estate deposits,
utility deposits and deferred acquisition fees for an acquisition completed in January 2011.
Deferred Financing Costs
Costs incurred in connection with debt financing are recorded as deferred financing costs. Deferred
financing costs are amortized using the straight-line basis which approximates the effective
interest rate method, over the contractual terms of the respective financings.
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 variable interest entities 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 variable interest entity 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. Please refer to Note 10 Investments in Joint
Venture.
Revenue Recognition
Revenue is recorded in accordance with ASC 840-10, Leases, and SEC Staff Accounting Bulletin No.
104, Revenue Recognition in Financial Statements, as amended (SAB 104). Revenue is recognized
when four basic criteria are met: persuasive evidence of an arrangement, the rendering of service,
fixed and determinable income and reasonably assured collectability. Leases with fixed annual
rental escalators are generally recognized on a straight-line basis over the initial lease period,
subject to a collectability assessment. Rental income related to leases with contingent rental
escalators is generally recorded based on the contractual cash rental payments due for the period.
Because our leases may provide for free rent, lease incentives, or other rental increases at
specified intervals, we straight-line the recognition of revenue, which results in the recording of
a receivable for rent not yet due under the lease terms. Our revenues are comprised largely of
rental income and other income collected from tenants.
Future Minimum Lease Payments
All resident leases in our senior operations living segment are on a month to month basis and are
excluded from the following schedule. Future minimum lease payments to be received from leases
under the triple-net leased segment and medical office building segments as of December 31, 2010
are as follows:
Years ending December 31, | ||||
2011 |
$ | 1,532,000 | ||
2012 |
$ | 1,571,000 | ||
2013 |
$ | 1,610,000 | ||
2014 |
$ | 1,650,000 | ||
2015 |
$ | 1,691,000 | ||
2016 and thereafter |
$ | 28,640,000 |
Organizational and Offering Costs
The Advisor funds organization and offering costs on our behalf. We are required to reimburse
the Advisor for such organization and offering costs up to 3.5% of the cumulative capital raised in
the Primary Offering. Organization and
offering costs include items such as legal and accounting fees, marketing, due diligence,
promotional and printing costs and amounts to reimburse our Advisor for all 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. All offering costs are recorded as an offset to additional
paid-in capital, and all organization costs are recorded as an expense at the time we become liable
for the payment of these amounts. 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
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gross offering proceeds then raised, but the 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 the 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.
Noncontrolling Interest in Consolidated Subsidiaries
Noncontrolling interests relate to the interests in the consolidated entities that are not
wholly-owned by us.
ASC 810-10-65, Consolidation, clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. ASC 810-10-65 also requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest and
requires disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
We periodically evaluate individual noncontrolling interests for the ability to continue to
recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any
noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary
equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of
the end of the period in which the determination is made.
Fair Value of Financial Instruments
FASB 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 balance sheets include the following financial instruments: cash and cash equivalents, tenant
and other receivables, restricted cash, deferred costs and other assets, prepaid rent and security
deposits, accounts payable and accrued liabilities, distributions payable. We consider the carrying
values of our financial instruments to approximate fair value because of the short period of time
between origination of the instruments and their expected payment.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of December 31, 2010 and December 31, 2009, the
fair value of notes payable was approximately $81.7 million and $20.3 million, compared to the
carrying value of approximately $80.8 million and $20.3 million, respectively.
Basic and Diluted Net Loss per Common Share Attributable to Common Stockholders
Basic and diluted net loss per common share attributable to common stockholders per share is
computed by dividing net loss attributable to common stockholder by the weighted-average number of
common shares outstanding for the period. For the years ended December 31, 2010, 2009 and 2008,
there were no potential dilutive common shares.
Basic and diluted net loss per share is calculated as follows:
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Net loss attributable to common stockholders |
$ | (6,319,000 | ) | $ | (4,164,000 | ) | $ | (1,106,000 | ) | |||
Net loss per common share attributable to common stockholders
basic and diluted |
$ | (0.89 | ) | $ | (2.08 | ) | $ | (12.90 | ) | |||
Weighted average number of shares outstanding basic and diluted |
7,090,146 | 1,999,747 | 85,743 |
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Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of the assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting period. Actual
results could materially differ from those estimates.
Reclassification
Certain reclassifications have been made to the consolidated statement of operations for the year
ended December 31, 2009 to be consistent with the 2010 presentation. Specifically, $106,000 of
asset management expense reimbursed to the Advisor for the year ended December 31, 2009 has been
reclassified from general and administrative expenses to asset management fees and expense. For the
year ended December 31, 2008, no such expenses had been incurred or reimbursed to our Advisor.
Management believes this change in presentation provides a comprehensive view of all expenses
related to asset management.
Recently Issued Accounting Pronouncements
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805), or ASU 2010-29.
ASU 2010-29 amends ASC Topic 805 to require the disclosure of pro forma revenue and earnings for
all business combinations that occurred during the current year to be presented as of the beginning
of the comparable prior annual reporting period. The amendments in ASU 2010-29 also expand the
supplemental pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. ASU 2010-29 is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. Early adoption is permitted. We adopted ASU 2010-29 upon
issuance in December 2010 and have provided such pro forma revenue and earnings disclosures in Note
16, Business Combinations. The adoption of ASU 2010-29 did not have a material impact on our
consolidated financial statements.
In February 2010, the FASB issued 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 upon issuance. We adopted this
guidance during the quarter ended March 31, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
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 regarding 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 and it did not have a material impact on our condensed consolidated
financial statements and disclosures.
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4. Investments in Real Estate
The following table provides summary information regarding our property portfolio as of December
31, 2010.
December 31, | ||||||||||||||||||||||||
Date | Gross Square | Purchase | 2010 | |||||||||||||||||||||
Property | Location | Purchased | Feet | Price | Debt | % Occupancy | ||||||||||||||||||
Caruth Haven Court |
Highland Park, TX | 01/22/09 | 74,647 | $ | 20,500,000 | $ | 9,904,000 | 93.4 | % | |||||||||||||||
The Oaks Bradenton |
Bradenton, FL | 05/01/09 | 18,172 | $ | 4,500,000 | $ | 2,738,000 | 100.0 | % | |||||||||||||||
GreenTree at Westwood (1) |
Columbus, IN | 12/30/09 | 50,249 | $ | 5,150,000 | $ | | 84.5 | % | |||||||||||||||
Mesa Vista Inn Health
Center |
San Antonio, TX | 12/31/09 | 55,525 | $ | 13,000,000 | $ | 7,336,000 | 100.0. | % | |||||||||||||||
Rome LTACH Project |
Rome, GA | 01/12/10 | 53,000 | (2) | $ | | $ | 8,588,000 | | |||||||||||||||
Oakleaf Village Portfolio |
$ | 17,849,000 | ||||||||||||||||||||||
Oakleaf Village at
Lexington |
Lexington, SC | 04/30/10 | 67,000 | $ | 14,512,000 | $ | | 90.0 | % | |||||||||||||||
Oakleaf Village at
Greenville |
Greer, SC | 04/30/10 | 65,000 | $ | 12,488,000 | $ | | 65.6 | % | |||||||||||||||
Global Rehab Inpatient
Rehab Facility |
Dallas, TX | 08/19/10 | 40,000 | $ | 14,800,000 | $ | 7,530,000 | 100.0 | % | |||||||||||||||
Terrace at Mountain
Creek (3) |
Chattanooga, TN | 09/03/10 | 109,643 | $ | 8,500,000 | $ | 5,700,000 | 95.2 | % | |||||||||||||||
Littleton Specialty
Rehabilitation Facility |
Littleton, CO | 12/16/10 | 26,808 | (2) | | $ | 1,000 | | ||||||||||||||||
Carriage Court of
Hilliard |
Hilliard, OH | 12/22/10 | 69,184 | $ | 17,500,000 | $ | 13,586,000 | 100.0 | % | |||||||||||||||
Hedgcoxe Health Plaza |
Plano, TX | 12/22/10 | 32,109 | $ | 9,094,000 | $ | 5,060,000 | 94.9 | % | |||||||||||||||
Rivers Edge of Yardley |
Yardley, PA | 12/22/10 | 26,146 | $ | 4,500,000 | $ | 2,500,000 | 94.4 | % |
(1) | The earn-out agreement associated with this acquisition was estimated to have a fair value of $0.4 million and $0.4 million as of December 31, 2009 and 2010, respectively. | |
(2) | Represents estimated gross square footage upon completion of development. | |
(3) | The earn-out agreement associated with this acquisition was estimated to have a fair value of $1.0 million as of December 31, 2010. |
As of December 31, 2010, cost and accumulated depreciation and amortization related to real estate
assets and related lease intangibles were as follows:
Development | ||||||||||||||||||||
costs and | ||||||||||||||||||||
Buildings and | Furniture, fixtures | construction in | Intangible lease | |||||||||||||||||
Land | improvements | and equipment | progress | assets | ||||||||||||||||
Cost |
$ | 18,949,000 | $ | 89,719,000 | $ | 2,780,000 | $ | 13,669,000 | $ | 9,187,000 | ||||||||||
Accumulated
depreciation and
amortization |
| (1,786,000 | ) | (370,000 | ) | | (3,280,000 | ) | ||||||||||||
Net |
$ | 18,949,000 | $ | 87,933,000 | $ | 2,410,000 | $ | 13,669,000 | $ | 5,907,000 | ||||||||||
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As of December 31, 2009, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
Development | ||||||||||||||||||||
costs and | ||||||||||||||||||||
Buildings and | Furniture, fixtures | construction in | Intangible lease | |||||||||||||||||
Land | improvements | and equipment | progress | assets | ||||||||||||||||
Cost |
$ | 7,370,000 | $ | 31,045,000 | $ | 1,076,000 | $ | | $ | 2,764,000 | ||||||||||
Accumulated
depreciation and
amortization |
| (405,000 | ) | (67,000 | ) | | (895,000 | ) | ||||||||||||
Net |
$ | 7,370,000 | $ | 30,640,000 | $ | 1,009,000 | $ | | $ | 1,869,000 | ||||||||||
Depreciation expense associated with buildings and improvements, site improvements and
furniture, fixtures and equipment for the years ended December 31, 2010 and 2009 was approximately
$1.7 million and $0.5 million, respectively. We incurred no depreciation and amortization expenses
during the year ended December 31, 2008.
Amortization associated with the intangible assets for the year ended December 31, 2010, 2009 and
2008 were $2.4 million, $0.9 million, and $0, respectively.
Anticipated amortization for each of the five following years ended December 31 is as follows:
Intangible assets | ||||
2011 |
$ | 2,606,000 | ||
2012 |
693,000 | |||
2013 |
325,000 | |||
2014 |
265,000 | |||
2015 |
265,000 | |||
2016 and thereafter |
1,753,000 | |||
$ | 5,907,000 |
The estimated useful lives for intangible assets range from approximately one to 14 years. As of
December 31, 2010, the weighted-average amortization period for intangible assets was 7.3 years.
5. Allowance for Doubtful Accounts
As of December 31, 2010, 2009 and 2008, we had recorded $35,000, $0 and $0 allowance for
doubtful accounts, respectively.
6. 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.
On July 21, 2010, President Obama signed into law the financial regulatory reform act entitled the
Dodd-Frank Wall Street Reform and Consumer Protection Act that implements far-reaching changes to
the regulation of the financial services industry, including provisions that made permanent the
$250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor
Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit
insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all
insured depository institutions. As of December 31, 2010 we had cash accounts in excess of Federal
Deposit Insurance Corporation insured limits. We believe this risk is not significant.
Concentrations of credit risks arise when a number of operators, tenants or obligors related to our
investments are engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet contractual
obligations, including those to the Company, to be similarly affected by changes in economic
conditions. We regularly monitor various segments of our portfolio to assess potential concentrations of risks. Management
believes the current portfolio is reasonably diversified across healthcare related real estate and
does not contain any other significant concentration of credit risks, except as disclosed herein.
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Our senior living operation segment accounted for approximately 85.3%, 100% and 0% of total
revenues for the years ended December 31, 2010, 2009 and 2008, respectively. The following table
provides information about our senior living operation segment concentration for the year ended
December 31, 2010:
Percentage of | Percentage of | |||||||
Operators | Segment Revenues | Total Revenues | ||||||
12 Oaks Senior Living |
43.5 | % | 37.1 | % | ||||
Royal Senior Care |
29.3 | % | 25.0 | % | ||||
Provision Living |
12.2 | % | 10.4 | % | ||||
Legend Senior Living |
10.8 | % | 9.2 | % | ||||
Good Neighbor Care |
3.6 | % | 3.1 | % | ||||
Woodbine Senior Living |
0.6 | % | 0.5 | % | ||||
100.0 | % | 85.3 | % |
Our triple-net leased segment accounted for approximately 14.6%, 0% and 0% of total revenues for
the years ended December 31, 2010, 2009 and 2008, respectively. The following table provides
information about our triple-net leased segment for the year ended December 31, 2010:
Percentage of | Percentage of | |||||||
Tenant | Segment Revenues | Total Revenues | ||||||
Babcock PM Management |
75.8 | % | 11.1 | % | ||||
Global Rehab Hospitals |
24.2 | % | 3.5 | % | ||||
100.0 | % | 14.6 | % |
Our medical office building segment accounted for approximately 0.1%, 0% and 0% of total revenues
for the years ended December 31, 2010, 2009 and 2008, respectively.
As of December 31, 2010, we owned 13 properties and they are geographically located in nine states.
The following table provides information about our geographic risks by operating segment for the
year ended December 31, 2010:
Percentage of | Percentage of | |||||||
State | Segment Revenues | Total Revenues | ||||||
Senior living operations |
||||||||
Texas |
43.5 | % | 37.1 | % | ||||
South Carolina |
29.3 | % | 25.0 | % | ||||
Indiana |
12.2 | % | 10.4 | % | ||||
Florida |
10.8 | % | 9.2 | % | ||||
Tennessee |
2.8 | % | 2.4 | % | ||||
Ohio |
0.8 | % | 0.7 | % | ||||
Pennsylvania |
0.6 | % | 0.5 | % | ||||
Triple net leased properties |
||||||||
Texas |
100.0 | % | 85.3 | % | ||||
Georgia (1) |
| % | | % | ||||
Colorado (1) |
| % | | % | ||||
Medical office building |
||||||||
Texas |
100.0 | % | 0.1 | % |
(1) | Under construction as of December 31, 2010 |
7. 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 December 31, 2010, we had acquired eight
assisted-living facilities and formed seven wholly owned taxable REIT subsidiaries, or TRSs, which
includes a Master TRS that consolidates our wholly owned 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.
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Each TRS is a tax paying component for purposes of classifying deferred tax assets and
liabilities. We record net deferred tax assets to the extent we believe these assets will more
likely than not be realized. In making such determination, we consider all available positive and
negative evidence, including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations. In the event we
were to determine that we would not be able to realize our deferred income tax assets in the future
in excess of their net recorded amount, we would 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. For the year ended December 31, 2010, our TRS
reported net taxable income of approximately $0.5 million. Based on a projected net taxable income
for the year, the TRS expensed approximately $0.2 million of Federal and State income taxes in
2010.
8. Payable to Related Parties
Payable to related parties at December 31, 2010 and December 31, 2009 was $65,000 and $1.7 million,
respectively, which consists of offering costs, acquisition fees, expense reimbursement payable,
sales commissions and dealer manager fees to our Advisor and PCC.
9. Equity
Common Stock
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. As of December 31, 2010,
we had cumulatively issued approximately 11.3 million shares of common stock for a total of
approximately $112.9 million of gross proceeds. As of December 31, 2009, we had cumulatively
issued approximately 4.9 million shares of common stock for a total of approximately $49.1 million
of gross proceeds. This excludes shares issued under the distribution reinvestment plan.
Distribution Reinvestment Plan
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 December 31, 2010 and
2009, we have issued approximately 394,000 and 99,000 shares, respectively, under the distribution
reinvestment plan. 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 share redemption program for investors who have held their shares for at least
one year, unless the shares are being redeemed in connection with a stockholders 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 were held. Our board of directors may
amend, suspend or terminate the program at anytime upon thirty (30) days prior notice to our
stockholders.
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Table of Contents
During the year ended December 31, 2010 and 2009, we redeemed shares pursuant to our stock
repurchase program as follows (in thousands, except per-share amounts):
Approximate Dollar | ||||||||||||
Total | Value of Shares | |||||||||||
Number of Shares | Available That | |||||||||||
Redeemed | Average Price | May Yet Be Redeemed | ||||||||||
Period | (1) | Paid per Share | Under the Program (1) | |||||||||
January 2010 |
7,425 | $ | 9.55 | $ | 808,000 | |||||||
February 2010 |
2,784 | $ | 9.93 | $ | 780,000 | |||||||
March 2010 |
| $ | | $ | 780,000 | |||||||
April 2010 |
| $ | | $ | 780,000 | |||||||
May 2010 |
10,000 | $ | 9.00 | $ | 690,000 | |||||||
June 2010 |
3,500 | $ | 8.99 | $ | 659,000 | |||||||
July 2010 |
58,504 | $ | 9.99 | $ | 74,000 | |||||||
August 2010 |
4,196 | $ | 9.74 | $ | 33,000 | |||||||
September 2010 |
8,678 | $ | 9.56 | $ | | |||||||
October 2010 |
| $ | | $ | | |||||||
November 2010 |
$ | $ | | |||||||||
December 2010 |
| $ | | $ | | |||||||
95,087 | ||||||||||||
Approximate Dollar | ||||||||||||
Total | Value of Shares | |||||||||||
Number of Shares | Available That May Yet Be | |||||||||||
Redeemed | Average Price | Redeemed | ||||||||||
Period | (1) | Paid per Share | Under the Program (1) | |||||||||
January 2009 |
| $ | | $ | 63,000 | |||||||
February 2009 |
| $ | | $ | 63,000 | |||||||
March 2009 |
| $ | | $ | 63,000 | |||||||
April 2009 |
| $ | | $ | 63,000 | |||||||
May 2009 |
| $ | | $ | 63,000 | |||||||
June 2009 |
17,245 | $ | 9.99 | $ | | |||||||
July 2009 |
| $ | | $ | | |||||||
August 2009 |
| $ | | $ | | |||||||
September 2009 |
| $ | | $ | | |||||||
October 2009 |
| $ | | $ | | |||||||
November 2009 |
1,000 | $ | 9.95 | $ | | |||||||
December 2009 |
| $ | | $ | | |||||||
18,245 | ||||||||||||
(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. 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 these shares were held. 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 program in the prior year, and (ii) we may not, except to repurchase the shares of a deceased shareholder, 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. |
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.
Employee and Director Incentive Stock Plan
We have adopted an Employee and Director Incentive Stock Plan (the Plan) which provides for the
grant of awards to our directors and full-time employees, as well as other eligible participants
that provide services to us. We have no employees, and we do not intend to grant awards under the
Plan to persons who are not directors of ours. Awards granted under the Plan may consist of
nonqualified stock options, incentive stock options, restricted stock, share appreciation rights,
and dividend equivalent rights. The term of the Plan is 10 years. The total number of shares of
common stock reserved for issuance under the Plan is equal to 10% of our outstanding shares of
stock at any time. As of December 31, 2010 and 2009 we have not granted any awards under the Plan.
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Table of Contents
Distributions
The following table shows the distributions declared on daily record dates for each day during the
period from January 1, 2009 through December 31, 2010, aggregated by quarter as follows:
Distribution Declared (1) | ||||||||||||
Period | Cash | Reinvested | Total | |||||||||
First quarter 2009 |
$ | 116,000 | $ | 122,000 | $ | 238,000 | ||||||
Second quarter 2009 |
170,000 | 190,000 | 360,000 | |||||||||
Third quarter 2009 |
266,000 | 284,000 | 550,000 | |||||||||
Fourth quarter 2009 |
414,000 | 401,000 | 815,000 | |||||||||
2009 Totals |
$ | 966,000 | $ | 997,000 | $ | 1,963,000 | ||||||
First quarter 2010 |
$ | 525,000 | $ | 506,000 | $ | 1,031,000 | ||||||
Second quarter 2010 |
696,000 | 665,000 | 1,361,000 | |||||||||
Third quarter 2010 |
857,000 | 834,000 | 1,691,000 | |||||||||
Fourth quarter 2010 |
1,017,000 | 1,011,000 | 2,028,000 | |||||||||
2010 Totals |
$ | 3,095,000 | $ | 3,016,000 | $ | 6,111,000 | ||||||
(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.
Tax Treatment of Distributions
The income tax treatment for the distributions per share to common stockholders reportable for the
years ended December 31, 2010, 2009, and 2008 as follows:
Per Common Shares | 2010 | 2009 | 2008(1) | |||||||||||||||||||||
Return of capital |
$ | 0.75 | 100.00 | % | $ | 0.75 | 100.00 | % | $ | 0.29 | 100 | % |
(1) | Dividend per common share for 2008 is calculated based on 139 days outstanding during the year. |
10. Investments in Joint Venture
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
December 31, 2010, total assets were approximately $27.1 million, which includes approximately
$25.8 million of real estate assets and total liabilities were
approximately $18.1 million, which
includes an approximately $17.9 million of secured mortgage
debt. See Note 13 for further details
regarding the mortgage debt. We may be required to fund additional capital contributions, including funding of
any capital expenditures deemed necessary to continue to
operate the entity, and any operating cash shortfalls that the entity may experience.
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On December 16, 2010, we funded an investment in a joint venture with affiliates of The Cirrus
Group, an unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in
Littleton, CO. We agreed to contribute approximately $1.6 million of capital to acquire a 90%
limited partnership interest in Littleton Med Partners, LP. Three affiliates of The Cirrus Group
contributed an aggregate of approximately $0.2 million to acquire an aggregate 9.5% limited
partnership interest in the Littleton Med Partners, LP. A fourth affiliate of the Cirrus Group
acts as the general partner and holds the remaining 0.5% interest in the Littleton Med Partners,
LP. The Companys equity investment in the joint venture was funded from proceeds from its ongoing
initial public offering. As of December 31, 2010 and 2009, we owned a 90.0% and 0%, respectively
of limited partnership interest in Littleton Med Partners, LP.
On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus
Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the campus of
the Floyd Medical Center in Rome, Georgia. We contributed approximately $2.7 million of capital to
acquire a 75.0% limited partnership interest in Rome LTH Partners, LP. Cornerstone Private Equity
Fund Operating Partnership, LP, an affiliate of our sponsor, contributed approximately $0.5 million
of capital to acquire a 15.0% limited partnership interest in Rome LTH Partners, LP. Three
affiliates of The Cirrus Group contributed an aggregate of approximately $0.3 million to acquire an
aggregate 9.5% limited partnership interest in the Rome LTH Partners, LP. A fourth affiliate of
the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Rome LTH
Partners LP. The Companys equity investment in the joint venture was funded from proceeds from its
ongoing initial public offering. As of December 31, 2010 and 2009, we owned a 75.0% and 0%,
respectively of limited partnership interest in Rome LTH Partners, LP.
Under the
terms of The Cirrus Group joint ventures, we may be obligated to monetize a portion of our partners interest in the
appreciation of value in the joint venture properties. These obligations may be exercised by our partners at their sole
discretion between years two and four of the joint ventures. If not exercised during this period, the obligations to our
partners, with regard to the value associated with this interest, will be satisfied upon ultimate sale of the underlying
properties. The amount that would be paid upon monetization is subject to change based on a number of factors,
including the value of the properties, net income earned by the properties and payment of preferred returns on
equities. At December 31, 2010, both properties were under development and we have determined that
sufficient uncertainty exists with respect to exercise of the monetization feature. As of December 31, 2010, we
believe that the probability of payments under these obligations is reasonably possible, accordingly, we have not
recognized these obligations in our December 31, 2010 consolidate financial statements. As of the date of this
report, the amount of contingent liability with respect to the monetization feature is estimated to be approximately
$1.6 million.
11. Related Party Transactions
Our 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, our 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 our 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 our Advisor under the Advisory agreement are
described below.
Organizational and Offering Costs. Costs of the offering have been paid by the Advisor on
our behalf and will be 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 our Advisor for all marketing related costs and expenses
such as salaries and direct expenses of employees of our 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 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. 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 December 31, 2010, the advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $4.6 million, including approximately $0.1
million of organizational costs that have been expensed and approximately $4.5 million of offering
costs which reduce net proceeds of our offerings. Of this amount $3.9 million reduced the net
proceeds of our initial public offering and $0.6 million reduced the net proceeds of our follow-on
offering. As of December 31, 2009,
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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 reduced net proceeds of our initial public offering.
Acquisition Fees and Expenses. The Advisory Agreement requires us to pay the Advisor
acquisition fees in an amount equal to 2% 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 after reaching the minimum offering amount, 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 years ended December 31, 2010, 2009 and 2008, the Advisor
earned approximately $2.3 million, $1.1 million and $0.2 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 will reimburse the Advisor for the direct 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 years ended 2010
and 2009, the Advisor earned approximately $0.7 million and $0.2 million of asset management fees,
respectively, which were expensed. In addition, we reimbursed our Advisor for approximately
$0.4 million and $0.1 million of direct and indirect costs incurred by our Advisor in providing asset
management services for the years ended December 31, 2010 and 2009. No such costs were incurred in 2008.
Operating Expenses. The Advisory agreement provides for reimbursement of our Advisors
direct and indirect costs of providing administrative and management services to us. For years
ended December 31, 2010, 2009 and 2008, $1.2 million, $0.5 million, and $0.4 million of such costs were
incurred, respectively. Four fiscal quarters after the acquisition of our first real estate asset,
and every fiscal quarter thereafter, our advisor must reimburse us the amount by which our total
operating expenses (as defined) for the prior 12 months exceed the greater of 2% of our average
invested assets or 25% of our net income unless our independent directors committee determines 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. No such costs were incurred in
2010, 2009 and 2008.
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. | ||
| 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 |
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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. |
No such costs were incurred in 2010, 2009 and 2008.
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, as Dealer Manager, is also entitled to receive a dealer
manager fee equal to up to 3% of gross proceeds from sales in the Primary Offering. The Dealer
Manager 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) to the extent are in excess of 13.5% of gross proceeds from the Offering.
For the years ended December 31, 2010, 2009 and 2008, we incurred approximately $6.2 million, $3.8
million, and $1.0 million, respectively, payable to PCC for dealer manager fees and sales
commissions.
12. Segment Reporting
As of December 31, 2010, we operated in three reportable business segments: senior living
operations, triple-net leased properties, and medical office building properties. Our senior living
operations segment primarily consists of investments in seniors housing communities located in the
United States for which we engage independent third-party mangers. Our triple-net leased properties
segment consists of investments in skilled nursing and hospital facilities in the United States.
These facilities are leased to healthcare operating companies under long term triple-net or
absolute-net leases, which require the tenants to pay all property-related expenses. Our medical
office building operations segment primarily consists of investing in medical office buildings and
leasing those properties to healthcare providers under long term leases, which require tenants to
pay property-related expenses.
On December 22, 2010 we completed the purchase of Hedgcoxe Health Plaza, a multi-tenant medical
office building in Plano, TX. With the addition of Hedgcoxe Health Plaza, we determined that
segregating our MOB operations into its own reporting segment would be useful in assessing the
performance of this portion of our business as a business segment
consistent with managements focus in
assessing performance and operating decisions. Prior to the Hedgcoxe Health Plaza acquisition, we
operated in two reportable segments: senior living operations and triple-net leased properties.
We evaluate performance of the combined properties in each segment based on net operating income.
Net operating income is defined as total revenue less property operating and maintenance expenses.
There are no intersegment sales or transfers.
The following tables reconcile the segment activity to consolidated net income for the years ended
December 31, 2010, 2009 and 2008:
For the Year Ended December 31, 2010 | ||||||||||||||||
Senior living | Triple-net leased | Medical office | ||||||||||||||
operations | properties | building | Consolidated | |||||||||||||
Rental revenues |
$ | 12,150,000 | $ | 2,321,000 | $ | 23,000 | $ | 14,494,000 | ||||||||
Resident services and fee income |
2,738,000 | | | 2,738,000 | ||||||||||||
Tenant reimbursements and other income |
305,000 | 279,000 | 6,000 | 590,000 | ||||||||||||
$ | 15,193,000 | $ | 2,600,000 | $ | 29,000 | $ | 17,822,000 | |||||||||
Property operating and maintenance expenses |
10,832,000 | 298,000 | 3,000 | 11,133,000 | ||||||||||||
Net operating income |
4,361,000 | 2,302,000 | 26,000 | 6,689,000 | ||||||||||||
General and administrative expenses |
2,396,000 | |||||||||||||||
Asset management fees and expenses |
1,030,000 | |||||||||||||||
Real estate acquisition costs |
3,273,000 | |||||||||||||||
Depreciation and amortization |
4,072,000 | |||||||||||||||
Interest income |
(17,000 | ) | ||||||||||||||
Other expense |
33,000 | |||||||||||||||
Interest expense |
2,373,000 | |||||||||||||||
Net loss |
(6,471,000 | ) | ||||||||||||||
Net loss
attributable to the noncontrolling interests |
(152,000 | ) | ||||||||||||||
Net loss attributable to common stockholders |
$ | (6,319,000 | ) | |||||||||||||
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For the Year Ended December 31, 2009 | ||||||||||||||||
Senior living | Triple-net leased | Medical office | ||||||||||||||
operations | properties | building | Consolidated | |||||||||||||
Rental revenues |
$ | 4,964,000 | $ | | $ | | $ | 4,964,000 | ||||||||
Resident services and fee income |
1,697,000 | | | 1,697,000 | ||||||||||||
Tenant reimbursements and other income |
| | | | ||||||||||||
$ | 6,661,000 | $ | | $ | | $ | 6,661,000 | |||||||||
Property operating and maintenance expenses |
5,172,000 | | | 5,172,000 | ||||||||||||
Net operating income |
1,489,000 | | | 1,489,000 | ||||||||||||
General and administrative expenses |
1,100,000 | |||||||||||||||
Asset management fees and expenses |
317,000 | |||||||||||||||
Real estate acquisition costs |
1,814,000 | |||||||||||||||
Depreciation and amortization |
1,367,000 | |||||||||||||||
Interest income |
(13,000 | ) | ||||||||||||||
Interest expense |
1,053,000 | |||||||||||||||
Net loss |
(4,149,000 | ) | ||||||||||||||
Net loss
attributable to the noncontrolling interests |
15,000 | |||||||||||||||
Net loss attributable to common stockholders |
$ | (4,164,000 | ) | |||||||||||||
For the Year Ended December 31, 2008 | ||||||||||||||||
Senior living | Triple-net leased | Medical office | ||||||||||||||
operations | properties | building | Consolidated | |||||||||||||
Rental revenues |
$ | | $ | | $ | | $ | | ||||||||
Resident fees and services |
| | | | ||||||||||||
Tenant reimbursements and other income |
| | | | ||||||||||||
$ | | $ | | $ | | $ | | |||||||||
Property operating and maintenance expenses |
| | | | ||||||||||||
Net operating income |
| | | | ||||||||||||
General and administrative expenses |
875,000 | |||||||||||||||
Asset management fees and expenses |
| |||||||||||||||
Real estate acquisition costs |
358,000 | |||||||||||||||
Depreciation and amortization |
| |||||||||||||||
Interest income |
(7,000 | ) | ||||||||||||||
Interest expense |
1,000 | |||||||||||||||
Net loss |
(1,227,000 | ) | ||||||||||||||
Net loss
attributable to the noncontrolling interests |
(121,000 | ) | ||||||||||||||
Net loss attributable to common stockholders |
$ | (1,106,000 | ) | |||||||||||||
The following table reconciles the segment activity to consolidated financial position as of
December 31, 2010 and 2009.
December 31, 2010 | December 31, 2009 | |||||||
Assets |
||||||||
Investment in real estate: |
||||||||
Senior living operations |
$ | 78,722,000 | $ | 27,888,000 | ||||
Triple-net leased properties |
41,433,000 | 13,000,000 | ||||||
Medical office building |
8,713,000 | | ||||||
Total reportable segments |
$ | 128,868,000 | $ | 40,888,000 | ||||
Reconciliation to consolidated assets: |
||||||||
Cash and cash equivalents |
29,819,000 | 14,900,000 | ||||||
Deferred financing costs, net |
1,382,000 | 228,000 |
F-22
Table of Contents
December 31, 2010 | December 31, 2009 | |||||||
Tenant and other receivables, net |
1,462,000 | 481,000 | ||||||
Deferred costs and other assets |
554,000 | 338,000 | ||||||
Restricted cash |
2,942,000 | 364,000 | ||||||
Goodwill |
5,329,000 | 1,141,000 | ||||||
Total assets |
$ | 170,356,000 | $ | 58,340,000 | ||||
As of December 31, 2008, goodwill had a balance of $0. For the years ended December 31, 2010 and
2009, due to acquisitions in our senior living operations segment, we recorded approximately $4.2
million and $1.1 million, respectively, of goodwill. As of December 31, 2010 and 2009, goodwill had
a balance of approximately $5.3 million and $1.1 million, respectively, all related to senior
living operations segment.
13. Notes Payable
Notes payable were $80.8 million and $20.3 million as of December 31, 2010 and 2009, respectively.
As of December 31, 2010, we had fixed and variable rate secured mortgage loans with effective
interest rates ranging from 2.50% to 6.50% per annum and a weighted average effective interest rate
of 6.09% per annum. As of December 31, 2010, we had $46.0 million of fixed rate debt, or 57% of
notes payable, at a weighted average interest rate of 4.34% per annum and $34.8 million of variable
rate debt, or 43% of notes payable, at a weighted average interest rate of 8.41% per annum. As of
December 31, 2009, we had fixed and variable rate mortgage loans with effective interest rates
ranging from 2.50% to 6.50% per annum and a weighted average effective interest rate of 6.36% per
annum.
We are required by the terms of the applicable loan documents to meet certain financial
covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements.
As of December 31, 2010, we were in compliance with all such covenants and requirements.
Outstanding | Outstanding | |||||||||||||
Principal Balance | Principal Balance | |||||||||||||
Interest | as of December 31, | as of December 31, | ||||||||||||
Property Name | Payment Type | Rate | 2010(1) | 2009(1) | Maturity Date | |||||||||
Carriage Court of Hilliard
|
Principal and interest at a 35-year amortization rate | 5.40% fixed | $ | 13,586,000 | $ | | August 1, 2044 | |||||||
Caruth Haven Court
|
Principal and interest at a 30-year amortization rate | 6.43% fixed | $ | 9,904,000 | $ | 10,000,000 | December 16, 2019 | |||||||
Global Rehab Inpatient Rehab Facility |
Principal and interest at a 30-year amortization rate | 6.25% fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR + 3.25% | $ | 7,530,000 | $ | | December 22, 2016 | |||||||
Hedgcoxe Health Plaza
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 5,060,000 | $ | | November 18, 2012 | |||||||
Mesa Vista Inn Health Center
|
Principal and interest at a 20-year amortization rate | 6.50% fixed | $ | 7,336,000 | $ | 7,500,000 | January 5, 2015 | |||||||
Oakleaf Village Portfolio
|
(2) | (2) | $ | 17,849,000 | $ | | April 30, 2015 | |||||||
Oakleaf Village at Lexington |
| | | | | |||||||||
Oakleaf Village at Greenville |
| | | | | |||||||||
Rivers Edge of Yardley
|
Interest Only | 30-day LIBOR +4.00% with a 2% LIBOR floor | $ | 2,500,000 | $ | | November 18, 2012 | |||||||
Rome LTACH Project (3)
|
Month 1-24 Interest-only Month 25 on Principal and interest at a 25-year amortization rate | 1Mo LIBOR + 3.00% with a 6.15% floor | $ | 8,588,000 | $ | | December 18, 2012 | |||||||
Littleton Specialty Rehabilitation Facility (4) |
Month 1-18 Interest-only Month 19 on Principal and interest at a 20-year amortization rate | 6.0% fixed | $ | 1,000 | $ | | December 22, 2015 | |||||||
The Oaks Bradenton
|
(5) | (5) | $ | 2,738,000 | $ | 2,760,000 | May 1, 2014 | |||||||
Terrace at Mountain Creek
|
Month 1-24 interest only. Month 25 to 36 Principal and interests at a 25-year amortization rate | 3Mo LIBOR + 3.50% with a 5.5% floor | $ | 5,700,000 | $ | | September 1, 2013 | |||||||
$ | 80,792,000 | $ | 20,260,000 | |||||||||||
(1) | As of December 31, 2010 and 2009, all notes payable are secured by the underlying real estate. |
F-23
Table of Contents
(2) | The aggregate loan amount is composed of a restatement date balance of approximately $12.9 million outstanding with respect to a prior loan (the Initial Loan), and an additional amount of approximately $5.1 million disbursed on the closing date (the Restatement Date Loan). From June 1, 2010 through the maturity date, payments on the Restatement Date Loan are due monthly and based upon a 30-year amortization schedule. From June 1, 2010 through January 10, 2011, payments on the Initial Loan are due monthly based upon a 25-year amortization schedule, thereafter through maturity, payments on the Initial Loan are due monthly based upon a 30-year amortization schedule. 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 (the Contract Rate). The outstanding balance of the Initial Loan bears interest at a rate of 6.62% per annum until January 10, 2011 and thereafter at the contract rate. In connection with our Oakleaf Village Portfolio financing, we incurred financing cost $3,000 for the year ended December 31, 2010. | |
(3) | For the years ended December 31, 2010, 2009, and 2008 we had not expensed any interest expense related to the Rome LTACH Project. For the year ended December 31, 2010, interest expense and deferred financing fees of $101,000 and $130,000, respectively, were capitalized. | |
(4) | For the years ended December 31, 2010, 2009, and 2008 we had not expensed any interest expense related to the Littleton Specialty Rehabilitation Facility. For the year ended December 31, 2010, deferred financing fees of $2,000 was capitalized. | |
(5) | Of the total loan amount, $2.4 million bears a fixed interest rate of 6.25% per annum. The remaining $0.36 million bears a variable interest rate equivalent to the prevailing market certificate of deposit rate plus a 1.5% margin. Monthly payments for the first twelve months will be interest-only. Monthly payments beginning the thirteenth month will include interest and principal based on a 25-year amortization period. |
On November 19, 2010, we entered into an agreement with KeyBank National Association, an
unaffiliated financial institution, to obtain a $25,000,000 revolving credit facility. The credit
facility may be increased in the future in incremental amounts of at least $25.0 Million at our
request subject to attaining certain portfolio size targets. The initial term of the credit
facility is 24 months, maturing on November 18, 2012, and may be extended by six months subject to
satisfaction of certain conditions, including payment of an extension fee. The actual amount of
credit available under the credit facility is a function of certain loan to cost, loan to value and
debt service coverage ratios contained in the credit facility. The credit facility will be secured
by first priority liens on our eligible real property assets that make up the borrowing base (as
such term is defined) for the credit facility. The interest rate for this credit facility is
one-month LIBOR plus a margin of 400 basis points, with a floor of 200 basis points for one-month
LIBOR. The credit facility also requires payment of a fee of up to 25 basis points related to
unused credit available to us under the credit facility. We are entitled to prepay the obligations
at any time without penalty. In connection with our credit facility, we incurred $7,000 of
interest expense on the unused credit available to us under the credit facility.
In connection with our notes payable, we had incurred financing costs totaling approximately
$1.7 million and $0.3 million, as of December 31, 2010 and 2009, respectively. These financing costs
have been capitalized and are being amortized over the life of the agreements. For the years ended
December 31, 2010, 2009 and 2008, approximately $104,000, $111,000 and $0, respectively, of
deferred financing costs were amortized and included in interest expense in the consolidated
statements of operations.
The principal payments due on our notes payable as of December 31, 2010 for each of the next five
years are as follows:
Principal | ||||
Year | amount | |||
2011 |
$ | 793,000 | ||
2012 |
849,000 | |||
2013 |
22,720,000 | |||
2014 |
3,500,000 | |||
2015 |
23,855,000 | |||
2016 and thereafter |
29,075,000 | |||
Total |
$ | 80,792,000 | ||
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Table of Contents
Interest Expense and Deferred Financing Cost
The following table sets forth our gross interest expense and deferred financing cost
amortization for the years ended December 31, 2010, 2009 and 2008. The capitalized amount is a cost
of development and increases the carrying value of construction in progress.
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Gross interest expense and deferred financing cost amortization |
$ | 2,606,000 | $ | 1,053,000 | $ | 1,000 | ||||||
Capitalized interest expense and deferred financing cost amortization |
(233,000 | ) | | | ||||||||
Interest Expense |
$ | 2,373,000 | $ | 1,053,000 | $ | 1,000 | ||||||
14. Commitments and Contingencies
Acquisition Commitment
On December 30, 2010, we became obligated under a purchase and sale agreement to acquire Forestview
Manor from a non-related party, for a purchase price of approximately $10.8 million. Refer to Note
17 Subsequent Events of the consolidated financial statements.
Litigation
We are not presently subject to any material litigation nor, to our knowledge, any material
litigation threatened against us which if determined unfavorably to us would have a material
adverse effect on our consolidated cash flows, financial condition or results of operations.
Environmental Matters
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.
Other
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.
15. Selected Quarterly Data (unaudited)
Set forth below is certain unaudited quarterly financial information. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included in the amounts
stated below to present fairly, and in accordance with generally accepted accounting principles,
the selected quarterly information when read in conjunction with the consolidated financial
statements.
F-25
Table of Contents
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Revenues |
$ | 5,754,000 | $ | 4,955,000 | $ | 4,071,000 | $ | 3,042,000 | ||||||||
Expenses |
7,165,000 | 5,928,000 | 5,160,000 | 3,651,000 | ||||||||||||
Loss from operations |
$ | (1,411,000 | ) | $ | (973,000 | ) | $ | (1,089,000 | ) | $ | (609,000 | ) | ||||
Net loss |
$ | (2,254,000 | ) | $ | (1,648,000 | ) | $ | (1,626,000 | ) | $ | (943,000 | ) | ||||
Noncontrolling interest |
34,000 | 40,000 | 82,000 | (4,000 | ) | |||||||||||
Net loss attributable to common stockholders |
$ | (2,220,000 | ) | $ | (1,608,000 | ) | $ | (1,544,000 | ) | $ | (947,000 | ) | ||||
Net loss per common share attributable to common stockholders basic and diluted |
$ | (0.21 | ) | $ | (0.18 | ) | $ | (0.22 | ) | $ | (0.17 | ) | ||||
Weighted average shares |
10,518,801 | 8,782,378 | 7,099,586 | 5,414,179 |
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
Revenues |
$ | 2,072,000 | $ | 1,889,000 | $ | 1,645,000 | $ | 1,055,000 | ||||||||
Expenses |
3,030,000 | 2,428,000 | 2,329,000 | 1,983,000 | ||||||||||||
Loss from operations |
$ | (958,000 | ) | $ | (539,000 | ) | $ | (684,000 | ) | $ | (928,000 | ) | ||||
Net loss |
$ | (1,244,000 | ) | $ | (829,000 | ) | $ | (958,000 | ) | $ | (1,118,000 | ) | ||||
Noncontrolling interest |
(57,000 | ) | 8,000 | 24,000 | 10,000 | |||||||||||
Net loss attributable to common stockholders |
$ | (1,301,000 | ) | $ | (821,000 | ) | $ | (934,000 | ) | $ | (1,108,000 | ) | ||||
Net loss per common share attributable to common stockholders basic and diluted |
$ | (0.31 | ) | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.89 | ) | ||||
Weighted average shares |
4,160,842 | 2,775,594 | 1,838,828 | 1,240,370 |
16. Business Combinations
We
completed six property acquisitions during 2010. The following summary provides the
allocation of the acquired assets and liabilities of Oakleaf at Greenville and Oakleaf at
Lexington, together as Oakleaf Village, Global Rehab Inpatient Facility, Terrace at Mountain Creek,
Hedgcoxe Health Plaza, Carriage Court of Hilliard, and Rivers Edge of Yardley (the 2010
Acquisitions) as of the respective dates of acquisitions. We have accounted for the acquisitions
as business combinations under U.S. GAAP. Under business combination accounting, the assets and
liabilities of acquired properties were recorded as of the acquisition date, at their respective
fair values, and consolidated in our financial statements. The detail of the purchase price of the
six acquired properties:
Global Rehab | Terrace at | Carriage | Hedgcoxe | |||||||||||||||||||||||||
Oakleaf | Inpatient | Mountain | River's Edge | Court of | Health | |||||||||||||||||||||||
Village | Facility | Creek | of Yardley | Hilliard | Plaza | Total | ||||||||||||||||||||||
Land |
$ | 3,118,000 | $ | 2,004,000 | $ | 1,880,000 | $ | 860,000 | $ | 1,580,000 | $ | 1,580,000 | $ | 11,022,000 | ||||||||||||||
Buildings & improvements |
20,039,000 | 10,088,000 | 5,901,000 | 2,690,000 | 11,690,000 | 5,809,000 | 56,217,000 | |||||||||||||||||||||
Site improvements |
499,000 | 280,000 | 169,000 | 320,000 | 490,000 | 330,000 | 2,088,000 | |||||||||||||||||||||
Furniture & fixtures |
515,000 | | 160,000 | 190,000 | 840,000 | | 1,705,000 | |||||||||||||||||||||
Tenant Improvements |
| | | | | 249,000 | 249,000 | |||||||||||||||||||||
Intangible assets |
1,811,000 | 2,378,000 | 840,000 | 370,000 | 260,000 | 754,000 | 6,413,000 | |||||||||||||||||||||
Other assets |
| | 98,000 | | 736,000 | 289,000 | 1,123,000 | |||||||||||||||||||||
Note payable assumed |
(12,902,000 | ) | | | | (13,586,000 | ) | | (26,488,000 | ) | ||||||||||||||||||
Security deposits and other liabilities |
| | (1,077,000 | (1) | | (172,000 | ) | (49,000 | ) | (1,298,000 | ) | |||||||||||||||||
Assets contributed by noncontrolling interest |
(1,880,000 | ) | | | | | | (1,880,000 | ) | |||||||||||||||||||
Goodwill |
1,018,000 | | 550,000 | 70,000 | 2,549,000 | | 4,187,000 | |||||||||||||||||||||
Real estate acquisitions |
$ | 12,218,000 | $ | 14,750,000 | $ | 8,521,000 | $ | 4,500,000 | $ | 4,387,000 | $ | 8,962,000 | $ | 53,338,000 | ||||||||||||||
Acquisition expenses |
$ | 364,000 | $ | 98,000 | $ | 194,000 | $ | 109,000 | $ | 86,000 | $ | 62,000 | $ | 913,000 |
F-26
Table of Contents
(1) | The facility was purchased, from an affiliate of Wilkinson Real Estate, a non-related party, for a purchase price of approximately $8.5 million. The acquisition includes a $1.0 million earn-out provision. Wilkinson Real Estate may exercise the earn-out provision at any point during the first three years after closing. The earn out amount value will be calculated based on the excess of trailing six month net operating income, capped at 10%, over the purchase price. |
The Company recorded revenues and net losses for the year ended December 31, 2010 of approximately
$5.8 million and $0.9 million, respectively, related to the 2010 Acquisitions. The following
unaudited pro forma information for the years ended December 31, 2010 and 2009 has been prepared to
reflect the incremental effect of the 2010 Acquisitions as if such acquisitions had occurred on
January 1, 2009.
Year ended December 31, 2010 |
Year ended December 31, 2009 |
|||||||
Revenues |
$ | 29,311,000 | $ | 27,252,000 | ||||
Net loss |
$ | (7,030,000 | ) | $ | (5,829,000 | ) | ||
Basic and diluted net loss per common share attributable to common stockholders |
$ | (0.65 | ) | $ | (0.66 | ) |
We completed four property acquisitions during 2009. The following summary provides the allocation
of the acquired assets and liabilities of Caruth Haven Court, The Oaks Bradenton, GreenTree at
Westwood and Mesa Vista Inn Health Center (the 2009 Acquisitions) as of the respective dates of
acquisitions. We have accounted for the acquisitions as business
combinations under U.S. GAAP.
Under business combination accounting, the assets and liabilities of acquired properties were
recorded as of the acquisition date, at their respective fair values, and consolidated in our
financial statements. The breakdown of the purchase price of the four acquired properties:
Caruth Haven Court |
The Oaks Bradenton |
GreenTree at Westwood |
Mesa Vista Inn Health Center |
Total | ||||||||||||||||
Land |
$ | 4,256,000 | $ | 390,000 | $ | 714,000 | $ | 2,010,000 | $ | 7,370,000 | ||||||||||
Buildings & improvements |
13,871,000 | 2,733,000 | 3,670,000 | 10,264,000 | 30,538,000 | |||||||||||||||
Site improvements |
115,000 | 86,000 | 47,000 | 166,000 | 414,000 | |||||||||||||||
Furniture & fixtures |
273,000 | 112,000 | 131,000 | 559,000 | 1,075,000 | |||||||||||||||
Intangible assets |
1,370,000 | 773,000 | 619,000 | | 2,762,000 | |||||||||||||||
Other assets |
42,000 | | 18,000 | 11,000 | 71,000 | |||||||||||||||
Note payable |
| | | (7,500,000 | ) | (7,500,000 | ) | |||||||||||||
Security deposits and other liabilities |
(237,000 | ) | (12,000 | ) | (597,000 | )(1) | (747,000 | ) | (1,593,000 | ) | ||||||||||
Goodwill |
363,000 | 406,000 | 372,000 | | 1,141,000 | |||||||||||||||
Real estate acquisitions |
$ | 20,053,000 | $ | 4,488,000 | $ | 4,974,000 | $ | 4,763,000 | $ | 34,278,000 | ||||||||||
Acquisition Expenses |
$ | 845,000 | $ | 271,000 | $ | 163,000 | $ | 434,000 | $ | 1,713,000 | ||||||||||
(1) | The facility was purchased Greentree at Westwood, LLC, a non related party, for a purchase price of $5.2 million. Under the purchase and sale agreement executed in connection with the acquisition, a portion of the purchase price for the property is to be calculated and paid to the seller as earn-out payments based upon the net operating income, as defined, of the property during each of the three-years following our acquisition of the property. The maximum aggregate amount that the seller may receive under the earn-out provision is $1.0 million. |
The Company recorded revenues and net losses for the year ended December 31, 2009 of approximately
$6.7 million and $1.7 million, respectively, related to the 2009 Acquisitions. The following
unaudited pro forma information for the years ended December 31, 2009 and 2008 has been prepared to
reflect the incremental effect of the 2009 Acquisitions as if such acquisitions had occurred on
January 1, 2009 and 2008.
Year ended December 31, 2009 |
Year ended December 31, 2008 |
|||||||
Revenues |
$ | 10,724,000 | $ | 10,909,000 | ||||
Net loss |
$ | (4,071,000 | ) | $ | (2,499,000 | ) | ||
Basic and diluted net loss per common share attributable to common stockholders |
$ | (0.91 | ) | $ | (1.28 | ) |
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Table of Contents
17. Subsequent Events
Property Acquisition
On January 14, 2011, we purchased an assisted living property, Forestview Manor, from 153 Parade
Road, LLC a non-related party, for a purchase price of approximately $10.8 million. The acquisition
was funded with our revolving credit facility from KeyBank National Association and with proceeds
from our initial public offering.
Greentree at Westwood Financing
On February 11, 2011, we funded $2.8 million through the revolving credit facility from KeyBank
National Association for Greentree at Westwood.
Sale of Shares of Common Stock
As of March 17, 2011, we had raised approximately $123.3 million through the issuance of
approximately12.4 million shares of our common stock under our Offering, excluding, approximately
509,000 shares that were issued pursuant to our distribution reinvestment plan reduced by
approximately 157,000 shares pursuant to our stock repurchase program.
F-28
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2010
Balance at | Charged to | Balance at | ||||||||||||||
Beginning of | Costs and | End of | ||||||||||||||
Description | Period | Expenses | Deductions | Period | ||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||
Allowance for doubtful accounts |
$ | | $ | | $ | | $ | | ||||||||
Year Ended December 31, 2009: |
||||||||||||||||
Allowance for doubtful accounts |
$ | | $ | 11,000 | $ | (11,000 | ) | $ | | |||||||
Year Ended December 31, 2010: |
||||||||||||||||
Allowance for doubtful accounts |
$ | | $ | 35,000 | $ | | $ | 35,000 | ||||||||
F-29
Table of Contents
CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2010
Life on which | ||||||||||||||||||||||||||||||||||||||||||||
Costs | Depreciation in | |||||||||||||||||||||||||||||||||||||||||||
Initial Cost | Capitalized | Gross Amount Invested | Latest Income | |||||||||||||||||||||||||||||||||||||||||
Building & | Subsequent to | Building and | Accumulated | Date of | Date | Statement is | ||||||||||||||||||||||||||||||||||||||
Description | Encumbrances | Land | Improv. | Acquisition | Land | Improv. | Total | Depreciation | Construct | Acquired | Computed | |||||||||||||||||||||||||||||||||
Caruth Haven Court Highland Park, TX |
$ | 9,904,000 | $ | 4,256,000 | $ | 13,986,000 | $ | 188,000 | $ | 4,256,000 | $ | 14,174,000 | $ | 18,430,000 | $ | 738,000 | 1999 | 01/22/09 | 39 years | |||||||||||||||||||||||||
The Oaks Bradenton Bradenton, FL |
2,738,000 | 390,000 | 2,818,000 | 2,000 | 390,000 | 2,820,000 | 3,210,000 | 127,000 | 1996 | 05/01/09 | 39 years | |||||||||||||||||||||||||||||||||
GreenTree Columbus, IN |
| 714,000 | 3,717,000 | 17,000 | 714,000 | 3,734,000 | 4,448,000 | 100,000 | 1998 | 12/30/09 | 39 years | |||||||||||||||||||||||||||||||||
Mesa Vista Inn Health Center San Antonio, TX |
7,336,000 | 2,010,000 | 10,430,000 | | 2,010,000 | 10,430,000 | 12,440,000 | 274,000 | 2008 | 12/31/09 | 39 years | |||||||||||||||||||||||||||||||||
Rome LTACH Project |
8,588,000 | | | | | | | | 01/12/10 | | ||||||||||||||||||||||||||||||||||
Oakleaf Village Portfolio |
17,849,000 | |||||||||||||||||||||||||||||||||||||||||||
Oakleaf Village at Lexington |
1,767,000 | 10,768,000 | 3,000 | 1,767,000 | 10,771,000 | 12,538,000 | 191,000 | 1999 | 04/30/10 | 39 years | ||||||||||||||||||||||||||||||||||
Oakleaf Village at Greenville |
1,351,000 | 9,770,000 | 4,000 | 1,351,000 | 9,774,000 | 11,125,000 | 174,000 | 2001 | 04/30/10 | 39 years | ||||||||||||||||||||||||||||||||||
Global Rehab Inpatient Rehab Facility |
7,530,000 | 2,004,000 | 10,368,000 | | 2,004,000 | 10,368,000 | 12,372,000 | 104,000 | 2008 | 08/19/10 | 39 years | |||||||||||||||||||||||||||||||||
Terrace at Mountain Creek |
5,700,000 | 1,880,000 | 6,070,000 | | 1,880,000 | 6,070,000 | 7,950,000 | 55,000 | 1995 | 09/03/10 | 39 years | |||||||||||||||||||||||||||||||||
Specialty Rehabilitation Facility Project |
1,000 | 557,000 | | | 557,000 | | 557,000 | | | 12/15/10 | | |||||||||||||||||||||||||||||||||
Hedgcoxe |
5,060,000 | 1,580,000 | 6,388,000 | | 1,580,000 | 6,388,000 | 7,968,000 | 6,000 | 2008 | 12/22/10 | 38 years | |||||||||||||||||||||||||||||||||
Rivers Edge of Yardley |
2,500,000 | 860,000 | 3,010,000 | | 860,000 | 3,010,000 | 3,870,000 | 6,000 | 1996 | 12/22/10 | 25 years | |||||||||||||||||||||||||||||||||
Carriage Court of Hilliard |
13,586,000 | 1,580,000 | 12,180,000 | | 1,580,000 | 12,180,000 | 13,760,000 | 11,000 | 1998 | 12/22/10 | 31 years | |||||||||||||||||||||||||||||||||
Totals |
$ | 80,792,000 | $ | 18,949,000 | $ | 89,505,000 | $ | 214,000 | $ | 18,949,000 | $ | 89,719,000 | $ | 108,668,000 | $ | 1,786,000 | ||||||||||||||||||||||||||||
(a) | The changes in total real estate for the years ended December 31, 2010 are as follows. |
Accumulated | ||||||||
Cost | Depreciation | |||||||
Balance at December 31, 2008 |
$ | | $ | | ||||
2009 Acquisitions |
30,952,000 | 399,000 | ||||||
2009 Additions |
93,000 | 6,000 | ||||||
Balance at December 31, 2009 |
$ | 31,045,000 | $ | 405,000 | ||||
2010 Acquisitions |
58,553,000 | 555,000 | ||||||
2010 Additions |
121,000 | 826,000 | ||||||
Balance at December 31, 2010 |
$ | 89,719,000 | $ | 1,786,000 | ||||
(b) | For federal income tax purposes, the aggregate cost of our thirteen properties is approximately $122.8 million. |
F-30
Table of Contents
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORNERSTONE HEALTHCARE PLUS REIT, INC. |
||||
By: | /s/ TERRY G. ROUSSEL | |||
TERRY G. ROUSSEL | ||||
Chief Executive Officer, President and
Chairman of the Board of Directors
Date: March 23, 2011 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on March 23, 2011.
Name | Title | |
/s/ Terry G. Roussel
|
Chief Executive Officer and Director (Principal Executive Officer) |
|
/s/ Sharon C. Kaiser
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
|
/s/ Steven M. Pearson
|
Director | |
/s/ James M. Skorheim
|
Director | |
/s/ Barry A. Chase
|
Director | |
/s/ William Bloomer
|
Director | |
/s/ Romeo Cefalo
|
Director | |
/s/ William Sinton
|
Director | |
/s/ Ronald Shuck
|
Director |
F-31
Table of Contents
Ex. | Description | |
1.1
|
Form of Dealer Manager Agreement (incorporated by reference to Exhibit 1.1 to the Registrants Registration Statement on Form S-11 (No. 333-168013) filed on July 7, 2010 (Registration Statement)). | |
1.2
|
Form of Participating Broker Agreement (incorporated by reference to Exhibit 1.2 to the Registration Statement). | |
3.1
|
Articles of Amendment and Restatement of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
3.2
|
Articles of Amendment of the Registrant, dated as of December 29, 2009 (incorporated by reference to Exhibit 3.2 to the Registrants Annual Report on Form 10-K for the 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 Registrants prospectus filed on February 7, 2011). | |
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 Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007 (Pre-Effective Amendment No. 2). | |
4.3
|
Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrants prospectus filed on February 7, 2011). | |
10.1
|
Advisory Agreement (incorporated by reference to Exhibit 10.1 to Pre-Effective Amendment No. 3 to the Registration Statement on Form S-11 (No. 333-139704) filed on July 16, 2007 (Pre-Effective Amendment No. 3)). | |
10.2
|
Form of Employee and Director Long-term Incentive Plan (incorporated by reference to Exhibit 10.2 to Pre-Effective Amendment No. 3). | |
10.3
|
Agreement of Limited Partnership of Cornerstone Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3 to Pre-Effective Amendment No. 2). | |
10.4
|
Purchase and Sale Agreement, as amended, by and between Cornerstone Growth and Income Operating Partnership, L.P. and SHP II Caruth, LP, a Texas limited partnership. (incorporated by reference to the Registrants current report on Form 8-K filed November 13, 2008). | |
10.5
|
Multifamily Deed of Trust, Assignment of Rents and Security Agreement and Fixture Filing by and between by and between Caruth Haven L.P, a Delaware limited partnership as trustor, Peter S. Graf, as trustee, and KeyCorp Real Estate Capital Markets, Inc., an Ohio Corporation as beneficiary, dated as of December 16, 2009 (incorporated by reference to Exhibit 10.5 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.6
|
Multifamily Note by and between Caruth Haven L.P, a Delaware limited partnership as borrower, and KeyCorp Real Estate Capital Markets, Inc., an Ohio Corporation , dated as of December 16, 2009 (incorporated by reference to Exhibit 10.6 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.7
|
Purchase and Sale Agreement, by and between Greentree Acquisition, LLC, a Delaware limited liability company and Greentree at Westwood, LLC, an Indiana limited liability company, dated December 30, 2009 (incorporated by reference to the Registrants current report on Form 8-K filed January 6, 2010). | |
10.8
|
Purchase and Sale Agreement, by and between MVI Health Center, LP, a Delaware limited partnership and SNF Mesa Vista, LLC, an Texas limited liability company, dated December 31, 2009 (incorporated by reference to the Registrants current report on Form 8-K filed January 6, 2010). |
F-32
Table of Contents
Ex. | Description | |
10.9
|
Deed of Trust (Security Agreement and Financing Statement) by and between HHC San Antonio Northwest NC, LP, as Grantor, PlainsCapital Bank, as Beneficiary, and Frank Jackel, as Trustee, dated as of March 23, 2007 (incorporated by reference to Exhibit 10.9 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.10
|
Promissory Note by and between HHC San Antonio Northwest NC, LP, as Borrower, and PlainsCapital Bank, as Lender, dated as of March 23, 2007 (incorporated by reference to Exhibit 10.10 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.11
|
Assumption Agreement by and between SNF Mesa Vista, LLC, a Texas limited liability company and MVI Health Center, LP, a Delaware limited partnership, dated as of December 31, 2009 (incorporated by reference to Exhibit 10.11 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.12
|
Amended and Restated Lease Agreement by and between MVI Health Center, LP, a Delaware limited partnership as Lessor and PM Management Babcock NC, LLC, a Texas limited liability company as Lessee, dated as of December 31, 2009 (incorporated by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
10.13
|
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 Registrants Current Report on Form 8-K filed May 5, 2010). | |
10.14
|
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 Registrants Current Report on Form 8-K filed May 5, 2010). | |
10.15
|
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 Registrants Current Report on Form 8-K filed May 5, 2010). | |
10.16
|
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 Registrants Current Report on Form 8-K filed May 5, 2010). | |
10.17
|
Purchase and Sale Agreement, by and between Global Rehab Dallas, LP, a Delaware limited partnership and GR IRF I, LP, a Texas limited partnership, dated July 14, 2010 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed August 25, 2010). | |
10.18
|
First Amendment to Purchase and Sale Agreement, by and between Global Rehab Dallas, LP, a Delaware limited partnership and GR IRF I, LP, a Texas limited partnership, dated July 19, 2010 (incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed August 25, 2010). | |
10.19
|
Second Amendment to Purchase and Sale Agreement, by and between Global Rehab Dallas, LP, a Delaware limited partnership and GR IRF I, LP, a Texas limited partnership, dated August 17, 2010 (incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed August 25, 2010). | |
10.20
|
Hospital Lease Agreement dated August 28, 2007 with GlobalRehab, LP, a Texas limited partnership, as lessee, as amended on September 18, 2007, November 9, 2007, February 19, 2009 and August 2, 2010 (incorporated by reference to Exhibit 10.2 to Post-Effective Amendment No. 6 to the Registrants Registration Statement on Form S-11, Commission File No. 333-139704). |
F-33
Table of Contents
Ex. | Description | |
10.21
|
Credit Agreement by and Among Cornerstone Healthcare Plus Operating Partnership, L.P. and KeyBank National Association, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed November 24, 2010 (incorporated by reference to Exhibit 10.21 to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-11, Commission File No. 333-168013). | |
10.22
|
The Purchase and Sale Agreement by and Among Hilliard ALF, LLC, a Delaware limited liability company and Carriage Court Hilliard, LLC, a Delaware limited liability company and Carriage Court Hilliard Lessee, LLC, a Delaware limited liability company and Lawyers Title Insurance Corporation, a Nebraska corporation, dated July 18, 2010 (incorporated by reference to Exhibit 10.22 to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-11, Commission File No. 333-168013). | |
10.23
|
Release and Assumption Agreement by and between Hilliard ALF, LLC, a Delaware limited liability company, and Hilliard ALF TRS, LLC, a Delaware limited liability company and Carriage Court Hilliard, LLC, a Delaware limited liability company and Carriage Court Hilliard Lessee, LLC, a Delaware limited liability company, dated December 22, 2010 (incorporated by reference to Exhibit 10.23 to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-11, Commission File No. 333-168013). | |
10.24
|
Mortgage Note by and between Carriage Court Hilliard, LLC, a Delaware limited liability company and Red Mortgage Capital, Inc., an Ohio corporation, dated July 30, 2009 (incorporated by reference to Exhibit 10.24 to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-11, Commission File No. 333-168013). | |
10.25
|
Operating Agreement of Cornerstone Rome LTH Partners LLC, a Delaware limited liability company, dated effective as of December 18, 2009 (incorporated by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
10.26
|
Agreement of Limited Partnership of Rome LTH Partners, LP, a Texas limited partnership, dated effective as of December 18, 2009 (incorporated by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
10.27
|
Loan Agreement Between Mutual of Omaha Bank and Rome LTH Partners, LP dated as of December 18, 2009 (incorporated by reference to Exhibit 10.3 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
10.28
|
Ground Lease Agreement with Floyd Healthcare Management, Inc, d/b/a Floyd Medical Center dated as of December 18, 2010 (incorporated by reference to Exhibit 10.4 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
10.29
|
Lease Agreement dated effective as of December 18, 2009 entered into by and between Rome LTH Partners, LP, and The Specialty Hospital, LLC. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.5 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
10.30
|
Lease Agreement dated effective as of December 18, 2009 entered into by and between Rome LTH Partners, LP, and Floyd Healthcare Management, Inc, d/b/a Floyd Medical Center. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.6 of the Registrants Quarterly Report on Form 10-Q filed on May 17, 2010). | |
14.1
|
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009). | |
21.1
|
List of Subsidiaries (filed herewith). |
F-34
Table of Contents
Ex. | Description | |
31.1
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
31.2
|
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
F-35