UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 000-54371

GRUBB & ELLIS HEALTHCARE REIT II, INC.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		26-4008719 (I.R.S. Employer Identification No.)
1551 N. Tustin Avenue,
Suite 300, Santa Ana, California (Address of principal executive offices)		92705 (Zip Code)

(714) 667-8252
(Registrant’s telephone number, including area code)

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

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

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

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

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

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

As of April 30, 2011, there were 24,083,002 shares of common stock of Grubb & Ellis Healthcare REIT II, Inc. outstanding.

 

 

Grubb & Ellis Healthcare REIT II, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			2
Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Unaudited)			2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)			3
Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2011 and 2010 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			46
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			50
Item 4. [Removed and Reserved.]			50
Item 5. Other Information			51
Item 6. Exhibits			51
Signatures			52
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements.

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31, 2011				December 31, 2010
ASSETS
Real estate investments:
Operating properties, net		$	194,098,000			$	163,335,000
Cash and cash equivalents			6,706,000				6,018,000
Accounts and other receivables, net			479,000				241,000
Restricted cash			3,158,000				2,816,000
Real estate and escrow deposits			1,100,000				649,000
Identified intangible assets, net			33,299,000				28,568,000
Other assets, net			2,982,000				2,369,000
Total assets		$	241,822,000			$	203,996,000
LIABILITIES AND EQUITY
Liabilities:
Mortgage loans payable, net		$	49,175,000			$	58,331,000
Line of credit			7,400,000				11,800,000
Accounts payable and accrued liabilities			3,586,000				3,356,000
Accounts payable due to affiliates			1,173,000				840,000
Derivative financial instruments			379,000				453,000
Identified intangible liabilities, net			481,000				502,000
Security deposits, prepaid rent and other liabilities			3,437,000				3,352,000
Total liabilities			65,631,000				78,634,000
Commitments and contingencies (Note 10)
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value; 200,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 21,579,624 and 15,452,668 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively			216,000				154,000
Additional paid-in capital			192,221,000				137,657,000
Accumulated deficit			(16,367,000	)			(12,571,000	)
Total stockholders’ equity			176,070,000				125,240,000
Noncontrolling interests (Note 12)			121,000				122,000
Total equity			176,191,000				125,362,000
Total liabilities and equity		$	241,822,000			$	203,996,000

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

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended
		March 31,
		2011				2010
Revenue:
Rental income		$	6,007,000			$	61,000
Expenses:
Rental expenses			1,203,000				17,000
General and administrative			921,000				185,000
Acquisition related expenses			1,549,000				637,000
Depreciation and amortization			2,202,000				29,000
Total expenses			5,875,000				868,000
Income (loss) from operations			132,000				(807,000	)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt discount):
Interest expense			(1,095,000	)			(1,000	)
Gain in fair value of derivative financial instruments			74,000				—
Interest income			4,000				5,000
Net loss			(885,000	)			(803,000	)
Less: net (income) loss attributable to noncontrolling interests			—				—
Net loss attributable to controlling interest		$	(885,000	)		$	(803,000	)
Net loss per common share attributable to controlling interest — basic and diluted		$	(0.05	)		$	(0.30	)
Weighted average number of common shares outstanding — basic and diluted			18,144,696				2,690,794
Distributions declared per common share		$	0.16			$	0.16

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

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

		Stockholders’ Equity
		Common Stock
		Number of								Additional				Preferred				Accumulated				Noncontrolling
		Shares				Amount				Paid-In Capital				Stock				Deficit				Interests				Total Equity
BALANCE — December 31, 2010			15,452,668			$	154,000			$	137,657,000			$	—			$	(12,571,000	)		$	122,000			$	125,362,000
Issuance of common stock			5,999,895				61,000				59,809,000				—				—				—				59,870,000
Offering costs			—				—				(6,465,000	)			—				—				—				(6,465,000	)
Issuance of common stock under the DRIP			135,561				1,000				1,287,000				—				—				—				1,288,000
Repurchase of common stock			(8,500	)			—				(78,000	)			—				—				—				(78,000	)
Amortization of nonvested common stock compensation			—				—				11,000				—				—				—				11,000
Distribution to noncontrolling interests			—				—				—				—				—				(1,000	)			(1,000	)
Distributions declared			—				—				—				—				(2,911,000	)			—				(2,911,000	)
Net loss			—				—				—				—				(885,000	)			—				(885,000	)
BALANCE — March 31, 2011			21,579,624			$	216,000			$	192,221,000			$	—			$	(16,367,000	)		$	121,000			$	176,191,000

		Stockholders’ Equity
		Common Stock
		Number of								Additional				Preferred				Accumulated				Noncontrolling
		Shares				Amount				Paid-In Capital				Stock				Deficit				Interest				Total Equity
BALANCE — December 31, 2009			1,532,268			$	15,000			$	13,549,000			$	—			$	(281,000	)		$	1,000			$	13,284,000
Issuance of common stock			2,469,928				25,000				24,627,000				—				—				—				24,652,000
Offering costs			—				—				(2,673,000	)			—				—				—				(2,673,000	)
Issuance of common stock under the DRIP			13,214				—				126,000				—				—				—				126,000
Amortization of nonvested common stock compensation			—				—				8,000				—				—				—				8,000
Contribution from sponsor			—				—				259,000				—				—				—				259,000
Distributions declared			—				—				—				—				(433,000	)			—				(433,000	)
Net loss			—				—				—				—				(803,000	)			—				(803,000	)
BALANCE — March 31, 2010			4,015,410			$	40,000			$	35,896,000			$	—			$	(1,517,000	)		$	1,000			$	34,420,000

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

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(885,000	)		$	(803,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization (including deferred financing costs, above/below market leases, leasehold interests, debt discount and deferred rent receivable)			2,060,000				18,000
Stock based compensation			11,000				8,000
Bad debt expense			14,000				—
Changes in fair value of derivative financial instruments			(74,000	)			—
Changes in operating assets and liabilities:
Accounts and other receivables, net			(77,000	)			—
Other assets, net			(309,000	)			(70,000	)
Accounts payable and accrued liabilities			82,000				234,000
Accounts payable due to affiliates			321,000				(29,000	)
Security deposits, prepaid rent and other liabilities			(42,000	)			(22,000	)
Net cash provided by (used in) operating activities			1,101,000				(664,000	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate operating properties			(37,636,000	)			(9,915,000	)
Capital expenditures			(388,000	)			—
Restricted cash			(342,000	)			(38,000	)
Real estate and escrow deposits			(451,000	)			(500,000	)
Net cash used in investing activities			(38,817,000	)			(10,453,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on mortgage loans payable			(9,165,000	)			—
Borrowings under the line of credit			19,700,000				—
Payments under the line of credit			(24,100,000	)			—
Proceeds from issuance of common stock			59,870,000				24,652,000
Deferred financing costs			(84,000	)			(19,000	)
Repurchase of common stock			(78,000	)			—
Contribution from sponsor			—				236,000
Distribution to noncontrolling interests			(1,000	)			—
Security deposits			(1,000	)			—
Payment of offering costs			(6,437,000	)			(2,826,000	)
Distributions paid			(1,300,000	)			(110,000	)
Net cash provided by financing activities			38,404,000				21,933,000
NET CHANGE IN CASH AND CASH EQUIVALENTS			688,000				10,816,000
CASH AND CASH EQUIVALENTS — Beginning of period			6,018,000				13,773,000
CASH AND CASH EQUIVALENTS — End of period		$	6,706,000			$	24,589,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	1,032,000			$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Investing Activities:
Accrued capital expenditures		$	412,000			$	—
The following represents the increase in certain assets and liabilities in connection with our acquisitions of operating properties:
Other receivables		$	174,000			$	118,000
Other assets		$	42,000			$	7,000
Mortgage loans payable, net		$	—			$	3,025,000
Derivative financial instrument		$	—			$	310,000
Accounts payable and accrued liabilities		$	60,000			$	107,000
Security deposits, prepaid rent and other liabilities		$	127,000			$	81,000
Financing Activities:
Issuance of common stock under the DRIP		$	1,288,000			$	126,000
Contribution receivable from sponsor		$	—			$	23,000
Distributions declared but not paid		$	1,117,000			$	197,000
Accrued offering costs		$	653,000			$	129,000
Accrued deferred financing costs		$	5,000			$	7,000

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

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The use of the words “we,” “us” or “our” refers to Grubb & Ellis Healthcare REIT II, Inc. and its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context otherwise requires.

1. Organization and Description of Business

Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7, 2009 and therefore we consider that our date of inception. We were initially capitalized on February 4, 2009. We intend to invest in a diversified portfolio of real estate properties, focusing primarily on medical office buildings and healthcare-related facilities. We may also originate and acquire secured loans and real estate-related investments. We generally will seek investments that produce current income. We intend to elect to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes for our taxable year ended December 31, 2010.

We are conducting a best efforts initial public offering, or our offering, in which we are offering to the public up to 300,000,000 shares of our common stock for $10.00 per share in our primary offering and 30,000,000 shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, for $9.50 per share, for a maximum offering of up to $3,285,000,000. The United States Securities and Exchange Commission, or SEC, declared our registration statement effective as of August 24, 2009. We reserve the right to reallocate the shares of our common stock we are offering between the primary offering and the DRIP. As of March 31, 2011, we had received and accepted subscriptions in our offering for 21,222,108 shares of our common stock, or $211,732,000, excluding shares of our common stock issued pursuant to the DRIP.

We conduct substantially all of our operations through Grubb & Ellis Healthcare REIT II Holdings, LP, or our operating partnership. We are externally advised by Grubb & Ellis Healthcare REIT II Advisor, LLC, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our advisor that has a one-year term that expires June 1, 2011 and is subject to successive one-year renewals upon the mutual consent of the parties. Our advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our advisor also provides marketing, sales and client services on our behalf. Our advisor engages affiliated entities to provide various services to us. Our advisor is managed by and is a wholly owned subsidiary of Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our sponsor.

We currently operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. As of March 31, 2011, we had completed 16 acquisitions comprising 30 buildings and approximately 995,000 square feet of gross leasable area, or GLA, for an aggregate purchase price of $230,815,000.

Grubb & Ellis Healthcare REIT II, Inc.

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

2. Summary of Significant Accounting Policies

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

Basis of Presentation

Our accompanying condensed consolidated financial statements include our accounts and those of our operating partnership, the wholly owned subsidiaries of our operating partnership and all non-wholly owned subsidiaries and any variable interest entities, or VIEs, as defined, in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidation, or ASC Topic 810, which we have concluded should be consolidated pursuant to ASC Topic 810. We operate and intend to continue to operate in an umbrella partnership REIT structure in which our operating partnership, or wholly owned subsidiaries of our operating partnership, will own substantially all of the properties acquired on our behalf. We are the sole general partner of our operating partnership and as of March 31, 2011 and December 31, 2010 own a 99.99% general partnership interest therein. Our advisor is a limited partner and as of March 31, 2011 and December 31, 2010 owns a 0.01% noncontrolling limited partnership interest in our operating partnership. Because we are the sole general partner of our operating partnership and have unilateral control over its management and major operating decisions, the accounts of our operating partnership are consolidated in our condensed consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation.

Interim Unaudited Financial Data

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

In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 10, 2011.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. 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 differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.

Grubb & Ellis Healthcare REIT II, Inc.

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

Allowance for Uncollectible Accounts

Tenant receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. We maintain an allowance for deferred rent receivables arising from the straight line recognition of rents. Such allowance is charged to bad debt expense which is included in general and administrative in our accompanying condensed consolidated statements of operations. Our determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. As of March 31, 2011 and December 31, 2010, we had $19,000 and $5,000, respectively, in allowance for uncollectible accounts which was determined necessary to reduce receivables to our estimate of the amount recoverable. For the three months ended March 31, 2011 and 2010, none of our receivables or deferred rent receivables were directly written off to bad debt expense.

Segment Disclosure

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. As of March 31, 2011, we operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. With the continued expansion of our portfolio, we believe segregation of our operations into three reporting segments would be useful in assessing the performance of our business in the same way that management intends to review our performance and make operating decisions. Prior to this we operated through one reportable segment. See Note 15, Segment Reporting, for a further discussion.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, Improving Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends ASC Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820, to require additional disclosure and clarify existing disclosure requirements about fair value measurements. ASU 2010-06 requires entities to provide fair value disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in the statement of financial position. The additional requirements also include disclosure regarding the amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. The guidance clarifies existing disclosure requirements regarding the inputs and valuation techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements, which disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted ASU 2010-06 on January 1, 2010 and January 1, 2011, as applicable, which only applies to our disclosures on the fair value of financial instruments. The adoption of ASU 2010-06 did not have a material impact on our footnote disclosures. We have provided the applicable disclosures in Note 13, Fair Value of Financial Instruments.

Grubb & Ellis Healthcare REIT II, Inc.

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

3. Real Estate Investments

Our investments in our consolidated properties consisted of the following as of March 31, 2011 and December 31, 2010:

		March 31, 2011				December 31, 2010
Land		$	17,395,000			$	14,592,000
Building and improvements			180,208,000				150,813,000
			197,603,000				165,405,000
Less: accumulated depreciation			(3,505,000	)			(2,070,000	)
		$	194,098,000			$	163,335,000

Depreciation expense for the three months ended March 31, 2011 and 2010 was $1,444,000 and $16,000, respectively. In addition to the property acquisitions discussed below, for the three months ended March 31, 2011 and 2010 we had capital expenditures of $393,000 and $0, respectively, on our medical office buildings.

We reimburse our advisor or its affiliates for acquisition expenses related to selecting, evaluating, acquiring and investing in properties. The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our disinterested independent directors. As of March 31, 2011, such fees and expenses did not exceed 6.0% of the purchase price of our acquisitions.

Acquisitions in 2011

During the three months ended March 31, 2011, we completed three acquisitions comprising five buildings from unaffiliated parties. The aggregate purchase price of these properties was $37,373,000 and we paid $1,023,000 in acquisition fees to our advisor or its affiliates in connection with these acquisitions. The following is a summary of our acquisitions for the three months ended March 31, 2011:

																				Acquisition Fee
								Ownership				Purchase				Line of				to our Advisor
Property		Location		Type		Date Acquired		Percentage				Price				Credit(1)				or its Affiliates(2)
Columbia Long-Term Acute Care Hospital(3)		Columbia, MO		Hospital		01/31/11			100	%		$	12,423,000			$	11,000,000			$	336,000
St. Anthony North Medical Office Building		Westminster, CO		Medical Office		03/29/11			100	%			11,950,000				—				329,000
Loma Linda Pediatric Specialty Hospital		Loma Linda, CA		Skilled Nursing		03/31/11			100	%			13,000,000				8,700,000				358,000
Total												$	37,373,000			$	19,700,000			$	1,023,000

Grubb & Ellis Healthcare REIT II, Inc.

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

Acquisitions in 2010

During the three months ended March 31, 2010, we completed two acquisitions comprising three buildings from unaffiliated parties. The aggregate purchase price of these properties was $13,470,000 and we paid $371,000 in acquisition fees to our advisor or its affiliates in connection with these acquisitions. The following is a summary of our acquisitions for the three months ended March 31, 2010:

																						Mortgage				Acquisition Fee
										Date				Ownership				Purchase				Loans				to our Advisor
Property		Location				Type				Acquired				Percentage				Price				Payable(1)				or its Affiliates(2)
Lacombe Medical Office Building		Lacombe, LA				Medical Office					03/05/10				100	%		$	6,970,000			$	—			$	192,000
Center for Neurosurgery and Spine		Sartell, MN				Medical Office					03/31/10				100	%			6,500,000				3,341,000				179,000
Total																		$	13,470,000			$	3,341,000			$	371,000

4. Identified Intangible Assets, Net

Identified intangible assets, net consisted of the following as of March 31, 2011 and December 31, 2010:

		March 31, 2011				December 31, 2010
In place leases, net of accumulated amortization of $1,360,000 and $1,028,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 11.5 years and 11.3 years as of March 31, 2011 and December 31, 2010, respectively)		$	15,769,000			$	13,245,000
Above market leases, net of accumulated amortization of $178,000 and $121,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 9.5 years and 9.6 years as of March 31, 2011 and December 31, 2010, respectively)			1,729,000				1,795,000
Tenant relationships, net of accumulated amortization of $565,000 and $377,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 22.0 years and 21.8 years as of March 31, 2011 and December 31, 2010, respectively)			13,609,000				11,912,000
Leasehold interests, net of accumulated amortization of $7,000 and $2,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 65.7 years and 62.4 years as of March 31, 2011 and December 31, 2010, respectively)			1,888,000				1,256,000
Master lease, net of accumulated amortization of $152,000 and $95,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 1.3 years and 1.6 years as of March 31, 2011 and December 31, 2010, respectively)			304,000				360,000
		$	33,299,000			$	28,568,000

Amortization expense for the three months ended March 31, 2011 and 2010 was $827,000 and $13,000, respectively, which included $66,000 and $0, respectively, of amortization recorded against rental income for above market leases and $5,000 and $0, respectively, of amortization recorded against rental expenses for leasehold interests in our accompanying condensed consolidated statements of operations.

Grubb & Ellis Healthcare REIT II, Inc.

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

The aggregated weighted average remaining life of the identified intangible assets is 18.7 years and 17.7 years as of March 31, 2011 and December 31, 2010, respectively. Estimated amortization expense on the identified intangible assets as of March 31, 2011, for the nine months ending December 31, 2011 and for each of the next four years ending December 31 and thereafter, is as follows:

Year		Amount
2011		$	2,495,000
2012			3,019,000
2013			2,648,000
2014			2,511,000
2015			2,304,000
Thereafter			20,322,000
		$	33,299,000

5. Other Assets, Net

Other assets, net consisted of the following as of March 31, 2011 and December 31, 2010:

		March 31, 2011				December 31, 2010
Deferred financing costs, net of accumulated amortization of $408,000 and $225,000 as of March 31, 2011 and December 31, 2010, respectively		$	1,205,000			$	1,390,000
Lease commissions, net of accumulated amortization of $3,000 and $1,000 as of as of March 31, 2011 and December 31, 2010, respectively			304,000				58,000
Deferred rent receivable			1,025,000				576,000
Prepaid expenses and deposits			448,000				345,000
		$	2,982,000			$	2,369,000

Amortization expense on deferred financing costs and lease commissions for the three months ended March 31, 2011 and 2010 was $249,000 and $0, respectively, of which $247,000 and $0, respectively, of amortization was recorded as interest expense for deferred financing costs in our accompanying condensed consolidated statements of operations. $42,000 of the $247,000 was related to the write-off of deferred financing costs due to the early extinguishment of a mortgage loan payable on Surgical Hospital of Humble. See Note 6, Mortgage Loans Payable, Net, for a further discussion.

Estimated amortization expense on deferred financing costs and lease commissions as of March 31, 2011, for the nine months ending December 31, 2011 and for each of the next four years ending December 31 and thereafter, is as follows:

Year		Amount
2011		$	594,000
2012			392,000
2013			89,000
2014			84,000
2015			84,000
Thereafter			266,000
		$	1,509,000

6. Mortgage Loans Payable, Net

Mortgage loans payable were $49,483,000 ($49,175,000, net of discount) and $58,648,000 ($58,331,000, net of discount) as of March 31, 2011 and December 31, 2010, respectively.

As of March 31, 2011, we had two fixed rate and three variable rate mortgage loans payable with effective interest rates ranging from 1.35% to 6.00% per annum and a weighted average effective interest rate of 5.01% per annum. As of March 31, 2011, we had $12,286,000 ($12,266,000, net of discount) of fixed rate debt, or 24.8% of mortgage loans payable, at a weighted average effective interest rate of 5.96% per annum and $37,197,000 ($36,909,000, net of discount) of variable rate debt, or 75.2% of mortgage loans payable, at a weighted average effective interest rate of 4.70% per annum.

Grubb & Ellis Healthcare REIT II, Inc.

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

As of December 31, 2010, we had two fixed rate and four variable rate mortgage loans payable with effective interest rates ranging from 1.36% to 6.00% per annum and a weighted average effective interest rate of 5.12% per annum. As of December 31, 2010, we had $12,354,000 ($12,332,000, net of discount) of fixed rate debt, or 21.1% of mortgage loans payable, at a weighted average effective interest rate of 5.96% per annum and $46,294,000 ($45,999,000, net of discount) of variable rate debt, or 78.9% of mortgage loans payable, at a weighted average effective interest rate of 4.90% per annum.

Most of the mortgage loans payable may be prepaid and in some cases subject to a prepayment premium. We are required by the terms of certain loan documents to meet certain covenants, such as occupancy ratios, leverage ratios, net worth ratios, debt service coverage ratios, liquidity ratios, operating cash flow to fixed charges ratios, distribution ratios and reporting requirements. As of March 31, 2011 and December 31, 2010, we were in compliance with all such requirements.

Mortgage loans payable, net consisted of the following as of March 31, 2011 and December 31, 2010:

		Interest
Property		Rate(1)				Maturity Date		March 31, 2011				December 31, 2010
Fixed Rate Debt:
Highlands Ranch Medical Pavilion			5.88	%		11/11/12		$	4,360,000			$	4,383,000
Pocatello East Medical Office Building			6.00	%		10/01/20			7,926,000				7,971,000
									12,286,000				12,354,000
Variable Rate Debt:
Center for Neurosurgery and Spine(2)			1.35	%		08/15/21 (callable)			3,130,000				3,184,000
Virginia Skilled Nursing Facility Portfolio(3)			5.50	%		03/14/12			26,810,000				26,810,000
Surgical Hospital of Humble(4)			5.75	%		12/09/11			—				9,000,000
Lawton Medical Office Building Portfolio			3.16	%		01/01/16			7,257,000				7,300,000
									37,197,000				46,294,000
Total fixed and variable rate debt									49,483,000				58,648,000
Less: discount									(308,000	)			(317,000	)
Mortgage loans payable, net								$	49,175,000			$	58,331,000

Grubb & Ellis Healthcare REIT II, Inc.

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

The principal payments due on our mortgage loans payable as of March 31, 2011, for the nine months ending December 31, 2011 and for each of the next four years ending December 31 and thereafter, is as follows:

Year		Amount
2011		$	3,440,000
2012			31,439,000
2013			341,000
2014			341,000
2015			341,000
Thereafter			13,581,000
		$	49,483,000

7. Derivative Financial Instrument

ASC Topic 815, Derivatives and Hedging, or ASC Topic 815, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We utilize derivatives such as fixed interest rate swaps to add stability to interest expense and to manage our exposure to interest rate movements. Consistent with ASC Topic 815, we record derivative financial instruments in our accompanying condensed consolidated balance sheets as either an asset or a liability measured at fair value. ASC Topic 815 permits special hedge accounting if certain requirements are met. Hedge accounting allows for gains and losses on derivatives designated as hedges to be offset by the change in value of the hedged item(s) or to be deferred in other comprehensive income.

As of March 31, 2011, no derivatives were designated as fair value hedges or cash flow hedges. Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes in the fair value of derivative financial instruments are recorded as a component of interest expense in gain (loss) in fair value of derivative financial instruments in our accompanying condensed consolidated statements of operations. For the three months ended March 31, 2011 and 2010, we recorded $74,000 and $0, respectively, as a decrease to interest expense in our accompanying condensed consolidated statements of operations related to the change in the fair value of our derivative financial instruments.

The following table lists the derivative financial instruments held by us as of March 31, 2011:

						Interest										Maturity
Notional Amount				Index		Rate				Fair Value				Instrument		Date
$	3,130,000			one month LIBOR			6.00	%		$	(330,000	)		Swap			08/15/21
	7,257,000			one month LIBOR			4.41	%			(49,000	)		Swap			01/01/14
$	10,387,000									$	(379,000	)

The following table lists the derivative financial instruments held by us as of December 31, 2010:

						Interest										Maturity
Notional Amount				Index		Rate				Fair Value				Instrument		Date
$	3,184,000			one month LIBOR			6.00	%		$	(372,000	)		Swap			08/15/21
	7,300,000			one month LIBOR			4.41	%			(81,000	)		Swap			01/01/14
$	10,484,000									$	(453,000	)

See Note 13, Fair Value of Financial Instruments, for a further discussion of the fair value of our derivative financial instruments.

8. Line of Credit

On July 19, 2010, we entered into a loan agreement with Bank of America, or the Bank of America Loan Agreement, to obtain a secured revolving credit facility with an aggregate maximum principal amount of $25,000,000, or the line of credit. The actual amount of credit available under the line of credit at any given time is a function of, and is subject to, certain loan to cost, loan to value and debt service coverage ratios contained in the Bank of America Loan Agreement. The line of credit matures on July 19, 2012 and may be extended by one 12-month period subject to satisfaction of certain conditions, including payment of an extension fee.

Grubb & Ellis Healthcare REIT II, Inc.

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

Any loan made under the line of credit shall bear interest at per annum rates equal to either: (i) the daily floating London Interbank Offered Rate, or LIBOR, plus 3.75%, subject to a minimum interest rate floor of 5.00% per annum, or (ii) or if the daily floating LIBOR rate is not available, a base rate which means, for any day, a fluctuating rate per annum equal to the prime rate for such day plus 3.75%, subject to a minimum interest rate floor of 5.00% per annum.

The Bank of America Loan Agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt and limitations on distributions by properties that serve as collateral for the line of credit in the event of default. The Bank of America Loan Agreement also provides that an event of default under any other unsecured or recourse debt that we have in excess of $5,000,000 shall constitute an event of default under the Bank of America Loan Agreement. The Bank of America Loan Agreement also imposes the following financial covenants: (i) minimum liquidity thresholds; (ii) a minimum ratio of operating cash flow to fixed charges; (iii) a maximum ratio of liabilities to asset value; (iv) a maximum distribution covenant; and (v) a minimum tangible net worth covenant. In the event of default, Bank of America has the right to terminate its obligations under the Bank of America Loan Agreement, including the funding of future loans and to accelerate the payment on any unpaid principal amount of all outstanding loans and interest thereon and may seek foreclosure on any properties securing the line of credit. As of March 31, 2011 and December 31, 2010, we were in compliance with all such covenants and requirements.

As of March 31, 2011 and December 31, 2010, our aggregate borrowing capacity under the line of credit was $25,000,000 and $22,600,000, respectively, and borrowings under the line of credit totaled $7,400,000 and $11,800,000, respectively. As of March 31, 2011 and December 31, 2010, $17,600,000 and $10,800,000, respectively, remained available under the line of credit. The weighted-average interest rate of borrowings as of March 31, 2011 and December 31, 2010 was 5.00% per annum. The line of credit is secured by Lacombe Medical Office Building, Parkway Medical Center, Livingston Medical Arts Pavilion, St. Vincent Medical Office Building, Sylva Medical Office Building and Ennis Medical Office Building as of March 31, 2011.

On May 4, 2011, we entered into an agreement with Bank of America to modify the line of credit. For a further discussion of the modification of the line of credit, see Note 18, Subsequent Events — Line of Credit Modification.

9. Identified Intangible Liabilities, Net

Identified intangible liabilities, net consisted of the following as of March 31, 2011 and December 31, 2010:

		March 31, 2011				December 31, 2010
Below market leases, net of accumulated amortization of $55,000 and $42,000 as of March 31, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 17.1 years and 16.9 years as of March 31, 2011 and December 31, 2010, respectively)		$	481,000			$	502,000

Amortization expense on below market leases for the three months ended March 31, 2011 and 2010 was $21,000 and $0, respectively. Amortization expense on below market leases is recorded to rental income in our accompanying condensed consolidated statements of operations.

Grubb & Ellis Healthcare REIT II, Inc.

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

Estimated amortization expense on below market leases as of March 31, 2011, for the nine months ending December 31, 2011 and for each of the next four years ending December 31 and thereafter, is as follows:

Year		Amount
2011		$	61,000
2012			72,000
2013			25,000
2014			17,000
2015			17,000
Thereafter			289,000
		$	481,000

10. Commitments and Contingencies

Litigation

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

Environmental Matters

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

Other Organizational and Offering Expenses

Our organizational and offering expenses, other than selling commissions and the dealer manager fee, are being paid by our advisor or its affiliates on our behalf. Other organizational and offering expenses include all expenses (other than selling commissions and the dealer manager fee which generally represent 7.0% and 3.0%, respectively, of our gross offering proceeds) to be paid by us in connection with our offering. These other organizational and offering expenses will only become our liability to the extent they do not exceed 1.0% of the gross proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP. As of March 31, 2011 and December 31, 2010, our advisor and its affiliates had incurred expenses on our behalf of $2,737,000 and $2,701,000, respectively, in excess of 1.0% of the gross proceeds of our offering, and therefore, these expenses are not recorded in our accompanying condensed consolidated financial statements as of March 31, 2011 and December 31, 2010. To the extent we raise additional funds from our offering, these amounts may become our liability.

When recorded by us, other organizational expenses will be expensed as incurred, and offering expenses are charged to stockholders’ equity as such amounts are reimbursed to our advisor or its affiliates from the gross proceeds of our offering. See Note 11, Related Party Transactions — Offering Stage, for a further discussion of other organizational and offering expenses.

Other

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

Grubb & Ellis Healthcare REIT II, Inc.

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

11. Related Party Transactions

Fees and Expenses Paid to Affiliates

All of our executive officers and our non-independent directors are also executive officers and employees and/or holders of a direct or indirect interest in our advisor, our sponsor, Grubb & Ellis Equity Advisors or other affiliated entities. We entered into the Advisory Agreement with our advisor and a dealer manager agreement with Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities, or our dealer manager. Effective as of April 19, 2011, the dealer manager agreement with Grubb & Ellis Securities was assigned to, and assumed by, Grubb & Ellis Capital Corporation, a wholly owned subsidiary of our sponsor. These agreements entitle our advisor, our dealer manager and their affiliates to specified compensation for certain services, as well as reimbursement of certain expenses. In the aggregate, for the three months ended March 31, 2011 and 2010, we incurred $8,393,000 and $3,082,000, respectively, to our advisor or its affiliates as detailed below.

Offering Stage

Selling Commissions

Our dealer manager receives selling commissions of up to 7.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to participating broker-dealers. For the three months ended March 31, 2011 and 2010, we incurred $4,069,000 and $1,686,000, respectively, in selling commissions to our dealer manager. Such commissions are charged to stockholders’ equity as such amounts are reimbursed to our dealer manager from the gross proceeds of our offering.

Dealer Manager Fee

Our dealer manager receives a dealer manager fee of up to 3.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to participating broker-dealers. For the three months ended March 31, 2011 and 2010, we incurred $1,796,000 and $740,000, respectively, in dealer manager fees to our dealer manager or its affiliates. Such fees and reimbursements are charged to stockholders’ equity as such amounts are reimbursed to our dealer manager or its affiliates from the gross proceeds of our offering.

Other Organizational and Offering Expenses

Our organizational and offering expenses are paid by our advisor or Grubb & Ellis Equity Advisors on our behalf. Our advisor or Grubb & Ellis Equity Advisors are reimbursed for actual expenses incurred up to 1.0% of the gross offering proceeds from the sale of shares of our common stock in our offering other than shares of our common stock sold pursuant to the DRIP. For the three months ended March 31, 2011 and 2010, we incurred $600,000 and $247,000, respectively, in offering expenses to our advisor or Grubb & Ellis Equity Advisors. Other organizational expenses are expensed as incurred, and offering expenses are charged to stockholders’ equity as such amounts are reimbursed to our advisor or Grubb & Ellis Equity Advisors from the gross proceeds of our offering.

Acquisition and Development Stage

Acquisition Fee

Our advisor or its affiliates receive an acquisition fee of up to 2.75% of the contract purchase price for each property we acquire or 2.0% of the origination or acquisition price for any real estate-related investment we originate or acquire. Our advisor or its affiliates are entitled to receive these acquisition fees for properties and real estate-related investments we acquire with funds raised in our offering, including acquisitions completed after the termination of the Advisory Agreement, or funded with net proceeds from the sale of a property or real estate-related investment, subject to certain conditions.

For the three months ended March 31, 2011 and 2010, we incurred $1,023,000 and $371,000, respectively, in acquisition fees to our advisor or its affiliates. Acquisition fees in connection with the acquisition of properties are expensed as incurred in accordance with ASC Topic 805, Business Combinations, or ASC Topic 805, and are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

Grubb & Ellis Healthcare REIT II, Inc.

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

Development Fee

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

For the three months ended March 31, 2011 and 2010, we did not incur any development fees to our advisor or its affiliates.

Reimbursement of Acquisition Expenses

Our advisor or its affiliates are reimbursed for acquisition expenses related to selecting, evaluating and acquiring assets, which will be reimbursed regardless of whether an asset is acquired. The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our disinterested independent directors. As of March 31, 2011, such fees and expenses did not exceed 6.0% of the purchase price or total development costs.

For the three months ended March 31, 2011 and 2010, we incurred $8,000 and $8,000, respectively, in acquisition expenses to our advisor or its affiliates. Reimbursements of acquisition expenses are expensed as incurred in accordance with ASC Topic 805 and are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

Operational Stage

Asset Management Fee

Our advisor or its affiliates are paid a monthly fee for services rendered in connection with the management of our assets equal to one-twelfth of 0.85% of average invested assets, subject to our stockholders receiving distributions in an amount equal to 5.0% per annum, cumulative, non-compounded, of average invested capital. For such purposes, average invested assets means the average of the aggregate book value of our assets invested in real estate properties and real estate-related investments, before deducting depreciation, amortization, bad debt and other similar non-cash reserves, computed by taking the average of such values at the end of each month during the period of calculation; and average invested capital means, for a specified period, the aggregate issue price of shares of our common stock purchased by our stockholders, reduced by distributions of net sales proceeds by us to our stockholders and by any amounts paid by us to repurchase shares of our common stock pursuant to our share repurchase plan.

For the three months ended March 31, 2011 and 2010, we incurred $440,000 and $5,000, respectively, in asset management fees to our advisor or its affiliates, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

Property Management Fee

Our advisor or its affiliates are paid a monthly property management fee of up to 4.0% of the gross monthly cash receipts from each property managed by our advisor or its affiliates. Our advisor or its affiliates may sub-contract its duties to any third-party, including for fees less than the property management fees payable to our advisor, or its affiliates. In addition to the above property management fee, for each property managed directly by entities other than our advisor or its affiliates, we will pay our advisor or its affiliates a monthly oversight fee of up to 1.0% of the gross cash receipts from the property; provided however, that in no event will we pay both a property management fee and an oversight fee to our advisor or its affiliates with respect to the same property.

Grubb & Ellis Healthcare REIT II, Inc.

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

For the three months ended March 31, 2011 and 2010, we incurred $120,000 and $2,000, respectively, in property management fees and oversight fees to our advisor or its affiliates, which is included in rental expenses in our accompanying condensed consolidated statements of operations.

On-site Personnel and Engineering Payroll

For the three months ended March 31, 2011 and 2010, our advisor or its affiliates incurred on our behalf $24,000 and $0, respectively, in payroll for on-site personnel and engineering, which is included in rental expenses in our accompanying condensed consolidated statements of operations.

Lease Fees

We may pay our advisor or its affiliates a separate fee for any leasing activities in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Such fee is generally expected to range from 3.0% to 8.0% of the gross revenues generated during the initial term of the lease.

For the three months ended March 31, 2011 and 2010, we incurred $248,000 and $0, respectively, in lease fees to our advisor or its affiliates, which is capitalized as lease commissions and included in other assets, net in our accompanying condensed consolidated balance sheets.

Construction Management Fee

In the event that our advisor or its affiliates assist with planning and coordinating the construction of any capital or tenant improvements, our advisor or its affiliates will be paid a construction management fee of up to 5.0% of the cost of such improvements. For the three months ended March 31, 2011 and 2010, we did not incur any construction management fees to our advisor or its affiliates. Construction management fees are capitalized as part of the associated asset and included in operating properties, net on our accompanying condensed consolidated balance sheets.

Operating Expenses

We reimburse our advisor or its affiliates for operating expenses incurred in rendering services to us, subject to certain limitations. However, we cannot reimburse our advisor or its affiliates at the end of any fiscal quarter for total operating expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of: (i) 2.0% of our average invested assets, as defined in the Advisory Agreement, or (ii) 25.0% of our net income, as defined in the Advisory Agreement, unless our independent directors determine that such excess expenses are justified based on unusual and nonrecurring factors. For the 12 months ended March 31, 2011, our operating expenses did not exceed this limitation. Our operating expenses as a percentage of average invested assets and as a percentage of net income were 1.7% and 141.0%, respectively, for the 12 months ended March 31, 2011.

For the three months ended March 31, 2011 and 2010, Grubb & Ellis Equity Advisors incurred operating expenses on our behalf of $9,000 and $9,000, respectively, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

Related Party Services Agreement

We entered into a services agreement, effective September 21, 2009, or the Transfer Agent Services Agreement, with Grubb & Ellis Equity Advisors, Transfer Agent, LLC, formerly known as Grubb & Ellis Investor Solutions, LLC, or our transfer agent, for transfer agent and investor services. The Transfer Agent Services Agreement has an initial one-year term and shall thereafter automatically be renewed for successive one-year terms. Since our transfer agent is an affiliate of our advisor, the terms of the Transfer Agent Services Agreement were approved and determined by a majority of our directors, including a majority of our independent directors, as fair and reasonable to us and at fees which are no greater than that which would be paid to an unaffiliated third party for similar services. The Transfer Agent Services Agreement requires our transfer agent to provide us with a 180 day advance written notice for any termination, while we have the right to terminate upon 60 days advance written notice.

Grubb & Ellis Healthcare REIT II, Inc.

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

For the three months ended March 31, 2011 and 2010, we incurred expenses of $49,000 and $14,000, respectively, for investor services that our transfer agent provided to us, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

For the three months ended March 31, 2011 and 2010, Grubb & Ellis Equity Advisors incurred expenses of $20,000 and $10,000, respectively, for subscription agreement processing services that our transfer agent provided to us. As an other organizational and offering expense, these subscription agreement processing expenses will only become our liability to the extent cumulative other organizational and offering expenses do not exceed 1.0% of the gross proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP.

Compensation for Additional Services

Our advisor or its affiliates are paid for services performed for us other than those required to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of compensation for these services must be approved by a majority of our board of directors, including a majority of our independent directors, and cannot exceed an amount that would be paid to unaffiliated third parties for similar services. For the three months ended March 31, 2011 and 2010, we incurred expenses of $7,000 and $0, respectively, for internal controls compliance services our advisor or its affiliates provided to us.

Liquidity Stage

Disposition Fees

For services relating to the sale of one or more properties, our advisor or its affiliates will be paid a disposition fee up to the lesser of 2.0% of the contract sales price or 50.0% of a customary competitive real estate commission given the circumstances surrounding the sale, in each case as determined by our board of directors, including a majority of our independent directors, upon the provision of a substantial amount of the services in the sales effort. The amount of disposition fees paid, when added to the real estate commissions paid to unaffiliated parties, will not exceed the lesser of the customary competitive real estate commission or an amount equal to 6.0% of the contract sales price. For the three months ended March 31, 2011 and 2010, we did not incur any disposition fees to our advisor or its affiliates.

Subordinated Participation Interest

Subordinated Distribution of Net Sales Proceeds

In the event of liquidation, our advisor will be paid a subordinated distribution of net sales proceeds. The distribution will be equal to 15.0% of the net proceeds from the sales of properties, after distributions to our stockholders, in the aggregate, of (i) a full return of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) plus (ii) an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock, as adjusted for distributions of net sale proceeds. Actual amounts to be received depend on the sale prices of properties upon liquidation. For the three months ended March 31, 2011 and 2010, we did not incur any such distributions to our advisor.

Subordinated Distribution upon Listing

Upon the listing of shares of our common stock on a national securities exchange, our advisor will be paid a distribution equal to 15.0% of the amount by which (i) the market value of our outstanding common stock at listing plus distributions paid prior to listing exceeds (ii) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the amount of cash that, if distributed to stockholders as of the date of listing, would have provided them an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the date of listing. Actual amounts to be received depend upon the market value of our outstanding stock at the time of listing among other factors. For the three months ended March 31, 2011 and 2010, we did not incur any such distributions to our advisor.

Grubb & Ellis Healthcare REIT II, Inc.

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

Subordinated Distribution Upon Termination

Upon termination or non-renewal of the Advisory Agreement, our advisor will be entitled to a subordinated distribution from our operating partnership equal to 15.0% of the amount, if any, by which (i) the appraised value of our assets on the termination date, less any indebtedness secured by such assets, plus total distributions paid through the termination date, exceeds (ii) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the total amount of cash that, if distributed to them as of the termination date, would have provided them an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the termination date. In addition, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing or other liquidity event, including a liquidation, sale of substantially all of our assets or merger in which our stockholders receive, in exchange for their shares of our common stock, shares of a company that are traded on a national securities exchange.

As of March 31, 2011 and December 31, 2010, we had not recorded any charges to earnings related to the subordinated distribution upon termination.

Accounts Payable Due to Affiliates

The following amounts were outstanding to affiliates as of March 31, 2011 and December 31, 2010:

Fee		March 31, 2011				December 31, 2010
Selling commissions and dealer manager fees		$	545,000			$	539,000
Lease commissions			236,000				5,000
Asset and property management fees			202,000				166,000
Offering costs			108,000				86,000
Operating expenses			60,000				16,000
On-site personnel and engineering payroll			9,000				7,000
Acquisition expenses			8,000				—
Construction management fees			5,000				21,000
		$	1,173,000			$	840,000

12. Equity

Preferred Stock

Our charter authorizes us to issue 200,000,000 shares of our $0.01 par value preferred stock. As of March 31, 2011 and December 31, 2010, no shares of preferred stock were issued and outstanding.

Common Stock

We are offering and selling to the public up to 300,000,000 shares of our common stock, par value $0.01 per share, for $10.00 per share and up to 30,000,000 shares of our common stock, par value $0.01 per share, to be issued pursuant to the DRIP for $9.50 per share. Our charter authorizes us to issue 1,000,000,000 shares of our common stock.

Grubb & Ellis Healthcare REIT II, Inc.

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

On February 4, 2009, our advisor purchased 20,000 shares of common stock for total cash consideration of $200,000 and was admitted as the initial stockholder. We used the proceeds from the sale of shares of our common stock to our advisor to make an initial capital contribution to our operating partnership.

On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock to our independent directors. On June 8, 2010, in connection with their re-election, we granted an aggregate of 7,500 shares of our restricted common stock to our independent directors. Through March 31, 2011, we had issued 21,222,108 shares of our common stock in connection with our offering and 344,516 shares of our common stock pursuant to the DRIP, and we had also repurchased 29,500 shares of our common stock under our share repurchase plan. As of March 31, 2011 and December 31, 2010, we had 21,579,624 and 15,452,668 shares of our common stock issued and outstanding.

Noncontrolling Interests

On February 4, 2009, our advisor made an initial capital contribution of $2,000 to our operating partnership in exchange for 200 partnership units.

As of March 31, 2011 and December 31, 2010, we owned a 99.99% general partnership interest in our operating partnership and our advisor owned a 0.01% limited partnership interest in our operating partnership. As such, 0.01% of the earnings of our operating partnership are allocated to noncontrolling interests, subject to certain limitations.

In addition, as of March 31, 2011 and December 31, 2010, we owned a 98.75% interest in the consolidated limited liability company that owns Pocatello East Medical Office Building, or the Pocatello East MOB property, that was purchased on July 27, 2010. As such, 1.25% of the earnings of the Pocatello East MOB property are allocated to noncontrolling interests.

Distribution Reinvestment Plan

We adopted the DRIP that allows stockholders to purchase additional shares of our common stock through the reinvestment of distributions, subject to certain conditions. We have registered and reserved 30,000,000 shares of our common stock for sale in our offering pursuant to the DRIP. For the three months ended March 31, 2011 and 2010, $1,288,000 and $126,000, respectively, in distributions were reinvested and 135,561 and 13,214 shares of our common stock, respectively, were issued pursuant to the DRIP. As of March 31, 2011 and December 31, 2010, a total of $3,273,000 and $1,985,000, respectively, in distributions were reinvested and 344,516 and 208,955 shares of our common stock, respectively, were issued pursuant to the DRIP.

Share Repurchase Plan

Our board of directors has approved a share repurchase plan. Our share repurchase plan allows for repurchases of shares of our common stock by us when certain criteria are met. Share repurchases will be made at the sole discretion of our board of directors. All repurchases are subject to a one-year holding period, except for repurchases made in connection with a stockholder’s death or “qualifying disability,” as defined in our share repurchase plan. Subject to the availability of the funds for share repurchases, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided, however, that shares subject to a repurchase requested upon the death of a stockholder will not be subject to this cap. Funds for the repurchase of shares of our common stock will come exclusively from the cumulative proceeds we receive from the sale of shares of our common stock pursuant to the DRIP.

Under our share repurchase plan, repurchase prices range from $9.25, or 92.5% of the price paid per share, following a one year holding period to an amount not less than 100% of the price paid per share following a four year holding period. However, if shares of our common stock are to be repurchased in connection with a stockholder’s death or qualifying disability, the repurchase price will be no less than 100% of the price paid to acquire the shares of our common stock from us. In order to effect the repurchase of shares of our common stock held for less than one year due to the death of a stockholder or a stockholder with a qualifying disability, we must receive written notice within one year after the death of the stockholder or the stockholder’s qualifying disability, as applicable. Furthermore, our share repurchase plan provides that if there are insufficient funds to honor all repurchase requests, pending requests will be honored among all requests for repurchase in any given repurchase period, as follows: first, pro rata as to repurchases sought upon a stockholder’s death; next, pro rata as to repurchases sought by stockholders with a qualifying disability; and, finally, pro rata as to other repurchase requests.

Grubb & Ellis Healthcare REIT II, Inc.

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

For the three months ended March 31, 2011, we received share repurchase requests and repurchased 8,500 shares of our common stock for an aggregate of $78,000 at an average repurchase price of $9.25 per share, using proceeds we received from the sale of shares of our common stock pursuant to the DRIP. We did not receive any share repurchase requests for the three months ended March 31, 2010. As of March 31, 2011 and December 31, 2010, we had received share repurchase requests and had repurchased 29,500 shares of our common stock for an aggregate of $288,000 at an average price of $9.78 per share and 21,000 shares of our common stock for an aggregate of $210,000 at an average price of $10.00 per share, respectively, using proceeds we received from the sale of shares of our common stock pursuant to the DRIP.

2009 Incentive Plan

We adopted the 2009 Incentive Plan, or our incentive plan, pursuant to which our board of directors or a committee of our independent directors may make grants of options, restricted shares of common stock, stock purchase rights, stock appreciation rights or other awards to our independent directors, employees and consultants. The maximum number of shares of our common stock that may be issued pursuant to our incentive plan is 2,000,000.

On October 21, 2009, we granted an aggregate of 15,000 shares of restricted common stock, as defined in our incentive plan, to our independent directors in connection with their initial election to our board of directors, of which 20.0% vested on the grant date and 20.0% will vest on each of the first four anniversaries of the date of grant. On June 8, 2010, in connection with their re-election, we granted an aggregate of 7,500 shares of our restricted common stock, as defined in our incentive plan, to our independent directors, which will vest over the same period described above. The fair value of each share of restricted common stock was estimated at the date of grant at $10.00 per share, the per share price of shares in our offering, and with respect to the initial 20.0% of shares that vested on the grant date, expensed as compensation immediately, and with respect to the remaining shares, amortized on a straight-line basis over the vesting period. Shares of restricted common stock may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions expire upon vesting. Shares of restricted common stock have full voting rights and rights to dividends. For the three months ended March 31, 2011 and 2010, we recognized compensation expense of $11,000 and $8,000, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three months ended March 31, 2011 and 2010, we did not assume any forfeitures. Stock compensation expense is included in general and administrative in our accompanying condensed consolidated statements of operations.

As of March 31, 2011 and December 31, 2010, there was $125,000 and $136,000, respectively, of total unrecognized compensation expense, net of estimated forfeitures, related to nonvested shares of our restricted common stock. This expense is expected to be recognized over a remaining weighted average period of 2.81 years.

Grubb & Ellis Healthcare REIT II, Inc.

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

As of March 31, 2011 and December 31, 2010, the fair value of the nonvested shares of restricted common stock was $150,000. A summary of the status of the nonvested shares of our restricted common stock as of March 31, 2011 and December 31, 2010, and the changes for the three months ended March 31, 2011, is presented below:

						Weighted
						Average Grant
		Number of Nonvested Shares of				Date Fair
		our Restricted Common Stock				Value
Balance — December 31, 2010			15,000			$	10.00
Granted			—				—
Vested			—				—
Forfeited			—				—
Balance — March 31, 2011			15,000			$	10.00
Expected to vest — March 31, 2011			15,000			$	10.00

13. Fair Value of Financial Instruments

Financial Instruments Reported at Fair Value

Derivative Financial Instruments

We use interest rate swaps to manage interest rate risk associated with floating rate debt. The valuation of these instruments is determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

To comply with the provisions of ASC Topic 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our interest rate swaps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this instrument utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparty. However, as of March 31, 2011, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our interest rate swaps. As a result, we have determined that our interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy.

Grubb & Ellis Healthcare REIT II, Inc.

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

Assets and liabilities at fair value

The table below presents our assets and liabilities measured at fair value on a recurring basis as of March 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

		Quoted Prices in
		Active Markets for								Significant
		Identical Assets				Significant Other				Unobservable
		and Liabilities				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Liabilities:
Derivative financial instruments		$	—			$	379,000			$	—			$	379,000
Total liabilities at fair value		$	—			$	379,000			$	—			$	379,000

The table below presents our assets and liabilities measured at fair value on a recurring basis as of December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

		Quoted Prices in
		Active Markets for								Significant
		Identical Assets				Significant Other				Unobservable
		and Liabilities				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Liabilities:
Derivative financial instruments		$	—			$	453,000			$	—			$	453,000
Total liabilities at fair value		$	—			$	453,000			$	—			$	453,000

Financial Instruments Disclosed at Fair Value

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

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

We consider the carrying values of cash and cash equivalents, restricted cash, real estate and escrow deposits, accounts and other receivables, net and accounts payable and accrued liabilities to approximate fair value for these financial instruments because of the short period of time between origination of the instruments and their expected realization. The fair value of accounts payable due to affiliates is not determinable due to the related party nature of the accounts payable.

The fair value of the mortgage loans payable and the line of credit is estimated using a discounted cash flow analysis using borrowing rates available to us for debt instruments with similar terms and maturities. As of March 31, 2011 and December 31, 2010, the fair value of the mortgage loans payable were $49,351,000 and $59,246,000, respectively, compared to the carrying value of $49,175,000 and $58,331,000, respectively. The fair value of the line of credit as of March 31, 2011 and December 31, 2010 was $7,499,000 and $12,070,000, respectively, compared to a carrying value of $7,400,000 and $11,800,000, respectively.

14. Business Combinations

2011

For the three months ended March 31, 2011, we completed three acquisitions comprising five buildings and 125,000 square feet of GLA. The aggregate purchase price was $37,373,000, plus closing costs and acquisition fees of $1,164,000, which are included in acquisition related expenses in our accompanying condensed consolidated statements of operations. See Note 3, Real Estate Investments, for a listing of the properties acquired, acquisition dates and the amount of financing initially incurred or assumed in connection with such acquisitions.

Grubb & Ellis Healthcare REIT II, Inc.

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

Results of operations for the property acquisitions are reflected in our accompanying condensed consolidated statements of operations for the three months ended March 31, 2011 for the periods subsequent to the acquisition dates. For the period from the acquisition date through March 31, 2011, we recognized the following amounts of revenues and net income (loss) for the property acquisitions:

Property		Revenues				Net Income
Columbia Long-Term Acute Care Hospital		$	248,000			$	155,000
St. Anthony North Denver Medical Office Building		$	17,000			$	7,000
Loma Linda Pediatric Specialty Hospital		$	4,000			$	—

The fair value of our three properties at the time of acquisition is shown below:

		Columbia Long-Term				St. Anthony North Denver				Loma Linda Pediatric
		Acute Care Hospital				Medical Office Building				Specialty Hospital
Land		$	1,433,000			$	—			$	1,370,000
Building and improvements			9,607,000				9,543,000				9,862,000
In-place leases			967,000				905,000				1,164,000
Tenant relationships			416,000				864,000				604,000
Leasehold interest			—				638,000				—
Total assets acquired			12,423,000				11,950,000				13,000,000
Total liabilities assumed			—				—				—
Net assets acquired		$	12,423,000			$	11,950,000			$	13,000,000

Assuming the property acquisitions in 2011 discussed above had occurred on January 1, 2010, for the three months ended March 31, 2011 and 2010, pro forma revenues, net income (loss), net income (loss) attributable to controlling interest and net income (loss) per common share attributable to controlling interest — basic and diluted would have been as follows:

		Three Months Ended
		March 31,
		2011				2010
Revenues		$	6,957,000			$	1,280,000
Net income (loss)		$	542,000			$	(399,000	)
Net income (loss) attributable to controlling interest		$	542,000			$	(399,000	)
Net income (loss) per common share attributable to controlling interest — basic and diluted		$	0.02			$	(0.07	)

The pro forma adjustments assume that the offering proceeds, at a price of $10.00 per share, net of offering costs were raised as of January 1, 2010. In addition, as acquisition related expenses related to the acquisitions are not expected to have a continuing impact, they have been excluded from the pro forma results. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

Grubb & Ellis Healthcare REIT II, Inc.

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

2010

For the three months ended March 31, 2010, we completed two acquisitions comprising three buildings and 71,000 square feet of GLA. The aggregate purchase price was $13,470,000, plus closing costs and acquisition fees of $505,000, which are included in acquisition related expenses in our accompanying condensed consolidated statements of operations. See Note 3, Real Estate Investments, for a listing of the properties acquired, the acquisition dates and the amount of financing initially incurred or assumed in connection with such acquisitions.

Results of operations for the property acquisitions are reflected in our accompanying condensed consolidated statements of operations for the three months ended March 31, 2010 for the periods subsequent to the acquisition dates. For the period from the acquisition date through March 31, 2010, we recognized the following amounts of revenues and net income (loss) for the property acquisitions:

Property		Revenues				Net Income (Loss)
Lacombe Medical Office Building		$	60,000			$	15,000
Center for Neurosurgery and Spine		$	1,000			$	(1,000	)

The fair value of our two properties at the time of acquisition is shown below:

		Lacombe Medical Office				Center for
		Building				Neurosurgery and Spine
Land		$	409,000			$	319,000
Building and improvements			5,438,000				4,689,000
In-place leases			512,000				575,000
Tenant relationships			458,000				585,000
Above market leases			—				327,000
Total assets acquired			6,817,000				6,495,000
Mortgage loan payables, net			—				(3,025,000	)
Derivative financial instrument			—				(310,000	)
Total liabilities assumed			—				(3,335,000	)
Net assets acquired		$	6,817,000			$	3,160,000

Assuming the property acquisitions in 2010 discussed above had occurred on January 1, 2010, for the three months ended March 31, 2010, pro forma revenues, net loss, net loss attributable to controlling interest and net loss per common share attributable to controlling interest — basic and diluted would have been as follows:

		Three Months Ended
		March 31, 2010
Revenues		$	319,000
Net loss		$	(876,000	)
Net loss attributable to controlling interest		$	(876,000	)
Net loss per common share attributable to controlling interest — basic and diluted		$	(0.33	)

The pro forma adjustments assume that the debt proceeds and the offering proceeds, at a price of $10.00 per share, net of offering costs were raised as of January 1, 2010. In addition, as acquisition related expenses related to the acquisitions are not expected to have a continuing impact, they have been excluded from the pro forma results. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

Grubb & Ellis Healthcare REIT II, Inc.

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

15. Segment Reporting

As of March 31, 2011, we evaluated our business and made resource allocations based on three business segments — medical office buildings, hospitals and skilled nursing facilities. Our medical office buildings are typically leased to multiple tenants under separate leases in each building, thus requiring active management and responsibility for many of the associated operating expenses (although many of these are, or can effectively be, passed through to the tenants). Our hospital investments are primarily single tenant properties which lease the facilities to unaffiliated tenants under “triple-net” and generally “master” leases that transfer the obligation for all facility operating costs (including maintenance, repairs, taxes, insurance and capital expenditures) to the tenant. Our skilled nursing facilities are acquired and similarly structured as our hospital investments. The accounting policies of these segments are the same as those described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 10, 2011. There are no intersegment sales or transfers.

We evaluate performance based upon net operating income of the combined properties in each segment. We define net operating income, a non-GAAP financial measure, as total revenues, less rental expenses. We believe that net income (loss), as defined by GAAP, is the most appropriate earnings measurement. However, we believe that segment profit serves as a useful supplement to net income (loss) because it allows investors and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies and between periods on a consistent basis. Segment profit should not be considered as an alternative to net income (loss) determined in accordance with GAAP as an indicator of our financial performance, and, accordingly, we believe that in order to facilitate a clear understanding of our consolidated historical operating results, segment profit should be examined in conjunction with net income (loss) as presented in our Consolidated Financial Statements and data included elsewhere in this Quarterly Report on Form 10-Q.

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

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

Grubb & Ellis Healthcare REIT II, Inc.

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

Summary information for the reportable segments during the three months ended March 31, 2011 and 2010 is as follows:

		Medical Office								Skilled Nursing				Three Months Ended
		Buildings				Hospitals				Facilities				March 31, 2011
Revenue:
Rental income		$	3,124,000			$	1,708,000			$	1,175,000			$	6,007,000
Expenses:
Rental expenses			1,000,000				136,000				67,000				1,203,000
Segment net operating income(1)		$	2,124,000			$	1,572,000			$	1,108,000			$	4,804,000
Expenses:
General and administrative															921,000
Acquisition related expenses															1,549,000
Depreciation and amortization															2,202,000
Income from operations															132,000
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt discount):
Interest expense															(1,095,000	)
Gain in fair value of derivative financial instruments															74,000
Interest income															4,000
Net loss														$	(885,000	)

		Medical Office								Skilled Nursing				Three Months Ended
		Buildings				Hospitals				Facilities				March 31, 2010
Revenue:
Rental income		$	61,000			$	—			$	—			$	61,000
Expenses:
Rental expenses			17,000				—				—				17,000
Segment net operating income(1)		$	44,000			$	—			$	—			$	44,000
Expenses:
General and administrative															185,000
Acquisition related expenses															637,000
Depreciation and amortization															29,000
Loss from operations															(807,000	)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt discount)															(1,000	)
Interest income															5,000
Net loss														$	(803,000	)