UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 30, 2011
Grubb
& Ellis Healthcare REIT II, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 000-54371 | 26-4008719 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
1551 N. Tustin Avenue, Suite 300, Santa Ana, California |
92705 |
|
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (714) 667-8252
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
INFORMATION TO BE INCLUDED IN THE REPORT
We previously filed a Current Report on Form 8-K on July 7, 2011 reporting our acquisition of
five skilled nursing facilities: Care Pavilion Skilled Nursing Facility, Cheltenham Skilled Nursing
Facility, Cliveden Skilled Nursing Facility, Maplewood Manor Skilled Nursing Facility and Tucker
House Skilled Nursing Facility, or the Philadelphia SNF Portfolio, all of which are located in
Philadelphia, Pennsylvania, for an aggregate purchase price of $75,000,000, plus closing costs. We
are filing this Current Report on Form 8-K/A, Amendment No. 1, to provide the financial information
required by Item 9.01.
On
June 30, 2011, we acquired the Philadelphia SNF Portfolio which
is leased to PA Holdings-SNF, L.P., whereby Mid-Atlantic Health Care, LLC, or Mid-Atlantic, serves as
the guarantor of the leased properties.
In
addition to the Philadelphia SNF Portfolio, Mid-Atlantic operates or
manages seven skilled nursing
facilities located in the states of Maryland and Delaware.
Mid-Atlantic commenced operations in 2003 and is viewed as a leader in innovative post-hospital
services throughout the region. Each facitility in the Philadelphia SNF Portfolio has between 180
and 396 beds.
In evaluating the Philadelphia SNF Portfolio as a potential acquisition and determining the
appropriate amount of consideration to be paid for the portfolio, a variety of factors were
considered, including our evaluation of property condition reports, the respective locations,
visibility and access to the five properties, the age, physical condition and curb appeal of the
five properties, neighboring property uses, local market conditions and general economic conditions
and patient demand.
The Philadelphia SNF Portfolio was built between 1900 and 1978 and consists of approximately
392,000 square feet of gross leasable area, or GLA, in the aggregate. The Philadelphia SNF
Portfolio is 100% leased to one tenant which has operations at each of the five property locations.
We believe that the financial condition and results of operations of the guarantor, Mid-Atlantic
Health Care, LLC, are more relevant to investors than the financial statements of the individual
properties and enable investors to evaluate the credit-worthiness of the guarantor of the lease and
pursuant to the guidance provided by the United States Securities and Exchange Commission, or the
SEC, we have provided the audited and unaudited financial statements of Mid-Atlantic Health Care,
LLC, below.
2
Item 9.01 Financial Statements and Exhibits.
Page | ||||
(a) Financial statements of businesses acquired. |
||||
Mid-Atlantic Health Care, LLC |
||||
I. Independent Auditors Report |
4 | |||
II. Balance Sheets as of December 31, 2009 and 2010 and March 31,
2011(Unaudited) |
5 | |||
III. Statements of Operations for the Years Ended December 31, 2008, 2009
and 2010 and for the Three Months Ended March 31, 2010
(Unaudited) and 2011 (Unaudited) |
6 | |||
IV. Statements of Members Equity for the Years Ended December 31,
2008, 2009 and 2010 and for the Three Months Ended March 31, 2011(Unaudited) |
7 | |||
V. Statements of Cash Flows for the Years Ended December 31, 2008, 2009
and 2010 and for the Three Months Ended March 31, 2010
(Unaudited) and 2011 (Unaudited) |
8 | |||
VI. Notes to Financial Statements |
10 | |||
(b) Pro forma financial information. |
||||
Grubb & Ellis Healthcare REIT II, Inc. |
||||
I. Unaudited Pro Forma Condensed Consolidated Financial Statements for the Six
Months Ended June 30, 2011 and for the Year Ended December 31, 2010 |
22 | |||
II. Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six
Months Ended June 30, 2011 |
23 | |||
III. Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 2010 |
24 | |||
IV. Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements for the
Six Months Ended June 30, 2011 and for the Year Ended December 31, 2010 |
25 |
3
INDEPENDENT AUDITORS REPORT
Board of Directors
Mid-Atlantic Health Care, LLC
Mid-Atlantic Health Care, LLC
We
have audited the accompanying balance sheets of Mid-Atlantic Health Care, LLC (the
Company) as of December 31, 2009 and 2010, and the related statements of operations,
members equity and cash flows for each of the three years in the period ended December 31, 2010.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes 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, the financial statements referred to above present fairly, in all
material respects, the financial position of Mid-Atlantic Health Care, LLC as of December 31, 2009
and 2010, and the results of its operations and its 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.
/s/ KMJ Corbin & Company LLP
KMJ Corbin & Company LLP
KMJ Corbin & Company LLP
Costa Mesa, California
September 16, 2011
September 16, 2011
4
MID-ATLANTIC HEALTH CARE, LLC
BALANCE SHEETS
December 31, | ||||||||||||
2009 | 2010 | March 31, 2011 | ||||||||||
(Unaudited) | ||||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash |
$ | 71,190 | $ | 371,245 | $ | 94,912 | ||||||
Accounts
receivable |
104,045 | 136,691 | | |||||||||
Due from employees |
5,000 | 25,000 | 25,000 | |||||||||
Due from
related parties, current portion |
1,167,062 | 704,732 | 125,504 | |||||||||
Due from members |
42,977 | 42,977 | 42,977 | |||||||||
Prepaid expenses and other current assets |
54,549 | 73,783 | 84,391 | |||||||||
Total current assets |
1,444,823 | 1,354,428 | 372,784 | |||||||||
Property and equipment, net |
76,058 | 122,292 | 120,789 | |||||||||
Other assets: |
||||||||||||
Project costs |
79,752 | 117,280 | 2,756,977 | |||||||||
Due from
related parties, net of current portion |
255,802 | 581,395 | 640,886 | |||||||||
Other assets |
6,143 | 6,143 | 6,143 | |||||||||
Total other assets |
341,697 | 704,818 | 3,404,006 | |||||||||
$ | 1,862,578 | $ | 2,181,538 | $ | 3,897,579 | |||||||
LIABILITIES AND MEMBERS EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable and accrued expenses |
$ | 184,903 | $ | 192,370 | $ | 304,884 | ||||||
Due to related parties |
539,932 | 262,531 | 1,379,280 | |||||||||
Line of credit |
| | 299,638 | |||||||||
Notes payable, current portion |
20,387 | 28,867 | 20,763 | |||||||||
Capital lease obligations, current portion |
13,666 | 1,396 | 1,396 | |||||||||
Total current liabilities |
758,888 | 485,164 | 2,005,961 | |||||||||
Notes payable, net of current portion |
11,690 | 22,425 | 19,728 | |||||||||
Capital lease obligations, net of current portion |
477 | 4,360 | 4,212 | |||||||||
Total liabilities |
771,055 | 511,949 | 2,029,901 | |||||||||
Commitments and contingencies |
||||||||||||
Members equity |
1,091,523 | 1,669,589 | 1,867,678 | |||||||||
$ | 1,862,578 | $ | 2,181,538 | $ | 3,897,579 | |||||||
See accompanying notes to financial statements
5
MID-ATLANTIC HEALTH CARE, LLC
STATEMENTS OF OPERATIONS
For The Three | For The Three | |||||||||||||||||||
For The Years Ended December 31, | Months Ended | Months Ended | ||||||||||||||||||
2008 | 2009 | 2010 | March 31, 2010 | March 31, 2011 | ||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||
Management fees |
$ | 1,712,493 | $ | 2,581,427 | $ | 3,279,186 | $ | 766,860 | $ | 895,942 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Administration |
1,470,600 | 1,547,625 | 2,050,292 | 436,455 | 551,279 | |||||||||||||||
Employee benefits |
267,174 | 256,897 | 328,439 | 80,530 | 118,471 | |||||||||||||||
Building |
15,924 | 15,195 | 24,244 | 8,126 | 6,377 | |||||||||||||||
Depreciation and amortization |
28,485 | 29,377 | 40,917 | 8,400 | 10,598 | |||||||||||||||
Rent |
23,977 | 25,055 | 37,947 | 9,487 | 9,710 | |||||||||||||||
Total operating expenses |
1,806,160 | 1,874,149 | 2,481,839 | 542,998 | 696,435 | |||||||||||||||
Operating (loss) income |
(93,667 | ) | 707,278 | 797,347 | 223,862 | 199,507 | ||||||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest expense |
(4,594 | ) | (3,304 | ) | (1,866 | ) | (509 | ) | (1,418 | ) | ||||||||||
Other income |
| | 482,585 | | | |||||||||||||||
Total other income (expense), net |
(4,594 | ) | (3,304 | ) | 480,719 | (509 | ) | (1,418 | ) | |||||||||||
Net (loss) income |
$ | (98,261 | ) | $ | 703,974 | $ | 1,278,066 | $ | 223,353 | $ | 198,089 | |||||||||
See accompanying notes to financial statements
6
MID-ATLANTIC HEALTH CARE, LLC
STATEMENTS OF MEMBERS DEFICIT
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2011 (Unaudited)
For The Three Months Ended March 31, 2011 (Unaudited)
Balance at January 1, 2008 |
$ | 391,982 | ||
Contributions from members |
253,828 | |||
Net loss |
(98,261 | ) | ||
Balance at December 31, 2008 |
547,549 | |||
Net income |
703,974 | |||
Distributions to members |
(160,000 | ) | ||
Balance at December 31, 2009 |
1,091,523 | |||
Net income |
1,278,066 | |||
Distributions to members |
(700,000 | ) | ||
Balance at December 31, 2010 |
1,669,589 | |||
Net income (unaudited) |
198,089 | |||
Balance at March 31, 2011 (unaudited) |
$ | 1,867,678 | ||
See accompanying notes to financial statements
7
MID-ATLANTIC HEALTH CARE, LLC
STATEMENTS OF CASH FLOWS
For The Three | For The Three | |||||||||||||||||||
For The Years Ended December 31, | Months Ended | Months Ended | ||||||||||||||||||
2008 | 2009 | 2010 | March 31, 2010 | March 31, 2011 | ||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (98,261 | ) | $ | 703,974 | $ | 1,278,066 | $ | 223,353 | $ | 198,089 | |||||||||
Adjustments to reconcile net (loss) income to net
cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
28,485 | 29,377 | 40,917 | 8,400 | 10,598 | |||||||||||||||
Project cost write-offs |
109,676 | 25,410 | 136,294 | | | |||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts receivable |
| (104,045 | ) | (32,646 | ) | 46,874 | 136,691 | |||||||||||||
Advances to employees |
| (5,000 | ) | (20,000 | ) | (15,000 | ) | | ||||||||||||
Prepaid expenses and other current assets |
4,841 | (6,324 | ) | (492 | ) | 2,168 | (10,608 | ) | ||||||||||||
Other assets |
7,648 | 7,425 | | | | |||||||||||||||
Accounts payable and accrued expenses |
73,023 | 14,800 | 7,467 | 61,465 | 112,514 | |||||||||||||||
Advances
(to) from related parties, net |
130,547 | (398,716 | ) | (178,664 | ) | (243,753 | ) | 1,636,486 | ||||||||||||
Net cash provided by operating activities |
255,959 | 266,901 | 1,230,942 | 83,507 | 2,083,770 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment |
| (17,155 | ) | (41,441 | ) | (11,718 | ) | (9,095 | ) | |||||||||||
Project refunds (costs) |
(216,980 | ) | 18,631 | (173,822 | ) | (41,788 | ) | (2,639,697 | ) | |||||||||||
Net cash used in investing activities |
(216,980 | ) | 1,476 | (215,263 | ) | (53,556 | ) | (2,648,792 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on capital lease obligations |
(12,112 | ) | (13,670 | ) | (13,882 | ) | (3,684 | ) | (148 | ) | ||||||||||
Proceeds from line of credit |
| | | | 299,638 | |||||||||||||||
Principal payments on notes payable |
(22,062 | ) | (32,029 | ) | (21,000 | ) | (9,873 | ) | (10,801 | ) | ||||||||||
Members distributions |
| (160,000 | ) | (662,000 | ) | (50,000 | ) | | ||||||||||||
Net cash (used in) provided by financing activities |
(34,174 | ) | (205,699 | ) | (696,882 | ) | (63,557 | ) | 288,689 | |||||||||||
Continued ...
8
MID-ATLANTIC HEALTH CARE, LLC
STATEMENTS OF CASH FLOWS CONTINUED
For The Three | For The Three | |||||||||||||||||||
For The Years Ended December 31, | Months Ended | Months Ended | ||||||||||||||||||
2008 | 2009 | 2010 | March 31, 2010 | March 31, 2011 | ||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||
Net increase (decrease) in cash |
4,805 | 62,678 | 300,055 | (33,556 | ) | (276,333 | ) | |||||||||||||
Cash, beginning of period |
3,707 | 8,512 | 71,190 | 71,190 | 371,245 | |||||||||||||||
Cash, end of period |
$ | 8,512 | $ | 71,190 | $ | 371,245 | $ | 37,634 | $ | 94,912 | ||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||||||||||
Cash paid for interest |
$ | 4,594 | $ | 3,304 | $ | 1,866 | $ | 509 | $ | 1,418 | ||||||||||
Cash paid for income taxes |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Supplemental disclosure of non-cash investing
and financing activities: |
||||||||||||||||||||
Acquisition of property and equipment
through note payable obligations |
$ | | $ | | $ | 40,215 | $ | | $ | | ||||||||||
Acquisition of property and equipment
through capital lease obligations |
$ | | $ | | $ | 5,495 | $ | | $ | | ||||||||||
Prepaid insurance financed with notes payable |
$ | 15,258 | $ | 23,626 | $ | 18,742 | $ | | $ | | ||||||||||
Reclassification of related party payables
to contributed capital |
$ | 253,828 | $ | | $ | | $ | | $ | | ||||||||||
Distributions reclassed from related party
accounts |
$ | | $ | | $ | 38,000 | $ | | $ | | ||||||||||
See accompanying notes to financial statements
9
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP).
Nature of Business
Mid-Atlantic Health Care, LLC (the Company) was formed as a limited liability company under the
laws of the State of Maryland on August 18, 2005. The Company, located in Timonium, Maryland, is
primarily responsible for the management and administration of nursing home facilities located in
Maryland and Delaware.
Interim Financial Information
The interim financial information as of March 31, 2011 and for the three months ended March 31,
2010 and 2011 is unaudited and has been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited information includes all adjustments
consisting only of normal recurring adjustments necessary for a fair presentation of the interim
information. Operating results for the three months ended March 31, 2011 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2011. All
references to March 31, 2011 or to the three months ended March 31, 2010 and 2011 in the notes to
the financial statements are unaudited.
Cash
The Company maintains cash balances at a financial institution. Accounts at the financial
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 and
the Companys non-interest bearing accounts are fully insured under the Temporary Liquidity
Guarantee Program, which has been extended through December 31, 2012. As of December 31, 2010 and
March 31, 2011, the Company had no amounts in excess of the FDIC insurance limits. The Company has
not experienced any losses in such accounts and believes it is not exposed to any significant
credit risk related to these deposits.
10
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Project Costs
Project
costs represent amounts expended for future acquisitions of
healthcare facilities, including deposits and other acquisition
related costs. The
Company will be reimbursed for project costs by the acquired facility at the time of acquisition.
If the acquisition is not made, the Company will expense any project costs that have not been
refunded at the time they become aware of the failed acquisition.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets of 5 years. Equipment under capital leases
is stated at the lower of the present value of minimum lease payments at the beginning of the
lease term or fair value at the inception of the lease. Equipment under capital leases is
amortized using the straight-line method over the lease term or the estimated useful life of the
equipment, as appropriate depending on the nature of the lease. Expenditures for major renewals
and betterments that extend the useful lives of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
Impairment of Long-Lived Assets
The Company reviews the carrying values of its long-lived assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. If the
expected future cash flows from the use of the asset and its eventual disposition is less than the
carrying amount of the asset, an impairment loss is recognized and measured using the fair value of
the related asset. No impairment charges were incurred during the years ended December 31, 2008,
2009 and 2010 and for the three months ended March 31, 2010 and 2011. There can be no assurance,
however, that market conditions will not change or demand for the Companys services will continue,
which could result in impairment of long-lived assets in the future.
11
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments
The Companys financial assets and liabilities recorded in the balance sheets include cash,
employee receivables, accounts receivable, amounts due to/due from related parties, accounts payable, accrued expenses,
line of credit, long-term debt and capital lease obligations. The
fair value of the line of credit, long-term debt and capital lease
obligations approximate carrying value based on current borrowing rates for similar types of
borrowing arrangements. The carrying amounts of the remaining financial assets and liabilities
approximate fair values based on the short-term maturities of the instruments.
GAAP has established a hierarchy which prioritizes the inputs to valuation techniques used to
measure fair value and requires that assets and liabilities carried at fair value be classified and
disclosed in one of the following three categories:
Level 1: | Quoted prices in active markets for identical assets or liabilities; | ||
Level 2: | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities, quoted prices in the markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and | ||
Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
Assets and liabilities are classified based on the lowest level of input that is significant to
the fair value measurement. The Company currently has no financial or nonfinancial assets or
liabilities subject to fair value measurement on a recurring basis.
12
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
The Companys revenue is derived from management fees charged to the nursing home facilities that
it manages based on underlying management contracts. Fees paid in advance to the Company are
deferred until earned. No amounts were advanced to the Company for management fees for the years
ended December 31, 2008, 2009 and 2010 and for the three months ended March 31, 2010 and 2011.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Significant estimates made
by management include, among others, collectability of receivables and the useful lives and
recoverability of long-lived assets. Actual results could differ from those estimates.
Income Taxes
The Company elected to be taxed under Subchapter S (S Corporation) of Chapter 1 of the Internal
Revenue Code for federal income tax purposes. Income tax effects of the Companys income or loss
are passed through to the members individually. Accordingly, no provision has been made for federal
income taxes in the accompanying financial statements. There is no minimum business state income
tax for the states of Maryland and Delaware; therefore, no provision for state income tax has been
made in the accompanying financial statements.
Subsequent Events
The Company has evaluated subsequent events through September 16, 2011, the date the financial
statements were available to be issued, and determined that no subsequent events have occurred that
would require recognition in the financial statements or disclosure in the notes
thereto other than as discussed in the accompanying notes.
13
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 2 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, | March 31, | |||||||||||
2009 | 2010 | 2011 | ||||||||||
(Unaudited) | ||||||||||||
Office furniture and equipment |
$ | 116,865 | $ | 189,361 | $ | 189,361 | ||||||
Computer equipment and software |
47,491 | 62,146 | 71,241 | |||||||||
164,356 | 251,507 | 260,602 | ||||||||||
Less accumulated depreciation
and amortization |
(88,298 | ) | (129,215 | ) | (139,813 | ) | ||||||
$ | 76,058 | $ | 122,292 | $ | 120,789 | |||||||
Depreciation and amortization expense of property and equipment for the years ended December 31,
2008, 2009 and 2010 and for the three months ended March 31, 2010 and 2011 totaled $28,485,
$29,377, $40,917, $8,400 (unaudited) and $10,598 (unaudited), respectively.
NOTE 3 PROJECT COSTS
Project
costs represent amounts expended for future acquisitions of
healthcare facilities, including deposits and other acquisition
related costs. The
Company has capitalized project costs in the amount of $79,752, $117,280 and $2,756,977 (unaudited)
as of December 31, 2009 and 2010, and as of March 31, 2011, respectively. The Company will be
reimbursed for project costs by the acquired facility at the time of acquisition. If the
acquisition is not made, the Company will expense any project costs that have not been refunded at
the time they become aware of the failed acquisition. Project costs of $109,676, $25,410 and
$136,294 were written off during the years ended December 31,
2008, 2009 and 2010, respectively,
and are included in administration expenses in the accompanying statements of operations. No
project costs were written off during the three months ended March 31, 2010 and 2011.
In February 2011, the Company entered into five separate Agreements of Purchase and Sale
(Agreements) for the purchase of five nursing home facilities and their real
property located in Pennsylvania. As of March 31, 2011, the Company had paid earnest monies
totaling $2,500,000 related to these Agreements. In June 2011, the Company renegotiated the
Agreements with the sellers (see Note 10).
14
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 4 NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following:
December 31, | March 31, | |||||||||||
2009 | 2010 | 2011 | ||||||||||
(Unaudited) | ||||||||||||
During 2009 and 2010, the Company financed its
insurance policies. The notes are unsecured
with interest payable during 2009 and 2010 at a
rate of 5.25% and 6.25%, respectively. The 2009
note payable has been paid in full. Monthly
payments of principal and interest on the 2010
note in the amount of $1,662 are payable
through March 2011. |
$ | 3,032 | $ | 4,812 | $ | | ||||||
During 2009 and 2010, the Company financed its
directors and officers insurance policies. The
notes are unsecured with interest payable at a
rate of 6.79% and 6.20% during 2009 and 2010,
respectively. As of December 31, 2010, the note
was paid in full. |
6,565 | | | |||||||||
During 2009 and 2010, the Company financed
certain vehicles through notes payable. The
notes require total monthly principal payments
in the amount of $899 and $2,050 for 2009 and
2010, respectively. The notes mature at various
dates through July 2013. One of the notes
accrues interest at a rate of 1.9%, while the
other note is non-interest bearing. Both notes
are secured by vehicles. |
22,480 | 46,480 | 40,491 | |||||||||
32,077 | 51,292 | 40,491 | ||||||||||
Less current portion |
(20,387 | ) | (28,867 | ) | (20,763 | ) | ||||||
$ | 11,690 | $ | 22,425 | $ | 19,728 | |||||||
15
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 4 NOTES PAYABLE AND LINE OF CREDIT, continued
Aggregate annual maturities of notes payable as of December 31, 2010 are as follows:
Years Ending | ||||
December 31, | ||||
2011 |
$ | 28,867 | ||
2012 |
14,419 | |||
2013 |
8,006 | |||
$ | 51,292 | |||
Interest
expense on notes payable was $397, $664, $620, $116 (unaudited) and
$42 (unaudited) for the years ended December
31, 2008, 2009, 2010 and for the three months ended March 31, 2010 and 2011, respectively.
Line of Credit
On January 13, 2011, the Company entered into a promissory note agreement (the Line) with a bank. The
Line provides for maximum borrowings of $360,000. The Line is
collateralized by all equipment of the Company. The Line bears interest at a rate of 4.55% per
annum. The outstanding principal plus all accrued unpaid interest was due on July 1, 2011. The
Company subsequently amended the terms of the Line to extend the maturity date to December 31,
2011. As of March 31, 2011, the outstanding balance on the Line was $299,638 (unaudited). The
Company recorded interest expense of $1,174 (unaudited) related
to the Line for the three months ended March 31, 2011.
NOTE 5 MEMBERS EQUITY
During the year ended December 31, 2008, the Company converted an aggregate of $253,828 of amounts
due to members to contributed capital.
During the years ended December 31, 2009 and 2010, the Company distributed cash in the amount of
$160,000 and $662,000, respectively, to its members, based on their ownership percentages. There were no
distributions made during the year ended December 31, 2008 and for the three months ended March 31,
2011. During the year ended December 31, 2010, the Company
reclassified $38,000 of related party advances to distributions.
16
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 6 RELATED PARTY TRANSACTIONS
Management Fees
Management fee income received from parties related through common ownership amounted to
$1,712,493, $2,143,984 and $2,809,516 for the years ended December 31, 2008, 2009 and 2010, respectively.
Management fee income received from parties related through common ownership amounted to $637,504
(unaudited) and $758,876 (unaudited) for the three months ended March 31, 2010 and 2011,
respectively.
Due From Employees
The amounts due from employees arose from advances to employees for personal use. Included in this
amount are amounts due from the Companys Chief Financial Officer of $20,000 and $20,000
(unaudited) as of December 31, 2010 and March 31, 2011,
respectively.
Due From/To Related Parties
The amounts due from/to related parties arose from working capital advances to and from the Company
and unpaid management fees. All advances are unsecured, due on
demand, and non-interest bearing.
Due From/To Members
The amounts due from/to members arose from advances by the members to and from the Company. All
advances are unsecured, due on demand, and non-interest bearing. Amounts due to members of $150,123,
$106,048, and $82,497 (unaudited) are included in due to related parties
in the accompanying balance sheets as of December 31, 2009, 2010 and
March 31, 2011, respectively.
17
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 7 401(k) RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal Revenue Code. Under the plan
any employee who has completed one year of service is eligible to become a participant in the plan.
Participants of the plan can defer a percentage of their compensation not to exceed limits
established by the Internal Revenue Service. Participant contributions are 100% vested and are not
subject to forfeiture. The Company contributes matching funds equal to 100% of the employees
contributions, up to a maximum of 5% of compensation and may make an annual contribution at the
discretion of the Company. Total expense incurred by the Company related to this plan, excluding
administrative fees, was $56,026, $47,218, $58,939, $10,166 (unaudited) and $13,330 (unaudited)
for the years ended December 31, 2008, 2009 and 2010, and for the three months ended March 31, 2010
and 2011, respectively. As of December 31, 2009 and 2010 and as of March 31, 2011, the
Companys liability under the plan was $45,384, $54,696 and $67,842 (unaudited), respectively, which
is included in accounts payable and accrued expenses in the
accompanying balance sheets.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office facility under a non-cancelable operating lease arrangement. The
operating lease expires on December 31, 2014 and requires monthly payments ranging from $3,200 to
$3,400. Total rent expense for the years ended December 31, 2008, 2009, 2010 and for the three months
ended March 31, 2010 and 2011 was $23,977, $25,055, $37,947, $9,487 (unaudited) and $9,710
(unaudited), respectively.
The future minimum lease payments under the terms of the lease as of December 31, 2010 are as follows:
Years Ending | ||||
December 31, | ||||
2011 |
$ | 39,000 | ||
2012 |
40,000 | |||
2013 |
41,000 | |||
2014 |
41,000 | |||
$ | 161,000 | |||
18
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 8 COMMITMENTS AND CONTINGENCIES, continued
Capital Leases
The Company has capital lease agreements for office and equipment that expire on various dates in
January 2011 through September 2015 with imputed interest rates up to 13.00% per annum. The leases
require monthly payments ranging from $112 to $766.
The future minimum lease payments under the capital leases and the net present value of future
minimum lease payments as of December 31, 2010 are as follows:
Years Ending | ||||
December 31, | ||||
2011 |
$ | 1,900 | ||
2012 |
1,400 | |||
2013 |
1,400 | |||
2014 |
1,400 | |||
2015 |
1,000 | |||
7,100 | ||||
Less amounts representing interest |
(1,344 | ) | ||
Present value of minimum lease payments |
5,756 | |||
Less current installments |
(1,396 | ) | ||
$ | 4,360 | |||
Interest expense on the capital lease obligations for the years ended December 31, 2008, 2009 and
2010 and for the three months ended March 31, 2010 and 2011 was $980, $2,640, $1,246, $393 (unaudited) and
$202 (unaudited), respectively.
19
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 8 COMMITMENTS AND CONTINGENCIES, continued
The following is an analysis of the equipment under capital lease, which is included in property
and equipment:
December 31, | March 31, | |||||||||||
2009 | 2010 | 2011 | ||||||||||
(Unaudited) | ||||||||||||
Equipment under capital leases |
$ | 45,903 | $ | 40,932 | $ | 40,932 | ||||||
Less accumulated depreciation and amortization |
(32,226 | ) | (34,547 | ) | (35,240 | ) | ||||||
$ | 13,677 | $ | 6,385 | $ | 5,692 | |||||||
Litigation
The Company may become a party to litigation in the normal course of business. The Company accrues
for open claims based on its historical experience and available insurance coverage. In the opinion
of management, there are no legal matters involving the Company that would have a material adverse
effect on the Companys financial position or results of operations.
Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees,
under which it may be required to make payments to a guaranteed or indemnified party, in relation
to certain actions or transactions. The Company indemnifies its managers, employees and agents to
the maximum extent permitted under the laws of the States of Maryland, and lessors in connection
with facility lease for certain claims arising from use of such facility. Additionally, the
Company indemnifies the bank under the Line against any and all claims, losses, liabilities, damages,
penalties, and expenses which the Company may directly or indirectly sustain or suffer resulting
from a breach of this promissory note. Historically, the Company has not been obligated nor
incurred any payments for these obligations and, therefore, no liabilities have been recorded for
these indemnities and guarantees in the accompanying balance sheets.
20
MID-ATLANTIC HEALTH CARE, LLC
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2008, 2009, 2010 and
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
For The Three Months Ended March 31, 2010 (Unaudited) and 2011 (Unaudited)
NOTE 9 OTHER INCOME
In April 2010, the Company entered into a settlement agreement with Magnolia Management, Inc. and
others regarding claims for tortuous interference with contract and punitive damages in a civil
action in the Circuit Court for Worcester County, Maryland. In connection with the terms of the
settlement, the Company recorded other income in the amount of $100,000 for the year ended
December 31, 2010.
In August 2010, the Company entered into a settlement agreement with a former employee and others
regarding claims for tortuous interference with contract and punitive damages in a civil action in
the Circuit Court for Worcester County, Maryland. In connection with the terms of the settlement,
the Company recorded other income in the amount of $382,585, net of attorneys fees, for the year
ended December 31, 2010.
NOTE 10 SUBSEQUENT EVENTS
In
June 2011, certain affiliates of the Company entered into Asset
Purchase Agreements (New Agreements) with the sellers of
the five nursing home facilities located in Pennsylvania (see
Note 3). As part of the New Agreements, the Company agreed not
purchase the real property of each of the facilities and the
affiliates of the Company agreed to purchase the operations of the
each facility. The real property was purchased by a subsidiary of
Grubb & Ellis Healthcare REIT, Inc. (G&E), who was
also a party to the New Agreements. All amounts paid by the Company
related to these transactions were reimbursed by the affiliates or
G&E, or were applied to the purchase price of the operations of
the five nursing home facilities.
In June 2011, an affiliate of the Company entered into a Master Lease Agreement with certain affiliates of G&E. In connection with the Master Lease Agreement, the Company became a guarantor of all the obligations and the performance of the Company’s affiliates under the lease, during the term of the Master Lease Agreement.
21
Grubb & Ellis Healthcare REIT II, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2011 and for the Year Ended December 31, 2010
For the Six Months Ended June 30, 2011 and for the Year Ended December 31, 2010
The accompanying unaudited pro forma condensed consolidated financial statements (including
the notes thereto) are qualified in their entirety by reference to and should be read in
conjunction with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and our
Annual Report on Form 10-K for the year ended December 31, 2010. In managements opinion, all
adjustments necessary to reflect the transactions have been made.
The accompanying unaudited pro forma condensed consolidated statements of operations for the
six months ended June 30, 2011 and for the year ended December 31, 2010 are presented as if we
acquired the Milestone MOB Portfolio and the Philadelphia SNF Portfolio, or collectively the
Properties, on January 1, 2010. The Properties were acquired using a combination of debt financing
and cash proceeds, net of offering costs, received from our initial public offering through the
acquisition date. However, 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.
An unaudited pro forma condensed consolidated balance sheet as of June 30, 2011 is not
presented as the effect of the acquisitions of the Properties are fully reflected in our historical
consolidated balance sheet as of June 30, 2011.
The accompanying unaudited pro forma condensed consolidated financial statements are unaudited
and are subject to a number of estimates, assumptions, and other uncertainties, and do not purport
to be indicative of the actual results of operations that would have occurred had the acquisitions
reflected therein in fact occurred on the date specified, nor do such financial statements purport
to be indicative of the results of operations that may be achieved in the future.
22
Grubb & Ellis Healthcare REIT II, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 2011
For the Six Months Ended June 30, 2011
Acquisition of | Acquisition of | |||||||||||||||
Company | the Milestone | the Philadelphia | Company | |||||||||||||
Historical(A) | MOB Portfolio(B) | SNF Portfolio(C) | Pro Forma | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 14,682,000 | $ | 1,294,000 | $ | 4,249,000 | $ | 20,225,000 | ||||||||
Expenses: |
||||||||||||||||
Rental expenses |
3,020,000 | 499,000 | 522,000 | (D) | 4,041,000 | |||||||||||
General and administrative |
2,379,000 | 191,000 | 298,000 | (E) | 2,868,000 | |||||||||||
Acquisition related expenses |
8,785,000 | (1,495,000 | ) | (3,768,000 | ) (F) | 3,522,000 | ||||||||||
Depreciation and amortization |
5,476,000 | 643,000 | 1,555,000 | (G) | 7,674,000 | |||||||||||
Total expenses |
19,660,000 | (162,000 | ) | (1,393,000 | ) | 18,105,000 | ||||||||||
(Loss) income from operations |
(4,978,000 | ) | 1,456,000 | 5,642,000 | 2,120,000 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of deferred
financing costs and debt discount and premium): |
||||||||||||||||
Interest expense |
(2,568,000 | ) | (699,000 | ) | (1,215,000 | ) (H) | (4,482,000 | ) | ||||||||
Loss in fair value of derivative financial
instruments |
(225,000 | ) | | | (225,000 | ) | ||||||||||
Interest income |
6,000 | | | 6,000 | ||||||||||||
Net (loss) income |
(7,765,000 | ) | 757,000 | 4,427,000 | (2,581,000 | ) | ||||||||||
Less: Net income attributable to
noncontrolling interests |
(1,000 | ) | | | (1,000 | ) | ||||||||||
Net (loss) income attributable to controlling interest |
$ | (7,766,000 | ) | $ | 757,000 | $ | 4,427,000 | $ | (2,582,000 | ) | ||||||
Net loss per common share attributable to controlling
interest basic and diluted |
$ | (0.36 | ) | $ | (0.11 | ) | ||||||||||
Weighted average number of common shares
outstanding basic and diluted |
21,864,450 | 24,498,371 | (I) | |||||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed consolidated financial statements.
23
Grubb & Ellis Healthcare REIT II, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2010
For the Year Ended December 31, 2010
Acquisition of | Acquisition of | |||||||||||||||
Company | the Milestone | the Philadelphia | Company | |||||||||||||
Historical(J) | MOB Portfolio(K) | SNF Portfolio(L) | Pro Forma | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 8,682,000 | $ | 2,202,000 | $ | 8,501,000 | $ | 19,385,000 | ||||||||
Expenses: |
||||||||||||||||
Rental expenses |
2,201,000 | 1,244,000 | 1,060,000 | (M) | 4,505,000 | |||||||||||
General and administrative |
1,670,000 | 366,000 | 623,000 | (N) | 2,659,000 | |||||||||||
Acquisition related expenses |
7,099,000 | | | (O) | 7,099,000 | |||||||||||
Depreciation and amortization |
3,591,000 | 1,662,000 | 3,109,000 | (P) | 8,362,000 | |||||||||||
Total expenses |
14,561,000 | 3,272,000 | 4,792,000 | 22,625,000 | ||||||||||||
(Loss) income from operations |
(5,879,000 | ) | (1,070,000 | ) | 3,709,000 | (3,240,000 | ) | |||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of deferred
financing costs and debt discount and premium): |
||||||||||||||||
Interest expense |
(1,416,000 | ) | (1,742,000 | ) | (2,457,000 | ) (Q) | (5,615,000 | ) | ||||||||
Loss in fair value of derivative financial
instruments |
(143,000 | ) | | | (143,000 | ) | ||||||||||
Interest income |
15,000 | | | 15,000 | ||||||||||||
Net (loss) income |
(7,423,000 | ) | (2,812,000 | ) | 1,252,000 | (8,983,000 | ) | |||||||||
Less: Net income attributable to
noncontrolling interests |
(1,000 | ) | | | (1,000 | ) | ||||||||||
Net (loss) income attributable to controlling interest |
$ | (7,424,000 | ) | $ | (2,812,000 | ) | $ | 1,252,000 | $ | (8,984,000 | ) | |||||
Net loss per common share attributable to controlling
interest basic and diluted |
$ | (0.99 | ) | $ | (0.89 | ) | ||||||||||
Weighted average number of common shares
outstanding basic and diluted |
7,471,184 | 10,105,105 | (R) | |||||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed consolidated financial statements.
24
Grubb & Ellis Healthcare REIT II, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six Months
Ended June 30, 2011
(A) As reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.
(B) Amounts represent the estimated operations, including pro forma adjustments, based on
historical operations of the Milestone MOB Portfolio, which was acquired in May 2011.
(C) The Philadelphia SNF Portfolio was structured under the terms of a bond net lease and the
related pro forma adjustments include the rental revenues, tenant recoveries, and rental expenses
directly attributable to the bond net leased property based on the master lease entered into on
June 30, 2011.
(D) Amount represents the estimated rental expenses of the Philadelphia SNF Portfolio. We
entered into an advisory agreement with Grubb & Ellis Healthcare REIT II Advisor, LLC, or our
advisor, or our advisory agreement. Pursuant to our advisory agreement, our advisor or its
affiliates are entitled to receive, for services in managing each of our properties, either a
monthly property management fee or a monthly oversight fee of up to 4.0% of the gross monthly cash
receipts of the property. As a result, the pro forma amounts shown are reflective of our current
advisory agreement for an oversight fee at a rate of 1.0%.
Also, adjustments were made for an incremental property tax expense assuming the acquisition
price and historical property tax rate.
(E) Pursuant to our advisory agreement, our advisor or its affiliates are entitled to receive
a monthly asset management 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
invested capital. At the time of the acquisition of the Philadelphia SNF Portfolio, our
stockholders had received annualized distributions greater than 5.0% per annum. As such, we assumed
an asset management fee was incurred for the six months ended June 30, 2011.
(F) We incurred a total of $3,768,000 in acquisition related expenses, all of which was
incurred during the six months ended June 30, 2011, in connection with the acquisition of the
Philadelphia SNF Portfolio. As these are nonrecurring charges, they have been excluded from the
unaudited pro forma condensed consolidated statement of operations for the six months ended June
30, 2011.
(G) Amount represents depreciation and amortization expense on the allocation of the purchase
price. We allocated the purchase price to the fair value of the assets acquired and liabilities
assumed as follows: $4,747,000 to land, $68,418,000 to building and improvements, $1,065,000 to
furniture, fixtures and equipment and $6,326,000 to in-place leases. Depreciation and amortization
expense is recognized using the straight-line method over an estimated useful life of 39.0 years,
8.8 years to 12 years, 5 years and 12 years for building, improvements, furniture, fixtures and
equipment and in-place leases, respectively.
In addition, we allocated $4,056,000 to other liabilities. Included in other liabilities is
$1,402,000 and $2,500,000 accrued for as contingent consideration in connection with the purchase
of the Philadelphia SNF Portfolio. An estimated $1,402,000 of such amount will be paid upon receipt
of notification within six years of the acquisition date that the tenant has achieved a certain
rent coverage ratio for the preceding 12 months. There is no minimum or maximum required payment,
however, such payment is limited by the tenants rent coverage ratio and will result in additional
rental revenue to us. Up to $2,500,000 of such contingent consideration will be paid within two
years of the acquisition date upon notification that (i) the tenant has achieved a certain rent
coverage ratio for the three most recent calendar months and (ii) the tenant has completed
improvements in an amount up to $2,500,000. The range of payment is between $0 and up to a maximum
of $2,500,000.
The purchase price allocations, and therefore, depreciation and amortization expense are
preliminary and subject to change.
25
Grubb & Ellis Healthcare REIT II, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)
(H) We financed the purchase price, plus closing costs, of the Philadelphia SNF Portfolio,
using borrowings of $52,870,000 and $22,000,000 under our line of credit with KeyBank National
Association, or KeyBank, or our KeyBank line of credit, and our line of credit with Bank of
America, N.A., or Bank of America, or our Bank of America line of credit, respectively, and the
remaining balance using cash proceeds from our offering. We have reflected the amount of interest
expense calculated on $31,115,000 in borrowings under our Bank of America line credit in the amount
listed in the Acquisition of the Milestone MOB Portfolio column. Borrowings under our Bank of
America line of credit are limited to the availability of credit remaining on the line of credit at
the time of acquisition which was $31,115,000. Therefore, we have assumed the purchase price, plus
closing costs, was financed using $52,870,000 in borrowings under the KeyBank line of credit and
the remaining from cash proceeds from our offering.
As such, this amount represents interest expense, and the amortization of the corresponding
loan fees, on the KeyBank line of credit. Our KeyBank line of credit bears interest at variable
interest rates. LIBOR Loans under our KeyBank line of credit bear interest at a rate equal to the
London Interbank Offered Rate, or LIBOR, plus 3.50% per annum and Prime Rate Loans under our
KeyBank line of credit bear interest at a rate equal to the rate of interest established by KeyBank
as its Prime Rate, plus 0.75% per annum. If interest rates increase by 0.125%, interest expense
would increase by $33,000 for the six months ended June 30, 2011.
(I) Amount represents the weighted average number of shares of our common stock from our
offering, at $10.00 per share, required to generate sufficient offering proceeds, net of offering
costs, to fund the purchase of the Properties. The calculation assumes these proceeds were raised
as of January 1, 2010.
2. Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended
December 31, 2010
(J) As reported in our Annual Report on Form 10-K for the year ended December 31, 2010.
(K) Amounts represent the estimated operations, including pro forma adjustments, based on
historical operations of the Milestone MOB Portfolio, which was acquired in May 2011.
(L) The Philadelphia SNF Portfolio was structured under the terms of a bond net lease and the
related pro forma adjustments include the rental revenues, tenant recoveries, and rental expenses
directly attributable to the bond net leased property based on the master lease entered into on
June 30, 2011.
(M) Amount represents the estimated rental expenses of the Philadelphia SNF Portfolio.
Pursuant to our advisory agreement, our advisor or its affiliates are entitled to receive, for
services in managing each of our properties, either a monthly property management fee or a monthly
oversight fee of up to 4.0% of the gross monthly cash receipts of the property. As a result, the
pro forma amounts shown are reflective of our current advisory agreement for an oversight fee at a
rate of 1.0%.
Also, adjustments were made for an incremental property tax expense assuming the acquisition
price and historical property tax rate.
(N) Pursuant to our advisory agreement, our advisor or its affiliates are entitled to receive
a monthly asset management 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
invested capital. At the time of the acquisition of the Philadelphia SNF
Portfolio, our stockholders had received annualized distributions greater than 5.0% per annum.
As such, we assumed an asset management fee was incurred for the year ended December 31, 2010.
(O) We incurred a total of $3,768,000 in acquisition related expenses, none of which was
incurred in 2010, in connection with the acquisition of the Philadelphia SNF Portfolio. As these
are nonrecurring charges, they have been excluded from the unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 2010.
26
Grubb & Ellis Healthcare REIT II, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)
(P) Amount represents depreciation and amortization expense on the allocation of the purchase
price. We allocated the purchase price to the fair value of the assets acquired and liabilities
assumed as follows: $4,747,000 to land, $68,418,000 to building and improvements, $1,065,000 to
furniture, fixtures and equipment and $6,326,000 to in-place leases. Depreciation and amortization
expense is recognized using the straight-line method over an estimated useful life of 39.0 years,
8.8 years to 12 years, 5 years and 12 years for building, improvements, furniture, fixtures and
equipment and in-place leases, respectively.
In addition, we allocated $4,056,000 to other liabilities. Included in other liabilities is
$1,402,000 and $2,500,000 accrued for as contingent consideration in connection with the purchase
of the Philadelphia SNF Portfolio. An estimated $1,402,000 of such amount will be paid upon receipt
of notification within six years of the acquisition date that the tenant has achieved a certain
rent coverage ratio for the preceding 12 months. There is no minimum or maximum required payment,
however, such payment is limited by the tenants rent coverage ratio and will result in additional
rental revenue to us. Up to $2,500,000 of such contingent consideration will be paid within two
years of the acquisition date upon notification that (i) the tenant has achieved a certain rent
coverage ratio for the three most recent calendar months and (ii) the tenant has completed
improvements in an amount up to $2,500,000. The range of payment is between $0 and up to a maximum
of $2,500,000.
The purchase price allocations, and therefore, depreciation and amortization expense are
preliminary and subject to change.
(Q) We financed the purchase price, plus closing costs, of the Philadelphia SNF Portfolio,
using borrowings of $52,870,000 and $22,000,000 under our KeyBank line of credit and our Bank of
America line of credit, respectively, and the remaining balance using cash proceeds from our
offering. We have reflected the amount of interest expense calculated on $31,115,000 in borrowings
under our Bank of America line credit in the amount listed in the Acquisition of the Milestone MOB
Portfolio column. Borrowings under our Bank of America line of credit are limited to the
availability of credit remaining on the line of credit at the time of acquisition which was
$31,115,000. Therefore, we have assumed the purchase price, plus closing costs, was financed using
$52,870,000 in borrowings under the KeyBank line of credit and the remaining from cash proceeds
from our offering.
As such, this amount represents interest expense, and the amortization of the corresponding
loan fees, on the KeyBank line of credit. Our KeyBank line of credit bears interest at variable
interest rates. LIBOR Loans under our KeyBank line of credit bear interest at a rate equal to
LIBOR plus 3.50% per annum and Prime Rate Loans under our KeyBank line of credit bear interest at
a rate equal to the rate of interest established by KeyBank as its Prime Rate, plus 0.75% per
annum. If interest rates increase by 0.125%, interest expense would increase by $67,000 for the
year ended December 31, 2010.
(R) Amount represents the weighted average number of shares of our common stock from our offering,
at $10.00 per share, required to generate sufficient offering proceeds, net of offering costs, to
fund the purchase of the Properties. The calculation assumes these proceeds were raised as of
January 1, 2010.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Grubb & Ellis Healthcare REIT II, Inc. |
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Date: September 16, 2011 | By: | /s/ Jeffrey T. Hanson | ||
Name: | Jeffrey T. Hanson | |||
Title: | Chief Executive Officer | |||
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