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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2012

or

 

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

For the transition period from              to             

Commission File Number: 000-54371

 

 

GRIFFIN-AMERICAN HEALTHCARE

REIT II, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-4008719

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4000 MacArthur Boulevard, West Tower, Suite 200,

Newport Beach, California

  92660
(Address of principal executive offices)   (Zip Code)

(949) 270-9200

(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.    x  Yes    ¨  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).    x  Yes    ¨  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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of May 4, 2012, there were 61,061,601 shares of common stock of Griffin-American Healthcare REIT II, Inc. outstanding.

 

 

 


Table of Contents

Griffin-American 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, 2012 (Unaudited) and December  31, 2011 (Unaudited)

     2   

Condensed Consolidated Statements of Operations for the Three Months Ended March  31, 2012 and 2011 (Unaudited)

     3   

Condensed Consolidated Statements of Equity for the Three Months Ended March  31, 2012 and 2011 (Unaudited)

     4   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2012 and 2011 (Unaudited)

     5   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     55   

Item 4. Controls and Procedures

     56   
PART II — OTHER INFORMATION   

Item 1. Legal Proceedings

     57   

Item 1A. Risk Factors

     57   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     59   

Item 3. Defaults Upon Senior Securities

     61   

Item 4. Mine Safety Disclosures

     61   

Item 5. Other Information

     61   

Item 6. Exhibits

     61   

Signatures

     62   

 

1


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Griffin-American Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2012 and December 31, 2011

(Unaudited)

 

     March 31, 2012     December 31, 2011  
ASSETS   

Real estate investments:

    

Operating properties, net

   $ 562,268,000      $ 369,317,000   

Cash and cash equivalents

     10,214,000        44,682,000   

Accounts and other receivables, net

     3,205,000        1,763,000   

Accounts receivable due from affiliate

     5,000        121,000   

Restricted cash

     12,705,000        2,289,000   

Real estate and escrow deposits

     2,100,000        7,550,000   

Identified intangible assets, net

     113,845,000        66,115,000   

Other assets, net

     9,644,000        7,315,000   
  

 

 

   

 

 

 

Total assets

   $ 713,986,000      $ 499,152,000   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Liabilities:

    

Mortgage loans payable, net

   $ 205,624,000      $ 80,466,000   

Lines of credit

     27,935,000        —     

Accounts payable and accrued liabilities

     8,732,000        7,703,000   

Accounts payable due to affiliates

     947,000        1,111,000   

Derivative financial instruments

     824,000        819,000   

Identified intangible liabilities, net

     735,000        623,000   

Security deposits, prepaid rent and other liabilities

     14,160,000        10,950,000   
  

 

 

   

 

 

 

Total liabilities

     258,957,000        101,672,000   

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; 56,662,626 and 48,869,669 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     567,000        489,000   

Additional paid-in capital

     504,697,000        435,252,000   

Accumulated deficit

     (50,355,000     (38,384,000
  

 

 

   

 

 

 

Total stockholders’ equity

     454,909,000        397,357,000   

Noncontrolling interests (Note 12)

     120,000        123,000   
  

 

 

   

 

 

 

Total equity

     455,029,000        397,480,000   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 713,986,000      $ 499,152,000   
  

 

 

   

 

 

 

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

 

2


Table of Contents

Griffin-American Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Revenue:

    

Rental income

   $ 18,729,000      $ 6,007,000   

Expenses:

    

Rental expenses

     3,302,000        1,203,000   

General and administrative

     2,307,000        921,000   

Acquisition related expenses

     6,570,000        1,549,000   

Depreciation and amortization

     6,983,000        2,202,000   
  

 

 

   

 

 

 

Total expenses

     19,162,000        5,875,000   
  

 

 

   

 

 

 

(Loss) income from operations

     (433,000     132,000   

Other income (expense):

    

Interest expense (including amortization of deferred financing costs and debt discount and premium):

    

Interest expense

     (3,065,000     (1,095,000

(Loss) gain in fair value of derivative financial instruments

     (5,000     74,000   

Interest income

     4,000        4,000   
  

 

 

   

 

 

 

Net loss

     (3,499,000     (885,000
  

 

 

   

 

 

 

Less: net (income) loss attributable to noncontrolling interests

     —          —     
  

 

 

   

 

 

 

Net loss attributable to controlling interest

   $ (3,499,000   $ (885,000
  

 

 

   

 

 

 

Net loss per common share attributable to controlling interest — basic and diluted

   $ (0.07   $ (0.05
  

 

 

   

 

 

 

Weighted average number of common shares outstanding — basic and diluted

     52,044,669        18,144,696   
  

 

 

   

 

 

 

Distributions declared per common share

   $ 0.17      $ 0.16   
  

 

 

   

 

 

 

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

 

3


Table of Contents

Griffin-American Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     Stockholders’ Equity              
     Common Stock                                 
     Number of           Additional     Preferred      Accumulated     Noncontrolling        
   Shares     Amount     Paid-In Capital     Stock      Deficit     Interests     Total Equity  

BALANCE - December 31, 2011

     48,869,669      $ 489,000      $ 435,252,000      $ —         $ (38,384,000   $ 123,000      $ 397,480,000   

Issuance of common stock

     7,515,822        75,000        74,931,000        —           —          —          75,006,000   

Offering costs

     —          —          (8,109,000     —           —          —          (8,109,000

Issuance of common stock under the DRIP

     408,019        4,000        3,872,000        —           —          —          3,876,000   

Repurchase of common stock

     (130,884     (1,000     (1,266,000     —           —          —          (1,267,000

Amortization of nonvested common stock compensation

     —          —          17,000        —           —          —          17,000   

Contribution from noncontrolling interest

     —          —          —          —           —          2,000        2,000   

Distribution to noncontrolling interest

     —          —          —          —           —          (5,000     (5,000

Distributions declared

     —          —          —          —           (8,472,000     —          (8,472,000

Net loss

     —          —          —          —           (3,499,000     —          (3,499,000
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE - March 31, 2012

     56,662,626      $ 567,000      $ 504,697,000      $ —         $ (50,355,000   $ 120,000      $ 455,029,000   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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 interest

     —          —           —          —           —          (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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

Griffin-American Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (3,499,000   $ (885,000

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization (including deferred financing costs, above/below market leases, leasehold interests, debt discount and premium and deferred rent receivables)

     6,132,000        2,060,000   

Stock based compensation

     17,000        11,000   

Acquisition fees paid in stock

     99,000        —     

Bad debt expense

     —          14,000   

Changes in fair value of contingent consideration

     (368,000     —     

Changes in fair value of derivative financial instruments

     5,000        (74,000

Changes in operating assets and liabilities:

    

Accounts and other receivables

     501,000        (77,000

Accounts receivable due from affiliate

     121,000        —     

Other assets

     (252,000     (309,000

Accounts payable and accrued liabilities

     291,000        82,000   

Accounts payable due to affiliates

     296,000        321,000   

Security deposits, prepaid rent and other liabilities

     (2,188,000     (42,000
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,155,000        1,101,000   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Acquisition of real estate operating properties

     (114,259,000     (37,636,000

Capital expenditures

     (836,000     (388,000

Restricted cash

     (10,416,000     (342,000

Real estate and escrow deposits

     5,450,000        (451,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (120,061,000     (38,817,000
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Payments on mortgage loans payable

     (659,000     (9,165,000

Borrowings under the lines of credit

     154,570,000        19,700,000   

Payments under the lines of credit

     (126,635,000     (24,100,000

Proceeds from issuance of common stock

     72,798,000        59,870,000   

Deferred financing costs

     (1,096,000     (84,000

Contingent consideration related to acquisition of real estate

     (781,000     —     

Repurchase of common stock

     (1,267,000     (78,000

Contribution from noncontrolling interest

     2,000        —     

Distribution to noncontrolling interest

     (5,000     (1,000

Security deposits

     2,000        (1,000

Payment of offering costs

     (8,331,000     (6,437,000

Distributions paid

     (4,160,000     (1,300,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     84,438,000        38,404,000   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (34,468,000     688,000   

CASH AND CASH EQUIVALENTS — Beginning of period

     44,682,000        6,018,000   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of period

   $ 10,214,000      $ 6,706,000   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid for:

    

Interest

   $ 2,124,000      $ 1,032,000   

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:

    

Investing Activities:

    

Accrued capital expenditures

   $ 602,000      $ 412,000   

The following represents the increase in certain assets and liabilities in connection with our acquisitions of operating properties:

    

Other receivables

   $ 32,000      $ 174,000   

Other assets

   $ 57,000      $ 42,000   

Mortgage loans payable, net

   $ 125,969,000      $ —     

Accounts payable and accrued liabilities

   $ 315,000      $ 60,000   

Security deposits, prepaid rent and other liabilities

   $ 6,593,000      $ 127,000   

Financing Activities:

    

Issuance of common stock under the DRIP

   $ 3,876,000      $ 1,288,000   

Distributions declared but not paid

   $ 3,075,000      $ 1,117,000   

Accrued offering costs

   $ 94,000      $ 653,000   

Receivable from transfer agent

   $ 1,898,000      $ —     

Accrued deferred financing costs

   $ 81,000      $ 5,000   

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

 

5


Table of Contents

Griffin-American Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three Months Ended March 31, 2012 and 2011

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

1. Organization and Description of Business

Griffin-American Healthcare REIT II, Inc., a Maryland corporation, was incorporated as Grubb & Ellis Healthcare REIT II, Inc. on January 7, 2009 and therefore we consider that our date of inception. We were initially capitalized on February 4, 2009. Our board of directors adopted an amendment to our charter, which was filed with the Maryland State Department of Assessments and Taxation on January 3, 2012, to change our corporate name from Grubb & Ellis Healthcare REIT II, Inc. to Griffin-American Healthcare REIT II, Inc. 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 seek investments that produce current income. We qualified to be taxed 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 beginning with our taxable year ended December 31, 2010 and we intend to continue to be taxed as a REIT.

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 will sell shares of our common stock in our offering until the earlier of August 24, 2012, or the date on which the maximum offering amount has been sold; provided, however, that our board of directors may extend our offering as permitted under applicable law, or we may extend our offering with respect to shares of our common stock offered pursuant to the DRIP. However, we reserve the right to terminate our offering at any time prior to such termination date. As of March 31, 2012, we had received and accepted subscriptions in our offering for 55,325,058 shares of our common stock, or $552,112,000, excluding shares of our common stock issued pursuant to the DRIP.

We conduct substantially all of our operations through Griffin-American Healthcare REIT II Holdings, LP, or our operating partnership. On January 3, 2012, our operating partnership filed an Amendment to the Certificate of Limited Partnership with the Delaware Department of State to change its name from Grubb & Ellis Healthcare REIT II Holdings, LP to Griffin-American Healthcare REIT II Holdings, LP. Until January 6, 2012, we were externally advised by Grubb & Ellis Healthcare REIT II Advisor, LLC, or our former advisor, pursuant to an advisory agreement, as amended and restated, or the G&E Advisory Agreement, between us and our former advisor. From August 24, 2009 through January 6, 2012, our former advisor supervised and managed our day-to-day operations and selected the properties and real estate-related investments we acquired, subject to the oversight and approval of our board of directors. Our former advisor also provided marketing, sales and client services on our behalf and engaged affiliated entities to provide various services to us. Our former advisor was managed by and was a wholly owned subsidiary of Grubb & Ellis Equity Advisors, LLC, or GEEA, which was a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our former sponsor.

On November 7, 2011, our independent directors determined that it is in the best interests of our company and its stockholders to transition advisory and dealer manager services rendered to us by affiliates of Grubb & Ellis and to engage American Healthcare Investors LLC, or American Healthcare Investors, and Griffin Capital Corporation, or Griffin Capital, as replacement co-sponsors, or our co-sponsors. As a result, on November 7, 2011, we notified our former advisor that we terminated the G&E Advisory Agreement. Pursuant to the G&E Advisory Agreement, either party could terminate the G&E Advisory Agreement without cause or penalty; however, certain rights and obligations of the parties would survive during a 60-day transition period and beyond.

 

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Table of Contents

Griffin-American Healthcare REIT II, Inc.

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

 

In addition, on November 7, 2011, we notified Grubb & Ellis Capital Corporation that we terminated the Amended and Restated Dealer Manager Agreement dated June 1, 2011 between us and Grubb & Ellis Capital Corporation, or the G&E Dealer Manager Agreement, in accordance with the terms thereof. Until January 6, 2012, Grubb & Ellis Capital Corporation remained a non-exclusive agent of our company and distributor of shares of our common stock.

As a result of the co-sponsorship arrangement, an affiliate of Griffin Capital, Griffin-American Healthcare REIT Advisor, LLC, or Griffin-American Advisor, or our advisor, serves as our advisor and delegates advisory duties to Griffin-American Healthcare REIT Sub-Advisor, LLC, or Griffin-American Sub-Advisor, or our sub-advisor. Griffin-American Sub-Advisor is jointly owned by our co-sponsors. Our advisor, through our sub-advisor, uses its best efforts, subject to the oversight, review and approval of our board of directors, to, among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives. Our advisor performs its duties and responsibilities under an advisory agreement, or the Advisory Agreement, as our fiduciary. Our sub-advisor performs its duties and responsibilities pursuant to a sub-advisory agreement with our advisor and also acts as our fiduciary. Collectively, we refer to our advisor and our sub-advisor as our advisor entities. Griffin Capital Securities, Inc., or Griffin Securities, or our dealer manager, an affiliate of Griffin Capital, serves as our dealer manager pursuant to a dealer manager agreement, or the Dealer Manager Agreement. We are not affiliated with Griffin Capital, Griffin-American Advisor or Griffin Securities; however, we are affiliated with Griffin-American Sub-Advisor and American Healthcare Investors.

American Healthcare Investors and Griffin Capital have agreed to pay the majority of the expenses we have incurred in connection with the transition to our co-sponsors.

The Advisory Agreement with Griffin-American Advisor took effect on January 7, 2012 upon the expiration of the 60-day transition period provided for in the G&E Advisory Agreement. The Dealer Manager Agreement with Griffin Securities also became effective January 7, 2012.

We currently operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. As of March 31, 2012, we had completed 28 acquisitions comprising 72 buildings and approximately 2,716,000 square feet of gross leasable area, or GLA, for an aggregate purchase price of $671,425,000.

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, 2012 and December 31, 2011 own a 99.99% general partnership interest therein. Our former advisor is a limited partner of our operating partnership and as of March 31, 2012 and December 31, 2011 owns less than a 0.01% noncontrolling limited partnership interest in our operating partnership. On January 4, 2012, our advisor contributed $2,000 to acquire 200 limited partnership units of our operating partnership and as such, as of March 31, 2012, owns less than 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.

 

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Griffin-American Healthcare REIT II, Inc.

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

 

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 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012.

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.

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, 2012 and December 31, 2011, we had $112,000 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, 2012 and 2011, none of our receivables nor our deferred rent receivables were directly written off to bad debt expense.

Other Liabilities

As of March 31, 2012 and December 31, 2011, included in security deposits, prepaid rent and other liabilities in our accompanying consolidated balance sheets is $4,844,000 and $6,058,000, respectively, of contingent purchase price consideration in connection with the acquisition of Pocatello East Medical Office Building, or the Pocatello East MOB property, Yuma Skilled Nursing Facility, Philadelphia SNF Portfolio and Maxfield Medical Office Building. Such amounts are due upon certain criteria being met within specified timeframes.

 

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Griffin-American Healthcare REIT II, Inc.

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

 

See Note 13, Fair Value Measurements – Assets and Liabilities Reported at Fair Value – Contingent Consideration, for a further discussion.

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, 2012, we operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. We believe segregation of our operations into these three reporting segments is useful in assessing the performance of our business in the same way that management intends to review our performance and make operating decisions. See Note 15, Segment Reporting, for a further discussion.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update, or ASU, 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04, which changes the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between GAAP and International Financial Reporting Standards, or IFRS. Additional disclosure requirements in ASU 2011-04 include: (i) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by an entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (ii) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (iii) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (iv) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is not permitted. We adopted ASU 2011-04 on January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements, but it does require certain additional footnote disclosures. We have provided the applicable disclosures in Note 13, Fair Value Measurements.

3. Real Estate Investments

Our investments in our consolidated properties consisted of the following as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  

Building and improvements

   $ 533,228,000      $ 353,839,000   

Land

     43,073,000        26,326,000   

Furniture, fixtures and equipment

     2,648,000        1,070,000   
  

 

 

   

 

 

 
     578,949,000        381,235,000   

Less: accumulated depreciation

     (16,681,000     (11,918,000
  

 

 

   

 

 

 
   $ 562,268,000      $ 369,317,000   
  

 

 

   

 

 

 

Depreciation expense for the three months ended March 31, 2012 and 2011 was $4,771,000 and $1,444,000, respectively. In addition to the acquisitions discussed below, for the three months ended March 31, 2012 and 2011, we had capital expenditures of $806,000 and $393,000, respectively, on our medical office buildings and $236,000 and $0, respectively, on our skilled nursing facilities. We did not have any capital expenditures on our hospitals for the three months ended March 31, 2012 and 2011.

 

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

 

Until January 6, 2012, we reimbursed our former advisor or its affiliates and since January 7, 2012, we reimburse our advisor entities or their 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 contract purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our directors, including a majority of our independent directors. As of March 31, 2012, such fees and expenses did not exceed 6.0% of the purchase price of our acquisitions, except with respect to our acquisition of Lakewood Ranch Medical Office Building, or the Lakewood Ranch property, and Philadelphia SNF Portfolio, both of which we acquired in 2011. Pursuant to our charter, prior to the acquisition of the Lakewood Ranch property and Philadelphia SNF Portfolio, our directors, including a majority of our independent directors, not otherwise interested in the transactions, approved the fees and expenses associated with the acquisition in excess of the 6.0% limit and determined that such fees and expenses were commercially competitive, fair and reasonable to us.

Acquisitions in 2012

For the three months ended March 31, 2012, we completed three acquisitions comprising 16 buildings from unaffiliated parties. The aggregate purchase price of these properties was $232,800,000 and we paid $6,303,000 in acquisition fees to our former advisor or its affiliates and to our advisor entities or their affiliates in connection with these acquisitions. The following is a summary of our acquisitions for the three months ended March 31, 2012:

 

Property

 

Location

 

Type

  Date Acquired     Ownership
Percentage
    Purchase
Price
    Mortgage Loans
Payable
(1)
    Lines of
Credit
(2)
    Acquisition
Fee
(3)
 

Southeastern SNF Portfolio

 

Conyers, Covington, Snellville, Gainesville

and Atlanta, GA; Memphis and Millington, TN; Shreveport, LA; and

Mobile, AL

  Skilled Nursing     01/10/12        100   $ 166,500,000      $ 83,159,000      $ 58,435,000      $ 4,579,000   

FLAGS MOB Portfolio

 

Boynton Beach, FL Austell, GA;

Okatie, SC; and

Tempe, AZ

  Medical Office Medical    
 
 
01/27/12
and
03/23/12
  
  
  
    100     33,800,000        17,354,000        15,600,000        879,000   

Spokane MOB

  Spokane, WA   Office     01/31/12        100     32,500,000        14,482,000        19,000,000        845,000   
         

 

 

   

 

 

   

 

 

   

 

 

 

Total

          $ 232,800,000      $ 114,995,000      $ 93,035,000      $ 6,303,000   
         

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the balance of the mortgage loans payable assumed by us on the property at the time of acquisition.
(2) Represents borrowings under our secured revolving lines of credit with Bank of America, N.A., or Bank of America, and KeyBank National Association, or KeyBank, as defined in Note 8, Lines of Credit, at the time of acquisition. We periodically advance funds and pay down our secured revolving lines of credit with Bank of America and KeyBank as needed. See Note 8, Lines of Credit, for a further discussion.
(3) Our former advisor or its affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.75% of the contract purchase price of Southeastern SNF Portfolio. Our advisor entities and their affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.60% of the contract purchase price of FLAGS MOB Portfolio and Spokane MOB, which was paid as follows: (i) in shares of our common stock in an amount equal to 0.15% of the contract purchase price, at $9.00 per share, the established offering price as of the date of closing, net of selling commissions and dealer manager fees, and (ii) the remainder in cash equal to 2.45% of the contract purchase price.

 

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

 

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 former 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:

 

Property

   Location    Type    Date
Acquired
     Ownership
Percentage
    Purchase
Price
     Line of
Credit
(1)
     Acquisition
Fee
(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   
             

 

 

    

 

 

    

 

 

 

 

(1) Represents borrowings under our secured revolving line of credit with Bank of America, as defined in Note 8, Lines of Credit, at the time of acquisition. We periodically advance funds and pay down our secured revolving line of credit with Bank of America as needed. See Note 8, Lines of Credit, for a further discussion.
(2) Our former advisor or its affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.75% of the contract purchase price for each property acquired.
(3) On January 31, 2011, we purchased the Columbia Long-Term Acute Care Hospital, which is the fourth hospital comprising the Monument LTACH Portfolio.

4. Identified Intangible Assets, Net

Identified intangible assets, net consisted of the following as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  

In place leases, net of accumulated amortization of $4,981,000 and $3,656,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 8.3 years and 10.5 years as of March 31, 2012 and December 31, 2011, respectively)

   $ 51,314,000       $ 27,957,000   

Tenant relationships, net of accumulated amortization of $2,068,000 and $1,541,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 23.6 years and 19.6 years as of March 31, 2012 and December 31, 2011, respectively)

     42,362,000         22,580,000   

Leasehold interests, net of accumulated amortization of $200,000 and $141,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 62.1 years and 60.9 years as of March 31, 2012 and December 31, 2011, respectively)

     14,025,000         12,148,000   

Above market leases, net of accumulated amortization of $677,000 and $495,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 7.3 years and 8.9 years as of March 31, 2012 and December 31, 2011, respectively)

     4,867,000         2,649,000   

Master lease, net of accumulated amortization of $659,000 and $492,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 1.2 years and 1.5 years as of March 31, 2012 and December 31, 2011, respectively)

     656,000         781,000   

Defeasible interest, net of accumulated amortization of $2,000 and $0 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 41.5 years and 0 years as of March 31, 2012 and December 31, 2011, respectively)

     621,000         —     
  

 

 

    

 

 

 
   $ 113,845,000       $ 66,115,000   
  

 

 

    

 

 

 

 

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

 

Amortization expense for the three months ended March 31, 2012 and 2011 was $2,472,000 and $827,000, respectively, which included $217,000 and $66,000, respectively, of amortization recorded against rental income for above market leases and $59,000 and $5,000, respectively, of amortization recorded against rental expenses for leasehold interests in our accompanying condensed consolidated statements of operations.

The aggregate weighted average remaining life of the identified intangible assets is 20.7 and 22.7 years as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012, estimated amortization expense on the identified intangible assets for the nine months ending December 31, 2012 and for each of the next four years ending December 31 and thereafter is as follows:

 

Year

   Amount  

2012

   $ 8,397,000   

2013

     10,146,000   

2014

     8,015,000   

2015

     7,284,000   

2016

     6,698,000   

Thereafter

     73,305,000   
  

 

 

 
   $ 113,845,000   
  

 

 

 

5. Other Assets, Net

Other assets, net consisted of the following as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  

Deferred rent receivables

   $ 4,546,000       $ 3,138,000   

Deferred financing costs, net of accumulated amortization of $1,328,000 and $1,397,000 as of March 31, 2012 and December 31, 2011, respectively

     3,576,000         2,883,000   

Prepaid expenses and deposits

     833,000         755,000   

Lease commissions, net of accumulated amortization of $46,000 and $30,000 as of as of March 31, 2012 and December 31, 2011, respectively

     639,000         424,000   

Contingent consideration asset

     50,000         115,000   
  

 

 

    

 

 

 
   $ 9,644,000       $ 7,315,000   
  

 

 

    

 

 

 

Amortization expense on deferred financing costs for the three months ended March 31, 2012 and 2011 was $472,000 and $249,000, respectively. Amortization expense on deferred financing costs is recorded to interest expense in our accompanying condensed consolidated statements of operations.

Amortization expense on lease commissions for the three months ended March 31, 2012 and 2011 was $16,000 and $42,000, respectively.

As of March 31, 2012, estimated amortization expense on deferred financing costs and lease commissions for the nine months ending December 31, 2012 and for each of the next four years ending December 31 and thereafter is as follows:

 

Year

   Amount  

2012

   $ 962,000   

2013

     960,000   

2014

     703,000   

2015

     353,000   

2016

     267,000   

Thereafter

     970,000   
  

 

 

 
   $ 4,215,000   
  

 

 

 

6. Mortgage Loans Payable, Net

Mortgage loans payable were $194,866,000 ($205,624,000, net of discount and premium) and $80,529,000 ($80,466,000, net of discount and premium) as of March 31, 2012 and December 31, 2011, respectively.

 

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

 

As of March 31, 2012, we had 19 fixed rate and five variable rate mortgage loans payable with effective interest rates ranging from 1.34% to 6.60% per annum and a weighted average effective interest rate of 4.91% per annum. As of March 31, 2012, we had $155,359,000 ($166,370,000, net of discount and premium) of fixed rate debt, or 79.7% of mortgage loans payable, at a weighted average effective interest rate of 5.16% per annum and $39,507,000 ($39,254,000, net of discount and premium) of variable rate debt, or 20.3% of mortgage loans payable, at a weighted average effective interest rate of 3.93% per annum.

As of December 31, 2011, we had six fixed rate and four variable rate mortgage loans payable with effective interest rates ranging from 1.38% to 6.60% per annum and a weighted average effective interest rate of 4.82% per annum. As of December 31, 2011, we had $53,557,000 ($53,762,000, net of discount and premium) of fixed rate debt, or 66.5% of mortgage loans payable, at a weighted average effective interest rate of 5.39% per annum and $26,972,000 ($26,704,000, net of discount) of variable rate debt, or 33.5% of mortgage loans payable, at a weighted average effective interest rate of 3.68% per annum.

Most of the mortgage loans payable may be prepaid, which in some cases are 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, 2012 and 2011, we were in compliance with all such covenants and requirements.

Mortgage loans payable, net consisted of the following as of March 31, 2012 and December 31, 2011:

 

Property

   Interest
Rate(1)
    Maturity Date     March 31, 2012     December 31, 2011  

Fixed Rate Debt:

        

Highlands Ranch Medical Pavilion

     5.88     11/11/12      $ 4,265,000      $ 4,289,000   

Pocatello East Medical Office Building

     6.00     10/01/20        7,741,000        7,788,000   

Monument Long-Term Acute Care Hospital Portfolio

     5.53     06/19/18        15,138,000        15,248,000   

Hardy Oak Medical Office Building

     6.60     10/10/16        5,157,000        5,182,000   

Maxfield Medical Office Building

     5.17     02/28/15        5,008,000        5,050,000   

Milestone Medical Office Building Portfolio

     4.50     02/01/17        16,000,000        16,000,000   

Southeastern Skilled Nursing Facility Portfolio

     4.57     08/01/40        7,069,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.60     08/01/40        11,322,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.60     08/01/40        5,036,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.60     08/01/40        10,837,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.57     08/01/40        4,583,000        —     

Southeastern Skilled Nursing Facility Portfolio

     5.25     03/01/45        11,900,000        —     

Southeastern Skilled Nursing Facility Portfolio

     5.25     03/01/45        8,029,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.60     08/01/45        4,785,000        —     

Southeastern Skilled Nursing Facility Portfolio

     4.57     08/01/45        6,750,000        —     

FLAGS MOB Portfolio

     5.62     07/01/14        7,786,000        —     

FLAGS MOB Portfolio

     6.31     08/01/16        4,139,000        —     

FLAGS MOB Portfolio

     5.33     08/01/15        5,381,000        —     

Spokane MOB

     5.59     03/11/35        14,433,000        —     
      

 

 

   

 

 

 
         155,359,000        53,557,000   

Variable Rate Debt:

        

Center for Neurosurgery and Spine(2)

     1.34     08/15/21 (callable)      2,907,000        2,964,000   

Virginia Skilled Nursing Facility Portfolio(3)

     5.50     09/14/12        9,771,000        9,771,000   

Lawton Medical Office Building Portfolio

     3.10     01/01/16        7,099,000        7,142,000   

Muskogee Long-Term Acute Care Hospital

     2.64     04/08/18        7,055,000        7,095,000   

Southeastern Skilled Nursing Facility Portfolio(4)

     4.50     05/31/12        12,675,000        —     
      

 

 

   

 

 

 
         39,507,000        26,972,000   
      

 

 

   

 

 

 

Total fixed and variable rate debt

         194,866,000        80,529,000   

Less: discount

         (280,000     (291,000

Add: premium

         11,038,000        228,000   
      

 

 

   

 

 

 

Mortgage loans payable, net

       $ 205,624,000      $ 80,466,000   
      

 

 

   

 

 

 

 

(1) Represents the per annum interest rate in effect as of March 31, 2012.

 

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

 

(2) The mortgage loan payable requires monthly principal and interest payments and is due August 15, 2021; however, the principal balance is immediately due upon written request from the seller confirming that the seller agrees to pay the interest rate swap termination amount, if any. Additionally, the seller guarantors agreed to retain their guaranty obligations with respect to the mortgage loan and the interest rate swap agreement. We, the seller and the seller guarantors have also agreed to indemnify the other parties for any liability caused by a party’s breach or nonperformance of obligations under the loan.
(3) Represents a bridge loan which initially matured on March 14, 2012. In March 2012, we exercised the six-month extension available pursuant to the loan documents, thereby extending the maturity date to September 14, 2012 or until such time that we are able to pay such bridge loan in full by obtaining a Federal Housing Association Mortgage loan.
(4) Represents a bridge loan we have until such time that we are able to pay such bridge loan in full by obtaining a Federal Housing Association Mortgage loan. The bridge loan matures on May 31, 2012; however, the bridge loan may be extended for three six-month periods pursuant to the terms of the bridge loan.

As of March 31, 2012, the principal payments due on our mortgage loans payable for the nine months ending December 31, 2012 and for each of the next four years December 31 and thereafter, is as follows:

 

Year

   Amount  

2012

   $ 31,819,000   

2013

     3,085,000   

2014

     10,751,000   

2015

     12,737,000   

2016

     17,923,000   

Thereafter

     118,551,000   
  

 

 

 
   $ 194,866,000   
  

 

 

 

7. Derivative Financial Instruments

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 or items or to be deferred in other comprehensive income.

As of March 31, 2012, 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 (loss) gain in fair value of derivative financial instruments in our accompanying condensed consolidated statements of operations. For the three months ended March 31, 2012 and 2011, we recorded $(5,000) and $74,000, respectively, as an (increase) 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.

 

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

 

The following table lists the derivative financial instruments held by us as of March 31, 2012:

 

Notional Amount

    

Index

   Interest
Rate
    Fair Value    

Instrument

   Maturity
Date
$ 2,907,000       one month LIBOR      6.00   $ (466,000   Swap    08/15/21
  7,099,000       one month LIBOR      4.41     (140,000   Swap    01/01/14
  7,055,000       one month LIBOR      4.28     (200,000   Swap    05/01/14
  6,784,000       one month LIBOR      4.11     (18,000   Swap    10/01/15

 

 

         

 

 

      
$ 23,845,000            $ (824,000     

 

 

         

 

 

      

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

 

            Interest                Maturity

Notional Amount

    

Index

   Rate     Fair Value    

Instrument

   Date
$ 2,964,000       one month LIBOR      6.00   $ (478,000   Swap    08/15/21
  7,142,000       one month LIBOR      4.41     (139,000   Swap    01/01/14
  7,095,000       one month LIBOR      4.28     (202,000   Swap    05/01/14

 

 

         

 

 

      
$ 17,201,000            $ (819,000     

 

 

         

 

 

      

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

8. Lines of Credit

Bank of America, N.A.

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 Bank of America line of credit. On May 4, 2011, we modified the Bank of America line of credit to increase the aggregate maximum principal amount from $25,000,000 to $45,000,000, subject to certain borrowing base conditions. The proceeds of loans made under the Bank of America line of credit may be used for working capital, capital expenditures and other general corporate purposes (including, without limitation, property acquisitions). The actual amount of credit available under the Bank of America 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, as amended. The Bank of America 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.

Prior to May 4, 2011, any loan made under the Bank of America line of credit bore interest at rates equal to either: (i) the daily floating London Interbank Offered Rate, or LIBOR, plus 3.75% per annum, subject to a minimum interest rate floor of 5.00% per annum, or (ii) if the daily floating LIBOR rate was not available, a base rate which meant, for any day, a fluctuating rate per annum equal to the prime rate for such day plus 3.75% per annum, subject to a minimum interest rate floor of 5.00% per annum. The May 4, 2011 modification to the Bank of America line of credit: (i) reduced the interest rate to an interest rate equal to LIBOR plus 3.50% per annum or in the event the daily LIBOR rate is not available, then Bank of America’s prime rate for such day plus 3.50%; and (ii) removed the requirement of an 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 Bank of America 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 Bank of America line of credit. As of March 31, 2012 and December 31, 2011, we were in compliance with all such covenants and requirements.

 

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Based on the value of the properties securing the Bank of America line of credit, our aggregate borrowing capacity under the Bank of America line of credit was $38,435,000 as of March 31, 2012 and December 31, 2011. There were no borrowings outstanding under the Bank of America line of credit as of March 31, 2012 and December 31, 2011. As of March 31, 2012 and December 31, 2011, $38,435,000 remained available under the Bank of America line of credit. The Bank of America 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, Ennis Medical Office Building and St. Anthony North Medical Office Building as of March 31, 2012 and December 31, 2011.

KeyBank National Association

On June 30, 2011, we entered into a loan agreement with KeyBank, or the KeyBank Loan Agreement, to obtain a secured revolving credit facility with an aggregate maximum principal amount of $71,500,000, or the KeyBank line of credit. On October 6, 2011, RBS Citizens, N.A., d/b/a Charter One, or Charter One, was added as a syndication agent to the KeyBank line of credit, whereby $35,750,000 of the aggregate maximum principal amount of the KeyBank line of credit was assigned to Charter One. The proceeds of loans made under the KeyBank line of credit may be used to acquire, finance or refinance eligible properties or for other incidental purposes as approved by KeyBank. The KeyBank line of credit matures on June 30, 2014 and may be extended by one 12-month period subject to the satisfaction of certain conditions, including payment of an extension fee.

During the initial and extended term of the KeyBank Loan Agreement, any loan made under the KeyBank Loan Agreement shall bear interest at a per annum rate depending on the type of designated loan being provided for under the KeyBank Loan Agreement. As a result, the interest rates shall be as follows: (i) for loans designated as LIBOR Loans, as defined in the KeyBank Loan Agreement, the interest rate shall be based on LIBOR, as defined in the KeyBank Loan Agreement, plus 3.50% per annum; (ii) for loans designated as Prime Rate Loans, as defined in the KeyBank Loan Agreement, the interest rate shall be equal to a fluctuating interest rate per annum equal to the rate of interest established by KeyBank as its Prime Rate, plus 0.75% per annum; and (iii) for loans designated as Base Rate Loans, as defined in the KeyBank Loan Agreement, the interest rate shall be equal to a fluctuating interest rate equal to 3.50% per annum plus the greater of: (a) a rate of interest established by KeyBank as its Prime Rate; (b) the Federal Funds Rate plus 0.50% per annum; or (c) the interest rate then in effect for LIBOR Loans, plus 1.00% per annum.

The KeyBank 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 by our operating partnership and its subsidiaries that own properties that serve as collateral for the KeyBank line of credit. The KeyBank Loan Agreement also imposes the following financial covenants: (i) a maximum consolidated total leverage ratio; (ii) a minimum debt service coverage ratio; (iii) a minimum consolidated net worth covenant; and (iv) a minimum rent coverage ratio. In addition, the KeyBank Loan Agreement includes events of default that are customary for credit facilities and transactions of this type. In the event of default, KeyBank has the right to assert its remedies and terminate its obligations under the KeyBank Loan Agreement, including the termination of funding of future loans, acceleration of payment on any unpaid principal amount of all outstanding loans and interest thereon and foreclosure on the properties securing the KeyBank line of credit. As of March 31, 2012, we were in compliance with all such covenants and requirements.

Based on the value of the properties securing the KeyBank line of credit, the aggregate borrowing capacity was $71,500,000 as of March 31, 2012 and December 31, 2011. As of March 31, 2012, borrowings outstanding under the KeyBank line of credit totaled $27,935,000, and $43,565,000 remained available under the KeyBank line of credit. As of December 31, 2011, there were no borrowings outstanding under the KeyBank line of credit and $71,500,000 remained available under the KeyBank line of credit. The weighted-average interest rate of borrowings as of March 31, 2012 was 3.97% per annum. The KeyBank line of credit is secured by four facilities of Virginia Skilled Nursing Facility Portfolio, Yuma Skilled Nursing Facility and Philadelphia SNF Portfolio as of March 31, 2012 and December 31, 2011.

 

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

 

9. Identified Intangible Liabilities, Net

Identified intangible liabilities, net consisted of the following as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  

Below market leases, net of accumulated amortization of $173,000 and $135,000 as of March 31, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 12.7 years and 14.6 years as of March 31, 2012 and December 31, 2011, respectively)

   $ 735,000       $ 623,000   

Amortization expense on below market leases for the three months ended March 31, 2012 and 2011 was $38,000 and $21,000, respectively. Amortization expense on below market leases is recorded to rental income in our accompanying condensed consolidated statements of operations.

As of March 31, 2012, estimated amortization expense on below market leases for the nine months ending December 31, 2012 and for each of the next four years ending December 31 and thereafter, is as follows:

 

Year

   Amount  

2012

   $ 119,000   

2013

     114,000   

2014

     68,000   

2015

     43,000   

2016

     37,000   

Thereafter

     354,000   
  

 

 

 
   $ 735,000   
  

 

 

 

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.

 

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

 

Other Organizational and Offering Expenses

Since January 7, 2012, our other organizational and offering expenses, other than selling commissions and the dealer manager fee, are being paid by our sub-advisor or its affiliates on our behalf. Prior to January 7, 2012, other organizational and offering expenses were paid by our former advisor or its affiliates. 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, 2012 and December 31, 2011, our sub-advisor, our former advisor or their affiliates had collectively incurred expenses on our behalf of $3,100,000 and $2,946,000, 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, 2012 and December 31, 2011. 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 sub-advisor, our former advisor or their 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.

11. Related Party Transactions

Fees and Expenses Paid to Affiliates

Until January 6, 2012, all of our executive officers and our non-independent directors were also executive officers and employees and/or holders of a direct or indirect interest in our former advisor, our former sponsor, GEEA or other affiliated entities.

Effective as of August 24, 2009, we entered into the G&E Advisory Agreement with our former advisor, and effective as of June 22, 2009, we entered into the G&E Dealer Manager Agreement with Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities. Until April 18, 2011, Grubb & Ellis Securities served as the dealer manager of our offering pursuant to the G&E Dealer Manager Agreement. Effective as of April 19, 2011, the G&E Dealer Manager Agreement with Grubb & Ellis Securities was assigned to, and assumed by, Grubb & Ellis Capital Corporation, a wholly owned subsidiary of our former sponsor. Therefore, references to the G&E Dealer Manager shall be deemed to refer to either Grubb & Ellis Securities or Grubb & Ellis Capital Corporation, or both, as applicable, unless otherwise specified.

On November 7, 2011, we notified our former advisor of the termination of the G&E Advisory Agreement. Pursuant to the G&E Advisory Agreement, either party may terminate the G&E Advisory Agreement without cause or penalty, subject to a 60-day transition period; however, certain rights and obligations of the parties survived during the 60-day transition period and beyond. As a result of a new advisory agreement that took effect on January 7, 2012 upon the expiration of the 60-day transition period provided for in the G&E Advisory Agreement, Griffin-American Advisor serves as our advisor and delegates advisory duties to Griffin-American Sub-Advisor.

In addition, on November 7, 2011, we notified Grubb & Ellis Capital Corporation of the termination of the G&E Dealer Manager Agreement. Pursuant to the G&E Dealer Manager Agreement, either party may terminate the G&E Dealer Manager Agreement, subject to a 60-day transition period. Until January 6, 2012, Grubb & Ellis Capital Corporation remained a non-exclusive agent of our company and distributor of shares of our common stock. As a result of the Dealer Manager Agreement that took effect on January 7, 2012 upon the expiration of the 60-day transition period provided for in the G&E Dealer Manager Agreement, Griffin Securities serves as our dealer manager. The terms of the Dealer Manager Agreement are substantially the same as the terms of the terminated G&E Dealer Manager Agreement.

 

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

 

Upon the termination of the G&E Advisory Agreement and G&E Dealer Manager Agreements and corresponding 60-day transition periods, after January 6, 2012, we were no longer affiliated with Grubb & Ellis and its affiliates. The G&E Advisory Agreement and the G&E Dealer Manager Agreement entitled our former advisor, G&E 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, 2012 and 2011, we incurred $5,481,000 and $8,393,000, respectively, in fees and expenses paid to our former advisor or its affiliates as detailed below.

We are affiliated with Griffin-American Sub-Advisor and American Healthcare Investors; however, we are not affiliated with Griffin Capital, Griffin-American Advisor or Griffin Securities. In the aggregate, for the three months ended March 31, 2012, we incurred $4,205,000 in fees and expenses paid to our affiliates as detailed below. As discussed above, our advisor, which is not our affiliate, delegates certain advisory duties pursuant to a sub-advisory agreement to our sub-advisor, which is our affiliate. Therefore, although certain obligations under the Advisory Agreement are contractually performed by or for our advisor, only such obligations pursuant to the sub-advisory agreement that are performed by or for our sub-advisor or its affiliates are disclosed in this related party transactions note.

Offering Stage

Selling Commissions

Until January 6, 2012, G&E Dealer Manager received 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. G&E Dealer Manager could have re-allowed all or a portion of these fees to participating broker-dealers. For the three months ended March 31, 2012 and 2011, we incurred $512,000 and $4,069,000, respectively, in selling commissions to G&E Dealer Manager. Such commissions were charged to stockholders’ equity as such amounts were paid to G&E Dealer Manager from the gross proceeds of our offering.

Effective as of January 7, 2012, selling commissions are paid to Griffin Securities, an unaffiliated entity. See Note 12, Equity – Offering Costs, for a further discussion.

Dealer Manager Fee

Until January 6, 2012, G&E Dealer Manager received 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. G&E Dealer Manager could have re-allowed all or a portion of these fees to participating broker-dealers. For the three months ended March 31, 2012 and 2011, we incurred $227,000 and $1,796,000, respectively, in dealer manager fees to G&E Dealer Manager. Such fees were charged to stockholders’ equity as such amounts were paid to G&E Dealer Manager from the gross proceeds of our offering.

Effective as of January 7, 2012, the dealer manager fee is paid to Griffin Securities, an unaffiliated entity. See Note 12, Equity – Offering Costs, for a further discussion.

Other Organizational and Offering Expenses

Effective as of January 7, 2012, our other organizational and offering expenses are paid by our sub-advisor or its affiliates on our behalf. Our sub-advisor or its affiliates 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, 2012, we incurred $674,000 in offering expenses to our sub-advisor.

Until January 6, 2012, our former advisor or its affiliates were entitled to the same reimbursement. For the three months ended March 31, 2012 and 2011, we incurred $76,000 and $600,000, respectively, in offering expenses to our former advisor or its affiliates.

Other organizational expenses were expensed as incurred, and offering expenses are charged to stockholders’ equity as such amounts are paid from the gross proceeds of our offering.

 

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

 

Acquisition and Development Stage

Acquisition Fee

Effective as of January 7, 2012, our sub-advisor or its affiliates receive an acquisition fee of up to 2.60% 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. The acquisition fee for property acquisitions is paid with a combination of shares of our common stock and cash as follows: (i) shares of common stock in an amount equal to 0.15% of the contract purchase price of the properties, at the then-established offering price, net of selling commissions or dealer manager fees, and (ii) the remainder in cash in an amount equal to 2.45% of the contract purchase price of the properties. Our sub-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, 2012, we incurred $1,724,000 in acquisition fees to our sub-advisor or its affiliates.

Until January 6, 2012, our former advisor or its affiliates were entitled to a similar fee; however, such fee was up to 2.75% of the contract purchase price for each property we acquired or 2.0% of the origination or acquisition price for any real estate-related investment we originated or acquired, payable entirely in cash. For the three months ended March 31, 2012 and 2011, we incurred $4,579,000 and $1,023,000, respectively, in acquisition fees to our former 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.

Development Fee

Effective as of January 7, 2012, our sub-advisor or its affiliates receive, in the event our sub-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 were provided; however, we will not pay a development fee to our sub-advisor or its affiliates if our sub-advisor or its affiliates elect to receive an acquisition fee based on the cost of such development. For the three months ended March 31, 2012, we did not incur any development fees to our sub-advisor or its affiliates.

Until January 6, 2012, our former advisor or its affiliates would have been entitled to the same development fee. We did not incur any development fees to our former advisor or its affiliates.

Reimbursement of Acquisition Expenses

Effective as of January 7, 2012, our sub-advisor or its affiliates are reimbursed for acquisition expenses related to selecting, evaluating and acquiring assets, which is reimbursed regardless of whether an asset is acquired. For the three months ended March 31, 2012, we did not incur any acquisition expenses to our sub-advisor and its affiliates.

Until January 6, 2012, our former advisor or its affiliates were entitled to such reimbursements. For the three months ended March 31, 2012 and 2011, we incurred $0 and $8,000, respectively, in acquisition expenses to our former 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.

 

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

 

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 directors, including a majority of our independent directors, not otherwise interested in the transaction. As of March 31, 2012, such fees and expenses did not exceed 6.0% of the purchase price of our acquisitions, except with respect to our acquisition of Lakewood Ranch property and Philadelphia SNF Portfolio, both of which we acquired in 2011. Pursuant to our charter, prior to the acquisition of the Lakewood Ranch property and Philadelphia SNF Portfolio, our directors, including a majority of our independent directors, not otherwise interested in the transactions, approved the fees and expenses associated with the acquisition in excess of the 6.0% limit and determined that such fees and expenses were commercially competitive, fair and reasonable to us.

Operational Stage

Asset Management Fee

Effective as of January 7, 2012, our sub-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 existing as of January 6, 2012 and one-twelfth of 0.75% of the average invested assets acquired after January 6, 2012, 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, 2012, we incurred $1,196,000 in asset management fees to our sub-advisor.

Until January 6, 2012, our former advisor or its affiliates were entitled to a similar monthly asset management fee; however, such asset management fee was equal to one-twelfth of 0.85% of average invested assets. For the three months ended March 31, 2012 and 2011, we incurred $61,000 and $440,000, respectively, in asset management fees to our former advisor or its affiliates.

Asset management fees are included in general and administrative in our accompanying condensed consolidated statements of operations.

Property Management Fee

Effective as of January 7, 2012, our sub-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 sub-advisor or its affiliates. Our sub-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 sub-advisor or its affiliates. In addition to the above property management fee, for each property managed directly by entities other than our sub-advisor or its affiliates, we pay our sub-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 sub-advisor or its affiliates with respect to the same property. For the three months ended March 31, 2012, we incurred $348,000 in property management fees and oversight fees to our sub-advisor or its affiliates.

Until January 6, 2012, our former advisor or its affiliates were entitled to similar property management and oversight fees. For the three months ended March 31, 2012 and 2011, we incurred $16,000 and $120,000, respectively, in property management fees and oversight fees to our former advisor or its affiliates.

Property management fees and oversight fees are included in rental expenses in our accompanying condensed consolidated statements of operations.

 

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

 

On-site Personnel and Engineering Payroll

For the three months ended March 31, 2012 and 2011, we incurred $0 and $24,000, respectively, in payroll for on-site personnel and engineering to our former advisor or its affiliates, which is included in rental expenses in our accompanying condensed consolidated statements of operations. We have not incurred any on-site personnel and engineering payroll to our sub-advisor or its affiliates.

Lease Fees

Effective as of January 7, 2012, we pay our sub-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, 2012, we incurred $231,000 in lease fees to our sub-advisor or its affiliates.

Until January 6, 2012, our former advisor or its affiliates were entitled to similar lease fees. For the three months ended March 31, 2012 and 2011, we incurred $0 and $248,000, respectively, in lease fees to our former advisor or its affiliates.

Lease fees are capitalized as lease commissions and included in other assets, net in our accompanying condensed consolidated balance sheets.

Construction Management Fee

Effective as of January 7, 2012, in the event that our sub-advisor or its affiliates assist with planning and coordinating the construction of any capital or tenant improvements, our sub-advisor or its affiliates are paid a construction management fee of up to 5.0% of the cost of such improvements. For the three months ended March 31, 2012, we incurred $32,000 in construction management fees to our sub-advisor or its affiliates.

Until January 6, 2012, our former advisor or its affiliates were entitled to similar construction management fees. For the three months ended March 31, 2012 and 2011, we did not incur any construction management fees to our former advisor or its affiliates.

Construction management fees are capitalized as part of the associated asset and included in operating properties, net in our accompanying condensed consolidated balance sheets.

Operating Expenses

Effective as of January 7, 2012, we reimburse our sub-advisor or its affiliates for operating expenses incurred in rendering services to us, subject to certain limitations. However, we cannot reimburse our sub-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 determined that such excess expenses were justified based on unusual and nonrecurring factors.

For the 12 months ended March 31, 2012, 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 1.5% and 51.2%, respectively, for the 12 months ended March 31, 2012.

For the three months ended March 31, 2012, our sub-advisor or its affiliates did not incur any operating expenses on our behalf.

Until January 6, 2012, our former advisor or its affiliates were entitled to a similar reimbursement of operating expenses. For the three months ended March 31, 2012 and 2011, GEEA incurred operating expenses on our behalf of $0 and $9,000, respectively,

 

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Operating expense reimbursements are 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 former transfer agent, for transfer agent and investor services. Since our former transfer agent was an affiliate of our former 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 party for similar services.

On November 7, 2011, we provided notice of termination of the Transfer Agent Services Agreement to our former transfer agent. Under the Transfer Agent Services Agreement, we were required to provide 60 days written notice of termination. Therefore, the Transfer Agent Services Agreement terminated on January 6, 2012. We engaged DST Systems, Inc., an unaffiliated party, to serve as our replacement transfer agent on January 6, 2012.

For the three months ended March 31, 2012 and 2011, we incurred $10,000 and $49,000, respectively, for investor services that our former 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, 2012 and 2011, GEEA incurred expenses of $2,000 and $20,000, respectively, for subscription agreement processing services that our former 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

Effective as of January 7, 2012, our sub-advisor and its affiliates are paid for services performed for us other than those required to be rendered by our sub-advisor or its affiliates under the Advisory Agreement. The rate of compensation for these services has to 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 parties for similar services. For the three months ended March 31, 2012, our sub-advisor and its affiliates did not perform any additional services for us.

Prior to January 6, 2012, our former advisor or its affiliates were also entitled to compensation for additional services under similar conditions. For the three months ended March 31, 2012 and 2011, we incurred expenses of $0 and $7,000, respectively, for internal controls compliance services our former advisor or its affiliates provided to us.

Liquidity Stage

Disposition Fees

Effective as of January 7, 2012, for services relating to the sale of one or more properties, our sub-advisor or its affiliates are 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, 2012 and 2011, we did not incur any disposition fees to our sub-advisor or its affiliates.

 

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

 

Prior to January 6, 2012, our former advisor or its affiliates would have been entitled to similar disposition fees. We did not incur any disposition fees to our former advisor or its affiliates.

Subordinated Participation Interest

Subordinated Distribution of Net Sales Proceeds

Effective as of January 7, 2012, in the event of liquidation, our sub-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 (reduced by the amounts paid, if any, to our former advisor pursuant to its subordinated distribution upon termination described below), 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, 2012 and 2011, we did not incur any such distributions to our sub-advisor.

Prior to January 7, 2012, our former advisor would have been entitled to a similar subordinated distribution of net sales proceeds. For the three months ended March 31, 2012 and 2011, we did not incur any subordinated distribution of net sales proceeds to our former advisor.

Subordinated Distribution upon Listing

Effective as of January 7, 2012, upon the listing of shares of our common stock on a national securities exchange, our sub-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; provided, however, that any amounts owed to our sub-advisor shall be reduced by any amounts paid to our former advisor pursuant to its subordinated distribution upon termination described below. 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, 2012 and 2011, we did not incur any such distributions to our advisor.

Prior to January 7, 2012, our former advisor would have been entitled to a similar subordinated distribution upon listing. For the three months ended March 31, 2012 and 2011, we did not incur any subordinated distribution upon listing to our former advisor.

Subordinated Distribution Upon Termination

On January 9, 2012, our former advisor tendered its notice of election to defer its right to receive a subordinated distribution upon termination, as further disclosed below, 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. Such notice was tendered beyond the notice period provided under our operating partnership agreement.

Upon termination or non-renewal of the Advisory Agreement, our sub-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, will provide 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; provided further, that any amounts owed to our sub-advisor pursuant to a subordinated distribution upon termination shall be reduced by the amounts paid, if any, to our former advisor pursuant to its subordinated distribution upon termination.

 

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

 

As of March 31, 2012 and December 31, 2011, we had not recorded any charges to earnings related to the subordinated distribution upon termination.

Executive Stock Purchase Plans

On April 7, 2011, our Chairman of the board of directors and Chief Executive Officer, Jeffrey T. Hanson, and our President and Chief Operating Officer, Danny Prosky, each executed an executive stock purchase plan, or the G&E Plan, whereby each executive had irrevocably agreed to invest 100% and 50.0%, respectively, of their net after-tax cash compensation as employees of our sponsor directly into our company by purchasing shares of our common stock on a regular basis, corresponding to regular payroll periods and the payment of any other net after-tax cash compensation, including bonuses. Their first investment under the G&E Plan began with their regularly scheduled payroll payment on April 29, 2011 and was to terminate on the earlier of (i) December 31, 2011, (ii) the termination of our offering, (iii) any suspension of our offering by our board of directors or regulatory body, or (iv) the date upon which the number of shares of our common stock owned by Mr. Hanson or Mr. Prosky, when combined with all their other investments in our common stock, exceeds the ownership limits set forth in our charter. The shares were purchased pursuant to our offering at a price of $9.00 per share, reflecting the elimination of selling commissions and the dealer manager fee in connection with such transactions.

On November 7, 2011, Messrs. Hanson and Prosky tendered their resignations from our former sponsor. On December 30, 2011, Messrs. Hanson and Prosky, as well as our Executive Vice President, Mathieu B. Streiff, each executed a stock purchase plan effective January 1, 2012, whereby each executive has irrevocably agreed to invest 100%, 50.0% and 50.0%, respectively, of all of their net after-tax salary and cash bonus compensation that is earned on or after February 1, 2012 as employees of American Healthcare Investors directly into our company by purchasing shares of our common stock. In January 2012, our Chief Financial Officer, Shannon K S Johnson; our Senior Vice President of Acquisitions, Stefan Oh; and our Secretary, Cora Lo; also entered into stock purchase plans in which they each irrevocably agreed to invest 15.0%, 15.0% and 10.0%, respectively, of their net after tax base salaries as employees of American Healthcare Investors into shares of our common stock. Pursuant to the stock purchase plans, each individual has directed that the respective portion of their net after-tax salary that is earned on or after February 1, 2012 as employees of American Healthcare Investors directly into our company by purchasing shares of our common stock. Such arrangements shall terminate on the earlier of (i) December 31, 2012, (ii) the termination of our offering, (iii) any suspension of our offering by our board of directors or a regulatory body, or (iv) the date upon which the number of shares of our common stock owned by any of them, when combined with all their other investments in our common stock, exceeds the ownership limits set forth in our charter. The shares will be purchased pursuant to our offering at a price of $9.00 per share, reflecting the elimination of selling commissions and the dealer manager fee in connection with such transactions.

For the three months ended March 31, 2012 and 2011, our officers invested the following amounts and we issued the following shares of our common stock pursuant to the applicable stock purchase plan.

 

          Three Months Ended  
          March 31,  
          2012      2011  

Officer’s Name

  

Title

   Amount      Shares      Amount      Shares  

Jeffrey T. Hanson

   Chairman of the board of directors and Chief Executive Officer    $ 13,000         1,398       $ —           —     

Danny Prosky

   President and Chief Operating Officer    $ 7,000         815       $ —           —     

Mathieu B. Streiff

   Executive Vice President    $ 6,000         712       $ —           —     

Shannon K S Johnson

   Chief Financial Officer    $ —           —         $ —           —     

Stefan Oh

   Senior Vice President of Acquisitions    $ —           —         $ —           —     

Cora Lo

   Secretary    $ —           —         $ —           —     

 

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

 

Accounts Receivable Due From Affiliate

American Healthcare Investors and Griffin Capital have agreed to pay the majority of the expenses we have incurred in connection with the transition to our co-sponsors. The portion of the expenses that our co-sponsors have agreed to pay are paid by us and then reimbursed by American Healthcare Investors and Griffin Capital within 120 days of payment. As such, as of March 31, 2012 and December 31, 2011, we have recorded a receivable of $5,000 and $121,000 from American Healthcare Investors, an affiliate, which is included in accounts receivable due from affiliate in our accompanying condensed consolidated balance sheets. We do not consider Griffin Capital an affiliate and therefore the receivable as of March 31, 2012 and December 31, 2011, of $5,000 and $121,000 from Griffin Capital is included in accounts and other receivables, net in our accompanying condensed consolidated balance sheets.

Accounts Payable Due to Affiliates

The following amounts were outstanding to our affiliates as of March 31, 2012 and to our former affiliates as of December 31, 2011:

 

Fee

   March 31, 2012      December 31, 2011  

Asset and property management fees

   $ 629,000       $ 405,000   

Lease commissions

     186,000         34,000   

Offering costs

     94,000         93,000   

Construction management fees

     37,000         64,000   

Miscellaneous operating expenses

     1,000         72,000   

Acquisition expenses

     —           2,000   

On-site personnel and engineering payroll

     —           7,000   

Selling commissions and dealer manager fees

     —           434,000   
  

 

 

    

 

 

 
   $ 947,000       $ 1,111,000   
  

 

 

    

 

 

 

12. Equity

Preferred Stock

Our charter authorizes us to issue 200,000,000 shares of our preferred stock, par value $0.01 per share. As of March 31, 2012 and December 31, 2011, 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.

On February 4, 2009, our former 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 former advisor to make an initial capital contribution to our operating partnership. We subsequently repurchased the 20,000 shares of our common stock from our former advisor in February 2012 in connection with our transition to our co-sponsors.

On January 4, 2012, Griffin-American Advisor acquired 22,222 shares of our common stock for $200,000.

On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock to our independent directors. On each of June 8, 2010 and June 14, 2011, 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, 2012, we had issued 55,325,058 shares of our common stock in connection with our offering and 1,545,032 shares of our common stock pursuant to the DRIP, and we had also repurchased 259,686 shares of our common stock under our share repurchase plan. As of March 31, 2012 and December 31, 2011, we had 56,662,626 and 48,869,669 shares of our common stock issued and outstanding, respectively.

As of March 31, 2012, we had a receivable of $1,898,000, net of selling commissions and dealer manager fees, from our transfer agent, which was received on April 2, 2012.

 

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

 

Offering Costs

Selling Commissions

Effective as of January 7, 2012, 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, 2012, we incurred $4,607,000 in selling commissions to our dealer manager. Such commissions are charged to stockholders’ equity as such amounts are paid to our dealer manager from the gross proceeds of our offering.

Dealer Manager Fee

Effective as of January 7, 2012, 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, 2012, we incurred $2,014,000 in dealer manager fees to our dealer manager. Such fees are charged to stockholders’ equity as such amounts are paid to our dealer manager from the gross proceeds of our offering.

Noncontrolling Interests

On February 4, 2009, our former advisor made an initial capital contribution of $2,000 to our operating partnership in exchange for 200 partnership units. On January 4, 2012, Griffin-American Advisor contributed $2,000 to acquire 200 limited partnership units of our operating partnership.

As of March 31, 2012 and December 31, 2011, we owned a 99.99% general partnership interest in our operating partnership and each of our former advisor and our advisor owned less than a 0.01% limited partnership interest in our operating partnership. As such, less than 0.01% of the earnings of our operating partnership are allocated to noncontrolling interests, subject to certain limitations.

In addition, as of March 31, 2012 and December 31, 2011, we owned a 98.75% interest in the consolidated limited liability company that owns 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, 2012 and 2011, $3,876,000 and $1,288,000, respectively, in distributions were reinvested and 408,019 and 135,561 shares of our common stock, respectively, were issued pursuant to the DRIP. As of March 31, 2012 and December 31, 2011, a total of $14,678,000 and $10,802,000, respectively, in distributions were reinvested and 1,545,032 and 1,137,013 shares of our common stock, respectively, were issued pursuant to the DRIP.

 

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

 

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. 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.

Under our share repurchase plan, for the three months ended March 31, 2012, we received share repurchase requests and repurchased 110,884 shares of our common stock, for an aggregate of $1,067,000, at an average repurchase price of $9.63 per share, using proceeds we received from the sale of shares of our common stock pursuant to the DRIP. Under our share repurchase plan, 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.

As of March 31, 2012 and December 31, 2011, we had received share repurchase requests and had repurchased 259,686 shares of our common stock for an aggregate of $2,475,000 at an average price of $9.53 per share and 148,802 shares of our common stock for an aggregate of $1,408,000 at an average price of $9.46 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 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 our 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 each of June 8, 2010 and June 14, 2011, 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 our 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 our restricted common stock may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions expire upon vesting. Shares of our restricted common stock have full voting rights and rights to dividends. For the three months ended March 31, 2012 and 2011, we recognized compensation expense of $17,000 and $11,000, 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, 2012 and 2011, we did not assume any forfeitures. Stock compensation expense is included in general and administrative in our accompanying condensed consolidated statements of operations.

 

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

 

As of March 31, 2012 and December 31, 2011, there was $128,000 and $145,000, 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 2.33 years.

As of March 31, 2012 and December 31, 2011, the fair value of the nonvested shares of our restricted common stock was $165,000 and $165,000, respectively. A summary of the status of the nonvested shares of our restricted common stock as of March 31, 2012 and December 31, 2011, and the changes for the three months ended March 31, 2012, is presented below:

 

     Number of Nonvested Shares of
our Restricted Common Stock
     Weighted
Average Grant
Date Fair
Value
 

Balance — December 31, 2011

     16,500       $ 10.00   

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

 

 

 

Balance — March 31, 2012

     16,500       $ 10.00   
  

 

 

    

 

 

 

Expected to vest — March 31, 2012

     16,500       $ 10.00   
  

 

 

    

 

 

 

13. Fair Value Measurements

Assets and Liabilities Reported at Fair Value

The table below presents our assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
     (Level 1)      (Level 2)      (Level 3)      Total  

Assets:

           

Contingent consideration asset

   $ —         $ —         $ 50,000       $ 50,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ 50,000       $ 50,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative financial instruments

   $ —         $ 824,000       $ —         $ 824,000   

Contingent consideration obligations

     —           —           4,844,000         4,844,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 824,000       $ 4,844,000       $ 5,668,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

     Quoted Prices in
Active Markets for
Identical Assets
and  Liabilities
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  
Assets:            

Contingent consideration asset

   $ —         $ —         $ 115,000       $ 115,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ 115,000       $ 115,000   
  

 

 

    

 

 

    

 

 

    

 

 

 
Liabilities:            

Derivative financial instruments

   $ —         $ 819,000       $ —         $ 819,000   

Contingent consideration obligations

     —           —           6,058,000         6,058,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 819,000       $ 6,058,000       $ 6,877,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers into and out of fair value measurement levels during the three months ended March 31, 2012 and 2011.

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, Fair Value Measurements and Disclosures, or 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 these instruments 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, 2012, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions 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.

Contingent Consideration

On July 27, 2010, we purchased Pocatello East Medical Office Building and in connection with such purchase we accrued $48,000 as a contingent consideration obligation as of March 31, 2012. Such payment will be a function of the annual increase in net operating income of the property as a result of new leasing, less leasing commissions and tenant improvements within 24 months of the date of acquisition. There is no minimum or maximum required payment, however such payment is limited by the new tenant’s rental rate and will result in additional rental revenue to us. We have based the valuation on actual leases signed and have assumed no additional leasing would result in additional payments.

 

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

 

On April 13, 2011, we purchased Yuma Skilled Nursing Facility and in connection with such purchase we accrued $1,500,000 as a contingent consideration obligation. Such payment will be made to the seller upon receipt of notification within three years of the acquisition date that (i) the tenant has achieved a certain specified lease coverage ratio for two consecutive calendar quarters and (ii) that the tenant has completed an estimated $3,500,000 renovation project. If such notification is not received, no payment will be made. The payment will be either $0 or $1,500,000. We have assumed that the criteria above will be met.

On June 30, 2011, we purchased Philadelphia SNF Portfolio and in connection with such purchase we accrued $1,439,000 as a contingent consideration obligation as of March 31, 2012. An estimated $1,439,000 of such amount will be paid upon receipt of notification within six years of the acquisition date that the tenant has achieved a certain specified rent coverage ratio for the preceding 12 months. There is no minimum or maximum required payment, however such payment is limited by the tenant’s rent coverage ratio and will result in additional rental revenue to us. We have assumed that the criteria above will be met and we will receive notification approximately 2.5 years from the date of acquisition. We have also assumed a capitalization rate of 9.75% and applied a discount factor of 11.0%.

In addition, in connection with the purchase of Philadelphia SNF Portfolio, we accrued $1,719,000 as a contingent consideration obligation as of March 31, 2012. 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 specified 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. We have assumed that the criteria above will be met and as of March 31, 2012, we have made payments of $781,000 towards this obligation.

On July 11, 2011, we purchased Maxfield Medical Office Building and in connection with such purchase we accrued $138,000 as a contingent consideration obligation as of March 31, 2012. Such consideration will be paid to the seller if, within 12 months of the acquisition date, the seller is able to lease approximately 4,000 square feet of GLA to a tenant. Such payment will be a function of the annual increase in net operating income of the property as a result of such lease, less leasing commissions, tenant improvements and rent abatement, if any. There is no minimum or maximum required payment, however such payment is limited by the new tenant’s rental rate and will result in additional rental revenue to us. We have assumed that there is a 20.0% probability that the criteria above will be met within 12 months of the acquisition date. In addition, we have assumed certain lease terms based on market conditions.

On December 22, 2011, we purchased Sierra Providence East Medical Plaza I and in connection with such purchase we recognized $50,000 as a contingent consideration asset as of March 31, 2012. We will receive such consideration to the extent a tenant in approximately 2,000 square feet of GLA does not pay their rental payments to us over the remaining term of their lease, which expires in April 2014. The range of payment to us is between $0 and up to a remaining maximum of $103,000. We have assumed that we will receive approximately 50.0% of the remaining payments under the tenant’s lease and will therefore receive approximately $50,000 of the $115,000 in funds the seller has set aside.

The fair value of the contingent consideration is determined based on the facts and circumstances existing at each reporting date and the likelihood of the counterparty achieving the necessary conditions based on a probability weighted discounted cash flow analysis based, in part, on significant inputs which are not observable in the market. As a result, we have determined that our contingent consideration valuations are classified in Level 3 of the fair value hierarchy. Our contingent consideration asset is included in other assets, net and our contingent consideration obligations are included in security deposits, prepaid rent and other liabilities in our accompanying condensed consolidated balance sheets and any changes in their fair value subsequent to their acquisition date valuations are charged to earnings. Gains and losses recognized on contingent consideration assets and obligations are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

 

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Griffin-American Healthcare REIT II, Inc.

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

 

The following is a reconciliation of the beginning and ending balances of our contingent consideration asset and obligations for three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
 
     2012         2011      
Contingent Consideration Asset:     

Beginning balance

   $ 115,000      $ —     

Realized/unrealized gains (losses) recognized in earnings

     (65,000     —     
  

 

 

   

 

 

 

Ending balance

   $ 50,000      $ —     
  

 

 

   

 

 

 

Amount of total gains (losses) included in earnings attributable to the change in unrealized gains (losses) relating to assets still held

   $ (53,000   $ —     
  

 

 

   

 

 

 
Contingent Consideration Obligations:     

Beginning balance

   $ 6,058,000      $ —     

Realized/unrealized (gains) and losses recognized in earnings

     (433,000     —     

Settlements of obligations

     (781,000     —     
  

 

 

   

 

 

 

Ending balance

   $ 4,844,000      $ —     
  

 

 

   

 

 

 

Amount of total (gains) losses included in earnings attributable to the change in unrealized (gains) losses relating to obligations still held

   $ (433,000   $ —     
  

 

 

   

 

 

 

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 sheet. 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 receivable due from affiliate, accounts payable and accrued liabilities, accounts payable due to affiliates, mortgage loans payable, net and borrowings under the lines 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 the 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 receivable due from affiliate and accounts payable due to affiliates is not determinable due to the related party nature of the accounts.

The fair value of the mortgage loans payable and the lines 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, 2012 and December 31, 2011, the fair value of the mortgage loans payable was $213,335,000 and $81,028,000, respectively, compared to the carrying value of $205,624,000 and $80,466,000, respectively. The fair value of the lines of credit as of March 31, 2012 and December 31, 2011 was $27,897,000 and $0, respectively, compared to the carrying value of $27,935,000 and $0, respectively. We have determined that the mortgage loans payable and the lines of credit valuations are classified as Level 2 within the fair value hierarchy.

 

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Griffin-American Healthcare REIT II, Inc.

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

 

14. Business Combinations

2012

For the three months ended March 31, 2012, we completed three acquisitions comprising 16 buildings and 726,000 square feet of GLA. The aggregate purchase price was $232,800,000, plus closing costs and acquisition fees of $7,003,000, 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.

Results of operations for the acquisitions are reflected in our accompanying condensed consolidated statements of operations for the three months ended March 31, 2012 for the period subsequent to the acquisition date of each property. For the period from the acquisition date through March 31, 2012, we recognized the following amounts of revenues and net income (loss) for the acquisitions:

 

Property

   Revenues      Net Income (Loss)  

Southeastern SNF Portfolio

   $ 4,299,000       $ 1,563,000   

FLAGS MOB Portfolio

   $ 520,000       $ (25,000

Spokane MOB

   $ 650,000       $ 94,000   

The following summarizes the fair value of our three acquisitions at the time of acquisition. We present separately the one individually significant acquisition during the three months ended March 31, 2012, Southeastern SNF Portfolio, and aggregate the rest of the acquisitions during the three months ended March 31, 2012.

 

     Southeastern SNF Portfolio      Other 2012 Acquisitions  

Building and improvements

   $ 123,175,000       $ 55,179,000   

Land

     15,009,000         1,738,000   

Furniture, fixtures and equipment

     1,578,000         —     

In-place leases

     20,919,000         3,938,000   

Tenant relationships

     15,271,000         5,038,000   

Leasehold interest

     —           1,936,000   

Master lease

     —           42,000   

Defeasible interest

     —           623,000   

Above market leases

     —           2,436,000   
  

 

 

    

 

 

 

Total assets acquired

     175,952,000         70,930,000   
  

 

 

    

 

 

 

Mortgage loans payable, net

     92,611,000         33,358,000   

Below market leases

     —           150,000   

Other liabilities

     —           3,980,000   
  

 

 

    

 

 

 

Total liabilities assumed

     92,611,000         37,488,000   
  

 

 

    

 

 

 

Net assets acquired

   $ 83,341,000       $ 33,442,000   
  

 

 

    

 

 

 

Assuming the acquisitions in 2012 discussed above had occurred on January 1, 2011, for the three months ended March 31, 2012 and 2011, pro forma revenues, net income, net income attributable to controlling interest and net income per common share attributable to controlling interest — basic and diluted would have been as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

Revenues

   $ 19,968,000       $ 12,619,000   

Net income

   $ 3,871,000       $ 669,000   

Net income attributable to controlling interest

   $ 3,871,000       $ 669,000   

Net income per common share attributable to controlling interest — basic and diluted

   $ 0.06       $ 0.02   

 

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Griffin-American Healthcare REIT II, Inc.

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

 

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, 2011. 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.

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 $1,170,000, 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.

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 date of each property. For the period from the acquisition date through March 31, 2011, we recognized the following amounts of revenues and net income for the 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
Acute Care Hospital
     St. Anthony North Denver
Medical Office Building
     Loma Linda Pediatric
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   
  

 

 

    

 

 

    

 

 

 

 

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Griffin-American Healthcare REIT II, Inc.

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

 

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

 

     Three Months Ended
March  31, 2011
 

Revenues

   $ 6,957,000   

Net income

   $ 542,000   

Net income attributable to controlling interest

   $ 542,000   

Net income per common share attributable to controlling interest — basic and diluted

   $ 0.02   

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.

15. Segment Reporting

As of March 31, 2012, we evaluated our business and made resource allocations based on three reportable 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 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012. 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, which excludes depreciation and amortization, general and administrative expenses, acquisition related expenses, interest expense and interest income. 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.

 

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Griffin-American 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, 2012 and 2011 is as follows:

 

     Medical Office
Buildings
     Hospitals      Skilled Nursing
Facilities
     Three Months Ended
March 31, 2012
 

Revenue:

           

Rental income

   $ 8,095,000       $ 2,197,000       $ 8,437,000       $ 18,729,000   

Expenses:

           

Rental expenses

     2,480,000         206,000         616,000         3,302,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net operating income

   $ 5,615,000       $ 1,991,000       $ 7,821,000       $ 15,427,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

General and administrative

              2,307,000   

Acquisition related expenses

              6,570,000   

Depreciation and amortization

              6,983,000   
           

 

 

 

Loss from operations

              (433,000

Other income (expense):

           

Interest expense (including amortization of deferred financing costs and debt discount and premium):

           

Interest expense

              (3,065,000

Loss in fair value of derivative financial instruments

              (5,000

Interest income

              4,000   
           

 

 

 

Net loss

            $ (3,499,000
           

 

 

 
     Medical Office
Buildings
     Hospitals      Skilled Nursing
Facilities
     Three Months Ended
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

   $ 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
           

 

 

 

Assets by reportable segments as of March 31, 2012 and December 31, 2011 are as follows:

 

     March 31,
2012
     December 31,
2011
 

Medical office buildings

   $ 290,491,000       $ 218,232,000   

Hospitals

     76,624,000         77,081,000   

Skilled nursing facilities

     335,909,000         151,081,000   

All other

     10,962,000         52,758,000   
  

 

 

    

 

 

 

Total assets

   $ 713,986,000       $ 499,152,000   
  

 

 

    

 

 

 

 

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Griffin-American Healthcare REIT II, Inc.

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

 

16. Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk are primarily cash and cash equivalents, escrow deposits, restricted cash and accounts and other receivables. Cash is generally invested in investment-grade, short-term instruments with a maturity of three months or less when purchased. We have cash in financial institutions that is insured by the Federal Deposit Insurance Corporation, or FDIC. As of March 31, 2012 and December 31, 2011, we had cash and cash equivalents, escrow deposits and restricted cash accounts in excess of FDIC insured limits. We believe this risk is not significant. Concentration of credit risk with respect to accounts receivable from tenants is limited. We perform credit evaluations of prospective tenants, and security deposits are obtained upon lease execution.

Based on leases in effect as of March 31, 2012, we owned properties in two states for which each state accounted for 10.0% or more of our annualized base rent. Georgia accounted for 19.5% of our annualized base rent and Pennsylvania accounted for 12.0% of our annualized base rent. Accordingly, there is a geographic concentration of risk subject to fluctuations in each state’s economy.

Based on leases in effect as of March 31, 2012, our three reportable business segments, medical office buildings, hospitals and skilled nursing facilities, accounted for 40.4%, 11.4% and 48.2%, respectively, of our annualized base rent. As of March 31, 2012, two of our tenants at our consolidated properties accounted for 10.0% or more of our annualized base rent, as follows:

 

Tenant

   2012 Annual Base
Rent(1)
     Percentage of 2012
Annual Base Rent
   

Property

   GLA
(Square
Feet)
     Lease
Expiration
Date
 

Warsaw Road, L.P. (Wellington Healthcare Services, L.P.)

   $ 15,818,000         25.3   Southeastern SNF Portfolio      454,000         01/31/27   

PA Holdings - SNF, L.P. (Mid-Atlantic Health Care, LLC)

   $ 7,516,000         12.0   Philadelphia SNF Portfolio      392,000         06/30/26   

 

(1) Annualized base rent is based on contractual base rent from leases in effect as of March 31, 2012. The loss of any of these tenants or their inability to pay rent could have a material adverse effect on our business and results of operations.

17. Per Share Data

We report earnings (loss) per share pursuant to ASC Topic 260, Earnings per Share. Basic earnings (loss) per share attributable for all periods presented are computed by dividing net income (loss) attributable to controlling interest by the weighted average number of shares of our common stock outstanding during the period. Diluted earnings (loss) per share are computed based on the weighted average number of shares of our common stock and all potentially dilutive securities, if any. Nonvested shares of our restricted common stock give rise to potentially dilutive shares of our common stock. As of March 31, 2012 and 2011, there were 16,500 shares and 15,000 shares, respectively, of nonvested shares of our restricted common stock outstanding, but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during these periods.

18. Subsequent Events

Status of our Offering

As of May 4, 2012, we had received and accepted subscriptions in our offering for 59,458,512 shares of our common stock, or $593,345,000, excluding shares of our common stock issued pursuant to the DRIP.

Share Repurchases

In April 2012, we repurchased 55,556 shares of our common stock, for an aggregate amount of $546,000, under our share repurchase plan.

 

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Griffin-American Healthcare REIT II, Inc.

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

 

Property Acquisitions

Subsequent to March 31, 2012, we completed two acquisitions comprising four buildings from unaffiliated parties. The aggregate purchase price of these properties was $43,850,000 and we paid $1,141,000 in acquisition fees to our advisor entities or their affiliates in connection with these acquisitions. We have not yet measured the fair value of the tangible and identified intangible assets and liabilities of the acquisitions. The following is a summary of our acquisitions subsequent to March 31, 2012:

 

Property

  

Location

   Type    Date Acquired      Ownership
Percentage
    Purchase
Price
     Mortgage Loans
Payable
(1)
     Lines of
Credit(2)
     Acquisition Fee (3)  

Centre Medical Plaza

   Chula Vista, CA    Medical
Office
     04/26/12         100   $ 24,600,000       $ 11,933,000       $ 6,000,000       $ 640,000   

Gulf Plains MOB Portfolio

   Amarillo and Houston, TX    Medical
Office
     04/26/12         100     19,250,000         —           16,000,000         501,000   
             

 

 

    

 

 

    

 

 

    

 

 

 

Total

              $ 43,850,000       $ 11,933,000       $ 22,000,000       $ 1,141,000   
             

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the balance of the mortgage loans payable assumed by us on the property at the time of acquisition.
(2) Represents borrowings under our secured revolving lines of credit with Bank of America and KeyBank, as defined in Note 8, Lines of Credit, at the time of acquisition. We periodically advance funds and pay down our secured revolving lines of credit with Bank of America and KeyBank as needed.
(3) Our advisor entities and their affiliates were paid, as compensation for services rendered in connection with the investigation, selection and acquisition of our properties, an acquisition fee of 2.60% of the contract purchase price, which was paid as follows: (i) in shares of our common stock in an amount equal to 0.15% of the contract purchase price, at $9.00 per share, the established offering price as of the date of closing, net of selling commissions and dealer manager fees, and (ii) the remainder in cash equal to 2.45% of the contract purchase price.

Monument Long-Term Acute Care Hospital Portfolio Mortgage Loan Payable

On April 5, 2012, we entered into a loan amendment for the mortgage loan payable on Monument Long-Term Acute Care Hospital Portfolio, which had an original principal amount of $15,500,000, an interest rate of 5.53% and an original maturity date of June 19, 2018. As a result of the loan amendment, we increased the mortgage loan payable balance by $9,500,000 at an interest rate of 6.19%, thereby resulting in a blended effective interest rate of approximately 5.78%, and amended the maturity date to May 27, 2018.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

The following discussion should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of March 31, 2012 and December 31, 2011, together with our results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011.

Forward-Looking Statements

Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “expect,” “project,” “may,” “will,” “should,” “could,” “would,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs; the availability of capital; changes in interest rates; competition in the real estate industry; the supply and demand for operating properties in our proposed market areas; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to REITs; the success of our best efforts initial public offering; the availability of properties to acquire; the availability of financing; and our ongoing relationship with American Healthcare Investors LLC, or American Healthcare Investors, and Griffin Capital Corporation, or Griffin Capital, or our co-sponsors, and their affiliates. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission, or SEC.

Overview and Background

Griffin-American Healthcare REIT II, Inc., a Maryland corporation, was incorporated as Grubb & Ellis Healthcare REIT II, Inc. on January 7, 2009 and therefore we consider that our date of inception. We were initially capitalized on February 4, 2009. Our board of directors adopted an amendment to our charter, which was filed with the Maryland State Department of Assessments and Taxation on January 3, 2012, to change our corporate name from Grubb & Ellis Healthcare REIT II, Inc. to Griffin-American Healthcare REIT II, Inc. 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 seek investments that produce current income. We qualified to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes beginning with our taxable year ended December 31, 2010 and we intend to continue to be taxed as a REIT.

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 SEC declared our registration statement effective as of August 24, 2009. We will sell shares of our common stock in our offering until the earlier of August 24, 2012, or the date on which the maximum offering amount has been sold; provided, however, that our board of directors may extend our offering as permitted under applicable law, or we may extend our offering with respect to shares of our common stock offered pursuant to the DRIP. However, we reserve the right to terminate our offering at any time prior to such termination date. As of March 31, 2012, we had received and accepted subscriptions in our offering for 55,325,058 shares of our common stock, or $552,112,000, excluding shares of our common stock issued pursuant to the DRIP.

 

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We conduct substantially all of our operations through Griffin-American Healthcare REIT II Holdings, LP, or our operating partnership. On January 3, 2012, our operating partnership filed an Amendment to the Certificate of Limited Partnership with the Delaware Department of State to change its name from Grubb & Ellis Healthcare REIT II Holdings, LP to Griffin-American Healthcare REIT II Holdings, LP. Until January 6, 2012, we were externally advised by Grubb & Ellis Healthcare REIT II Advisor, LLC, or our former advisor, pursuant to an advisory agreement, as amended and restated, or the G&E Advisory Agreement, between us and our former advisor. From August 24, 2009 through January 6, 2012, our former advisor supervised and managed our day-to-day operations and selected the properties and real estate-related investments we acquired, subject to the oversight and approval of our board of directors. Our former advisor also provided marketing, sales and client services on our behalf and engaged affiliated entities to provide various services to us. Our former advisor is managed by and is a wholly owned subsidiary of Grubb & Ellis Equity Advisors, LLC, which is a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our former sponsor.

On November 7, 2011, our independent directors determined that it is in the best interests of our company and its stockholders to transition advisory and dealer manager services rendered to us by affiliates of Grubb & Ellis and to engage American Healthcare Investors and Griffin Capital as replacement co-sponsors. As a result, on November 7, 2011, we notified our former advisor that we terminated the G&E Advisory Agreement. Pursuant to the G&E Advisory Agreement, either party could terminate the G&E Advisory Agreement without cause or penalty; however, certain rights and obligations of the parties would survive during a 60-day transition period and beyond.

In addition, on November 7, 2011, we notified Grubb & Ellis Capital Corporation that we terminated the dealer manager agreement dated June 1, 2011 between us and Grubb & Ellis Capital Corporation, or the G&E Dealer Manager Agreement, in accordance with the terms thereof. Until January 6, 2012, Grubb & Ellis Capital Corporation remained a non-exclusive agent of our company and distributor of shares of our common stock.

As a result of the co-sponsorship arrangement, an affiliate of Griffin Capital, Griffin-American Healthcare REIT Advisor, LLC, or Griffin-American Advisor, or our advisor, serves as our advisor and delegates advisory duties to Griffin-American Healthcare REIT Sub-Advisor, LLC, or Griffin-American Sub-Advisor, or our sub-advisor. Griffin-American Sub-Advisor is jointly owned by our co-sponsors. Our advisor, through our sub-advisor, uses its best efforts, subject to the oversight, review and approval of our board of directors, to, among other things, research, identify, review and make investments in and dispositions of properties and securities on our behalf consistent with our investment policies and objectives. Our advisor performs its duties and responsibilities under an advisory agreement, or the Advisory Agreement, as our fiduciary. Our sub-advisor performs its duties and responsibilities pursuant to a sub-advisory agreement with our advisor and also acts as our fiduciary. Collectively, we refer to our advisor and our sub-advisor as our advisor entities. Griffin Capital Securities, Inc., or Griffin Securities, or our dealer manager, an affiliate of Griffin Capital, serves as our dealer manager pursuant to a dealer manager agreement, or the Dealer Manager Agreement. We are not affiliated with Griffin Capital, Griffin-American Advisor or Griffin Securities; however, we are affiliated with Griffin-American Sub-Advisor and American Healthcare Investors.

American Healthcare Investors and Griffin Capital have agreed to pay the majority of the expenses we have incurred in connection with the transition to our co-sponsors.

The Advisory Agreement with Griffin-American Advisor took effect on January 7, 2012 upon the expiration of the 60-day transition period provided for in the G&E Advisory Agreement. The Dealer Manager Agreement with Griffin Securities also became effective January 7, 2012.

We currently operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. As of March 31, 2012, we had completed 28 acquisitions comprising 72 buildings and approximately 2,716,000 square feet of gross leasable area, or GLA, for an aggregate purchase price of $671,425,000.

 

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Critical Accounting Policies

The complete listing of our Critical Accounting Policies was previously disclosed in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012, and there have been no material changes to our Critical Accounting Policies as disclosed therein.

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. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements, to our accompanying condensed consolidated financial statements.

Acquisitions in 2012 and 2011

For a discussion of our acquisitions for the three months ended March 31, 2012 and 2011, see Note 3, Real Estate Investments, to our accompanying condensed consolidated financial statements. For a discussion of our acquisitions subsequent to March 31, 2012, see Note 18, Subsequent Events — Property Acquisitions, to our accompanying condensed consolidated financial statements.

Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of properties other than those listed in Part II, Item 1A. Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012.

Rental Income

The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from lease terminations at the then existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.

Offering Proceeds

If we fail to raise substantially more proceeds from the sale of shares of our common stock in our offering than the amount we have raised to date, we will have limited diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. As a result, our real estate portfolio would be concentrated in a small number of properties, which would increase exposure to local and regional economic downturns and the poor performance of one or more of our properties, whereby our stockholders would be exposed to increased risk. In addition, many of our expenses are fixed regardless of the size of our real estate portfolio. Therefore, depending on the amount of proceeds we raise from our offering, we would expend a larger portion of our income on operating expenses. This would reduce our profitability and, in turn, the amount of net income available for distribution to our stockholders.

 

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Scheduled Lease Expirations

As of March 31, 2012, our consolidated properties were 96.7% occupied. During the remainder of 2012, 2.6% of the occupied GLA is scheduled to expire. Our leasing strategy focuses on negotiating renewals for leases scheduled to expire during the remainder of the year. In the future, if we are unable to negotiate renewals, we will try to identify new tenants or collaborate with existing tenants who are seeking additional space to occupy.

As of March 31, 2012, our remaining weighted average lease term is 9.9 years.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws, regulations and standards relating to corporate governance and disclosure requirements applicable to public companies have increased the costs of compliance with corporate governance, reporting and disclosure practices. These costs may have a material adverse effect on our results of operations and could impact our ability to pay distributions at current rates to our stockholders. Furthermore, we expect that these costs will increase in the future due to our continuing implementation of compliance programs mandated by these requirements. Any increased costs may affect our ability to distribute funds to our stockholders. As part of our compliance with the Sarbanes-Oxley Act, we have provided management’s assessment of our internal control over financial reporting as of December 31, 2011 and will continue to comply with such regulations.

In addition, these laws, rules and regulations create new legal bases for potential administrative enforcement, civil and criminal proceedings against us in the event of non-compliance, thereby increasing the risks of liability and potential sanctions against us. We expect that our efforts to comply with these laws and regulations will continue to involve significant and potentially increasing costs, and that our failure to comply with these laws could result in fees, fines, penalties or administrative remedies against us.

Results of Operations

Our operating results for the three months ended March 31, 2012 and 2011 are primarily comprised of income derived from our portfolio of properties and acquisition related expenses in connection with the acquisition of such properties.

As of March 31, 2012, we operate through three reportable business segments — medical office buildings, hospitals and skilled nursing facilities. Except where otherwise noted, the change in our results of operations is primarily due to our 28 acquisitions as of March 31, 2012 as compared to 16 acquisitions as of March 31, 2011. As of March 31, 2012 and 2011, we owned the following types of properties:

 

$283,030,000 $283,030,000 $283,030,000 $283,030,000 $283,030,000 $283,030,000
     As of March 31,  
     2012     2011  
     Number of
Acquisitions
     Aggregate
Purchase Price
     Leased
%
    Number of
Acquisitions
     Aggregate
Purchase Price
     Leased
%
 

Medical office buildings

     19       $ 283,030,000         93.3     11       $ 107,020,000         95.3

Hospitals

     4         77,895,000         100     3         65,795,000         100

Skilled nursing facilities

     5         310,500,000         100     2         58,000,000         100
  

 

 

    

 

 

      

 

 

    

 

 

    

Total/Weighted Average

     28       $ 671,425,000         96.7     16       $ 230,815,000         97.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Rental Income

For the three months ended March 31, 2012 and 2011, rental income was $18,729,000 and $6,007,000, respectively, and was primarily comprised of base rent of $14,736,000 and $4,761,000, respectively, and expense recoveries of $2,526,000 and $798,000, respectively. Rental income by operating segment consisted of the following for the periods then ended:

 

     Three Months Ended
March 31,
 
     2012      2011  

Medical office buildings

   $ 8,095,000       $ 3,124,000   

Hospitals

     2,197,000         1,708,000   

Skilled nursing facilities

     8,437,000         1,175,000   
  

 

 

    

 

 

 

Total

   $ 18,729,000       $ 6,007,000   
  

 

 

    

 

 

 

Rental Expenses

For the three months ended March 31, 2012 and 2011, rental expenses were $3,302,000 and $1,203,000, respectively. Rental expenses consisted of the following for the periods then ended:

 

     Three Months Ended
March 31,
 
     2012      2011  

Real estate taxes

   $ 1,503,000       $ 490,000   

Building maintenance

     547,000         269,000   

Utilities

     521,000         196,000   

Property management fees

     364,000         120,000   

Administration

     120,000         64,000   

Insurance

     82,000         21,000   

Amortization of leasehold interests

     59,000         5,000   

Other

     106,000         38,000   
  

 

 

    

 

 

 

Total

   $ 3,302,000       $ 1,203,000   
  

 

 

    

 

 

 

Rental expenses and rental expenses as a percentage of revenue by operating segment consisted of the following for the periods then ended:

 

     Three Months Ended March 31,  
     2012     2011  

Medical office buildings

   $ 2,480,000         30.6   $ 1,000,000         32.0

Hospitals

     206,000         9.4     136,000         8.0   

Skilled nursing facilities

     616,000         7.3     67,000         5.7   
  

 

 

      

 

 

    

Total/Weighted Average

   $ 3,302,000         17.6   $ 1,203,000         20.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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General and Administrative

For the three months ended March 31, 2012 and 2011, general and administrative was $2,307,000 and $921,000, respectively. General and administrative consisted of the following for the periods then ended:

 

     Three Months Ended
March 31,
 
     2012      2011  

Asset management fees

   $ 1,257,000       $ 440,000   

Professional and legal fees

     562,000         211,000   

Transfer agent services

     211,000         —     

Board of directors fees

     97,000         60,000   

Directors’ and officers’ liability insurance

     42,000         44,000   

Bank charges

     41,000         18,000   

Franchise taxes

     32,000         55,000   

Postage and delivery

     19,000         11,000   

Restricted stock compensation

     17,000         11,000   

Transfer agent services — former affiliate

     10,000         49,000   

Other

     19,000         22,000   
  

 

 

    

 

 

 

Total

   $ 2,307,000       $ 921,000   
  

 

 

    

 

 

 

The increase in general and administrative is primarily the result of purchasing additional properties in 2012 and thus incurring higher asset management fees, as well as incurring higher professional and legal fees as a result of our increase in assets.

Acquisition Related Expenses

For the three months ended March 31, 2012 and 2011, we incurred acquisition related expenses of $6,570,000 and $1,549,000 respectively. For the three months ended March 31, 2012 and 2011, acquisition related expenses related primarily to expenses associated with our three acquisitions completed during each period, including acquisition fees of $4,579,000 and $1,023,000, respectively, incurred to our former advisor or its affiliates and acquisition fees of $1,724,000 and $0, respectively, incurred to our sub-advisor or its affiliates. The increase in acquisition related expenses for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 is due to purchasing $232,800,000 in acquisitions in 2012 as compared to $37,373,000 in acquisitions in 2011.

Depreciation and Amortization

For the three months ended March 31, 2012 and 2011, depreciation and amortization was $6,983,000 and $2,202,000, respectively, and consisted primarily of depreciation on our operating properties of $4,771,000 and $1,444,000, respectively, and amortization on our identified intangible assets of $2,196,000 and $756,000, respectively.

 

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Interest Expense

For the three months ended March 31, 2012 and 2011, interest expense including loss (gain) in fair value of derivative financial instruments was $3,070,000 and $1,021,000, respectively. Interest expense consisted of the following for the periods then ended:

 

     Three Months Ended
March 31,
 
     2012     2011  

Interest expense — mortgage loans payable and derivative financial instruments

   $ 2,220,000      $ 778,000   

Amortization of deferred financing costs — mortgage loans payable

     226,000        127,000   

Loss on extinguishment of debt — write-off of deferred financing costs

     —          42,000   

Amortization of debt discount and (premium), net

     (153,000     9,000   

Interest expense — lines of credit

     526,000        61,000   

Amortization of deferred financing costs — lines of credit

     246,000        78,000   

(Loss) gain in fair value of our derivative financial instruments

     5,000        (74,000
  

 

 

   

 

 

 

Total

   $ 3,070,000      $ 1,021,000   
  

 

 

   

 

 

 

Interest Income

For the three months ended March 31, 2012 and 2011, we had interest income of $4,000 and $4,000, respectively, related to interest earned on funds held in cash accounts.

Liquidity and Capital Resources

We are dependent upon the net proceeds from our offering to provide the capital required to acquire real estate and real estate-related investments, net of any indebtedness that we may incur. Our ability to raise funds through our offering is dependent on general economic conditions, general market conditions for REITs and our operating performance. The capital required to purchase real estate and real estate-related investments is obtained primarily from our offering and from any indebtedness that we may incur.

We expect to experience a relative increase in liquidity as additional subscriptions for shares of our common stock are received and a relative decrease in liquidity as net offering proceeds are expended in connection with the acquisition, management and operation of our real estate and real estate-related investments.

Our sources of funds will primarily be the net proceeds of our offering, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other sources within the next 12 months.

Our principal demands for funds are for acquisitions of real estate and real estate-related investments, to pay operating expenses and interest on our current and future indebtedness and to pay distributions to our stockholders. We estimate that we will require approximately $7,665,000 to pay interest on our outstanding indebtedness in the remaining nine months of 2012, based on interest rates in effect as of March 31, 2012. In addition, we estimate that we will require $31,819,000 to pay principal on our outstanding indebtedness in the remaining nine months of 2012. In addition, we require resources to make certain payments to our advisor entities and their affiliates, which during our offering includes payments for reimbursement of other organizational and offering expenses, selling commissions and dealer manager fees.

Generally, cash needs for items other than acquisitions of real estate and real estate-related investments are met from operations, borrowings and the net proceeds of our offering. However, there may be a delay between the sale of shares of our common stock and our investments in real estate and real estate-related investments, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations.

Our advisor entities evaluate potential additional investments and engage in negotiations with real estate sellers, developers, brokers, investment managers, lenders and others on our behalf. Until we invest the majority of the net proceeds of our offering in real estate and real estate-related investments, we may invest in short-term, highly liquid or other authorized investments. Such short-term investments will not earn significant returns, and we cannot predict how long it will take to fully invest the proceeds from our offering in real estate and real estate-related investments. The number of properties we may acquire and other investments we will make will depend upon the number of shares of our common stock sold in our offering and the resulting amount of net proceeds available for investment.

 

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When we acquire a property, our advisor entities prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit or other loans established with respect to the investment, operating cash generated by the investment, additional equity investments from us or joint venture partners or, when necessary, capital reserves. Any capital reserve would be established from the net proceeds of our offering, proceeds from sales of other investments, operating cash generated by other investments or other cash on hand. In some cases, a lender may require us to establish capital reserves for a particular investment. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs.

Other Liquidity Needs

In the event that there is a shortfall in net cash available due to various factors, including, without limitation, the timing of distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured debt financing through one or more third parties, or our advisor entities or their affiliates. There are currently no limits or restrictions on the use of proceeds from our advisor entities or their affiliates which would prohibit us from making the proceeds available for distribution. We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties.

Based on the properties we owned as of March 31, 2012, we estimate that our expenditures for capital improvements and tenant improvements will require up to $2,903,000 for the remaining nine months of 2012. As of March 31, 2012, we had $5,504,000 of restricted cash in loan impounds and reserve accounts for such capital expenditures. We cannot provide assurance, however, that we will not exceed these estimated expenditure and distribution levels or be able to obtain additional sources of financing on commercially favorable terms or at all.

If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewal leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of leasing activity and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs.

Cash Flows

Cash flows provided by operating activities for the three months ended March 31, 2012 and 2011 were $1,155,000 and $1,101,000, respectively. For the three months ended March 31, 2012, cash flows provided by operating activities primarily related to the cash flows from our property acquisitions, partially offset by the payment of acquisition related expenses and general and administrative expenses. For the three months ended March 31, 2011, cash flows provided by operating activities primarily related to the cash flows from our property acquisitions, partially offset by the payment of acquisition related expenses and general and administrative expenses. We anticipate cash flows from operating activities to increase as we purchase additional properties.

Cash flows used in investing activities for the three months ended March 31, 2012 and 2011 were $120,061,000 and $38,817,000, respectively. For the three months ended March 31, 2012, cash flows used in investing activities related primarily to the acquisition of our properties in the amount of $114,259,000, capital expenditures of $836,000 and an increase in restricted cash in the amount of $10,416,000, partially offset by a reduction of $5,450,000 in real estate and escrow deposits which were applied towards the purchase of real estate. For the three months ended March 31, 2011, cash flows used in investing activities related primarily to the acquisition of our properties in the amount of $37,636,000, capital expenditures of $388,000, increase in restricted cash in the amount of $342,000 and the payment of $451,000 in real estate and escrow deposits for the purchase of real estate. We anticipate cash flows used in investing activities to increase as we purchase additional properties.

 

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Cash flows provided by financing activities for the three months ended March 31, 2012 and 2011 were $84,438,000 and $38,404,000, respectively. For the three months ended March 31, 2012, such cash flows related primarily to funds raised from investors in our offering in the amount of $72,798,000 and net borrowings under our secured revolving credit facilities with Bank of America, N.A., or Bank of America, and KeyBank National Association, or KeyBank, or the lines of credit, in the amount of $27,935,000, partially offset by principal payments on our mortgage loans payable in the amount of $659,000, the payment of offering costs of $8,331,000 and distributions of $4,160,000. Additional cash outflows related to deferred financing costs of $1,096,000 in connection with the debt financing for our acquisitions, share repurchases of $1,267,000 and contingent consideration associated with some of our acquisitions in the amount of $781,000. For the three months ended March 31, 2011, such cash flows related primarily to funds raised from investors in our offering in the amount of $59,870,000, partially offset by the principal payments on our mortgage loans payable in the amount of $9,165,000, net payments under the line of credit with Bank of America in the amount of $4,400,000, payment of offering costs of $6,437,000 and distributions of $1,300,000. Additional cash outflows related to deferred financing costs of $84,000 in connection with the debt financing for our acquisitions. $7,500,000 of the $9,165,000 in payments on our mortgage loans payable reflect the early extinguishment of a mortgage loan payable on Surgical Hospital of Humble. We anticipate cash flows from financing activities to increase in the future as we raise additional funds from investors and incur debt to purchase properties.

Distributions

Our board of directors authorized a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on January 1, 2010 and ending on June 30, 2010, as a result of our former sponsor advising us that it intended to fund these distributions until we acquired our first property. We acquired our first property, Lacombe Medical Office Building, on March 5, 2010. Our former sponsor did not receive any additional shares of our common stock or other consideration for funding these distributions, and we will not repay the funds provided by our former sponsor for these distributions. Subsequently, our board of directors authorized, on a quarterly basis, a daily distribution to our stockholders of record as of the close of business on each day of the quarterly periods commencing on July 1, 2010 and ending on June 30, 2012.

For distributions declared for each record date in the January 2010 through December 2011 periods, the distributions were calculated based on 365 days in the calendar year and were equal to $0.001780822 per day per share of common stock, which is equal to an annualized distribution rate of 6.5%, assuming a purchase price of $10.00 per share. For distributions declared for each record date in the January 2012 through June 2012 periods, the distributions are calculated based on 365 days in the calendar year and are equal to $0.001808219 per day per share of common stock, which is equal to an annualized distribution rate of 6.6%, assuming a purchase price of $10.00 per share. These distributions are aggregated and paid in cash or shares of our common stock pursuant to the DRIP monthly in arrears. The distributions declared for each record date are paid only from legally available funds.

The amount of the distributions to our stockholders is determined quarterly by our board of directors and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT under the Code. We have not established any limit on the amount of offering proceeds that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business; (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability to maintain our qualification as a REIT.

 

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The distributions paid for the three months ended March 31, 2012 and 2011, along with the amount of distributions reinvested pursuant to the DRIP and the sources of our distributions as compared to cash flows from operations are as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  

Distributions paid in cash

   $ 4,160,000         $ 1,300,000      

Distributions reinvested

     3,876,000           1,288,000      
  

 

 

      

 

 

    
   $ 8,036,000         $ 2,588,000      
  

 

 

      

 

 

    

Sources of distributions:

          

Cash flows from operations

   $ 1,155,000         14.4   $ 1,101,000         42.5

Offering proceeds

     6,881,000         85.6     1,487,000         57.5
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 8,036,000         100   $ 2,588,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Under GAAP, acquisition expenses are expensed, and therefore, subtracted from cash flows from operations. However, these expenses are paid from offering proceeds.

Our distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and all or any portion of a distribution to our stockholders may be paid from offering proceeds. The payment of distributions from our offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively impact the amount of income available for future distributions.

As of March 31, 2012, we had an amount payable of $816,000 to our sub-advisor or its affiliates for asset and property management fees, lease commissions and miscellaneous operating expenses, which will be paid from cash flows from operations in the future as they become due and payable by us in the ordinary course of business consistent with our past practice.

As of March 31, 2012, no amounts due to our former advisor, our advisor entities or their affiliates have been deferred, waived or forgiven. Our former advisor, our advisor entities and their affiliates have no obligations to defer, waive or forgive amounts due to them. In the future, if our former advisor, our advisor entities or their affiliates do not defer, waive or forgive amounts due to them, this would negatively affect our cash flows from operations, which could result in us paying distributions, or a portion thereof, with net proceeds from our offering, funds from our co-sponsors or borrowed funds. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.

The distributions paid for the three months ended March 31, 2012 and 2011, along with the amount of distributions reinvested pursuant to the DRIP and the sources of our distributions as compared to funds from operations, or FFO, are as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  

Distributions paid in cash

   $ 4,160,000         $ 1,300,000      

Distributions reinvested

     3,876,000           1,288,000      
  

 

 

      

 

 

    
   $ 8,036,000         $ 2,588,000      
  

 

 

      

 

 

    

Sources of distributions:

          

FFO

   $ 3,481,000         43.3   $ 1,315,000         50.8

Offering proceeds

     4,555,000         56.7     1,273,000         49.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 8,036,000         100   $ 2,588,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. For a further discussion of FFO, see Funds from Operations and Modified Funds from Operations below.

 

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Financing

We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed 60.0% of all of our properties’ and other real estate-related assets’ combined fair market values, as defined, as determined at the end of each calendar year beginning with our first full year of operations. For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal of the asset. Our policies do not limit the amount we may borrow with respect to any individual investment. As of March 31, 2012, our borrowings were 33.3% of our properties’ combined fair market values, as defined.

Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300.0% of our net assets without the approval of a majority of our independent directors. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real estate or for working capital. We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual taxable income, excluding net capital gains, to our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of May 11, 2012 and March 31, 2012, our leverage did not exceed 300.0% of the value of our net assets.

Mortgage Loans Payable, Net

For a discussion of our mortgage loans payable, net, see Note 6, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial statements.

Lines of Credit

For a discussion of the lines of credit, see Note 8, Lines of Credit, to our accompanying condensed consolidated financial statements.

REIT Requirements

In order to maintain our qualification as a REIT for federal income tax purposes, we are required to make distributions to our stockholders of at least 90.0% of our annual taxable income, excluding net capital gains. In the event that there is a shortfall in net cash available due to factors including, without limitation, the timing of such distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured debt financing through one or more unaffiliated parties. We may also pay distributions from cash from capital transactions including, without limitation, the sale of one or more of our properties or from the proceeds of our offering.

Commitments and Contingencies

For a discussion of our commitments and contingencies, see Note 10, Commitments and Contingencies, to our accompanying condensed consolidated financial statements.

Debt Service Requirements

Our principal liquidity need is the payment of principal and interest on our outstanding indebtedness. As of March 31, 2012, we had $155,359,000 ($166,370,000, net of discount and premium) of fixed rate debt and $39,507,000 ($39,254,000, net of discount and premium) of variable rate debt outstanding secured by our properties. As of March 31, 2012, we had $27,935,000 outstanding under the lines of credit.

 

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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, 2012, we were in compliance with all such covenants and requirements on our mortgage loans payable and the lines of credit and we expect to remain in compliance with all such requirements for the next 12 months. As of March 31, 2012, the weighted average effective interest rate on our outstanding debt, factoring in our fixed rate interest rate swaps, was 4.95% per annum.

Contractual Obligations

The following table provides information with respect to (i) the maturity and scheduled principal repayment of our secured mortgage loans payable and our lines of credit, (ii) interest payments on our mortgage loans payable, lines of credit and fixed rate interest rate swaps, and (iii) obligations under our ground leases, as of March 31, 2012:

 

     Payments Due by Period  
     Less than 1 Year
(2012)
    1-3 Years
(2013-2014)
     4-5 Years
(2015-2016)
     More than 5 Years
(after 2017)
     Total  

Principal payments — fixed rate debt

   $ 6,214,000      $ 13,142,000       $ 23,651,000       $ 112,352,000       $ 155,359,000   

Interest payments — fixed rate debt

     5,976,000        14,951,000         12,779,000         59,211,000         92,917,000   

Principal payments — variable rate debt

     25,605,000 (1)      28,629,000         7,009,000         6,199,000         67,442,000   

Interest payments — variable rate debt (based on rates in effect as of March 31, 2012)

     1,531,000        2,477,000         567,000         218,000         4,793,000   

Interest payments — fixed rate interest rate swap (based on rates in effect as of March 31, 2012)

     158,000        316,000         50,000         —           524,000   

Ground lease obligations

     141,000        367,000         375,000         10,496,000         11,379,000   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,625,000      $ 59,882,000       $ 44,431,000       $ 188,476,000       $ 332,414,000   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our variable rate mortgage loan payable in the outstanding principal amount of $2,907,000 ($2,646,000, net of discount and premium) secured by Center for Neurosurgery and Spine as of March 31, 2012 has a fixed rate interest rate swap, thereby effectively fixing our interest rate on this mortgage loan payable to an effective interest rate of 6.00% per annum. This mortgage loan payable is due August 15, 2021; however, the principal balance is immediately due upon written request from the seller confirming that the seller agrees to pay any interest rate swap termination amount, if any. Assuming the seller does not exercise such right, interest payments, using the 6.00% per annum effective interest rate, would be $129,000, $292,000, $220,000 and $218,000 in 2012, 2013-2014, 2015-2016 and thereafter, respectively.

The table above does not reflect any payments expected under our contingent consideration obligations.

Off-Balance Sheet Arrangements

As of March 31, 2012, we had no off-balance sheet transactions nor do we currently have any such arrangements or obligations.

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.

 

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We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which is the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. In addition, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist, and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset an impairment charge would be recognized. Testing for impairment charges is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property.

Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income (loss).

However, FFO and modified funds from operations, or MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

 

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Changes in the accounting and reporting rules under GAAP that were put into effect and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed as operating expenses under GAAP. We believe these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. As disclosed in the prospectus for our offering, we will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income (loss) in calculating cash flows from operations and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. We are responsible for managing interest rate, hedge and foreign exchange risk, and we do not rely on another party to manage such risk. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are based on market fluctuations and may not be directly related or attributable to our operations.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses (which includes gains and losses on contingent consideration), amortization of above and below market leases, fair value adjustments of derivative financial instruments, gains or losses from the extinguishment of debt, change in deferred rent receivables and the adjustments of such items related to noncontrolling interests. The other adjustments included in the IPA’s Practice Guideline are not applicable to us for the three months ended March 31, 2012 and 2011. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offering to be used to fund acquisition fees and expenses. We do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent re-deployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our former advisor, our advisor entities or their affiliates and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. In the future, if we are not able to raise additional proceeds from our offering, this could result in us paying acquisition fees or reimbursing acquisition expenses due to our former advisor, our advisor entities and their affiliates, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties, or ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our former advisor, our advisor entities or their affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offering.

 

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Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

 

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The following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
 
     2012     2011  

Net loss

   $ (3,499,000   $ (885,000

Add:

    

Depreciation and amortization — consolidated properties

     6,983,000        2,202,000   

Less:

    

Net (income) loss attributable to noncontrolling interests

     —          —     

Depreciation and amortization related to noncontrolling interests

     (3,000     (2,000
  

 

 

   

 

 

 

FFO

   $ 3,481,000      $ 1,315,000   
  

 

 

   

 

 

 

Add:

    

Acquisition related expenses(a)

   $ 6,570,000      $ 1,549,000   

Amortization of above and below market leases(b)

     179,000        45,000   

Loss (gain) in fair value of derivative financial instruments(c)

     5,000        (74,000

Loss on extinguishment of debt(d)

     —          42,000   

Change in deferred rent receivables related to noncontrolling interests(e)

     —          1,000   

Less:

    

Change in deferred rent receivables(e)

     (1,408,000     (449,000
  

 

 

   

 

 

 

MFFO

   $ 8,827,000      $ 2,429,000   
  

 

 

   

 

 

 

Weighted average common shares outstanding — basic and diluted

     52,044,669        18,144,696   
  

 

 

   

 

 

 

Net loss per common share — basic and diluted

   $ (0.07   $ (0.05
  

 

 

   

 

 

 

FFO per common share — basic and diluted

   $ 0.07      $ 0.07   
  

 

 

   

 

 

 

MFFO per common share — basic and diluted

   $ 0.17      $ 0.13   
  

 

 

   

 

 

 

 

(a) In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition related expenses, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our former advisor, our advisor entities or their affiliates and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.
(b) Under GAAP, above and below market leases are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, we believe that by excluding charges relating to the amortization of above and below market leases, MFFO may provide useful supplemental information on the performance of the real estate.

 

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(c) Under GAAP, we are required to record our derivative financial instruments at fair value at each reporting period. We believe that adjusting for the change in fair value of our derivative financial instruments is appropriate because such adjustments may not be reflective of on-going operations and reflect unrealized impacts on value based only on then current market conditions, although they may be based upon general market conditions. The need to reflect the change in fair value of our derivative financial instruments is a continuous process and is analyzed on a quarterly basis in accordance with GAAP.
(d) We believe that adjusting for the gain or loss on extinguishment of debt provides useful information because such gain or loss on extinguishment of debt may not be reflective of on-going operations.
(e) Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, provide insight on the expected contractual cash flows of such lease terms, and align results with our analysis of operating performance.

Net Operating Income

Net operating income is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense and interest income. We believe that net operating income is useful for investors as it provides an accurate measure of the operating performance of our operating assets because net operating income excludes certain items that are not associated with the management of the properties. Additionally, we believe that net operating income is a widely accepted measure of comparative operating performance in the real estate community. However, our use of the term net operating income may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

The following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to net operating income for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended  
     March 31,  
     2012     2011  

Net loss

   $ (3,499,000   $ (885,000

Add:

    

General and administrative

     2,307,000        921,000   

Acquisition related expenses

     6,570,000        1,549,000   

Depreciation and amortization

     6,983,000        2,202,000   

Interest expense

     3,070,000        1,021,000   

Less:

    

Interest income

     (4,000     (4,000
  

 

 

   

 

 

 

Net operating income

   $ 15,427,000      $ 4,804,000   
  

 

 

   

 

 

 

Subsequent Events

For a discussion of subsequent events, see Note 18, Subsequent Events, to our accompanying condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There were no material changes in the information regarding market risk, or in the methods we use to manage market risk, that was provided in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 15, 2012.

 

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The table below presents, as of March 31, 2012, the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.

 

    Expected Maturity Date  
    2012     2013     2014     2015     2016     Thereafter     Total     Fair Value  

Fixed rate debt - principal payments

  $ 6,214,000      $ 2,742,000      $ 10,400,000      $ 12,378,000      $ 11,273,000      $ 112,352,000      $ 155,359,000      $ 174,337,000   

Weighted average interest rate on maturing debt

    5.69     5.29     5.51     5.24     6.14     5.11     5.16     —     

Variable rate debt — principal payments

  $ 25,605,000      $ 343,000      $ 28,286,000      $ 359,000      $ 6,650,000      $ 6,199,000      $ 67,442,000      $ 66,895,000   

Weighted average interest rate on maturing debt (based on rates in effect as of March 31, 2012)

    4.51     2.87     3.96     2.86     3.09     2.64     3.95     —     

Mortgage loans payable were $194,866,000 ($205,624,000, net of discount and premium) as of March 31, 2012. As of March 31, 2012, we had 19 fixed rate and five variable rate mortgage loans payable with effective interest rates ranging from 1.34% to 6.60% per annum and a weighted average effective interest rate of 4.91% per annum. As of March 31, 2012, we had $155,359,000 ($166,370,000, net of discount and premium) of fixed rate debt, or 79.7% of mortgage loans payable, at a weighted average effective interest rate of 5.16% per annum and $39,507,000 ($39,254,000, net of discount and premium) of variable rate debt, or 20.3% of mortgage loans payable, at a weighted average effective interest rate of 3.93% per annum. In addition, as of March 31, 2012, we had $27,935,000 outstanding under the lines of credit, at a weighted-average interest rate of 3.97% per annum.

As of March 31, 2012, the weighted average effective interest rate on our outstanding debt, factoring in our fixed rate interest rate swaps, was 4.95% per annum. $2,907,000 of our variable rate mortgage loans payable is due August 15, 2021; however, the principal balance is immediately due upon written request from the seller confirming that the seller agrees to pay the interest rate swap termination amount, if any, and as such, the $2,907,000 principal balance is reflected in the 2012 column above.

An increase in the variable interest rate on the lines of credit and our variable rate mortgage loans payable constitutes a market risk. As of March 31, 2012, a 0.50% increase in the London Interbank Offered Rate, or LIBOR, would have increased our overall interest expense on the lines of credit and variable mortgage loans payables by $206,000, or 7.5%.

In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2012 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2012, were effective.

(b) Changes in internal control over financial reporting. There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There were no material changes from the risk factors previously disclosed in our 2011 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or SEC, on March 15, 2012, except as noted below.

We have not had sufficient cash available from operations to pay distributions, and, therefore, we have paid distributions from the net proceeds of our offering, from borrowings in anticipation of future cash flows or from other sources. Any such distributions may reduce the amount of capital we ultimately invest in assets and negatively impact the value of our stockholders’ investment.

Distributions payable to our stockholders may include a return of capital, rather than a return on capital. We have not established any limit on the amount of proceeds from our initial public offering, or our offering, that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business; (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability to maintain our qualification as a real estate investment trust, or REIT. The actual amount and timing of distributions are determined by our board of directors in its sole discretion and typically will depend on the amount of funds available for distribution, which will depend on items such as our financial condition, current and projected capital expenditure requirements, tax considerations and annual distribution requirements needed to maintain our qualification as a REIT. As a result, our distribution rate and payment frequency vary from time to time.

We have used, and in the future may use, the net proceeds from our offering, borrowed funds, or other sources, to pay cash distributions to our stockholders, which may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. As a result, the amount of net proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our current and accumulated earnings and profits, the excess amount will be deemed a return of capital.

Our board of directors authorized a daily distribution to our stockholders of record as of the close of business on each day of the period commencing on January 1, 2010 and ending on June 30, 2010, as a result of our former sponsor, Grubb & Ellis Company, advising us that it intended to fund these distributions until we acquired our first property. We acquired our first property, Lacombe Medical Office Building, on March 5, 2010. Our former sponsor did not receive any additional shares of our common stock or other consideration for funding these distributions, and we will not repay the funds provided by our former sponsor for these distributions. Subsequently, our board of directors authorized, on a quarterly basis, a daily distribution to our stockholders of record as of the close of business on each day of the quarterly periods commencing on July 1, 2010 and ending on June 30, 2012.

For distributions declared for each record date in the January 2010 through December 2011 periods, the distributions were calculated based on 365 days in the calendar year and were equal to $0.001780822 per day per share of common stock, which is equal to an annualized distribution rate of 6.5%, assuming a purchase price of $10.00 per share. For distributions declared for each record date in the January 2012 through June 2012 periods, the distributions are calculated based on 365 days in the calendar year and are equal to $0.001808219 per day per share of common stock, which is equal to an annualized distribution rate of 6.6%, assuming a purchase price of $10.00 per share. These distributions are aggregated and paid in cash or shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, monthly in arrears. The distributions declared for each record date are paid only from legally available funds. We can provide no assurance that we will be able to continue this distribution rate or pay any subsequent distributions.

 

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The distributions paid for the three months ended March 31, 2012 and 2011, along with the amount of distributions reinvested pursuant to the DRIP and the sources of our distributions as compared to cash flows from operations are as follows:

 

     Three Months Ended  
     March 31,  
     2012     2011  

Distributions paid in cash

   $ 4,160,000         $ 1,300,000      

Distributions reinvested

     3,876,000           1,288,000      
  

 

 

      

 

 

    
   $ 8,036,000         $ 2,588,000      
  

 

 

      

 

 

    

Sources of distributions:

          

Cash flows from operations

   $ 1,155,000         14.4   $ 1,101,000         42.5

Offering proceeds

     6,881,000         85.6     1,487,000         57.5
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 8,036,000         100   $ 2,588,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Under accounting principles generally accepted in the United States of America, or GAAP, acquisition expenses are expensed, and therefore, subtracted from cash flows from operations. However, these expenses are paid from offering proceeds.

For a further discussion of distributions, see Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Distributions.

As of March 31, 2012, we had an amount payable of $816,000 to our sub-advisor or its affiliates for asset and property management fees, lease commissions and miscellaneous operating expenses, which will be paid from cash flows from operations in the future as they become due and payable by us in the ordinary course of business consistent with our past practice.

As of March 31, 2012, no amounts due to our former advisor, our advisor entities or their affiliates have been deferred, waived or forgiven. Our former advisor, our advisor entities and their affiliates have no obligations to defer, waive or forgive amounts due to them. In the future, if our former advisor, our advisor entities or their affiliates do not defer, waive or forgive amounts due to them, this would negatively affect our cash flows from operations, which could result in us paying distributions, or a portion thereof, with the net proceeds from our offering, funds from our sponsor or borrowed funds. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.

The distributions paid for the three months ended March 31, 2012 and 2011, along with the amount of distributions reinvested pursuant to the DRIP and the sources of our distributions as compared to funds from operations, or FFO, are as follows:

 

     Three Months Ended  
     March 31,  
     2012     2011  

Distributions paid in cash

   $ 4,160,000         $ 1,300,000      

Distributions reinvested

     3,876,000           1,288,000      
  

 

 

      

 

 

    
   $ 8,036,000         $ 2,588,000      
  

 

 

      

 

 

    

Sources of distributions:

          

FFO

   $ 3,481,000         43.3   $ 1,315,000         50.8

Offering proceeds

     4,555,000         56.7     1,273,000         49.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 8,036,000         100   $ 2,588,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. For a further discussion of FFO, which includes a reconciliation of our GAAP net loss to FFO, see Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations and Modified Funds from Operations.

We are subject to federal securities laws relating to our public communications. If any of our public communications are held to be in violation of such laws, we could be subject to potential liability. Investors in our offering should rely only on the statements made in our prospectus as supplemented to date in determining whether to purchase shares of our common stock.

From time to time, we or our representatives make public statements relating to our business and its prospects. Such communications are subject to federal securities laws. If any of our public communications are held by a court to be in violation of Section 5 of the Securities Act of 1933, as amended, we could be required to repurchase the shares sold to persons who received such communications before receiving a copy of our prospectus for a period of one year following the date of any violation determined by a court to have occurred. The repurchase price would be the original purchase price, plus statutory interest from the date of purchase. In the event that one or more of our public communications is claimed to have been made in violation of Section 5 of the Securities Act of 1933, as amended, we expect that we would contest such claim. Nevertheless, we cannot assure investors that a court would agree with us in such instance. Accordingly, there is a risk that we could be subject to potential liability with respect to any Section 5 claim, and such liability may adversely affect our operating results or financial position. Investors in our offering should rely only on the statements made in our prospectus as supplemented to date in determining whether to purchase shares of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

In connection with the transition of our advisor to Griffin-American Healthcare REIT Advisor, LLC, we issued 22,222 shares of our common stock to Griffin-American Healthcare REIT Advisor, LLC for $9.00 per share in a private offering on January 4, 2012. Such offering was exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Use of Public Offering Proceeds

Our Registration Statement on Form S-11 (File No. 333-158111), registering a public offering of up to 330,000,000 shares of our common stock, was declared effective under the Securities Act of 1933, as amended, or the Securities Act, on August 24, 2009. Pursuant to our Registration Statement on Form S-11, 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 the DRIP for $9.50 per share, for a maximum offering of up to $3,285,000,000, or our offering. Until April 18, 2011, Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities, served as the dealer manager of our offering. Effective as of April 19, 2011, the G&E Dealer Manager Agreement with Grubb & Ellis Securities was assigned to, and assumed by, Grubb & Ellis Capital Corporation, a wholly owned subsidiary of our former sponsor. On November 7, 2011, we entered into the Dealer Manager Agreement with Griffin Securities, whereby Griffin Securities began serving as the dealer manager of our offering effective January 7, 2012. The terms of the Dealer Manager Agreement with Griffin Securities are substantially the same as the terms of the terminated G&E Dealer Manager Agreement.

As of March 31, 2012, we had received and accepted subscriptions in our offering for 55,325,058 shares of our common stock, or $552,112,000, excluding shares of our common stock issued pursuant to the DRIP. As of March 31, 2012, a total of $14,678,000 in distributions were reinvested and 1,545,032 shares of our common stock were issued pursuant to the DRIP.

As of March 31, 2012, we had incurred selling commissions of $33,012,000, dealer manager fees of $14,517,000 and other offering expenses of $5,533,000 to our former affiliates or to our sub-advisor in connection with our offering. In addition, as of March 31, 2012, we had incurred selling commissions of $4,607,000 and dealer manager fees of $2,014,000 to Griffin Securities, an unaffiliated entity. Such commissions, fees and reimbursements are charged to stockholders’ equity as such amounts are reimbursed from the gross proceeds of our offering. The cost of raising funds in our offering as a percentage of gross proceeds received in our primary offering was 10.8% as of March 31, 2012 and will not exceed 11.0% in the aggregate. As of March 31, 2012, net offering proceeds were $507,107,000, including proceeds from the DRIP and after deducting offering expenses.

 

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As of March 31, 2012, $94,000 remained payable to Griffin-American Healthcare REIT Sub-Advisor, LLC, or our sub-advisor, for offering related costs.

As of March 31, 2012, we had used $388,188,000 in proceeds from our offering to acquire properties from unaffiliated parties, $18,423,000 to pay acquisition related expenses to affiliated parties, $12,705,000 for lender required restricted cash accounts to unaffiliated parties, $5,534,000 for deferred financing costs to unaffiliated parties, $5,805,000 to pay acquisition related expenses to unaffiliated parties, $56,333,000 to repay borrowings from unaffiliated parties incurred in connection with previous acquisition