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EX-31.1 - EXHIBIT 31.1 - Sentio Healthcare Properties Incv408331_ex31-1.htm
EX-10.2 - EXHIBIT 10.2 - Sentio Healthcare Properties Incv408331_ex10-2.htm
EX-10.4 - EXHIBIT 10.4 - Sentio Healthcare Properties Incv408331_ex10-4.htm
EX-10.7 - EXHIBIT 10.7 - Sentio Healthcare Properties Incv408331_ex10-7.htm
EX-32.1 - EXHIBIT 32.1 - Sentio Healthcare Properties Incv408331_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - Sentio Healthcare Properties Incv408331_ex32-2.htm
EX-10.6 - EXHIBIT 10.6 - Sentio Healthcare Properties Incv408331_ex10-6.htm
EX-10.5 - EXHIBIT 10.5 - Sentio Healthcare Properties Incv408331_ex10-5.htm
EX-31.2 - EXHIBIT 31.2 - Sentio Healthcare Properties Incv408331_ex31-2.htm
EX-10.1 - EXHIBIT 10.1 - Sentio Healthcare Properties Incv408331_ex10-1.htm

 

 

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, 2015

 

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 000-53969

  

 

 

SENTIO HEALTHCARE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

  

 

 

MARYLAND 20-5721212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
189 South Orange Avenue, Suite 1700,  
Orlando, FL 32801
(Address of principal executive offices) (Zip Code)

 

407-999-7679

(Registrant’s telephone number, including area code)

 

Not Applicable

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

  

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     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. Check one:

 

       Large accelerated filer ¨ Accelerated filer ¨
       
       Non-accelerated filer x 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 8, 2015, there were 11,487,916 shares of common stock of Sentio Healthcare Properties, Inc. outstanding. 

  

 

  

 
 

  

Table of Contents

 

PART I — FINANCIAL INFORMATION

FORM 10-Q

SENTIO HEALTHCARE PROPERTIES, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 2
   
Item 1. Financial Statements:  
   
Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014 3
   
Condensed Consolidated Statements of Operations for the Three months ended March 31, 2015 (unaudited) and 2014 (unaudited) 4
   
Condensed Consolidated Statement of Equity for the Three months ended March 31, 2015 (unaudited) 5
   
Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2015 (unaudited) and 2014 (unaudited) 6
   
Notes to Condensed Consolidated Financial Statements (unaudited) 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
   
Item 4. Controls and Procedures 22
   
PART II. OTHER INFORMATION 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
   
Item 6. Exhibits 23
   
SIGNATURES 24

  

2
 

  

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
ASSETS          
Cash and cash equivalents  $34,438,000   $35,564,000 
Investments in real estate:          
Land   42,289,000    42,266,000 
Buildings and improvements, net   341,704,000    306,788,000 
Furniture, fixtures and vehicles, net   10,458,000    8,987,000 
Intangible lease assets, net   9,555,000    11,028,000 
    404,006,000    369,069,000 
Deferred financing costs, net   3,807,000    3,338,000 
Investment in unconsolidated entities   4,984,000    5,146,000 
Tenant and other receivables, net   4,526,000    4,037,000 
Deferred costs and other assets   7,645,000    5,554,000 
Restricted cash   5,435,000    5,161,000 
Goodwill   5,965,000    5,965,000 
Total assets  $470,806,000   $433,834,000 
           
LIABILITIES AND EQUITY          
Liabilities:          
Notes payable, net  $294,893,000   $276,476,000 
Accounts payable and accrued liabilities   17,425,000    10,178,000 
Prepaid rent and security deposits   4,031,000    3,029,000 
Distributions payable   1,415,000    1,446,000 
Total liabilities   317,764,000    291,129,000 
Equity:          
Preferred Stock Series C, $0.01 par value; 1,000 shares authorized; 1,000 and 1,000 shares  issued and outstanding at March 31, 2015 and December 31, 2014, respectively.   -    - 
Common stock, $0.01 par value; 580,000,000 shares authorized; 11,480,619 and 11,472,765 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively   115,000    115,000 
Additional paid-in capital   65,468,000    66,792,000 
Accumulated deficit   (21,388,000)   (18,714,000)
Total stockholders' equity   44,195,000    48,193,000 
Noncontrolling interests:          
Series B convertible preferred OP units   105,566,000    91,088,000 
Other noncontrolling interest   3,281,000    3,424,000 
Total equity   153,042,000    142,705,000 
Total liabilities and equity  $470,806,000   $433,834,000 

 

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

 

3
 

  

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

   Three Months Ended March 31, 
   2015   2014 
Revenues:          
Rental revenues  $17,430,000   $11,027,000 
Resident fees and services   7,665,000    7,267,000 
Tenant reimbursements and other income   529,000    340,000 
    25,624,000    18,634,000 
Expenses:          
Property operating and maintenance   16,483,000    12,126,000 
General and administrative   186,000    394,000 
Asset management fees   1,359,000    957,000 
Real estate acquisition costs   582,000    34,000 
Depreciation and amortization   4,455,000    2,920,000 
    23,065,000    16,431,000 
Income from operations   2,559,000    2,203,000 
           
Other expense:          
Interest expense, net   3,167,000    2,209,000 
Equity in loss from unconsolidated entities   127,000    85,000 
Net loss   (735,000)   (91,000)
Preferred return to Series B convertible preferred OP units   1,801,000    362,000 
Net income attributable to other noncontrolling interests   138,000    157,000 
Net loss attributable to common stockholders  $(2,674,000)  $(610,000)
           
Basic and diluted weighted average number of common shares   11,478,707    12,611,127 
Basic and diluted net loss per common share attributable to common stockholders  $(0.23)  $(0.05)

 

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

 

4
 

  

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2015

(Unaudited)

 

   Preferred Stock   Common Stock           Total          
   Number of
shares
   Stock Par
Value
   Number of
Shares
   Stock Par
Value
   Additional
Paid-In Capital
   Accumulated
Deficit
   Stockholders'
Equity
   Noncontrolling
Interest
   Total 
BALANCE - December 31, 2014   1,000   $-    11,472,765   $115,000   $66,792,000   $(18,714,000)  $48,193,000   $94,512,000   $142,705,000 
Issuance of Common Stock             7,854         91,000         91,000         91,000 
Issuance of Series B convertible preferred OP units, net                                 -    15,452,000    15,452,000 
Distributions                       (1,415,000)        (1,415,000)   (3,056,000)   (4,471,000)
Net (loss) income                            (2,674,000)   (2,674,000)   1,939,000    (735,000)
BALANCE - March 31, 2015   1,000   $-    11,480,619   $115,000   $65,468,000   $(21,388,000)  $44,195,000   $108,847,000   $153,042,000 

  

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

 

5
 

  

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended March 31, 
   2015   2014 
Cash flows from operating activities:          
Net loss  $(735,000)  $(91,000)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Amortization of deferred financing costs   166,000    140,000 
Depreciation and amortization   4,455,000    2,920,000 
Straight-line rent and above/below market lease amortization   (221,000)   (132,000)
Amortization of loan premium   (15,000)   (17,000)
Equity in loss from unconsolidated entities   127,000    85,000 
Bad debt expense   49,000    140,000 
Deferred tax benefit   (234,000)   (404,000)
Changes in operating assets and liabilities:          
Tenant and other receivables   (300,000)   139,000 
Deferred costs and other assets   (203,000)   160,000 
Restricted cash   (142,000)   515,000 
Prepaid rent and tenant security deposits   977,000    925,000 
Accounts payable and accrued expenses   (576,000)   (728,000)
Net cash provided by operating activities   3,348,000    3,652,000 
Cash flows from investing activities:          
Real estate acquisitions   (31,335,000)   - 
Additions to real estate   (387,000)   (341,000)
Purchase of an interest in an unconsolidated entity   -    (1,161,000)
Restricted cash   (80,000)   (95,000)
Acquisition deposits   (1,669,000)   (84,000)
Distributions from unconsolidated entities   35,000    21,000 
Net cash used in investing activities   (33,436,000)   (1,660,000)
Cash flows from financing activities:          
Proceeds from issuance of Series B OP units, net   15,589,000    - 
Redeemed shares   -    (70,000)
Proceeds from notes payable   19,195,000    -
Repayment of notes payable   (763,000)   (726,000)
Offering costs   -    (5,000)
Deferred financing costs   (596,000)   (53,000)
Distributions paid to Series B convertible preferred OP units and other noncontrolling interests   (3,056,000)   (644,000)
Distributions paid to stockholders   (1,355,000)   (1,528,000)
Restricted cash   (52,000)   - 
Tender offer costs   -    (34,000)
Net cash provided by (used in) financing activities   28,962,000    (3,060,000)
Net decrease in cash and cash equivalents   (1,126,000)   (1,068,000)
Cash and cash equivalents - beginning of period   35,564,000    21,792,000 
Cash and cash equivalents - end of period  $34,438,000   $20,724,000 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $2,834,000   $2,133,000 
Cash paid for income taxes  $12,000   $20,000 
           
Supplemental disclosure of non-cash financing and investing activities:          
Distributions declared not paid  $1,330,000   $1,486,000 
Distributions reinvested  $6,000   $8,000 
Accrued preferred stock offering costs  $137,000   $- 
Accrued deferred acquisition costs  $138,000   $- 
Accrued tender offer costs  $-   $59,000 
Accrued additions to real estate  $147,000   $40,000 

 

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

 

6
 

   

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

 

1. Organization

 

Sentio Healthcare Properties, Inc., a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Sentio Healthcare Properties, Inc. and its consolidated subsidiaries, except where context otherwise requires. Effective January 1, 2012, subject to certain restrictions and limitations, our business is managed by Sentio Investments, LLC, a Florida limited liability company that was formed on December 20, 2011 (the “Advisor”). Prior to January 1, 2012, we were externally advised by Cornerstone Leveraged Realty Advisors, LLC.

 

Sentio Healthcare Properties OP, LP, a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. As of March 31, 2015, we owned 100% of the outstanding common units in the Operating Partnership and the HC Operating Partnership, LP, a subsidiary of the Operating Partnership. Pursuant to the terms of the KKR Equity Commitment (as described in Note 11), we have issued Series B Convertible Preferred Units in the Operating Partnership (“Series B Preferred Units”) to the Investor (as described in Note 11), the terms of which provide that the Investor may convert its preferred units into common units at its discretion. On an as-converted basis, as of March 31, 2015, the Investor owns 48.9% and we own the remaining interest in the Operating Partnership and the HC Operating Partnership, LP. We anticipate that we will conduct all or a portion of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

 

2. Summary of Significant Accounting Policies

 

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Principles of Consolidation and Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the guidance for the consolidation of variable interest entities (“VIEs”), we analyze our variable interests, including investments in partnerships and joint ventures, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews, based on our review of the design of the entity, its organizational structure including decision-making ability, risk and reward sharing experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions and financial agreements. We also use quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

 

Interim Financial Information

 

The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Our accompanying interim condensed consolidated financial statements should be read in conjunction with our audited condensed consolidated financial statements and the notes thereto included on our 2014 Annual Report on Form 10-K, as filed with the SEC.

 

3. Acquisitions

 

Sumter Grand

 

On February 6, 2015, through a wholly owned subsidiary, we acquired real estate property (“Sumter Grand”) from an unaffiliated third party, for a purchase price of $31.5 million. Sumter Grand, which opened in December 2014, is a 150-unit independent living facility located in The Villages, Florida. We funded the purchase of Sumter Grand with proceeds from the sale to the Investor of Series B Preferred Units pursuant to the KKR Equity Commitment (as described in Note 11) on December 30, 2014 and with proceeds from a mortgage loan from KeyBank National Association, Inc. (“KeyBank”), an unaffiliated lender (as described in Note 10).

 

The following summary provides the allocation of the acquired assets and liabilities of Sumter Grand as of the acquisition date. We have accounted for the acquisition as a business combination under GAAP. Under business combination accounting, the assets and liabilities of the acquired property was recorded at its respective fair value as of the acquisition date and consolidated in our financial statements. The details of the purchase price of the acquired property are set forth below:

 

7
 

  

   Sumter Grand 
Buildings and improvements  $37,295,000 
Furniture, fixtures and vehicles   1,580,000 
Intangible liability (1)   (516,000)
Contingent liability (2)   (6,859,000)
Real estate acquisition  $31,500,000 
Acquisition expenses  $423,000 

 

(1)This balance represents the Company’s fair value estimate of the above market ground lease associated with the land in the Sumter Grand acquisition.
(2)This balance represents the Company’s fair value estimate of an earnout liability the seller of Sumter Grand is entitled to based on a net operating income threshold. The earnout provision will expire if not acheived 42 months after acquisition.

 

The Company recorded revenues of $0.5 million and a net loss of $0.6 million for the three month period ended March 31, 2015 for the Sumter Grand acquisition.

 

Sumter Grand opened in December 2014, therefore the Company has excluded proforma financial statements as if the acquisition occurred on January 1, 2014.

 

4. Loan Receivable

 

On January 16, 2015, the Company, through an indirect wholly owned subsidiary, originated a development loan in the amount of $41.9 million for the development of The Delaney at Georgetown Village located in Georgetown, Texas (the “Georgetown Loan”). The borrower, Westminster-LCS Georgetown LLC, is not affiliated with the Company or the Advisor. The borrower is a joint venture between Life Care Companies, LLC (“LCS”) and a fund sponsored by Westminster Capital (“Westminster”), and will use the proceeds of the Georgetown Loan to develop a senior living facility with 207 units including independent living, assisted living and memory care.

 

The Georgetown Loan is secured by a first mortgage lien on the land, building, and all improvements made thereon. The Georgetown Loan matures on January 15, 2020 with one 12-month option to extend at the Company’s option, and bears interest at a fixed rate of 7.9% per annum for the term of the loan. Advances will be made periodically during the construction period to cover documented hard and soft costs of construction and interest, commencing after the borrower has expended its required equity contribution, and subject to customary construction draw conditions. The borrower paid a loan origination fee equal to 1% of the loan amount. Monthly payments are interest only for the term of the loan. The Company has the option to purchase the property at fair value upon stabilization or 48 months. Fair value is determined by the average asset value of independent appraisals obtained by the lender and borrower. Regardless of whether the Company exercises the option to purchase the property, the Company will be entitled to participate in the value creation which is the difference between the fair value and the total development cost. The Georgetown Loan is non-recourse to LCS and Westminster, but LCS has provided cost and completion guarantees as well as a guaranty of customary “bad boy” carve-outs.

 

On January 14, 2015, the Company closed a put exercise to fund the Georgetown Loan with proceeds from the sale of Series B Preferred Units to the Investor pursuant to the KKR Equity Commitment (as described in Note 11). Upon funding of the Georgetown Loan, interest income on the loan receivable will be recognized as earned based upon the principal amount outstanding subject to an evaluation of collectability risks. As of March 31, 2015, the borrower had made no draws on the Georgetown Loan.

 

5. Investments in Real Estate

 

As of March 31, 2015, cost and accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

 

   Land   Buildings and
Improvements
   Furniture, Fixtures
and Equipment
   Intangible Lease
Assets
 
Cost  $42,289,000   $365,325,000   $15,034,000   $26,763,000 
Accumulated depreciation and amortization   -    (23,621,000)   (4,576,000)   (17,208,000)
Net  $42,289,000   $341,704,000   $10,458,000   $9,555,000 

 

As of December 31, 2014, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

 

   Land   Buildings and
Improvements
   Furniture, Fixtures
and Equipment
   Intangible Lease
Assets
 
Cost  $42,266,000   $327,858,000   $13,125,000   $26,752,000 
Accumulated depreciation and amortization   -    (21,070,000)   (4,138,000)   (15,724,000)
Net  $42,266,000   $306,788,000   $8,987,000   $11,028,000 

 

Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended March 31, 2015 and 2014 was approximately $3.0 million and $1.9 million, respectively.

 

Amortization associated with intangible assets for the three months ended March 31, 2015 and 2014 was $1.5 million and $1.0 million, respectively.

 

8
 

  

Estimated amortization for April 1, 2015 through December 31, 2015 and each of the subsequent years is as follows:

 

   Intangible Assets 
April 1, 2015 - December 31, 2015  $2,885,000 
2016   559,000 
2017   557,000 
2018   557,000 
2019   464,000 
2020 and thereafter   4,533,000 

 

The estimated useful lives for intangible assets range from approximately one to 22 years. As of March 31, 2015, the weighted-average amortization period for intangible assets was 12 years.

 

6. Investments in Unconsolidated Entities

 

As of March 31, 2015, the Company owns interests in the following entities that are accounted for under the equity method of accounting:

 

Entity  (1)  Property Type  Acquired   Investment (2)   Ownership % 
Physicians Center MOB  Medical Office Building   April 2012   $144,000    71.9%
Buffalo Crossing  Assisted-Living Facility - Under Development   January 2014    1,161,000    25.0%
The Parkway  Assisted-Living Facility - Under Development   October 2014    3,679,000    65.0%
           $4,984,000      

 

(1)These entities are not consolidated because the Company exercises significant influence, but does not control or direct the activities that most significantly impact the entity’s performance.
(2)Represents the carrying value of the Company’s investment in the unconsolidated entities.

 

Summarized combined financial information for the Company’s unconsolidated entities is as follows:

 

   March 31,   December 31, 
   2015   2014 (1)(2) 
Cash and cash equivalents  $170,000   $48,000 
Investments in real estate, net   35,713,000    27,737,000 
Other assets   850,000    769,000 
Total assets  $36,733,000   $28,554,000 
           
Notes payable  $25,779,000   $17,444,000 
Accounts payable and accrued liabilities   2,138,000    1,676,000 
Other liabilities   74,000    68,000 
Total stockholders’ equity   8,742,000    9,366,000 
Total liabilities and equity  $36,733,000   $28,554,000 

  

   Three Months Ended March 31, 
   2015   2014 (1)(2) 
Total revenues  $428,000   $397,000 
Net loss   (244,000)  (112,000)
Company’s equity in loss from unconsolidated entities   (127,000)  (85,000)

 

(1)On January 28, 2014, through a wholly owned subsidiary, we acquired a 25% interest in a joint venture entity that is developing Buffalo Crossing, a 108-unit, assisted living community. Buffalo Crossing was accounted for under the equity method of accounting beginning with the first quarter of 2014.
(2)On October 2, 2014, through a wholly owned subsidiary, we acquired a 65% interest in a joint venture entity that is developing the Parkway, a 142-unit, senior housing facility. The Parkway was accounted for under the equity method of accounting beginning with the fourth quarter of 2014.

 

7. Income Taxes

 

For federal income tax purposes, we have elected to be taxed as a real estate investment trust (“REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with our taxable year ended December 31, 2008, which imposes limitations related to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly operate assisted-living facilities. However, such facilities may generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease with the Company. Therefore, we have formed Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of HC Operating Partnership, LP, to lease any assisted-living properties we acquire and to operate the assisted-living properties pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the management companies have direct control of the daily operations of these assisted-living properties.

 

9
 

  

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would establish a valuation allowance which would reduce the provision for income taxes.

 

The Master TRS recognized a $0.5 million benefit and a $0.2 million expense for federal and state income taxes in the three months ended March 31, 2015 and 2014, respectively, which have been recorded in general and administrative expenses. Net deferred tax assets related to the TRS entities totaled approximately $3.0 million at March 31, 2015 and $2.8 million at December 31, 2014, respectively, related primarily to book and tax basis differences for straight-line rent and accrued liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. Deferred tax assets are included in deferred costs and other assets in our condensed consolidated balance sheets. We have not recorded a valuation allowance against our deferred tax assets as of March 31, 2015, as we have determined that the future projected taxable income from the operations of the TRS entities are sufficient to cover the additional future expenses resulting from these book tax differences.

 

8. Segment Reporting

 

As of March 31, 2015, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in senior living, skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

 

We evaluate performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenue less property operating and maintenance expenses. There are no intersegment sales or transfers. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, asset management fees and expenses, real estate acquisition costs, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

 

The following tables reconcile the segment activity to consolidated net loss for the three months ended March 31, 2015 and 2014:

 

   Three Months Ended March 31, 2015 
   Senior living
properties
   Triple-
net leased
properties
   Medical office
properties
   Consolidated 
Rental revenue  $14,885,000   $2,329,000   $216,000   $17,430,000 
Resident services and fee income   7,665,000    -    -    7,665,000 
Tenant reimbursements and other income   134,000    318,000    77,000    529,000 
    22,684,000    2,647,000    293,000    25,624,000 
Property operating and maintenance expenses   16,118,000    284,000    81,000    16,483,000 
Net operating income  $6,566,000   $2,363,000   $212,000   $9,141,000 
General and administrative                  186,000 
Asset management fees and expenses                  1,359,000 
Real estate acquisition costs                  582,000 
Depreciation and amortization                  4,455,000 
Interest expense, net                  3,167,000 
Equity in loss from unconsolidated entities                  127,000 
Net loss                 $(735,000)

 

   Three Months Ended March 31, 2014 
   Senior living
properties
   Triple-
net leased
properties
   Medical office
properties
   Consolidated 
Rental revenue  $9,505,000   $1,309,000   $213,000   $11,027,000 
Resident services and fee income   7,267,000    -    -    7,267,000 
Tenant reimbursements and other income   100,000    164,000    76,000    340,000 
    16,872,000    1,473,000    289,000    18,634,000 
Property operating and maintenance expenses   11,829,000    219,000    78,000    12,126,000 
Net operating income  $5,043,000   $1,254,000   $211,000   $6,508,000 
General and administrative                  394,000 
Asset management fees and expenses                  957,000 
Real estate acquisition costs                  34,000 
Depreciation and amortization                  2,920,000 
Interest expense, net                  2,209,000 
Equity in loss from unconsolidated entities                  85,000 
Net loss                 $(91,000)

 

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The following table reconciles the segment activity to consolidated financial position as of March 31, 2015 and December 31, 2014.

 

   March 31, 2015   December 31, 2014 
Assets          
Investment in real estate:          
Senior living operations  $314,568,000   $278,880,000 
Triple-net leased properties   81,976,000    82,648,000 
Medical office building   7,462,000    7,541,000 
Total reportable segments  $404,006,000   $369,069,000 
Reconciliation to consolidated assets:          
Cash and cash equivalents   34,438,000    35,564,000 
Deferred financing costs, net   3,807,000    3,338,000 
Investment in unconsolidated entities   4,984,000    5,146,000 
Tenant and other receivables, net   4,526,000    4,037,000 
Deferred costs and other assets   7,645,000    5,554,000 
Restricted cash   5,435,000    5,161,000 
Goodwill   5,965,000    5,965,000 
Total assets  $470,806,000   $433,834,000 

 

As of March 31, 2015 and December 31, 2014, goodwill had a balance of approximately $6.0 million, all of which related to the senior living operations segment. The Company historically has not recorded any impairment charges for goodwill.

 

9. Fair Value Measurements

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 825-10, “Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value.

 

Fair value represents the estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820, Fair Value Measurement establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from independent sources and unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability.

  

Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. With the exception of notes payable discussed below, we consider the carrying values of our financial instruments to approximate fair value because they generally expose the Company to limited credit risk and because of the short period of time between origination of the financial assets and liabilities and their expected settlement.

 

The fair value of the Company’s notes payable is estimated by discounting future cash flows of each instrument at rates that reflect the current market rates available to the Company for debt of the same terms and maturities. The fair value of the notes payable was determined using Level 2 inputs of the fair value hierarchy. Based on the estimates used by the Company, the fair value of notes payable was $294.3 million and $275.8 million, compared to the carrying values of $294.9 million ($294.9 million, including premium) and $276.4 million ($276.5 million, including premium) at March 31, 2015 and December 31, 2014, respectively.

 

There were no transfers between Level 1 or 2 during the three months ended March 31, 2015.

 

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10. Notes Payable

 

Notes payable were $294.9 million ($294.9 million, including premium) and $276.4 million ($276.5 million, including premium) as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.80% to 6.43% per annum and a weighted average effective interest rate of 4.08% per annum. As of March 31, 2015, notes payable consisted of $155.8 million of fixed rate debt, or approximately 53% of notes payable, at a weighted average interest rate of 4.89% per annum and $139.1 million of variable rate debt, or approximately 47% of notes payable, at a weighted average interest rate of 3.18% per annum. As of December 31, 2014, we had $156.4 million of fixed rate debt, or 57% of notes payable, at a weighted average interest rate of 4.89% per annum and $120.0 million of variable rate debt, or 43% of notes payable, at a weighted average interest rate of 3.15% per annum.

 

On December 31, 2014, the Company entered into a secured loan agreement with KeyBank, in the aggregate amount of up to $53.2 million in connection with the acquisitions of the Sumter Place and Sumter Grand properties in The Villages, Florida. As of December 31, 2014 a total of $28.9 million was drawn on the loan related to Sumter Place. On February 6, 2015, in connection with the acquisition of Sumter Grand, an additional $19.2 million was drawn on the loan. The loan has a term of three years at a floating interest rate of one month LIBOR plus 3.15% subject to increase in certain circumstances. Loan payments are interest only for the initial three year term. We have the right to make prepayments on the loan, in whole or in part, without prepayment penalty provided that the minimum repayment is in increments of at least $500,000. We have an extension option for a single one-year term in which the payments would include principal amortization based on a 30-year amortization period.

 

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of March 31, 2015, we were in compliance with all such covenants and requirements with the exception of Woodbury Mews. At March 31, 2015, the average Woodbury Mews occupancy was below the minimum loan requirement, violating a covenant of this loan. Our lender has waived compliance with this covenant for the quarter ended March 31, 2015. In the event that we are not in compliance with this covenant in future periods and are unable to obtain a consent or waiver, KeyBank may choose to pursue remedies under the loan which could include foreclosure of the Woodbury Mews property and enforcement of the our guarantee of up to 25% of the loan balance. We intend to extend the $25.0 million Woodbury Mews loan that matures in the third quarter of 2015. The terms of this loan provide for one remaining one-year extension option, requiring the payment of a 25 basis point fee.

 

Principal payments due on our notes payable for April 1, 2015 to December 31, 2015 and each of the subsequent years is as follows:

 

Year  Principal Amount 
April 30, 2015 - December 31, 2015  $26,781,000 
2016   2,786,000 
2017   98,718,000 
2018   27,127,000 
2019   59,142,000 
2020 and thereafter   80,303,000 
   $294,857,000 
Add: premium   36,000 
   $294,893,000 

 

Interest Expense and Deferred Financing Cost

 

For the three months ended March 31, 2015 and 2014, the Company incurred interest expense, including amortization of deferred financing costs of $3.2 million and $2.2 million, respectively. As of March 31, 2015 and December 31, 2014, the Company’s net deferred financing costs were approximately $3.8 million and $3.3 million, respectively. All deferred financing costs are capitalized and amortized over the life of the respective loan agreement.

 

11. Stockholders’ Equity

 

Common Stock

 

Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share, of which 1,000 shares are designated as Senior Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”).

 

As of March 31, 2015 and December 31, 2014, including distributions reinvested, we had issued approximately 13.3 million shares of common stock for a total of approximately $132.3 million of gross proceeds, respectively, in our initial and follow-on public offerings.

 

Preferred Stock and OP Units

 

On February 10, 2013, we entered into a series of agreements, which have been amended at various points after February 10, 2013, with Sentinel RE Investment Holdings LP (the “Investor”), an affiliate of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) for the purpose of obtaining up to a $158.7 million of equity funding to be used to finance future investment opportunities (such investment and the related agreements, as amended, are referred to herein collectively as the “KKR Equity Commitment”). Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of up to three years, up to $158.7 million in aggregate issuance amount of Series C Preferred Stock in the Company and Series B Preferred Units in the Operating Partnership.

 

As of March 31, 2015 and December 31, 2014 we had issued 1,000 and 1,000 shares of Series C Preferred Stock and 1,101,560 and 946,560 Series B Preferred Units to the Investor for gross proceeds of $110.2 million and $94.8 million, respectively. The Series B Preferred Units outstanding are classified as non-controlling interests in the accompanying condensed consolidated balance sheets and are convertible into approximately 10,993,613 and 9,446,707 shares of the Company’s common stock, respectively.

 

The Series C Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on liquidation. The holders of the Series C Preferred Stock are entitled to receive dividends, as and if authorized by our board of directors out of funds legally available for that purpose, at an annual rate equal to 3% of the liquidation preference for each share. Dividends on the Series C Preferred Stock are payable annually in arrears.

 

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The Series B Preferred Units rank senior to the Operating Partnership’s common units with respect to distribution rights and rights on liquidation. The Series B Preferred Units are entitled to receive cash distributions at an annual rate equal to 7.5% (with respect to put exercises associated with real property acquisitions) and 6.0% (with respect to put exercises associated with construction loan originations) of the Series B liquidation preference to any distributions paid to common units of the Operating Partnership. If the Operating Partnership is unable to pay cash distributions, distributions will be paid in kind at an annual rate of 10% of the Series B liquidation preference. After payment of the preferred distributions, additional distributions will be paid first to the common units until they have received an aggregate blended return equal to a weighted average interest rate determined taking into account the Series B Preferred Units receiving a 6.0% return and the Series B Preferred Units receiving a 7.5% return per until in annual distributions commencing from February 10, 2013, and thereafter to the common units and Series B Preferred Units pro rata. For the three months ended March 31, 2015, the Company paid distributions on the Series B Preferred Units in the amount of $2.8 million.

 

On January 16, 2015, pursuant to a put exercise (the “Georgetown Put Exercise”), we agreed to issue 419,120 Series B Preferred Units to the Investor and the Investor agreed to fund $41.9 million related to the Georgetown Loan (as described in Note 4) pursuant to a draw schedule, subject to the terms and conditions set forth in a letter agreement dated January 16, 2015 (the “January Letter Agreement”). The January Letter Agreement divided the issuance of the Series B Preferred Units related to the Georgetown Put Exercise into two issuances. The first issuance in the amount of 155,000 Series B Preferred Units (which are convertible into approximately 1,546,906 shares of the Company’s common stock at the currently effective conversion price) occurred on January 16, 2015. The second issuance was to occur upon the receipt by us of all necessary lender consents to a “change-of-control” transaction which is expected to occur in May 2015.

 

On March 26, 2015, pursuant to a put exercise (the “March Put Exercise”) the Investor agreed to purchase 166,800 Series B Preferred Units for $16.7 million, subject to the terms and conditions set forth in a letter agreement dated March 26, 2015 (the “March Letter Agreement”). The March Letter Agreement divided the issuance of the Series B Preferred Units related to the March Put Exercise into two issuances. The first issuance was deemed to be 135,980 Series B Preferred Units previously issued on January 16, 2015 in connection with the Georgetown Put Exercise; in connection with the first issuance, the Investor funded $13.6 million to us. The second issuance was to occur upon the receipt by us of all necessary lender consents to a “change- of-control” transaction which is expected to occur in May 2015. Upon the issuance of the remaining 30,820 Series B Preferred Units related to the March Put Exercise the Investor was required to advance a purchase price of $3.1 million. Further, the first issuance related to the Georgetown Put Exercise was deemed to be 19,020 Series B Preferred Units and thus 400,100 Series B Preferred Units remain to be issued at the second issuance for the Georgetown Put Exercise.

  

After giving effect to the Series C Preferred Stock and Series B Preferred Units issued or to be issued pursuant to the January Letter Agreement and March Letter Agreement at March 31, 2015, 53,780 Series B Preferred Units remained issuable under the Purchase Agreement. The obligation of the Investor to purchase additional Series B Preferred Units under the Purchase Agreement is conditioned upon, among other things, the receipt of lender consents to a “change-of-control” transaction and of notice from us of the intention to sell a specified amount of securities to the Investor to finance a proposed investment opportunity.

 

Distributions Available to Common Stockholders

 

The following are the distributions declared during the three months ended March 31, 2015 and 2014:

 

   Distribution Declared (1)   Cash Flow from 
Period  Cash   Reinvested   Total   Operations 
                     
First quarter 2014  $1,486,000   $69,000   $1,555,000   $3,652,000 
First quarter 2015   1,330,000    85,000    1,415,000    3,348,000 

  

(1)In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our stockholders each taxable year equal to at least 90% of our net ordinary taxable income.

 

Commencing with the declaration of distributions for daily record dates occurring in the second quarter of 2013 and thereafter, our board of directors has declared distributions in amounts per share that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.50 per share (5.00% based on share price of $10.00).

 

The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.

 

Stock Repurchase Program

 

In 2007, we adopted a stock repurchase program that permitted our stockholders to sell their shares of common stock to us in limited circumstances subject to the terms and conditions of the program. Our board of directors could amend, suspend or terminate the program at any time with 30 days prior notice to stockholders and we had no obligation to repurchase our stockholders’ shares.

 

Since May 29, 2011 our stock repurchase program has been suspended for all repurchases except repurchases due to death of a stockholder. On March 31, 2014, we informed stockholders of the suspension of the share repurchase program following the March 2014 redemption date. The Company redeemed all stock repurchase requests due to death received prior to March 31, 2014. No shares have been repurchased pursuant to the program following the 2014 suspension. 

 

12. Earnings Per Share

 

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 common stockholders 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. The Series B Preferred Units give rise to potentially dilutive securities of our common stock. As of March 31, 2015 there were 1,101,560 Series B Preferred Units outstanding, but such units were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during these periods.

 

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13. Related Party Transactions

 

Advisory Relationship with the Advisor

 

We are party to an Advisory Agreement with the Advisor, which became effective on January 1, 2012 for a one-year term ending December 31, 2012. The Advisory Agreement was renewed for additional one-year terms commencing on January 1, 2013, January 1, 2014, and January 1, 2015, however, certain provisions of the Advisory Agreement have been amended as a result of the execution on February 10, 2013 of a Transition to Internal Management Agreement which was subsequently amended in April 2014 and February 2015 (as amended, the “Transition Agreement”) with the Advisor.

 

Pursuant to the provisions of the Advisory Agreement, the Advisor is responsible for managing, operating, directing and supervising the operation of our company and its assets. Generally, the Advisor is responsible for providing us with (i) property acquisition, disposition and financing services, (ii) asset management and operational services, including real estate services and financial and administrative services, (iii) stockholder services, and (iv) in the event we conduct a public offering of our securities, offering-related services. The Advisor is subject to the supervision and ultimate authority of our board of directors and has a fiduciary duty to us and our stockholders.

 

The terms of the KKR Equity Commitment are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

The Advisory Agreement with our Advisor and the terms of the Transition Agreement are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

The fees payable to the Advisor under the advisory agreement for the three months ended March 31, 2015 and 2014 were as follows:

 

   Three Months Ended March 31, 
   2015   2014 
Asset Management Fees  $1,359,000   $957,000 

 

Consistent with limitations set forth in our charter, the Advisory Agreement further provides that, commencing four fiscal quarters after the acquisition of our first real estate asset, we shall not reimburse the Advisor at the end of any fiscal quarter management fees and expenses and operating expenses that, in the four consecutive fiscal quarters then ended exceed (the “Excess Amount”) the greater of 2% of our average invested assets or 25% of our net income for such year (the “2%/25% Guidelines”) unless the Independent Directors Committee of our board of directors determines that such excess was justified, based on unusual and nonrecurring factors which it deems sufficient. If the Independent Directors Committee does not approve such excess as being so justified, the Advisory Agreement requires that any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our charter provides that, if the Independent Directors Committee does not determine that the Excess Amount is justified, the Advisor shall reimburse us the amount by which the aggregate annual expenses paid to the Advisor during the four consecutive fiscal quarters then ended exceed the 2%/25% Guidelines.

 

For the four fiscal quarters ended March 31, 2015, our management fees and expenses and operating expenses totaled did not exceed the greater of 2% of our average invested assets and 25% of our net income.

 

KKR Equity Commitment

 

Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of three years, up to $158.7 million in aggregate issuance amount of shares of newly issued Series C Preferred Stock and newly issued Series B Preferred Units to fund real estate acquisitions, a self-tender offer and the origination of a development loan. As a result of the transactions contemplated by the KKR Equity Commitment, the Investor currently beneficially owns an aggregate of 10,993,613 shares of common stock of the Company, which represents, in the aggregate, approximately, 48.9% of the outstanding shares of common stock as of March 31, 2015.

 

14. Commitments and Contingencies

 

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

 

Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our condensed consolidated financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.

  

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15. Subsequent Events

 

Gables of Kentridge

 

On April 1, 2015, through wholly owned subsidiaries, we acquired real estate property (“Gables of Kentridge”) from Kentridge at Golden Pond, LTD and Great-Kent, LLC (collectively, the “Sellers”), neither of which are affiliated with us or our Advisor, for a purchase price of $15.37 million. Gables of Kentridge is located in Kent, Ohio and has a total of 92 beds in 91 units, which are dedicated to both assisted living and memory care. Prior to the completion of this transaction, Gables of Kentridge was operated by Gables Management Company, Inc. (“Gables Management”). We have retained Gables Management on a fee basis to operate Gables of Kentridge, which currently manages the Gables of Hudson property we acquired in 2014.

  

Armbrook Village

 

On April 6, 2015, through wholly owned subsidiaries, we acquired a 95% interest in a joint venture entity that owns Armbook Village for an initial purchase price of $30.0 million, with additional proceeds, of up to $3.6 million payable to the seller if certain net operating income thresholds are met, for a maximum purchase price of $33.6 million. Armbrook Village, which opened in April 2013, is a senior living community that consists of 46 independent living units, 51 assisted living units, and 21 memory care units located in Westfield, Massachusetts. Senior Living Residences, LLC and its affiliates (collectively, “SLR”), which is not affiliated with us, is our joint venture partner. Prior to the completion of this transaction, Armbrook Village was operated by SLR and owned by a local Westfield commercial developer, which is not affiliated with us. SLR currently manages Standish Village and Compass on the Bay.

 

Preferred Unit Issuances

 

On May 1, 2015, we issued 430,920 Series B Preferred Units remaining to be issued in connection with the Georgetown Put Exercise and the March Put Exercise, which are convertible into approximately 4,300,599 shares of the Company’s common stock at the currently effective conversion price. As a result, on May 1, 2015, the Investor funded $3.1 million to us. See Note 11 for additional information.

 

Sale of Preferred Units in our Operating Partnership

 

On May 1, 2015, in connection with our acquisition of Golden Ridge, we closed a put exercise pursuant to the KKR Equity Commitment. Pursuant to the put exercise the Investor purchased 53,780 Series B Preferred Units for an aggregate purchase price of $5.4 million, which are convertible into approximately 536,727 shares of the Company’s common stock at the currently effective conversion price. After giving effect to the put exercise, the Investor owns approximately 57.9% of the outstanding shares of common stock on an as-converted basis. As of May 1, 2015, no securities remain issuable pursuant to the KKR Equity Commitment.

  

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

 

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014 as listed with the SEC.

 

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

 

Changes in national and local economic conditions in the real estate and healthcare markets specifically;

 

legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;

 

legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation;

 

volatility or uncertainty in capital markets, including the availability of debt and equity capital;

 

changes in interest rates;

 

competition in the real estate industry;

 

the supply and demand for operating properties in our market areas;

 

changes in accounting principles generally accepted in the United States of America, or GAAP; and

 

the risk factors in our Annual Report for the year ended December 31, 2014.

 

Overview

 

We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing in and owning commercial real estate and real estate-related assets. We invest exclusively in health care properties and other real-estate related assets located in markets in the United States.

 

Since January 1, 2012, our business has been managed by our Advisor pursuant to the Advisory Agreement. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf under the terms of the Advisory Agreement. Our Advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms of the Advisory Agreement, our Advisor will use commercially reasonable efforts to present to us investment opportunities and to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors.

 

On February 10, 2013, we entered into a series of agreements, which have been amended at various points after February 10, 2013, with the Investor for the purpose of obtaining up to a $158.7 million of equity funding to be used to finance future real estate investments (such investments and the related agreements are referred to herein collectively as the “KKR Equity Commitment”). Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of up to three years, up to $158.7 million in aggregate issuance amount of preferred securities in the Company and the Operating Partnership.

 

As of March 31, 2015, we had issued and outstanding 11,480,619 shares of common stock, and 1,000 shares of Series C Preferred Stock. All 1,000 shares of the Series C Preferred Stock were issued to the Investor pursuant to the KKR Equity Commitment. In addition, as of March 31, 2015 the Operating Partnership had issued and outstanding 11,480,619 Common Units, 1,000 Series A Preferred Units, and 1,101,560 Series B Preferred Units.

 

In connection with the KKR Equity Commitment, we entered into the Transition Agreement with our Advisor and the KKR Investor which sets forth the terms for a transition to an internal management structure for the Company. The Transition Agreement, as amended, requires that the existing external advisory structure will remain in place upon substantially the same terms as currently in effect until February 10, 2017, upon which time the advisory function will be internalized in accordance with procedures set forth in the Transition Agreement.

 

We commenced our initial public offering of our common stock on June 20, 2008. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan. On February 4, 2011, we commenced a follow-on offering of our common stock. We suspended primary offering sales in our follow-on offering on April 29, 2011 and completed the final sale of shares under the distribution reinvestment plan on May 10, 2011. We raised gross offering proceeds under the follow-on offering of $8.4 million from the sale of approximately 800,000 shares, including shares sold under the distribution reinvestment plan. On June 12, 2013, we deregistered all remaining unsold follow-on offering shares. On June 19, 2013, we filed a registration statement on Form S-3 to register up to $99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to the DRIP offering. The DRIP offering shares were initially offered at a purchase price of $10.02 per share, which was the then-current estimated per-share value of our common stock.  Effective February 28, 2014, the DRIP offering shares are being offered at a purchase price of $11.63 per share, which is our estimated per-share value of common stock as of February 28, 2014.

 

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Our revenues, which are comprised largely of rental income, include rents reported on a straight-line basis over the initial term of each lease. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; and (ii) control operating and other expenses, including maximizing tenant recoveries as provided for in lease structures. Our operations are impacted by property specific, market specific, general economic and other conditions.

 

Market Outlook — Real Estate and Real Estate Finance Markets

  

In recent years, both the national and most global economies have experienced increased unemployment and a downturn in economic activity, as well as significant market fluctuations. Despite certain recent more positive economic indicators and improved stock market performance, the economic environment continues to be volatile and to present challenges that may delay the implementation of our business strategy or force us to modify it.

 

Despite the economic conditions discussed above, the demand for health care services is projected to continue to grow for the foreseeable future. According to The National Coalition on Healthcare, by 2016 nearly $1 in every $5 in the U.S. will be spent on healthcare, and the aging US population is expected to continue to fuel the need for healthcare services. The over age 65 population of the United States is projected to grow 36% between 2010 and 2020, compared with 9% for the general population, according to the US Census Bureau. Presently, the healthcare real estate market is fragmented, with a local or regional focus, offering opportunities for consolidation and market dominance. We believe that a diversified portfolio of healthcare properties minimizes risks associated with third-party payors, such as Medicare and Medicaid, while also allowing us to capitalize on the favorable demographic trends described above.

 

Critical Accounting Policies

 

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

 

Results of Operations

 

As of March 31, 2015, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment invests in and directs the operations of assisted-living, memory care and other senior housing communities located in the United States. We engage independent third party managers to operate these properties. Our triple-net leased properties segment invests in healthcare properties in the United States leased under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings and leases those properties to healthcare providers under long-term “full service” leases which may require tenants to reimburse property related expenses to us.

 

As of March 31, 2015, we owned or had joint venture interests in 31 properties. These properties included 21 assisted-living facilities and two independent-living facilities, which comprise our senior housing segment; one medical office building, which comprises our MOB segment; four operating healthcare facilities, which comprise our triple-net leased segment; two development stage assisted living facility, and one medical office building held as unconsolidated entities. As of March 31, 2014, we owned or had joint venture interests in 23 properties. These properties included sixteen assisted-living facilities and one independent-living facility, which comprise our senior housing segment; one medical office building, which comprises our MOB segment; three operating healthcare facilities, which comprise our triple-net leased segment; one development stage assisted living facility, and one medical office building held as an unconsolidated entity. The Compass senior living investment was acquired in the second quarter of 2014, the St. Andrews Village net lease investment was acquired in the third quarter of 2014, and the Live Oaks Village of Hammond and Slidell, Spring Village at Wildewood, Gables of Hudson, and Sumter Place investments were acquired in the fourth quarter of 2014. The Sumter Grand investment was acquired in the first quarter of 2015. The results of our operations for the three months ended March 31, 2015 and 2014 vary largely as a result of acquisition activity.

  

Comparison of the Three Months Ended March 31, 2015 and 2014

 

   Three Months Ended         
   March 31,         
   2015   2014   $ Change   % Change 
Net operating income, as defined (1)                    
Senior living operations  $6,566,000   $5,043,000   $1,523,000   30%
Triple-net leased properties   2,363,000    1,254,000    1,109,000    88%
Medical office building   212,000    211,000    1,000    0%
Total portfolio net operating income  $9,141,000   $6,508,000   $2,633,000    40%
                     
Reconciliation to net loss:                    
Net operating income, as defined (1)  $9,141,000   $6,508,000   $2,633,000    40%
Other expense:                    
General and administrative   186,000    394,000    (208,000)   (53)%
Asset management fees and expenses   1,359,000    957,000    402,000    42%
Real estate acquisition costs   582,000    34,000    548,000    1612%
Depreciation and amortization   4,455,000    2,920,000    1,535,000    53%
Interest expense, net   3,167,000    2,209,000    958,000    43%
Equity in loss from unconsolidated entities   127,000    85,000    42,000    49%
Net loss  $(735,000)  $(91,000)  $(644,000)   708%

 

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  (1) Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our consolidated real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of our consolidated income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as a gain or loss from investments in unconsolidated entities depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

 

Senior Living Operations

 

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the three months ended March 31, 2015 increased to $6.6 million from $5.0 million for the three months ended March 31, 2014 primarily as a result of the acquisition of Compass on the Bay in the second quarter of 2014, Live Oaks Village of Hammond and Slidell, Spring Village at Wildewood, Gables of Hudson and Sumter Place in the fourth quarter of 2014 and Sumter Grand in the first quarter of 2015.

 

   Three Months Ended         
   March 31,         
   2015   2014   $ Change   % Change 
Senior Living Operations — Net operating income                    
Total revenues                    
Rental revenue  $14,885,000   $9,505,000   $5,380,000    57%
Resident services and fee income   7,665,000    7,267,000    398,000    5%
Tenant reimbursement and other income   134,000    100,000    34,000   34%
Less:                    
Property operating and maintenance expenses   16,118,000    11,829,000    4,289,000    36%
Total portfolio net operating income  $6,566,000   $5,043,000   $1,523,000   30%

 

Triple-Net Leased Properties

 

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income for the three months ended March 31, 2015 increased to $2.4 million from of $1.3 million for the three months ended March 31, 2014 primarily as a result of the acquisition of St. Andrews Village in the third quarter of 2014.

  

   Three Months Ended         
   March 31,         
   2015   2014   $ Change   % Change 
Triple-Net Leased Properties — Net operating income                    
Total revenues                    
Rental revenue  $2,329,000   $1,309,000   $1,020,000    78%
Tenant reimbursement and other income   318,000    164,000    154,000    94%
Less:                    
Property operating and maintenance expenses   284,000    219,000    65,000    30%
Total portfolio net operating income  $2,363,000   $1,254,000   $1,109,000    88%

 

Medical Office Buildings

 

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the three months ended March 31, 2015 of $0.2 million was comparable to net operating income for the three month period ended March 31, 2014.

 

   Three Months Ended         
   March 31,         
   2015   2014   $ Change   % Change 
Medical Office Buildings — Net operating income                    
Total revenues                    
Rental revenue  $216,000   $213,000   $3,000    1%
Tenant reimbursement and other income   77,000    76,000    1,000    1%
Less:                    
Property operating and maintenance expenses   81,000    78,000    3,000    4%
Total portfolio net operating income  $212,000   $211,000   $1,000    0%

 

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Unallocated (expenses) income

 

General and administrative expenses decreased to $0.2 million for the three months ended March 31, 2015 from $0.4 million for the three months ended March 31, 2014. The decrease was primarily due to higher legal and professional fees and board of directors fees and expenses offset by the deferred tax benefit for the first quarter of 2015 as compared to the three months ended March 31, 2014.

 

Asset management fees for the three months ended March 31, 2015 increased to $1.4 million from $1.0 million for the three months ended March 31, 2014 as a result of a higher asset base. Depreciation and amortization for the same periods increased to $4.5 million from $2.9 million as a result of additional depreciation and amortization resulting from acquisitions, particularly amortization of the in-place leases for senior living facilities acquired in the fourth quarter of 2014, which is generally recognized in the first twelve months after closing.

 

For the three months ended March 31, 2015 and 2014, real estate acquisition costs were $0.6 million and $0.0 million, respectively. Real estate acquisition costs in 2014 consisted primarily of costs associated with the acquisition of Sumter Grand in the first quarter of 2015.

 

Interest expense, net, for the three months ended March 31, 2015 increased to $3.2 million from $2.2 million for the three months ended March 31, 2014 primarily as a result of the debt incurred for acquisitions that occurred in the second and fourth quarters of 2014 and in the first quarter of 2015.

 

The Company recognized a loss from unconsolidated entities of $0.1 million for the three months ended March 31, 2015 and for the three months ended March 31, 2014. The Company’s allocation of loss from unconsolidated entities relates to the operations of Physicians Center MOB.

 

Liquidity and Capital Resources

 

On June 19, 2013, we filed a registration statement on Form S-3 to register up to $99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to an amended and restated distribution reinvestment plan (the “DRIP offering”). The DRIP offering shares were initially offered at a purchase price of $10.02 per share, which was the then-current estimated per-share value of our common stock.  Effective February 28, 2014, the DRIP offering shares are being offered at a purchase price of $11.63 per share, which reflects our estimated per-share value of our common stock as of February 28, 2014.

 

On February 10, 2013, we entered into the KKR Equity Commitment for the purpose of obtaining up to $158.7 million of equity funding to be used to finance future investment opportunities. Pursuant to the KKR Equity Commitment, we may issue and sell to the KKR Investor and its affiliates on a private placement basis from time to time over a period of up to three years, up to $158.7 million in aggregate issuance amount of shares of newly issued Series C Preferred Stock and newly issued Series B Convertible Preferred Units of our Operating Partnership. As of March 31, 2015, approximately $5.4 million of this commitment is available for investments and $0.0 million was unallocated to an investment opportunity.

 

We expect that primary sources of capital will include debt financing and net cash flows from operations. We expect that our primary uses of capital will be for the payment of tenant improvements and capital improvements and operating expenses, including interest expense on any outstanding indebtedness, reducing outstanding indebtedness and for the payment of distributions.

 

We intend to own our stabilized properties with low to moderate levels of debt financing. We will incur moderate to high levels of indebtedness when acquiring development or value-added properties and possibly other real estate investments. For our stabilized core plus properties, our long-term goal will be to use low to moderate levels of debt financing with leverage ranging from 50% to 65% of the value of the asset. For development and value-added properties, our goal will be to acquire and develop or redevelop these properties using moderate to high levels of debt financing with leverage ranging from 65% to 75% of the cost of the asset. Once these properties are developed, redeveloped and stabilized with tenants, we plan to reduce the levels of debt to fall within target debt ranges appropriate for core properties. While we seek to fall within the outlined targets on a portfolio basis, for any specific property we may exceed these estimates. To the extent sufficient proceeds from public and private offerings, debt financing or a combination of these are unavailable to repay acquisition debt financing down to the target ranges within a reasonable time as determined by our board of directors, we will endeavor to raise additional equity or sell properties to repay such debt so that we will own our properties with low to moderate levels of permanent financing. In the event that we are unable to raise additional equity, our ability to diversify our investments may be diminished.

 

In addition, one of our principal liquidity requirements includes debt service payments and the repayment of maturing debt. As of March 31, 2015, our notes payable were $294.9 million.

 

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of March 31, 2015, we were in compliance with all such covenants and requirements, with the exception of Woodbury Mews. As of March 31, 2015, the average occupancy level at our Woodbury Mews property was below the minimum required under the financial covenants in our loan documents, violating a covenant of this loan. The lender has waived compliance with this covenant for the quarter ended March 31, 2015, but we can provide no assurances that the lender will continue to waive compliance with this covenant in future quarters. Any such violation constitutes an event of default under the loan agreement, and if we do not secure a waiver of this covenant in future quarters in which the property does not satisfy the minimum occupancy level, the lender could, in its discretion, declare the loan to be immediately due and payable, take possession of the Woodbury Mews property, enforce the Company’s guarantee of up to 25% of the loan balance, or exercise other remedies available to it under law. If the lender were to declare the loan to be immediately due and payable, we expect to refinance the loan in satisfaction of the debt. Any such refinancing may be on terms and conditions less favorable than the terms currently available under the loan.

 

As of March 31, 2015 we had approximately $34.4 million in cash and cash equivalents on hand. Our liquidity will increase from the sale of the remaining preferred units of partnership interest in our Operating Partnership pursuant to the KKR Equity Commitment refinancings that result in excess loan proceeds, and increased cash flows from operations. The Company’s liquidity will decrease as net offering proceeds are expended in connection with acquisitions and if distributions are made in excess of cash available from operating cash flows.

 

Cash flows provided by operating activities for the three months ended March 31, 2015 and 2014 were $3.3 million and $3.7 million, respectively. The decrease in cash flows from operations was primarily due to a decrease in net operating income of $0.6 million and the timing of cash receipts and payments, including an increase in depreciation and amortization of approximately $1.5 million.

 

Cash flows used in investing activities for the three months ended March 31, 2015 and 2014 were $33.4 million and $1.7 million, respectively. The 2015 increase was due primarily to the acquisition of Sumter Grand in the first quarter of 2015.

 

Cash flows provided by (used in) financing activities for the three months ended March 31, 2015 and 2014 were $29.0 million and ($3.1) million, respectively. The change was due primarily to activity related to the KKR Equity Commitment and proceeds of notes payable in the first quarter of 2015. During the three months ended March 31, 2015, the Company received $15.5 million of net proceeds from the issuance of Series B Preferred Units related to the KKR Equity Commitment and received proceeds from notes payable of $19.2 million related to the acquisition of Sumter Grand. These proceeds were offset by the distributions paid to stockholders of $1.4 million and distributions paid to noncontrolling interests of $3.1 million. During the three months ended March 31, 2014, the Company received $0.0 million of net proceeds from the issuance of Series B Preferred Units related to the KKR Equity Commitment and received proceeds from notes payable of $0.0 million related to acquisitions. During the three months ended March 31, 2014, the Company paid distributions to stockholders of $1.5 million and paid distributions to noncontrolling interests of $0.6 million.

 

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We expect to have sufficient cash available from cash on hand and operations to fund capital improvements and recurring principal payments due on our borrowings in the next twelve months. We expect to exercise our one-year extension option on the $25.0 million Woodbury Mews loan that matures in the third quarter of 2015. We expect to fund stockholder distributions from cash on hand and from the excess cash provided by operations over required capital improvements and debt payments. This excess may be insufficient to make distributions at the current level or at all.

 

There may be a delay between the sale of our shares or equity securities and the purchase of properties. During this period, proceeds from sales of securities may be temporarily invested in short-term, liquid investments that could yield lower returns than investments in real estate.

 

Potential future sources of capital include proceeds from future equity offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations.

 

Funds from Operations and Modified Funds from Operations

 

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and subsidiaries. Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions, as well as dividend sustainability.

 

Changes in the accounting and reporting rules under GAAP have prompted a significant increase in the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use modified funds from operations (“MFFO”), which excludes from FFO real estate acquisition expenses, and non-cash amounts related to straight line rent to further evaluate our operating performance as well as dividend sustainability. We compute MFFO consistently with the definition suggested by the Investment Program Association (the “IPA”), the trade association for direct investment programs (including non-listed REITs). However, certain adjustments included in the IPA’s definition are not applicable to us and are therefore not included in the foregoing definition.

 

We believe that MFFO is a helpful measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes. Accordingly, we believe that MFFO can be a useful metric to assist management, investors and analysts in assessing the sustainability of our operating performance. As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following considerations:

 

Adjustments for straight line rents. Under GAAP, rental income recognition can be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the economic impact of our lease terms and presents results in a manner more consistent with management’s analysis of our operating performance.

 

Real estate acquisition costs. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. These acquisition costs have been funded from the proceeds of our initial public offering and other financing sources and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. Real estate acquisition expenses include those paid to our advisor and to third parties.

 

Non-recurring gains or losses included in net income from the extinguishment or sale of debt.

 

Unrealized gains or losses resulting from consolidation to, or deconsolidation from equity accounting.

 

FFO or MFFO should not be considered as an alternative to net income (loss) nor as an indication of our liquidity. Nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and MFFO should be reviewed along with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs. In addition, FFO and MFFO presented for different periods may not be directly comparable.

 

We believe that MFFO is helpful as a measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes.

 

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Our calculations of FFO and MFFO for the three months ended March 31, 2015 and 2014 are presented below:

 

   Three Months Ended 
   March 31, 
   2015   2014 
Net loss attributable to common stockholders  $(2,674,000)  $(610,000)
Adjustments:          
Real estate depreciation and amortization   4,455,000    2,920,000 
Joint venture depreciation and amortization   164,000    144,000 
Funds from operations (FFO)   1,945,000    2,454,000 
Adjustments:          
Straight-line rent and above/below market lease amortization   (209,000)   (132,000)
Real estate acquisition costs   582,000    34,000 
Modified funds from operations (MFFO)   2,318,000    2,356,000 
           
Weighted average shares   11,478,707    12,611,127 
           
FFO per weighted average shares  $0.17   $0.19 
MFFO per weighted average shares  $0.20   $0.19 

  

Distributions Available to Common Stockholders

 

Beginning in December 2012, our board of directors declared distributions for daily record dates occurring in the first quarter of 2013 in an amount per share that, if declared and paid each day for a 365 -day period, would equate to an annualized rate of $0.475 per share (4.75% based on share price of $10.00). Beginning April 1, 2013, our board of directors declared distributions for daily record dates occurring after April 1, 2013 in amounts per share that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $0.50 per share (5.00% based on a share price of $10.00).

 

The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.

 

   Distributions Declared (1)   Distributions   Cash Flows
from
     
Period  Cash   Reinvested   Total   Paid   Operations   Net Loss 
First quarter 2014  $1,486,000   $69,000   $1,555,000   $1,528,000   $3,652,000   $(91,000)
First quarter 2015   1,330,000    85,000    1,415,000    1,355,000    3,348,000    (735,000)

 

(1)In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our stockholders each taxable year equal to at least 90% of our net ordinary taxable income.

 

For the three months ended March 31, 2015, we declared distributions, including distributions reinvested, aggregating approximately $1.4 million to our stockholders. The distributions declared in the first quarter of 2015 to be reinvested in the Company’s common stock resulted in 7,296 shares of common stock being issued in April 2015. FFO for the three months ended March 31, 2015 was approximately $1.9 million and cash flow from operations was approximately $3.3 million. We funded our total distributions paid with cash flows from operations. For the purposes of determining the source of our distributions paid, we assume first that we use cash flows from operations from the relevant periods to fund distribution payments. See the reconciliation of FFO to net income above.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We invest our cash and cash equivalents in government-backed securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate fluctuations. However, we believe that the primary market risk to which we will be exposed is interest rate risk relating the variable portion of our debt financing. As of March 31, 2015, we had approximately $139.1 million of variable rate debt, the majority of which is at a rate tied to the one-Month LIBOR. A 1.0% change in one-Month LIBOR would result in a change in annual interest expense of approximately $1.4 million per year. Our interest rate risk management objectives are to monitor and manage the impact of interest rate changes on earnings and cash flows. We may use certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.

 

In addition to changes in interest rates, the fair value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for healthcare facilities, local, regional and national economic conditions and changes in the credit worthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.

 

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Item 4.Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

  

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

 

(a)Previously disclosed in the Company’s Current Reports on Form 8-K filed with the SEC on January 22, 2015 and April 1, 2015.

 

(c)During the quarter ended March 31, 2015, none of our shares were repurchased by us.

 

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Item 6.Exhibits

 

Ex.   Description
3.1   Articles of Amendment and Restatement of the Registrant, as amended on December 29, 2009 and January 24, 2012 (incorporated by reference to Exhibit 3.1 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2011).
3.2   Articles of Amendment of the Registrant, dated August 6, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.3   Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series A, dated August 6, 2013 (incorporated by reference to Exhibit 3.3 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.4   Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series C, dated August 6, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.5   Second Amended and Restated Bylaws of the Registrant as adopted on August 6, 2013 as amended by Amendment no. 1 to the Second Amended and Restated Bylaws of the Registrant, effective as of March 20, 2015 (incorporated by reference to Exhibit 3.5 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2014).
3.6   Second Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.7   First Amendment dated December 22, 2014 to the Second Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on December 30, 2014).
4.1   Form of Distribution Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Registrant’s prospectus filed on June 19, 2013).
4.2   Statement regarding restrictions on transferability of the Registrant’s shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007).
4.3   Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on June 19, 2013).
10.1   Letter Agreement dated January 16, 2015 by and among the Registrant, Sentio Healthcare Properties OP, L.P., and Sentinel RE Investment Holdings LP (filed herewith).
10.2   Letter Agreement dated March 26, 2015 by and among the Registrant, Sentio Healthcare Properties OP, L.P., and Sentinel RE Investment Holdings LP (filed herewith).
10.3   Amendment no. 3 dated February 24, 2015 to the Transition to Internal Management Agreement, dated February 10, 2013, by and among the Registrant, Sentio Healthcare Properties OP, L.P., Sentinel RE Investment Holdings LP and Sentio Investments, LLC (filed herewith).
10.4   Construction Loan Agreement dated January 15, 2015 between Sentio Georgetown, LLC, Sentio Georgetown TRS, LLC, and Westminster-LCS Georgetown LLC (filed herewith).
10.5   Promissory Note A dated January 15, 2015 by Westminster-LCS Georgetown LLC for the benefit of Sentio Georgetown, LLC (filed herewith).
10.6   Promissory Note B dated January 15, 2015 by Westminster-LCS Georgetown LLC for the benefit of Sentio Georgetown TRS, LLC (filed herewith).
10.7   Guaranty of Completion and Non-Recourse Carve-Outs dated January 15, 2015 by Life Care Companies LLC for the benefit of Sentio Georgetown, LLC, and Sentio Georgetown TRS, LLC (filed herewith).
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS   XBRL Instance Document (filed herewith).
101.SCH   XBRL Taxonomy Extension Schema (filed herewith).
101.CAL   XBRL Taxonomy Extension Calculation Linkbase (filed herewith).
101.DEF   XBRL Taxonomy Extension Definition Linkbase (filed herewith).
101.LAB   XBRL Taxonomy Extension Label Linkbase (filed herewith).
101.PRE   XBRL Taxonomy Extension Presentation Linkbase (filed herewith).

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 12th day of May 2015.

 

  SENTIO HEALTHCARE PROPERTIES, INC.
   
     
  By: /s/ JOHN MARK RAMSEY
    John Mark Ramsey, President and Chief
    Executive Officer
   

(Principal Executive Officer)

 

     
  By: /s/ SHARON C. KAISER
    Sharon C. Kaiser, Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)

 

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