Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - Healthcare Trust, Inc. | ex32.htm |
| EX-31.2 - EXHIBIT 31.2 - Healthcare Trust, Inc. | ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - Healthcare Trust, Inc. | ex311.htm |
| EX-3.3 - EXHIBIT 3.3 - Healthcare Trust, Inc. | ex33.htm |
| EX-10.57 - EXHIBIT 10.57 - Healthcare Trust, Inc. | ex1057.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission file number: 000-55201
Healthcare Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 38-3888962 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 14th Floor, New York, NY | 10022 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 415-6500 | ||
(Registrant's telephone number, including area code) | ||
American Realty Capital Healthcare Trust II, Inc. | ||
(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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 definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of July 31, 2015, the registrant had 85,444,253 shares of common stock outstanding.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page | |
2
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
June 30, 2015 | December 31, 2014 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate investments, at cost: | ||||||||
Land | $ | 143,515 | $ | 113,461 | ||||
Buildings, fixtures and improvements | 1,553,100 | 1,362,387 | ||||||
Acquired intangible assets | 211,291 | 186,849 | ||||||
Total real estate investments, at cost | 1,907,906 | 1,662,697 | ||||||
Less: accumulated depreciation and amortization | (91,622 | ) | (30,947 | ) | ||||
Total real estate investments, net | 1,816,284 | 1,631,750 | ||||||
Cash and cash equivalents | 109,489 | 182,617 | ||||||
Restricted cash | 3,201 | 1,778 | ||||||
Investment securities, at fair value | 16,083 | 20,286 | ||||||
Receivable for sale of common stock | — | 6 | ||||||
Prepaid expenses and other assets | 23,922 | 17,036 | ||||||
Deferred costs, net | 13,380 | 4,237 | ||||||
Total assets | $ | 1,982,359 | $ | 1,857,710 | ||||
LIABILITIES AND EQUITY | ||||||||
Mortgage notes payable | $ | 100,305 | $ | 65,786 | ||||
Mortgage premiums, net | 4,703 | 2,844 | ||||||
Credit facility | 135,000 | — | ||||||
Market lease intangible liabilities, net | 24,705 | 19,535 | ||||||
Accounts payable, accrued expenses and other liabilities (including $1,068 and $970 due to affiliates as of June 30, 2015 and December 31, 2014, respectively) | 26,643 | 22,248 | ||||||
Deferred rent | 2,880 | 3,023 | ||||||
Distributions payable | 11,917 | 12,097 | ||||||
Total liabilities | 306,153 | 125,533 | ||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding at June 30, 2015 and December 31, 2014 | — | — | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 85,167,195 and 83,718,853 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively | 852 | 837 | ||||||
Additional paid-in capital | 1,884,492 | 1,850,169 | ||||||
Accumulated other comprehensive income | 133 | 463 | ||||||
Accumulated deficit | (219,430 | ) | (129,406 | ) | ||||
Total stockholders' equity | 1,666,047 | 1,722,063 | ||||||
Non-controlling interests | 10,159 | 10,114 | ||||||
Total equity | 1,676,206 | 1,732,177 | ||||||
Total liabilities and equity | $ | 1,982,359 | $ | 1,857,710 | ||||
The accompanying notes are an integral part of these statements.
3
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 53,195 | $ | 2,314 | $ | 103,833 | $ | 3,441 | ||||||||
Operating expense reimbursement | 2,727 | 555 | 5,857 | 815 | ||||||||||||
Resident services and fee income | 3,594 | — | 6,947 | — | ||||||||||||
Total revenues | 59,516 | 2,869 | 116,637 | 4,256 | ||||||||||||
Expenses: | ||||||||||||||||
Property operating and maintenance | 28,629 | 735 | 56,106 | 1,029 | ||||||||||||
Operating fees to Advisor | 3,410 | — | 3,410 | — | ||||||||||||
Acquisition and transaction related | 3,188 | 2,599 | 5,187 | 3,003 | ||||||||||||
General and administrative | 2,533 | 579 | 5,132 | 991 | ||||||||||||
Depreciation and amortization | 33,583 | 2,381 | 63,031 | 3,238 | ||||||||||||
Total expenses | 71,343 | 6,294 | 132,866 | 8,261 | ||||||||||||
Operating loss | (11,827 | ) | (3,425 | ) | (16,229 | ) | (4,005 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (2,384 | ) | (742 | ) | (3,757 | ) | (745 | ) | ||||||||
Interest and other income | 666 | 20 | 939 | 21 | ||||||||||||
Gain on sale of investment securities | — | — | 286 | — | ||||||||||||
Total other expense | (1,718 | ) | (722 | ) | (2,532 | ) | (724 | ) | ||||||||
Loss before income tax and non-controlling interests | (13,545 | ) | (4,147 | ) | (18,761 | ) | (4,729 | ) | ||||||||
Income tax benefit | 47 | — | 18 | — | ||||||||||||
Net loss | (13,498 | ) | (4,147 | ) | (18,743 | ) | (4,729 | ) | ||||||||
Net loss attributable to non-controlling interests | 77 | — | 102 | — | ||||||||||||
Net loss attributable to stockholders | $ | (13,421 | ) | $ | (4,147 | ) | $ | (18,641 | ) | $ | (4,729 | ) | ||||
Other comprehensive loss: | ||||||||||||||||
Unrealized loss on investment securities, net | (375 | ) | — | (330 | ) | — | ||||||||||
Comprehensive loss | $ | (13,796 | ) | $ | (4,147 | ) | $ | (18,971 | ) | $ | (4,729 | ) | ||||
Basic and diluted weighted-average shares outstanding | 84,992,633 | 35,127,969 | 84,623,618 | 24,435,162 | ||||||||||||
Basic and diluted net loss per share | $ | (0.16 | ) | $ | (0.12 | ) | $ | (0.22 | ) | $ | (0.19 | ) | ||||
Distributions declared per share | $ | 0.42 | $ | 0.43 | $ | 0.84 | $ | 0.86 | ||||||||
The accompanying notes are an integral part of these statements.
4
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2015
(In thousands, except for share data)
(Unaudited)
Common Stock | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||
Balance, December 31, 2014 | 83,718,853 | $ | 837 | $ | 1,850,169 | $ | 463 | $ | (129,406 | ) | $ | 1,722,063 | $ | 10,114 | $ | 1,732,177 | ||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | 2 | — | — | 2 | — | 2 | ||||||||||||||||||||||
Common stock issued through distribution reinvestment plan | 1,641,303 | 16 | 38,964 | — | — | 38,980 | — | 38,980 | ||||||||||||||||||||||
Common stock repurchases | (191,895 | ) | (1 | ) | (4,649 | ) | — | — | (4,650 | ) | — | (4,650 | ) | |||||||||||||||||
Equity-based compensation, net | (1,066 | ) | — | 6 | — | — | 6 | — | 6 | |||||||||||||||||||||
Distributions declared | — | — | — | — | (71,383 | ) | (71,383 | ) | — | (71,383 | ) | |||||||||||||||||||
Contributions from non-controlling interest holders | — | — | — | — | — | — | 500 | 500 | ||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | (353 | ) | (353 | ) | ||||||||||||||||||||
Unrealized loss on investments | — | — | — | (330 | ) | — | (330 | ) | — | (330 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (18,641 | ) | (18,641 | ) | (102 | ) | (18,743 | ) | ||||||||||||||||||
Balance, June 30, 2015 | 85,167,195 | $ | 852 | $ | 1,884,492 | $ | 133 | $ | (219,430 | ) | $ | 1,666,047 | $ | 10,159 | $ | 1,676,206 | ||||||||||||||
The accompanying notes are an integral part of this statement.
5
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (18,743 | ) | $ | (4,729 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization | 63,031 | 3,238 | |||||
Amortization of deferred financing costs | 1,613 | 382 | |||||
Amortization of mortgage premiums | (866 | ) | (106 | ) | |||
Amortization of market lease and other intangibles, net | (63 | ) | 37 | ||||
Bad debt expense | 1,364 | — | |||||
Equity-based compensation | 6 | 24 | |||||
Gain on sale of investment securities | (286 | ) | — | ||||
Changes in assets and liabilities: | |||||||
Prepaid expenses and other assets | (6,351 | ) | 32 | ||||
Accounts payable, accrued expenses and other liabilities | 3,587 | 1,840 | |||||
Deferred rent | (143 | ) | 420 | ||||
Restricted Cash | (1,423 | ) | (1,900 | ) | |||
Net cash provided by (used in) operating activities | 41,726 | (762 | ) | ||||
Cash flows from investing activities: | |||||||
Investment in real estate and other assets | (199,523 | ) | (76,762 | ) | |||
Deposits paid for real estate acquisitions | (3,680 | ) | (12,060 | ) | |||
Capital expenditures | (3,129 | ) | — | ||||
Purchase of investment securities | (48 | ) | — | ||||
Proceeds from sale of investment securities | 4,207 | — | |||||
Net cash used in investing activities | (202,173 | ) | (88,822 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from credit facility | 135,000 | — | |||||
Payments of mortgage notes payable | (605 | ) | (70 | ) | |||
Payments of deferred financing costs | (10,667 | ) | (5,060 | ) | |||
Proceeds from issuance of common stock | 6 | 1,074,428 | |||||
Common stock repurchases | (3,350 | ) | (40 | ) | |||
Payments of offering costs and fees related to common stock issuances | (629 | ) | (119,141 | ) | |||
Distributions paid | (32,583 | ) | (7,407 | ) | |||
Contributions from non-controlling interest holders | 500 | — | |||||
Distributions to non-controlling interest holders | (353 | ) | — | ||||
Payments to affiliate | — | (632 | ) | ||||
Net cash provided by financing activities | 87,319 | 942,078 | |||||
Net change in cash and cash equivalents | (73,128 | ) | 852,494 | ||||
Cash and cash equivalents, beginning of period | 182,617 | 111,833 | |||||
Cash and cash equivalents, end of period | $ | 109,489 | $ | 964,327 | |||
6
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Supplemental disclosures of cash flow information: | |||||||
Cash paid for interest | $ | 2,799 | $ | 99 | |||
Cash paid for taxes | 312 | 161 | |||||
Non-cash investing and financing activities: | |||||||
Payable and accrued offering costs | $ | — | $ | 3,326 | |||
Unfulfilled repurchase requests included in accounts payable, accrued expenses and other liabilities | 2,567 | 200 | |||||
Assumption of mortgage notes payable used to acquire investments in real estate | 35,124 | 59,395 | |||||
Premiums on assumed mortgage notes payable | 2,725 | 3,076 | |||||
Liabilities assumed in real estate acquisitions | 139 | 211 | |||||
Common stock issued through distribution reinvestment plan | 38,980 | 8,107 | |||||
The accompanying notes are an integral part of these statements.
7
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 1 — Organization
Healthcare Trust, Inc. (including, as required by context, Healthcare Trust Operating Partnership, LP and its subsidiaries, the "Company"), formerly known as American Realty Capital Healthcare Trust II, Inc., invests in seniors housing and health care real estate in the United States. As of June 30, 2015, the Company owned 143 properties, located in 26 states and comprised of 7.1 million rentable square feet.
In February 2013, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to $1.7 billion of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. The Company closed its IPO in November 2014. As of June 30, 2015, the Company had 85.2 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and the DRIP of $2.1 billion. On March 18, 2015, the Company announced its intention to list its common stock on a national stock exchange under the symbol “HTI” (the "Listing").
The Company, which was incorporated on October 15, 2012, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with its taxable year ended December 31, 2013. Substantially all of the Company's business is conducted through Healthcare Trust Operating Partnership, LP (the "OP"), formerly known as American Realty Capital Healthcare Trust II Operating Partnership, LP, a Delaware limited partnership. The Company has no direct employees. Healthcare Advisors, LLC (the "Advisor"), formerly known as American Realty Capital Healthcare II Advisors, LLC, has been retained by the Company to manage the Company's affairs on a day-to-day basis. The Company has retained Healthcare Properties, LLC (the "Property Manager"), formerly known as American Realty Capital Healthcare II Properties, LLC, to serve as the Company's property manager. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO and continues to provide the Company with various services. The Advisor, the Property Manager and the Dealer Manager are under common control with AR Capital, LLC ("ARC"), the parent of the Company's sponsor, American Realty Capital VII, LLC (the "Sponsor"), as a result of which, they are related parties, and each have received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of our assets. The Advisor, Property Manager and Dealer Manager also have received or will receive compensation, fees and expense reimbursements related to the investment and management of the Company's assets.
Note 2 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2014, which are included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2015. There have been no significant changes to the Company's significant accounting policies during the six months ended June 30, 2015 other than the updates described below.
Reclassifications
Certain prior year amounts within cash flows from operating activities and cash flows from financing activities have been reclassified to conform with the current year presentation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of
8
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company has not yet selected a transition method and is currently evaluating the impact of this new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company has assessed the potential impacts from future adoption of this revised guidance and has determined that there will be no impact to its financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendment modifies the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company has not yet selected a transition method and is currently evaluating the impact of this new guidance.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of this new guidance.
9
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 3 — Real Estate Investments
The Company owned 143 properties as of June 30, 2015. The Company invests in medical office buildings ("MOB"), seniors housing communities and other healthcare-related facilities primarily to expand and diversify its portfolio and revenue base. The following table presents the allocation of the assets acquired during the six months ended June 30, 2015 and 2014:
Six Months Ended June 30, | ||||||||
(Dollar amounts in thousands) | 2015 | 2014 | ||||||
Real estate investments, at cost: | ||||||||
Land (1) | $ | 30,054 | $ | 17,105 | ||||
Buildings, fixtures and improvements (1) | 188,963 | 104,809 | ||||||
Total tangible assets | 219,017 | 121,914 | ||||||
Acquired intangibles: | ||||||||
In-place leases (1)(2) | 27,057 | 16,480 | ||||||
Market lease and other intangible assets (1)(2) | 1,394 | 3,526 | ||||||
Market lease liabilities (1)(2) | (6,957 | ) | (2,898 | ) | ||||
Total assets and liabilities acquired, net | 240,511 | 139,022 | ||||||
Mortgage notes payable assumed to acquire real estate investments | (35,124 | ) | (59,395 | ) | ||||
Premiums on mortgages assumed | (2,725 | ) | (3,076 | ) | ||||
Other assets and liabilities, net | (139 | ) | 211 | |||||
Deposits for real estate acquisitions | (3,000 | ) | — | |||||
Cash paid for acquired real estate investments | $ | 199,523 | $ | 76,762 | ||||
Number of properties purchased | 25 | 17 | ||||||
_______________
(1) Land, buildings, fixtures and improvements, in-place leases, market lease assets and market lease liabilities of $37.9 million related to four properties acquired during the six months ended June 30, 2015 include $3.2 million, $29.8 million, $4.2 million, $0.8 million and approximately $(22,000), respectively, which have been provisionally assigned to each class of asset and liability, pending receipt of information being prepared by a third-party specialist.
(2) | Weighted-average remaining amortization periods for in-place leases, market lease assets and market lease liabilities acquired during the six months ended June 30, 2015 were 6.2, 5.8 and 10.2 years, respectively, as of each property's respective acquisition date. |
The following table presents unaudited pro forma information as if the acquisitions that were completed during the six months ended June 30, 2015 had been consummated on January 1, 2014. Additionally, the unaudited pro forma net loss was adjusted to reclassify acquisition and transaction related expense of $5.1 million from the six months ended June 30, 2015 to the six months ended June 30, 2014.
Six Months Ended June 30, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Pro forma revenues (1) (2) | $ | 123,754 | $ | 17,841 | ||||
Pro forma net loss (1) (2) | $ | (12,764 | ) | $ | (8,194 | ) | ||
Basic and diluted pro forma net loss per share | $ | (0.15 | ) | $ | (0.34 | ) | ||
(1) For the six months ended June 30, 2015, aggregate revenues and net income derived from the operations of the Company's 2015 acquisitions (for the Company's period of ownership) were $6.1 million and $0.9 million, respectively.
(2) During the period from July 1, 2015 to August 7, 2015, the Company completed its acquisition of five properties. As of the date that these consolidated financial statements were available to be issued, the Company was still reviewing the financial information of these properties and, as such, it was impractical to include in these consolidated financial statements the pro-forma effect of these acquisitions (see Note 17 — Subsequent Events).
10
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter as of June 30, 2015. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
(In thousands) | Future Minimum Base Rent Payments | |||
July 1, 2015 — December 31, 2015 | $ | 42,436 | ||
2016 | 83,697 | |||
2017 | 82,132 | |||
2018 | 78,566 | |||
2019 | 73,821 | |||
Thereafter | 520,764 | |||
$ | 881,416 | |||
The following table lists the tenant (including for this purpose, all affiliates of such tenant) whose annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of June 30, 2015 and 2014:
June 30, | ||||
Tenant | 2015 | 2014 | ||
Pinnacle Health Hospitals | 12.4% | * | ||
_______________________________
* Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The following table lists the states where the Company had concentrations of properties where annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of June 30, 2015 and 2014:
June 30, | ||||
State | 2015 | 2014 | ||
Florida | 22.6% | 14.0% | ||
Georgia | * | 10.0% | ||
Illinois | * | 11.7% | ||
Iowa | 12.3% | * | ||
New York | * | 26.8% | ||
Pennsylvania | 13.6% | * | ||
_______________________________
* State's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
Note 4 — Investment Securities
As of June 30, 2015 and December 31, 2014, the Company had investments with an aggregate fair value of $16.1 million and $20.3 million, respectively, including real estate income funds managed by an affiliate of the Sponsor (see Note 9 — Related Party Transactions and Arrangements). These investments are considered available-for-sale securities and, therefore, increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income as a component of equity on the consolidated balance sheets unless the securities are considered to be other than temporarily impaired, at which time the losses would be reclassified to expense.
11
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following table details the unrealized gains and losses on investment securities as of June 30, 2015 and December 31, 2014.
(In thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
June 30, 2015 | ||||||||||||||||
Equity securities | $ | 15,951 | $ | 265 | $ | (133 | ) | $ | 16,083 | |||||||
December 31, 2014 | ||||||||||||||||
Equity securities | $ | 19,397 | $ | 477 | $ | (33 | ) | $ | 19,841 | |||||||
Debt security | 426 | 19 | — | 445 | ||||||||||||
$ | 19,823 | $ | 496 | $ | (33 | ) | $ | 20,286 | ||||||||
Certain of the Company's investments in preferred stock and real estate investment funds have been in a continuous unrealized loss position for less than twelve months. The Company believes that the decline in fair value is a factor of current market conditions and, as such, considers the unrealized losses as of June 30, 2015 to be temporary. Therefore no impairment was recorded during the three and six months ended June 30, 2015.
During the six months ended June 30, 2015, the Company sold certain of its investments in preferred stock and its investment in a senior note with a cost of $3.9 million for $4.2 million which resulted in a realized gain on sale of investment of $0.3 million. The Company did not sell any investments during the three months ended June 30, 2015 or the three and six months ended June 30, 2014 and therefore had no gains or losses from the sale of investments during these periods.
The Company's preferred stock investments, with an aggregate fair value of $11.7 million as of June 30, 2015, are redeemable at the respective issuer's option five years after issuance.
Note 5 — Revolving Credit Facility
On March 21, 2014, the Company entered into a senior secured credit facility in the amount of $50.0 million (the "Credit Facility"). On April 15, 2014 the amount available under the Credit Facility was increased to $200.0 million.
On June 26, 2015, the Company entered into an amendment to the Credit Facility, which allows for borrowings of up to $500.0 million. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The Credit Facility contains an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate borrowings under the Credit Facility to a maximum of $750.0 million. The amendment to the Credit Facility included changes to amounts committed by each of the banks in the syndicate, which resulted in a write off of deferred financing costs of $0.5 million during the three and six months ended June 30, 2015.
The Company has the option, based upon its leverage, to have the Credit Facility priced at either: (a) LIBOR, plus an applicable margin that ranges from 1.60% to 2.20%; or (b) the Base Rate, plus an applicable margin that ranges from 0.35% to 0.95%. Base Rate is defined in the Credit Facility as the greater of (i) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate,” (ii) 0.5% above the federal funds effective rate or (iii) the applicable one-month LIBOR plus 1.0%.
The Credit Facility provides for monthly interest payments for each Base Rate loan and periodic payments for each LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date on March 21, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty (subject to standard breakage costs). In the event of a default, the lender has the right to terminate its obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans.
As of June 30, 2015, the balance outstanding under the Credit Facility was $135.0 million, with an effective interest rate of 1.8%. The Company's unused borrowing capacity was $102.5 million, based on assets assigned to the Credit Facility as of June 30, 2015. Availability of borrowings is based on a pool of eligible unencumbered real estate assets. There were no advances outstanding as of December 31, 2014.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of June 30, 2015, the Company was in compliance with the financial covenants under the Credit Facility.
12
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 6 — Mortgage Notes Payable
The following table reflects the Company's mortgage notes payable as of June 30, 2015 and December 31, 2014.
Outstanding Loan Amount as of | Effective Interest Rate | ||||||||||||||||
Portfolio | Encumbered Properties | June 30, 2015 | December 31, 2014 | Interest Rate | Maturity | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
Creekside Medical Office Building - Douglasville, GA | 1 | $ | 5,088 | $ | 5,154 | 5.32 | % | Fixed | Sep. 2015 | ||||||||
Bowie Gateway Medical Center - Bowie, MD | 1 | 6,012 | 6,055 | 6.18 | % | Fixed | Sep. 2016 | ||||||||||
Medical Center of New Windsor - New Windsor, NY | 1 | 8,776 | 8,832 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Plank Medical Center - Clifton Park, NY | 1 | 3,483 | 3,506 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Cushing Center - Schenectady, NY | 1 | 4,236 | 4,287 | 5.71 | % | Fixed | Feb. 2016 | ||||||||||
Countryside Medical Arts - Safety Harbor, FL | 1 | 6,034 | 6,076 | 6.07 | % | Fixed | (1) | Apr. 2019 | |||||||||
St. Andrews Medical Park - Venice, FL | 3 | 6,670 | 6,716 | 6.07 | % | Fixed | (1) | Apr. 2019 | |||||||||
Campus at Crooks & Auburn Building C - Rochester Hills, MI | 1 | 3,591 | 3,626 | 5.91 | % | Fixed | Apr. 2016 | ||||||||||
Slingerlands Crossing Phase I - Bethlehem, NY | 1 | 6,715 | 6,759 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Slingerlands Crossing Phase II - Bethlehem, NY | 1 | 7,827 | 7,877 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Benedictine Cancer Center - Kingston, NY | 1 | 6,854 | 6,898 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Aurora Healthcare Center Portfolio - WI | 6 | 31,447 | — | 6.55 | % | Fixed | Jan. 2018 | ||||||||||
Palm Valley Medical Plaza - Goodyear, AZ | 1 | 3,572 | — | 4.21 | % | Fixed | Jun. 2023 | ||||||||||
Total | 20 | $ | 100,305 | $ | 65,786 | 6.21 | % | (2) | |||||||||
_______________________________
(1) Fixed interest rate through May 10, 2017. Interest rate changes to variable rate starting in June 2017.
(2) Calculated on a weighted average basis for all mortgages outstanding as of June 30, 2015.
Real estate investments, at cost, related to the mortgage notes payable of $182.4 million and $122.4 million at June 30, 2015 and December 31, 2014, respectively, have been pledged as collateral and are not available to satisfy our debts and obligations unless first satisfying the mortgage notes payable on the properties. The Company makes payments of principal and interest on all of its mortgage notes payable on a monthly basis.
The following table summarizes the scheduled aggregate principal payments on mortgage notes payable for the five years subsequent to June 30, 2015:
(In thousands) | Future Principal Payments | |||
July 1, 2015 — December 31, 2015 | $ | 5,751 | ||
2016 | 14,841 | |||
2017 | 33,728 | |||
2018 | 30,744 | |||
2019 | 12,128 | |||
Thereafter | 3,113 | |||
$ | 100,305 | |||
Some of the Company's mortgage note agreements require the compliance with certain property-level financial covenants including debt service coverage ratios. As of June 30, 2015, the Company was in compliance with the financial covenants under its mortgage note agreements.
13
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 7 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, if any, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The Company has or had investments in common stock, redeemable preferred stock, real estate income funds and a senior note that are traded in active markets and therefore, due to the availability of quoted market prices in active markets, the Company has classified these investments as Level 1 in the fair value hierarchy.
The following table presents information about the Company's assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
June 30, 2015 | ||||||||||||||||
Investment securities | $ | 16,083 | $ | — | $ | — | $ | 16,083 | ||||||||
December 31, 2014 | ||||||||||||||||
Investment securities | $ | 20,286 | $ | — | $ | — | $ | 20,286 | ||||||||
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, receivable for sale of common stock, prepaid expenses and other assets, due to affiliates, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below:
Carrying Amount(1) at | Fair Value at | Carrying Amount(1) at | Fair Value at | |||||||||||||||
(In thousands) | Level | June 30, 2015 | June 30, 2015 | December 31, 2014 | December 31, 2014 | |||||||||||||
Mortgage notes payable and premiums, net | 3 | $ | 105,008 | $ | 105,682 | $ | 68,630 | $ | 69,117 | |||||||||
Credit Facility | 3 | $ | 135,000 | $ | 135,000 | $ | — | $ | — | |||||||||
_______________________________
(1) Carrying value includes mortgage notes payable of $100.3 million and $65.8 million and mortgage premiums, net of $4.7 million and $2.8 million as of June 30, 2015 and December 31, 2014, respectively.
14
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The fair value of the mortgage notes payable are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. Advances under the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR.
Note 8 — Common Stock
As of June 30, 2015 and December 31, 2014, the Company had 85.2 million and 83.7 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, respectively, and had received total proceeds of $2.1 billion, including proceeds from shares issued pursuant to the DRIP.
On April 9, 2013, the Company's board of directors authorized, and the Company declared, distributions payable to stockholders of record each day during the applicable period equal to $0.0046575343 per day, which is equivalent to $1.70 per annum, per share of common stock. Distributions began to accrue on May 24, 2013, 15 days following the Company's initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share Repurchase Program
The Company's board of directors has adopted a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company in limited circumstances. The SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.
The repurchase price per share depends on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).
The Company is only authorized to repurchase shares pursuant to the SRP using the proceeds received from the DRIP and will limit the amount spent to repurchase shares in a given quarter to the amount of proceeds received from the DRIP in that same quarter. In addition, the board of directors may reject a request for redemption at any time. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests. Purchases under the SRP by the Company will be limited in any calendar year to 5% of the weighted average number of shares outstanding on December 31 of the previous calendar year.
When a stockholder requests redemption and the redemption is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through June 30, 2015:
Number of Requests | Number of Shares Repurchased | Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 57 | 74,031 | $ | 24.42 | ||||||
Six Months Ended June 30, 2015 (1) | 124 | 191,895 | 24.24 | |||||||
Cumulative repurchases as of June 30, 2015 (1) | 181 | 265,926 | $ | 24.29 | ||||||
_____________________________
(1) Includes 58 unfulfilled repurchase requests consisting of 105,974 shares at an average repurchase price per share of $24.22, which were approved for repurchase as of June 30, 2015 and were completed in August 2015.
15
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased under the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded as equity in the accompanying consolidated balance sheet in the period distributions are declared. During the six months ended June 30, 2015, the Company issued 1.6 million shares of common stock pursuant to the DRIP, generating aggregate proceeds of $39.0 million.
Note 9 — Related Party Transactions and Arrangements
As of June 30, 2015 and December 31, 2014, Healthcare Trust Special Limited Partnership, LLC (the "Special Limited Partner"), formerly known as American Realty Capital Healthcare II Special Limited Partnership, LLC, owned 8,888 shares of the Company's outstanding common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company.
The Company owns shares in real estate income funds managed by an affiliate of the Sponsor with a fair value of $3.8 million as of June 30, 2015 (see Note 4 — Investment Securities). There is no obligation to purchase any additional shares and the shares can be sold at any time.
On January 14, 2015, the Company purchased the Acuity Specialty Hospital portfolio from American Realty Capital Healthcare Trust, Inc. ("HCT") for a contract purchase price of $39.4 million. At the time of such purchase, the Sponsor and Advisor and the sponsor and advisor of HCT were under common control. On January 15, 2015, HCT merged into Stripe Sub, LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of Ventas, Inc. and therefore, the Sponsor and Advisor and the sponsor and advisor of HCT were no longer under common control as of such date.
The limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to the Company's Advisor, a limited partner of the OP. In connection with this special allocation, the Company's Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP.
Fees Paid in Connection with the IPO
The Dealer Manager was paid fees in connection with the sale of the Company's common stock in the IPO. The Company paid the Dealer Manager a selling commission of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Company paid the Dealer Manager up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager was permitted to reallow its dealer-manager fee to participating broker-dealers. A participating broker-dealer could elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares by such participating broker-dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option had been elected, the dealer manager fee would have been reduced to 2.5% of gross proceeds. The following table details total selling commissions and dealer manager fees incurred from and due to the Dealer Manager as of and for the periods presented:
Payable as of | ||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | June 30, | December 31, | |||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Total commissions and fees incurred from (reimbursed by) and due to the Dealer Manager | $ | — | $ | 70,722 | $ | (2 | ) | $ | 105,197 | $ | — | $ | 1 | |||||||||||
16
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The Advisor and its affiliates received compensation and reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Dealer Manager. All offering costs incurred by the Company or its affiliated entities on behalf of the Company were charged to additional paid-in capital on the accompanying balance sheet during the IPO. The following table details reimbursable offering costs incurred from and due to the Advisor and Dealer Manager as of and for the periods presented:
Payable as of | ||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | June 30, | December 31, | |||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Fees and expense reimbursements incurred from and due to the Advisor | $ | — | $ | 8,135 | $ | — | $ | 13,761 | $ | — | $ | — | ||||||||||||
Fees and expense reimbursements incurred from and due to the Dealer Manager | — | 944 | — | 1,568 | — | 605 | ||||||||||||||||||
Total fees and expense reimbursements incurred from and due to the Advisor and Dealer Manager | — | 9,079 | $ | — | $ | 15,329 | $ | — | $ | 605 | ||||||||||||||
The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding selling commissions and dealer manager fees, in excess of the 2.0% cap as of the end of the IPO were to be the Advisor's responsibility. As of the end of the IPO, offering and related costs, excluding selling commissions and dealer manager fees, did not exceed 2.0% of gross proceeds received from the IPO. In aggregate, offering costs including selling commissions and dealer manager fees were the Company's responsibility up to a maximum of 12.0% of the gross proceeds received from the IPO as determined at the end of the IPO. As of the end of the IPO in November 2014, offering costs were less than the 12.0% of the gross proceeds received in the IPO.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Advisor is also reimbursed for services provided for which it incurs investment-related expenses, or insourced expenses. The amount reimbursed for insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) may not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price of the Company's portfolio to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.
Until March 31, 2015, for its asset management services, the Company issued the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units were intended to be profits interests and vest, and are no longer subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) a listing; (2) an other liquidity event or (3) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated for any reason other than a termination without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.
17
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
When approved by the board of directors, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the IPO price minus the selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. As of June 30, 2015, the Company cannot determine the probability of achieving the performance condition. The Advisor receives distributions on vested and unvested Class B Units equal to the distribution rate received on the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss until the performance condition is considered probable to occur. As of June 30, 2015, the Company's board of directors had approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement.
On May 12, 2015, the Company, the OP and the Advisor entered into an amendment (the “Amendment”) to the advisory agreement, which, among other things, provides that the Company will cease causing the OP to issue Class B Units in the OP to the Advisor or its assignees related to any period ending after March 31, 2015. In lieu of Class B Units, effective April 1, 2015, the Company pays an asset management fee to the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets. The asset management fee is payable on the first business day of each month in the amount of 0.0625% multiplied by the cost of assets for the preceding monthly period. The asset management fee is payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee of 1.5% of gross revenues from the Company's stand-alone single-tenant net leased properties and 2.5% of gross revenues from all other types of properties, respectively. The Company also reimburses the Property Manager for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and will pay the Property Manager an oversight fee of up to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager or any affiliate of the Property Manager both a property management fee and an oversight fee with respect to any particular property.
Effective June 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over the estimated remaining term of the IPO and, as such, have been fully amortized as of December 31, 2014. The Dealer Manager and its affiliates also provide transfer agency services, as well as transaction management and other professional services. These fees were included in general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss.
18
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following table details amounts incurred, forgiven and payable in connection with the Company's operations-related services described above as of and for the periods presented.
Three Months Ended June 30, | Six Months Ended June 30, | Payable (Receivable) as of | ||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | June 30, | December 31, | |||||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2015 | 2014 | ||||||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Acquisition fees | $ | 1,131 | $ | — | $ | 1,185 | $ | — | $ | 1,988 | $ | — | $ | 1,369 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Acquisition cost reimbursements | 565 | — | 592 | — | 994 | — | 684 | — | — | — | ||||||||||||||||||||||||||||||
Financing coordination fees | 2,652 | — | 1,570 | — | 2,888 | — | 1,945 | — | — | — | ||||||||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||||||||||
Asset management fees (1) | 3,410 | — | — | — | 3,410 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Property management fees | — | 631 | — | 31 | — | 1,220 | — | 47 | — | — | ||||||||||||||||||||||||||||||
Transfer agent and other professional services | 1,213 | — | — | — | 2,070 | — | — | — | 1,068 | 364 | ||||||||||||||||||||||||||||||
Strategic advisory fees | — | — | 135 | — | — | — | 270 | — | — | — | ||||||||||||||||||||||||||||||
Distributions on Class B Units | 138 | — | 5 | — | 183 | — | 7 | — | — | — | ||||||||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 9,109 | $ | 631 | $ | 3,487 | $ | 31 | $ | 11,533 | $ | 1,220 | $ | 4,275 | $ | 47 | $ | 1,068 | $ | 364 | ||||||||||||||||||||
_______________
(1) | Prior to April 1, 2015, the Company caused the OP to issue (subject to periodic approval by the board of directors) to the Advisor restricted performance based Class B Units for asset management services. As of June 30, 2015, the Company's board of directors had approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement. Effective April 1, 2015, in connection with the Amendment, the Company will pay an asset management fee to the Advisor or its assignees in cash, in shares, or a combination of both and will no longer issue any Class B Units. |
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services during the operational stage; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. No reimbursement was incurred from the Advisor for providing services during the three and six months ended June 30, 2015 or 2014.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that are forgiven are not deferrals and, accordingly, will not be paid to the Advisor in the future. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's property operating and general and administrative costs, which the Company will not repay. No such fees were absorbed during the three and six months ended June 30, 2015 or 2014.
Fees and Participations Paid in Connection with a Listing or the Liquidation of the Company's Real Estate Assets
Fees Incurred in Connection with the Listing
On March 17, 2015, the Company formally engaged KeyBanc Capital Markets Inc. ("KeyBanc") and RCS Capital ("RCS Capital"), the investment banking and capital markets division of the Dealer Manager, and on May 20, 2015, the Company formally engaged BMO Capital Markets Corp. ("BMO"), as financial advisors. The Company's board of directors has determined, in consultation with KeyBanc and RCS Capital, that it is in the Company's best interests to proceed with a public listing application on a national securities exchange. Pursuant to the agreements with KeyBanc, BMO and RCS Capital, they will each receive a listing advisory fee equal to $1.5 million if the Company's shares are listed on a national securities exchange. In the event of a sale or acquisition transaction, KeyBanc, BMO and RCS Capital will each receive a proposed transaction fee equal to 0.25% of the value of the transaction. No fees have been incurred in connection with this agreement during the three and six months ended June 30, 2015 or 2014.
19
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Other Liquidation Related Fees and Participations
The Company will pay the Advisor an annual subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholders' capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year. This fee will be paid only upon the sale of assets, distributions or other event which results in the return on stockholders' capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and six months ended June 30, 2015 or 2014.
The Company will pay the Advisor a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three and six months ended June 30, 2015 or 2014.
The Special Limited Partner will be entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets from the OP equal to 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 6.0% cumulative non-compounded annual return on their capital contributions. No such participation in net sales proceeds became due and payable during the three and six months ended June 30, 2015 or 2014.
If the common stock of the Company is listed on a national exchange, the Special Limited Partner will be entitled to receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the adjusted market value of real estate assets plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distribution was incurred during the three and six months ended June 30, 2015 or 2014. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated incentive listing distribution.
Upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Note 10 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services, transaction management services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
20
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 11 — Equity-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further approval by the Company's board of directors or the stockholders, after initial election to the board of directors and after each annual stockholder meeting, with such shares vesting annually beginning with the one year anniversary of initial election to the board of directors and the date of the next annual meeting, respectively. Restricted stock issued to independent directors will vest over a five-year period in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of common shares granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 3.4 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares. The following table reflects restricted share award activity for the period presented:
Number of Common Shares | Weighted-Average Issue Price | ||||||
Unvested, December 31, 2014 | 7,198 | $ | 22.50 | ||||
Granted | 1,333 | 22.50 | |||||
Vested | (1,066 | ) | 22.50 | ||||
Forfeitures | (2,399 | ) | 22.50 | ||||
Unvested, June 30, 2015 | 5,066 | $ | 22.50 | ||||
As of June 30, 2015, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 3.7 years. The fair value of the restricted shares is being expensed on a straight-line basis over the service period of five years. Compensation expense related to restricted stock was approximately $5,000 and $4,000 during the three months ended June 30, 2015 and June 30, 2014, respectively. Compensation expense related to restricted stock was approximately $6,000 and $10,000 during the six months ended June 30, 2015 and June 30, 2014, respectively. Compensation expense related to restricted stock is recorded as general and administrative expense in the accompanying consolidated statement of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. During the three and six months ended June 30, 2014, the Company issued 404 and 604 shares in lieu of approximately $10,000 and $14,000 in cash. No such shares were issued during the three and six months ended June 30, 2015.
21
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 12 — Accumulated Other Comprehensive Income
The following table illustrates the changes in accumulated other comprehensive income as of and for the period presented:
(In thousands) | Unrealized Gains on Available-for-Sale Securities | |||
Balance, December 31, 2014 | $ | 463 | ||
Other comprehensive loss, before reclassifications | (44 | ) | ||
Amounts reclassified from accumulated other comprehensive income (1) | (286 | ) | ||
Balance, June 30, 2015 | $ | 133 | ||
__________________
(1) | During the six months ended June 30, 2015, the Company sold certain of its investments in preferred stock and its investment in a senior note which resulted in a realized gain of $0.3 million, which is included in gain on sale of investment securities on the consolidated statement of operations and comprehensive loss. |
Note 13 — Non-controlling Interests
The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP units"). As of June 30, 2015 and 2014, the Advisor held 90 OP units, which represents a nominal percentage of the aggregate OP ownership.
In November 2014, the Company partially funded the purchase of an MOB with the issuance of 405,908 OP units, with a value of $10.1 million or $25.00 per unit, from an unaffiliated third party.
A holder of OP units has the right to distributions and has the right to convert OP units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets. During the three and six months ended June 30, 2015, non-controlling interest holders were paid distributions of $0.2 million and $0.4 million, respectively. No such distributions were paid during the three and six months ended June 30, 2014.
The Company has an investment arrangement with an unaffiliated third party whereby such investor contributed $0.5 million in exchange for a 4.1% ownership interest in Plaza Del Rio Medical Office Campus Portfolio - Peoria, AZ and is entitled to receive a proportionate share of the net operating cash flow derived from the subsidiaries' property. Upon disposition of a property subject to non-controlling interest, the investor will receive a proportionate share of the net proceeds from the sale of the property. The investor has no recourse to any other assets of the Company. Due to the nature of the Company's involvement with the arrangement and the significance of its investment in relation to the investment of the third party, the Company has determined that it controls each entity in this arrangement and therefore the entities related to this arrangement are consolidated within the Company's financial statements. A non-controlling interest is recorded for the investor's ownership interest in the properties.
Note 14 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the three and six months ended June 30, 2015 and 2014:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss attributable to stockholders (in thousands) | $ | (13,421 | ) | $ | (4,147 | ) | $ | (18,641 | ) | $ | (4,729 | ) | ||||
Basic and diluted weighted-average shares outstanding | 84,992,633 | 35,127,969 | 84,623,618 | 24,435,162 | ||||||||||||
Basic and diluted net loss per share | $ | (0.16 | ) | $ | (0.12 | ) | $ | (0.22 | ) | $ | (0.19 | ) | ||||
22
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The Company had the following potentially dilutive securities as of June 30, 2015 and 2014, which were excluded from the calculation of diluted loss per share attributable to stockholders as the effect would have been antidilutive.
June 30, | ||||||
2015 | 2014 | |||||
Unvested restricted stock | 5,066 | 7,198 | ||||
OP Units | 405,998 | 90 | ||||
Class B Units | 359,250 | 12,940 | ||||
Total common share equivalents | 770,314 | 20,228 | ||||
Note 15 — Segment Reporting
During the three and six months ended June 30, 2015, the Company operated in three reportable business segments for management and internal financial reporting purposes: medical office buildings, triple-net leased healthcare facilities, and seniors housing — operating properties ("SHOP"). During the three and six months ended June 30, 2014, the Company did not own any SHOPs and, therefore, operated in two reportable business segments during this period.
These operating segments are the segments of the Company for which separate financial information is available and for which segment results are evaluated by the Company's executive officers in deciding how to allocate resources and in assessing performance. The medical office building segment primarily consists of MOBs leased to healthcare-related tenants under long-term leases, which may require such tenants to pay a pro rata share of property-related expenses. The triple-net leased healthcare facilities segment primarily consists of investments in seniors housing communities, hospitals, inpatient rehabilitation facilities and skilled nursing facilities under long-term leases, under which tenants are generally responsible to directly pay property-related expenses. The SHOP segment consists of direct investments in seniors housing communities, primarily providing assisted living, independent living and memory care services, which the Company operates through engaging independent third-party managers. The Company evaluates performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenues less property operating and maintenance expenses. There are no intersegment sales or transfers. The Company uses net operating income to evaluate the operating performance of real estate investments and to make decisions concerning the operation of the properties. The Company believes that net operating income is useful to investors in understanding the value of income-producing real estate. Net income (loss) 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 operating fees to the Advisor, acquisition and transaction related expenses, general and administrative expenses, depreciation and amortization expense, interest expense, income from investment securities and interest income, gain on sale of investment securities, and income tax expense. Additionally, net operating income as defined by the Company may not be comparable to net operating income as defined by other REITs or companies.
23
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following tables reconcile the segment activity to consolidated net loss for the three and six months ended June 30, 2015 and 2014.
Three Months Ended June 30, 2015 | Six Months Ended June 30, 2015 | |||||||||||||||||||||||||||||||
(In thousands) | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Rental income | $ | 13,238 | $ | 9,693 | $ | 30,264 | $ | 53,195 | $ | 24,718 | $ | 19,069 | $ | 60,046 | $ | 103,833 | ||||||||||||||||
Operating expense reimbursement | 2,672 | 55 | — | 2,727 | 5,769 | 88 | — | 5,857 | ||||||||||||||||||||||||
Resident services and fee income | — | — | 3,594 | 3,594 | — | — | 6,947 | 6,947 | ||||||||||||||||||||||||
Total revenues | 15,910 | 9,748 | 33,858 | 59,516 | 30,487 | 19,157 | 66,993 | 116,637 | ||||||||||||||||||||||||
Property operating and maintenance | 4,279 | 624 | 23,726 | 28,629 | 9,128 | 696 | 46,282 | 56,106 | ||||||||||||||||||||||||
Net operating income | $ | 11,631 | $ | 9,124 | $ | 10,132 | 30,887 | $ | 21,359 | $ | 18,461 | $ | 20,711 | 60,531 | ||||||||||||||||||
Operating fees to Advisor | (3,410 | ) | (3,410 | ) | ||||||||||||||||||||||||||||
Acquisition and transaction related | (3,188 | ) | (5,187 | ) | ||||||||||||||||||||||||||||
General and administrative | (2,533 | ) | (5,132 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (33,583 | ) | (63,031 | ) | ||||||||||||||||||||||||||||
Interest expense | (2,384 | ) | (3,757 | ) | ||||||||||||||||||||||||||||
Interest and other income | 666 | 939 | ||||||||||||||||||||||||||||||
Gain on sale of investment securities | — | 286 | ||||||||||||||||||||||||||||||
Income tax benefit | 47 | 18 | ||||||||||||||||||||||||||||||
Net loss attributable to non-controlling interests | 77 | 102 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (13,421 | ) | $ | (18,641 | ) | ||||||||||||||||||||||||||
Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||||||||||
(In thousands) | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Rental income | $ | 1,912 | $ | 402 | $ | — | $ | 2,314 | $ | 2,640 | $ | 801 | $ | — | $ | 3,441 | ||||||||||||||||
Operating expense reimbursement | 540 | 15 | — | 555 | 786 | 29 | — | 815 | ||||||||||||||||||||||||
Total revenues | 2,452 | 417 | — | 2,869 | 3,426 | 830 | — | 4,256 | ||||||||||||||||||||||||
Property operating and maintenance | 720 | 15 | — | 735 | 1,000 | 29 | — | 1,029 | ||||||||||||||||||||||||
Net operating income | $ | 1,732 | $ | 402 | $ | — | 2,134 | $ | 2,426 | $ | 801 | $ | — | 3,227 | ||||||||||||||||||
Acquisition and transaction related | (2,599 | ) | (3,003 | ) | ||||||||||||||||||||||||||||
General and administrative | (579 | ) | (991 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (2,381 | ) | (3,238 | ) | ||||||||||||||||||||||||||||
Interest expense | (742 | ) | (745 | ) | ||||||||||||||||||||||||||||
Interest and other income | 20 | 21 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (4,147 | ) | $ | (4,729 | ) | ||||||||||||||||||||||||||
24
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following table reconciles the segment activity to consolidated total assets as of the periods presented:
June 30, | December 31, | |||||||
(In thousands) | 2015 | 2014 | ||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Investments in real estate, net: | ||||||||
Medical office buildings | $ | 724,747 | $ | 593,648 | ||||
Triple-net leased healthcare facilities | 400,914 | 355,962 | ||||||
Seniors housing — operating properties | 690,623 | 682,140 | ||||||
Total investments in real estate, net | 1,816,284 | 1,631,750 | ||||||
Cash and cash equivalents | 109,489 | 182,617 | ||||||
Restricted cash | 3,201 | 1,778 | ||||||
Investment securities, at fair value | 16,083 | 20,286 | ||||||
Receivable for sale of common stock | — | 6 | ||||||
Prepaid expenses and other assets | 23,922 | 17,036 | ||||||
Deferred costs, net | 13,380 | 4,237 | ||||||
Total assets | $ | 1,982,359 | $ | 1,857,710 | ||||
Note 16 — Commitments and Contingencies
The Company has entered into operating and capital lease agreements related to certain acquisitions under leasehold interests arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter under these arrangements, including the present value of the net minimum payment due under capital leases. These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
Future Minimum Base Rent Payments | ||||||||
(In thousands) | Operating Leases | Capital Leases | ||||||
July 1, 2015 — December 31, 2015 | $ | 168 | $ | 36 | ||||
2016 | 340 | 74 | ||||||
2017 | 344 | 76 | ||||||
2018 | 349 | 78 | ||||||
2019 | 354 | 80 | ||||||
Thereafter | 16,619 | 7,930 | ||||||
Total minimum lease payments | $ | 18,174 | 8,274 | |||||
Less: amounts representing interest | (3,477 | ) | ||||||
Total present value of minimum lease payments | $ | 4,797 | ||||||
Total rental expense from operating leases was $0.1 million and $0.2 million during the three and six months ended June 30, 2015, respectively. Total rental expense from operating leases was approximately $17,000 and $23,000 during the three and six months ended June 30, 2014, respectively. During the three and six months ended June 30, 2015, interest expense related to capital leases was approximately $21,000 and $42,000, respectively. There was no such interest expense during the three and six months ended June 30, 2014.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company or its properties.
25
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of June 30, 2015, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 17 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following transactions:
Acquisitions
The following table presents certain information about the properties that the Company acquired from July 1, 2015 to August 7, 2015:
Number of Properties | Rentable Square Feet | Base Purchase Price (1) | ||||||||
(In thousands) | ||||||||||
Portfolio, June 30, 2015 | 143 | 7,063,325 | $ | 1,878,050 | ||||||
Acquisitions and Construction in Process | 5 | 250,929 | 105,784 | |||||||
Portfolio, August 7, 2015 | 148 | 7,314,254 | $ | 1,983,834 | ||||||
________________________
(1) Contract purchase price, excluding acquisition fees of $20.0 million and other acquisition related costs.
Changes to Credit Facility
On July 31, 2015 the amount available under the Credit Facility was increased to $565.0 million.
Sponsor Transactions
On August 6, 2015, ARC, the parent of the Sponsor, entered into a Transaction Agreement (the “Transaction Agreement”) with AMH Holdings (Cayman), L.P., a Cayman Islands exempted limited partnership (“AMH”), and an affiliate of Apollo Global Management, LLC (NYSE: APO) (together with its consolidated subsidiaries, “Apollo”), and a newly formed entity, AR Global Investments, LLC, a Delaware limited liability company (“AR Global”). The Transaction Agreement provides that ARC will transfer to AR Global substantially all of the assets of its ongoing asset management business (including equity interests in its subsidiaries). AMH will contribute money and other assets to AR Global. Following the consummation of the transaction contemplated by the Transaction Agreement, AMH will hold a 60% interest in AR Global and ARC will hold a 40% interest in AR Global. The business and affairs of AR Global will be overseen by a board of managers comprised of ten members, six of which will be appointed by AMH and four of which will be appointed by ARC. The Advisor and Property Manager are currently owned indirectly by ARC and following the transaction will be owned indirectly by AR Global.
Also on August 6, 2015, RCS Capital Corporation (“RCS Capital”), the parent of the Dealer Manager and a company under common control with ARC, announced that it had entered into an agreement with an affiliate of Apollo to sell RCS Capital’s Wholesale Distribution division, including the Dealer Manager, and certain related entities (collectively, the "Transactions"). Upon completion of the transaction, the Dealer Manager will continue to operate as a stand-alone entity within AR Global. The current management team of the Dealer Manager, which is led by William E. Dwyer III, will continue to operate the day-to-day functions of the business.
The Transactions are subject to customary closing conditions and are expected to close in 2015. Upon consummation of the Transactions, the Sponsor, Advisor and Property Manager are expected to continue to serve in their respective capacities to the Company. The Company’s independent directors unanimously endorsed the Transactions.
Name Change
On August 10, 2015, the Company filed Articles of Amendment to change the Company's name to "Healthcare Trust, Inc."
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Healthcare Trust, Inc., formerly known as American Realty Capital Healthcare Trust II, Inc., and the notes thereto. As used herein, the terms the "Company," "we," "our" and "us" refer to Healthcare Trust, Inc., a Maryland corporation, including, as required by context, Healthcare Trust Operating Partnership, LP, formerly known as American Realty Capital Healthcare Trust II Operating Partnership, LP, a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by Healthcare Trust Advisors, LLC (our "Advisor"), formerly known as American Realty Capital Healthcare II Advisors, LLC, a Delaware limited liability company. Capitalized terms used herein, but not otherwise defined, have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the consolidated financial statements and contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | Certain of our executive officers and directors are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor, our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager") and other entities affiliated with the parent of our sponsor, AR Capital, LLC (the "Parent of our Sponsor"). As a result, certain of our executive officers and directors, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by affiliates of the Parent of our Sponsor and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions. |
• | Because investment opportunities that are suitable for us may also be suitable for other investment programs advised by affiliates of the Parent of our Sponsor, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders. |
• | Although we intend to list our shares of common stock on a national stock exchange, there can be no assurance that our shares of common stock will be listed. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | We focus on acquiring a diversified portfolio of healthcare-related assets located in the United States and are subject to risks inherent in concentrating investments in the healthcare industry. |
• | The availability of qualified personnel. |
• | The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of tenants to make lease payments to us. |
• | We are depending on our Advisor to select investments and conduct our operations. Adverse changes in the financial condition of our Advisor or our relationship with our Advisor could adversely affect us. |
• | We may be unable to pay distributions with cash flows from operations, or maintain cash distributions or increase distributions over time. |
• | We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates. |
• | We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. |
• | We may not be able to achieve our rental rate objectives on new and renewal leases and our expenses could be greater, which may impact our results of operations. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions. |
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• | We are permitted to pay distributions of unlimited amounts from any source. There are no established limits on the amount of borrowings that we may use to fund distribution payments, except in accordance with our organizational documents and Maryland law. |
• | Any distributions may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of our stockholders' investment. |
• | We have not and may not in the future generate cash flows sufficient to pay our distributions to stockholders and, as such, we may be forced to source distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor or our property manager, Healthcare Trust Properties, LLC (the "Property Manager"), formerly known as American Realty Capital Healthcare II Properties, LLC, to waive fees or reimbursement of certain expenses and fees to fund our operations. There is no assurance these entities will waive such amounts. |
• | We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time. |
• | Changes in general economic, business and political conditions including the possibility of intensified international hostilities, acts of terrorism, and changes in conditions of United States or international lending, capital and financing markets. |
• | We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and the cash available for distributions. |
• | We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act. |
Overview
We invest in seniors housing and health care real estate in the United States. As of June 30, 2015, we owned 143 properties, located in 26 states with an aggregate contract purchase price of $1.9 billion, comprised of 7.1 million rentable square feet.
In February 2013, we commenced our IPO on a "reasonable best efforts" basis of up to $1.7 billion of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. We closed our IPO in November 2014. As of June 30, 2015, we have 85.2 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and have received total gross proceeds from the IPO and the DRIP of $2.1 billion. On March 18, 2015, we announced our intention to list our common stock on a national stock exchange under the symbol “HTI” (the "Listing").
We were incorporated on October 15, 2012 as a Maryland corporation that elected and qualified to be taxed as a REIT beginning with our taxable year ended December 31, 2013. Substantially all of our business is conducted through the OP. We have no direct employees. Our Advisor has been retained by us to manage our affairs on a day-to-day basis. We have retained the Property Manager to serve as our property manager. The Dealer Manager served as the dealer manager of the IPO and continues to provide us with various services. The Advisor, the Property Manager and the Dealer Manager are under common control with the Parent of our Sponsor, as a result of which, they are related parties, and each have received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of our assets. The Advisor, Property Manager and Dealer Manager also have received or will receive compensation, fees and expense reimbursements related to the investment and management of our assets.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
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Revenue Recognition
Our rental income is primarily related to rent received from tenants in our medical office buildings ("MOBs") and triple-net leased healthcare facilities and from residents in our seniors housing — operating properties ("SHOPs") held using a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA"). Rent from tenants in our MOB and triple-net leased healthcare facilities is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require us to record a receivable, and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation. Rental income from residents of our SHOPs is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. We defer the revenue related to lease payments received from tenants and residents in advance of their due dates.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Resident services and fee income relates to ancillary services performed for residents in our SHOPs. Fees for ancillary services are recorded in the period in which the services are performed.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statement of operations and comprehensive income (loss).
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statement of operations and comprehensive income (loss). If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below-market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e. location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
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We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the consolidated statement of operations and comprehensive income (loss) for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on our operations and financial results. Properties that are intended to be sold are to be designated as "held for sale" on the consolidated balance sheet at the lesser of the carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Depreciation and Amortization
We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
When circumstances indicate that the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating this impact of this new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have assessed the potential impacts from future adoption of this revised guidance and have determined that there will be no impact to our financial position, results of operations and cash flows.
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In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We have not yet selected a transition method and are currently evaluating the impact of this new guidance.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of this new guidance.
Properties
The following table presents certain additional information about the properties we own as of June 30, 2015:
Portfolio | Number of Properties | Rentable Square Feet | Occupancy | Gross Asset Value | |||||||
(In thousands) | |||||||||||
Medical Office Buildings | 70 | 2,704,403 | 91.8% | $ | 750,497 | ||||||
Triple-Net Leased Healthcare Facilities(1): | |||||||||||
Seniors Housing — Triple Net Leased | 15 | 527,722 | 85.9% | 99,018 | |||||||
Hospitals | 4 | 428,620 | N/A | 94,311 | |||||||
Post Acute / Skilled Nursing | 20 | 853,865 | 80.6% | 218,893 | |||||||
Seniors Housing — Operating Properties | 32 | 2,548,715 | 89.4% | 741,522 | |||||||
Land | 2 | N/A | N/A | 3,665 | |||||||
Portfolio, June 30, 2015 | 143 | 7,063,325 | $ | 1,907,906 | |||||||
_______________________________
(1) | Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties. Therefore, while occupancy rates may affect the profitability of our tenants’ operations, they do not have a direct impact on our revenues or financial results. Occupancy statistics for our triple-net leased healthcare facilities are compiled through reports from tenants and have not been independently validated by us. |
N/A | Not applicable or not available. |
Results of Operations
Comparison of the Three Months Ended June 30, 2015 to the Three Months Ended June 30, 2014
On April 1, 2014, we owned 10 properties (our "Same Store"). We have acquired 133 properties during the period from April 1, 2014 through June 30, 2015 (our "Acquisitions"). Accordingly, our results of operations for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 reflect significant increases in most categories primarily due to our Acquisitions.
Rental Income
Rental income increased $50.9 million to $53.2 million for the three months ended June 30, 2015 from $2.3 million for the three months ended June 30, 2014. This increase in rental income was directly related to our Acquisitions.
Operating Expense Reimbursements
Operating expense reimbursements increased $2.1 million to $2.7 million for the three months ended June 30, 2015 from $0.6 million for the three months ended June 30, 2014. Operating expense reimbursements increase in relation to the increase in property operating expenses. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are generally directly responsible for all operating costs of the respective properties. The increase in operating expense reimbursements was directly related to our Acquisitions.
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Resident Services and Fee Income
Resident services and fee income of $3.6 million for the three months ended June 30, 2015 relates to services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. We did not own any SHOPs and therefore did not have any resident services and fee income for the three months ended June 30, 2014.
Property Operating and Maintenance Expenses
Property operating expenses increased $27.9 million to $28.6 million for the three months ended June 30, 2015 from $0.7 million for the three months ended June 30, 2014. These costs primarily relate to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees, as well as costs relating to caring for the residents of our SHOPs. The increase in property operating expenses was directly related to our Acquisitions.
Operating Fees to Advisor
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. We incurred $3.4 million in asset management services from our Advisor for the three months ended June 30, 2015. Prior to April 1, 2015 we caused the OP to issue to the Advisor restricted performance based Class B Units for asset management services. On May 12, 2015, we entered into an amendment to our advisory agreement which, among other things, provided that we cease causing the OP to issue Class B Units in the OP to the Advisor or its assignees related to any periods ending after March 31, 2015. Effective April 1, 2015, we pay an asset management fee on the first business day of each month in the amount of 0.0625% multiplied by the cost of assets for the preceding monthly period. The asset management fee is payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor.
Property management fees increase in direct correlation with gross revenues. The Property Manager elected to waive all property management fees for the three months ended June 30, 2015 and 2014. For the three months ended June 30, 2015 and 2014, we would have incurred property management fees of $0.6 million and approximately $31,000, respectively, had these fees not been waived.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $3.2 million for the three months ended June 30, 2015 related to our acquisition of 15 properties during this period with an aggregate purchase price of $113.1 million. Acquisition and transaction related expenses of $2.6 million for the three months ended June 30, 2014 related to our acquisition of 14 properties during this period with an aggregate purchase price of $118.5 million.
General and Administrative Expenses
General and administrative expenses increased $1.9 million to $2.5 million for the three months ended June 30, 2015 from $0.6 million for the three months ended June 30, 2014. The increase was primarily driven by professional fees incurred to support a larger real estate portfolio and number of stockholders. Prior to the end of the IPO, costs related to stockholder services were charged to additional paid-in capital in the accompanying consolidated balance sheet. At the time the IPO ended in November 2014, we began to expense, as incurred, professional fees related to stockholder services, because these costs no longer related to fulfilling subscriptions and offering costs.
Depreciation and Amortization Expenses
Depreciation and amortization expense increased $31.2 million to $33.6 million for the three months ended June 30, 2015 from $2.4 million for the three months ended June 30, 2014. The increase in depreciation and amortization expense related to our Acquisitions, which resulted in an increase of $31.7 million. This increase was partially offset by Same Store depreciation and amortization, which decreased $0.5 million due to our reallocation during the fourth quarter of 2014 of amounts that were provisionally allocated to land, buildings, fixtures and improvements and acquired lease intangible assets. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives of the properties.
Interest Expense
Interest expense increased $1.7 million to $2.4 million for the three months ended June 30, 2015 from $0.7 million for the three months ended June 30, 2014. Interest expense related to our mortgage notes payable increased $1.0 million as a result of a higher average outstanding mortgage balance of $99.6 million during the three months ended June 30, 2015, compared to the $26.4 million average balance during the three months ended June 30, 2014, as well as the associated increases in amortization of deferred financing costs, partially offset by increased amortization of mortgage premiums.
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We entered into a $50.0 million credit facility (the "Credit Facility") in March 2014. In April 2014 and June 2015, we entered into amendments which increased available borrowings to $200.0 million and $500.0 million, respectively. Interest expense related to the Credit Facility increased $0.7 million primarily due to higher amortization of deferred financing costs and the write-off of financing costs associated with the amendments to the Credit Facility.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
Interest and Other Income
Interest and other income of $0.7 million for the three months ended June 30, 2015 includes income from our investment securities, income from contingent consideration and interest income earned on cash and cash equivalents held during the period. We did not have any investment securities, contingent consideration or interest bearing accounts during the three months ended June 30, 2014 and, therefore, had no interest and other income during this period.
Income tax benefit
Income tax benefit was $47,000 for the three months ended June 30, 2015. Income taxes generally related to our SHOPs, which are owned by our taxable REIT subsidiary ("TRS"). We did not own any SHOPs during the three months ended June 30, 2014 and therefore had no income tax expense or benefit during this period.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was approximately $0.1 million for the three months ended June 30, 2015, which represents net loss that is related to OP unit and non-controlling interest holders. We had 90 OP units outstanding as of June 30, 2014, compared to 0.4 million at June 30, 2015.
Comparison of the Six Months Ended June 30, 2015 to the Six Months Ended June 30, 2014
On January 1, 2014, we owned seven properties (our "Same Store"). We acquired 136 properties during the period from January 1, 2014 through June 30, 2015 (our "Acquisitions"). Accordingly, our results of operations for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 reflect significant increases in most categories primarily due to our Acquisitions.
Rental Income
Rental income increased $100.4 million to $103.8 million for the six months ended June 30, 2015 from $3.4 million for the six months ended June 30, 2014. The increase was due to our Acquisitions.
Operating Expense Reimbursements
Operating expense reimbursements increased $5.1 million to $5.9 million for the six months ended June 30, 2015 from $0.8 million for the six months ended June 30, 2014. Operating expense reimbursements increased in proportion with the increase in property operating expenses. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are generally directly responsible for all operating costs of the respective properties. The increase in operating expense reimbursements was directly related to our Acquisitions.
Resident Services and Fee Income
Resident services and fee income of $6.9 million for the six months ended June 30, 2015 relates to services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. We did not own any SHOPs and therefore did not have any resident services and fee income during the six months ended June 30, 2014.
Property Operating and Maintenance Expenses
Property operating expenses increased $55.1 million to $56.1 million for the six months ended June 30, 2015, from $1.0 million for the six months ended June 30, 2014. These costs primarily relate to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees, as well as costs relating to caring for the residents in our SHOPs. The increase was due to our Acquisitions.
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Operating Fees to Advisor
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. We incurred $3.4 million in asset management services from our Advisor for the six months ended June 30, 2015. Prior to April 1, 2015 we caused the OP to issue to the Advisor restricted performance based Class B Units for asset management services. On May 12, 2015, we entered into an amendment to our advisory agreement which, among other things, provided that we cease causing the OP to issue Class B Units in the OP to the Advisor or its assignees related to any periods ending after March 31, 2015. Effective April 1, 2015, we pay an asset management fee on the first business day of each month in the amount of 0.0625% multiplied by the cost of assets for the preceding monthly period. The asset management fee is payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor.
Property management fees increase in direct correlation with gross revenues. The Property Manager elected to waive all property management fees for the six months ended June 30, 2015 and 2014. For the six months ended June 30, 2015 and 2014, we would have incurred property management fees of $1.2 million and $47,000, respectively, had these fees not been waived.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $5.2 million for the six months ended June 30, 2015 primarily related to our acquisition of 25 properties during this period with an aggregate purchase price of $238.2 million. Acquisition and transaction related expenses of $3.0 million for the six months ended June 30, 2014 related to our acquisition of 17 properties during this period with an aggregate purchase price of $136.9 million.
General and Administrative Expenses
General and administrative expenses increased $4.1 million to $5.1 million for the six months ended June 30, 2015 from $1.0 million for the six months ended June 30, 2014. The increase was primarily driven by professional and audit fees incurred to support a larger real estate portfolio and number of stockholders. Prior to the end of the IPO, costs related to stockholder services were charged to additional paid-in capital in the accompanying consolidated balance sheet. At the time the IPO ended in November 2014, we began to expense, as incurred, professional fees related to stockholder services, because these costs no longer related to fulfilling subscriptions and offering costs.
Depreciation and Amortization Expenses
Depreciation and amortization expense increased $59.8 million to $63.0 million for the six months ended June 30, 2015 from $3.2 million for the six months ended June 30, 2014. The increase in depreciation and amortization expense related to our Acquisitions, which resulted in an increase of $60.2 million. This increase was partially offset by Same Store depreciation and amortization, which decreased $0.4 million due to our reallocation during the fourth quarter of 2014 of amounts that were provisionally allocated to land, buildings, fixtures and improvements and acquired lease intangible assets. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives of the properties.
Interest Expense
Interest expense increased $3.1 million to $3.8 million for the six months ended June 30, 2015 from $0.7 million for the six months ended June 30, 2014. Interest expense related to our mortgage notes payable increased $1.8 million related to our higher average mortgage notes payable balance of $85.1 million during the six months ended of June 30, 2015, compared to the $15.1 million average balance during the six months ended June 30, 2014, as well as the associated increases in amortization of deferred financing costs, partially offset by increased amortization of mortgage premiums.
We entered into the Credit Facility in March 2014. In April 2014 and June 2015, we entered into amendments which increased available borrowings to $200.0 million and $500.0 million, respectively. Interest expense related to the Credit Facility increased $1.1 million primarily due to higher amortization of deferred financing costs and the write-off of unamortized deferred financing costs associated with the amendments to the Credit Facility.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
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Interest and Other Income
Interest and other income of $0.9 million for the six months ended June 30, 2015 includes income from our investment securities, income from contingent consideration and interest income earned on cash and cash equivalents held during the period. During the six months ended June 30, 2014, we received approximately $21,000 in interest income from interest bearing accounts, however we did not have any investment securities or contingent consideration and, therefore, had no other income during this period.
Gain on sale of investments
Gain on sale of investments for the six months ended June 30, 2015 of $0.3 million related to selling certain investments in preferred stock and an investment in a senior note. We did not have any investment securities and therefore had no such sales during the six months ended June 30, 2014.
Income tax benefit
Income tax benefit was approximately $18,000 for the six months ended June 30, 2015. Income taxes generally related to our SHOPs, which are owned by our TRS. We did not own any SHOPs during the six months ended June 30, 2014 and therefore had no income tax expense or benefit during this period.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was $0.1 million for the six months ended June 30, 2015, which represents net loss that is related to non-controlling interest holders. We had 90 OP units outstanding as of June 30, 2014, compared to 0.4 million at June 30, 2015.
Cash Flows for the Six Months Ended June 30, 2015
During the six months ended June 30, 2015, net cash provided by operating activities was $41.7 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows provided by operating activities during the six months ended June 30, 2015 included $5.2 million of acquisition and transaction costs. Cash inflows related to a net loss adjusted for non-cash items of $46.1 million (net loss of $18.7 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets and mortgage premiums, share based compensation, bad debt expense and gain on sale of investments of $64.8 million) an increase in accounts payable and accrued expenses of $3.6 million primarily related to accrued professional fees, real estate taxes and property operating expenses for our MOBs and SHOPs. These cash inflows were partially offset by a net increase in prepaid and other assets of $6.4 million due to rent, other receivables and unbilled receivables recorded in accordance with straight-line basis accounting, as well as a $1.4 million increase in restricted cash related to tenant deposits, real estate tax and insurance escrows on mortgaged properties and $0.1 million in deferred rent.
Net cash used in investing activities during the six months ended June 30, 2015 was $202.2 million. The cash used in investing activities included $199.5 million to acquire 25 properties. Net cash used in investing activities also included $3.7 million in deposits for future potential real estate acquisitions and $3.1 million of capital expenditures, partially offset by $4.2 million in proceeds from the sale of investment securities.
Net cash provided by financing activities of $87.3 million during the six months ended June 30, 2015 related to proceeds from the Credit Facility of $135.0 million and contributions from non-controlling interest holders of $0.5 million. These cash inflows were partially offset by distributions to stockholders, net of proceeds received pursuant to the DRIP of $32.6 million, common stock repurchases of $3.4 million, financing costs of $10.7 million, offering costs paid of $0.6 million, mortgage payments of $0.6 million, and distributions to non-controlling interest holders of $0.4 million.
Cash Flows for the Six Months Ended June 30, 2014
During the six months ended June 30, 2014, net cash used in operating activities was $0.8 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows used in operating activities during the six months ended June 30, 2014 included $3.0 million of acquisition and transaction costs. Cash outflows included a net loss adjusted for non-cash items of $1.1 million (net loss of $4.7 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate assets and mortgage premiums and share based compensation of $3.6 million) and an increase in restricted cash of $1.9 million related to real estate tax and insurance escrows on mortgaged properties. These cash outflows were partially offset by cash inflows which included an increase in accounts payable and accrued expenses of $1.8 million primarily related to accrued real estate taxes and $0.4 million in deferred rent.
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The net cash used in investing activities during the six months ended June 30, 2014 of $88.8 million related to the acquisition of 17 properties with an aggregate purchase price of $136.9 million, partially funded with assumed debt of $59.4 million and other assumed liabilities. Net cash used in investing activities also included deposits on pending acquisitions of $12.1 million.
Net cash provided by financing activities of $942.1 million during the six months ended June 30, 2014 related to proceeds, net of receivables, from the issuance of common stock of $1.1 billion, partially offset by financing costs of $5.1 million, offering costs paid of $119.1 million, $7.4 million of distributions to stockholders, mortgage payments of $0.1 million and payments to affiliates for advances to fund offering costs of $0.6 million.
Liquidity and Capital Resources
As of June 30, 2015, we had $109.5 million of cash and cash equivalents and investment securities, at fair value, of $16.1 million. On November 17, 2014, we closed our IPO following the successful achievement of our target equity raise, including shares reallocated from the DRIP. As of June 30, 2015, we had 85.2 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from our IPO and the DRIP of $2.1 billion.
We acquired our first property and commenced real estate operations in May 2013. As of June 30, 2015, we owned 143 properties with an aggregate purchase price of $1.9 billion. Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, debt service obligations and distributions to our stockholders. We generally intend to acquire our assets with cash and mortgage or other debt proceeds, such as proceeds from our Credit Facility.
We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations and the operations of properties to be acquired in the future, proceeds from our Credit Facility and secured mortgage financings.
We expect to utilize proceeds from secured financings and our Credit Facility to complete future property acquisitions. Specifically, we may incur mortgage debt and pledge all or some of our properties as security for that debt to obtain funds to acquire additional properties. Once we have used all the proceeds from our IPO and availability under our Credit Facility to acquire properties, we expect that cash flow from our properties will be sufficient to fund operating expenses and the payment of our monthly distributions. Other potential future sources of capital include proceeds from secured and unsecured financings from banks or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations. We may borrow if we need funds to satisfy the REIT tax qualifications requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding net capital gain). We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
As of June 30, 2015, we had the ability to borrow up to $500.0 million on a revolving basis under the Credit Facility. On July 31, 2015, we increased the amount available under the Credit Facility to $565.0 million. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. Additionally, the Credit Facility contains an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate borrowings under the Credit Facility to a maximum of $750.0 million. The Credit Facility matures on March 21, 2019.
As of June 30, 2015, the balance outstanding under the Credit Facility was $135.0 million. Our unused borrowing capacity was $102.5 million, based on assets assigned to the Credit Facility as of June 30, 2015. Availability of borrowings is based on a pool of eligible unencumbered real estate assets.
We expect to use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined in our charter) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report on Form 10-Q or annual report on Form 10-K, as applicable, following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 45% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
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We currently maintain 5% of the overall value of our portfolio in liquid assets. However, our stockholders should not expect that we will continue to maintain liquid assets at or above this level. To the extent that we maintain borrowing capacity under our Credit Facility, such available amount will be included in calculating our liquid assets. Our Advisor will consider various factors in determining the amount of liquid assets we should maintain, including, but not limited to, our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under our Credit Facility, if any, our receipt of proceeds from any asset sale, and the use of cash to fund repurchases. The board of directors will review the amount and sources of liquid assets on a quarterly basis.
Our board of directors has adopted a Share Repurchase Program ("SRP") that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such purchase. There are limits on the number of shares we may repurchase under this program during any 12-month period. Further, we are only authorized to repurchase shares using the proceeds secured from the DRIP in any given quarter. The following table reflects the number of shares repurchased under the Company's SRP cumulatively through June 30, 2015:
Number of Requests | Number of Shares Repurchased | Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 57 | 74,031 | $ | 24.42 | ||||||
Six Months Ended June 30, 2015 (1) | 124 | 191,895 | 24.24 | |||||||
Cumulative repurchases as of June 30, 2015 (1) | 181 | 265,926 | $ | 24.29 | ||||||
_____________________________
(1) Includes 58 unfulfilled repurchase requests consisting of 105,974 shares at an average repurchase price per share of $24.22, which were approved for repurchase as of June 30, 2015 and were completed in August 2015.
Acquisitions
As of August 7, 2015, we owned 148 properties with an aggregate contract price of $2.0 billion. We had $213.1 million of assets under contract and executed letters of intent as of August 7, 2015. Pursuant to the terms of the purchase and sale agreements and letters of intent, our obligation to close upon these acquisitions is subject to certain conditions customary to closing, including the successful completion of due diligence and fully negotiated binding agreements. There can be no assurance that we will complete these acquisitions. We intend to use advances from our Credit Facility to fund acquisitions.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of real estate and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above.
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The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as expected by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may not be fully informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book, value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
There have been changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation, but have a limited and defined acquisition period. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to purchase a significant amount of new assets. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition and transaction-related fees and expenses that affect our operations only in periods in which properties are acquired and other transactions are occurring, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is stabilized. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our IPO has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
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We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to straight line rents and amortization of above and below market intangible lease assets and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.
Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition and transaction-related fees and expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, straight line rent, amortization of mortgage premiums and discounts, gains or losses on the sale of investments, gains or losses on the extinguishment of debt and the adjustments of such items related to non-controlling interests. Under GAAP, acquisition and transaction-related fees and expenses are characterized as operating expenses in determining operating net income during the period in which the asset is acquired. These expenses are paid in cash by us, and therefore such funds will not be available to invest in other assets, pay operating expenses or fund distributions. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. While we are responsible for managing interest rate, hedge and foreign exchange risk, we will retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to our investors.
We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, which have defined acquisition periods and targeted exit strategies, and allow us to evaluate our performance against other non-listed REITs. For example, acquisition and transaction-related costs may be funded from the proceeds of our IPO and other financing sources and not from operations. By excluding expensed acquisition and transaction-related costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure while an offering is ongoing such as our IPO where the price of a share of common stock is a stated value and there is no NAV determination during the offering stage and for a period thereafter.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
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The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the period indicated:
Three Months Ended | Six Months Ended | |||||||||||
(In thousands) | March 31, 2015 | June 30, 2015 | June 30, 2015 | |||||||||
Net loss (in accordance with GAAP) | $ | (5,245 | ) | $ | (13,498 | ) | $ | (18,743 | ) | |||
Depreciation and amortization | 29,445 | 33,532 | 62,977 | |||||||||
FFO | 24,200 | 20,034 | 44,234 | |||||||||
Acquisition and transaction-related fees and expenses | 1,999 | 3,174 | 5,173 | |||||||||
Amortization of market lease and other lease intangibles, net | 17 | (80 | ) | (63 | ) | |||||||
Straight-line rent | (2,396 | ) | (2,130 | ) | (4,526 | ) | ||||||
Amortization of premiums | (332 | ) | (534 | ) | (866 | ) | ||||||
Gain on sale of investment | (286 | ) | — | (286 | ) | |||||||
Loss on debt extinguishment | — | 548 | 548 | |||||||||
MFFO | $ | 23,202 | $ | 21,012 | $ | 44,214 | ||||||
Distributions
On April 9, 2013, our board of directors authorized, and we declared, distributions payable to stockholders of record each day during the applicable period equal to $0.0046575343 per day, which is equivalent to $1.70 per annum, per share of common stock. Distributions began to accrue on May 24, 2013, 15 days following our initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the six months ended June 30, 2015, distributions paid to common stockholders and OP unit holders totaled $71.9 million. Of that amount, $39.0 million was reinvested pursuant to the DRIP. During the six months ended June 2015, cash used to pay distributions was generated from net cash flow from operations, proceeds received from the DRIP and proceeds from financings.
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The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock and OP unit holders, excluding distributions related to unvested performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units" as these distributions are recorded as expenses in the consolidated statement of operations and comprehensive loss, for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
March 31, 2015 | June 30, 2015 | June 30, 2015 | |||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||
Distributions: | |||||||||||||||||||||
Distributions to stockholders | $ | 35,244 | $ | 36,319 | $ | 71,563 | |||||||||||||||
Distributions on OP units | 178 | 175 | 353 | ||||||||||||||||||
Total distributions | $ | 35,422 | $ | 36,494 | $ | 71,916 | |||||||||||||||
Source of distribution coverage: | |||||||||||||||||||||
Cash flows provided by operations (1) | $ | 17,479 | 49.3 | % | $ | 17,018 | 46.6 | % | $ | 34,497 | 48.0 | % | |||||||||
Offering proceeds from issuance of common stock | — | — | % | — | % | — | — | % | |||||||||||||
Proceeds received from common stock issued under the DRIP | 17,943 | 50.7 | % | 17,687 | 48.5 | % | 35,630 | 49.5 | % | ||||||||||||
Proceeds from financings | — | — | % | 1,789 | 4.9 | % | 1,789 | 2.5 | % | ||||||||||||
Total source of distribution coverage | $ | 35,422 | 100.0 | % | $ | 36,494 | 100.0 | % | $ | 71,916 | 100.0 | % | |||||||||
Cash flows provided by operations (GAAP basis) (1) | $ | 24,531 | $ | 17,195 | $ | 41,726 | |||||||||||||||
Net loss attributed to stockholders (in accordance with GAAP) | $ | (5,220 | ) | $ | (13,421 | ) | $ | (18,641 | ) | ||||||||||||
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(1) Cash flows provided by operations for the three months ended March 31, 2015 and June 30, 2015 and the six months ended June 30, 2015 reflect acquisition and transaction related expenses of $2.0 million, $3.2 million and $5.2 million, respectively.
For the six months ended June 30, 2015, cash flows provided by operations were $41.7 million. As shown in the table above, we funded distributions with cash flows provided by operations as well as proceeds received pursuant to our DRIP. To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO. Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.
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The following table compares cumulative distributions paid to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) for the period from October 15, 2012 (date of inception) through June 30, 2015:
For the Period from October 15, 2012 (date of inception) to | ||||
(In thousands) | June 30, 2015 | |||
Distributions paid: | ||||
Common stockholders (1) | $ | 150,958 | ||
OP units | 353 | |||
Total distributions paid | $ | 151,311 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 176,893 | ||
Acquisition and transaction related | (39,540 | ) | ||
Depreciation and amortization | (92,997 | ) | ||
Other operating expenses | (95,147 | ) | ||
Other non-operating expenses | (5,348 | ) | ||
Income tax expense | (552 | ) | ||
Net income attributable to non-controlling interests | 136 | |||
Net loss attributed to stockholders (in accordance with GAAP) (2) | $ | (56,555 | ) | |
Cash flow provided by operations | $ | 34,497 | ||
FFO | $ | 36,250 | ||
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(1) | Distributions paid to common stockholders includes $78.0 million of proceeds received pursuant to the DRIP. |
(2) Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.
Loan Obligations
The payment terms of our loan obligations require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of June 30, 2015, we were in compliance with the debt covenants under our loan agreements.
Our Advisor may, with approval from our independent directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings, including advances under our Credit Facility, as an efficient and accretive means of acquiring real estate.
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Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of June 30, 2015. The minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of June 30, 2015, the outstanding mortgage notes payable and loans under the Credit Facility had weighted-average effective interest rates of 6.2% and 1.8%, respectively.
Years Ended December 31, | ||||||||||||||||||||
(In thousands) | Total | July 1, 2015 — December 31, 2015 | 2016 — 2017 | 2018 — 2019 | Thereafter | |||||||||||||||
Principal on mortgage notes payable | $ | 100,305 | $ | 5,751 | $ | 48,569 | $ | 42,872 | $ | 3,113 | ||||||||||
Credit Facility | 135,000 | — | — | 135,000 | — | |||||||||||||||
Interest on mortgage notes payable | 14,839 | 3,046 | 9,937 | 1,433 | 423 | |||||||||||||||
Interest on Credit Facility | 9,095 | 1,231 | 4,886 | 2,978 | — | |||||||||||||||
Lease rental payments due (1) | 26,448 | 204 | 834 | 861 | 24,549 | |||||||||||||||
$ | 285,687 | $ | 10,232 | $ | 64,226 | $ | 183,144 | $ | 28,085 | |||||||||||
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(1) Lease rental payments due includes $3.5 million of imputed interest related to our capital lease obligations.
Election as a REIT
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we have been organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified for taxation as a REIT. In order to qualify and continue to qualify for taxation as a REIT we must, among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organization and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of American Realty Capital VII, LLC, our sponsor, under which we have paid and/or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common control with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our Credit Facility, bears interest at fixed rates and variable rates. As of June 30, 2015, we did not have any derivative financial instruments. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of June 30, 2015, our debt consisted of both fixed and variable-rate debt. We had fixed-rate secured mortgage financings with an aggregate carrying value of $105.0 million and a fair value of $105.7 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the mortgage notes, but it has no impact on interest due on the mortgage notes. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2015 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $1.8 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $1.5 million.
At June 30, 2015, our variable-rate Credit Facility had a carrying and fair value of $135.0 million. Interest rate volatility associated with this variable-rate Credit Facility affect interest expense incurred and cash flow. The sensitivity analysis related to all other variable-rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2015 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate Credit Facility would increase or decrease our interest expense by $1.4 million.
These amounts were determined by considering the impact of hypothetical interest rates changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of June 30, 2015 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 promulgated under the Exchange Act, we are required to establish and maintain disclosure controls and procedures as defined in subparagraph (e) of that rule. We are required to evaluate, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of each fiscal quarter. Management previously concluded that our disclosure controls and procedures were not effective as of December 31, 2014 or March 31, 2015 due to the material weakness in internal controls over financial reporting described in our Annual Report on Form 10-K filed with the SEC on April 15, 2015. As described below, a remediation plan has been implemented and, as of June 30, 2015, management deems the material weaknesses previously identified to be remediated and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During our most recent fiscal quarter, we executed our remediation plan, as further described below. In connection with the evaluation required by Rule 13a-15(d), we identified the execution of this remediation plan as having materially affected, or being reasonably likely to materially affect, our internal control over financial reporting. Other than the execution of the remediation plan, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Remediation of Material Weakness
We, with the concurrence and oversight of the audit committee of our board of directors, executed our remediation plan described in our Annual Report on Form 10-K filed with the SEC on April 15, 2015, during the quarter ended June 30, 2015. As part of the remediation plan management:
• | Enhanced information technology system access controls supporting the general ledger and accounts payable system applications to address appropriate segregation of duties and to restrict IT and financial users’ access to the underlying entities and IT functions and data commensurate with their job responsibilities; |
• | Implemented appropriate end-user controls over the use of significant Excel spreadsheets supporting the financial reporting process; and |
• | Implemented appropriate controls over the authorization of manual journal entries made to the general ledger. |
We verified that the aforementioned controls were appropriately designed and implemented as of June 30, 2015. We will continue to monitor and test, as applicable, the ongoing operating effectiveness of its new and enhanced controls.
Our internal controls over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. We recognize that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Item 1A. Risk Factors," disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. The following additional risk factors should be considered regarding our potential risks and uncertainties:
Distributions paid from sources other than our cash flows from operations result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.
Our cash flows provided by operations were $41.7 million for the six months ended June 30, 2015. During the six months ended June 30, 2015, we paid distributions of $71.9 million, of which $34.5 million, or 48.0%, was funded from cash flows from operations, $35.6 million, or 49.5%, was funded from proceeds received from our DRIP and $1.8 million, or 2.5%, was funded from financings. During the six months ended June 30, 2015, cash flow from operations included an increase in accounts payable and accrued expenses of $3.6 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the six months ended June 30, 2015, there would have been $3.6 million less in cash flow from operations available to pay distributions.
We may not generate sufficient cash flows from operations to pay future distributions. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. In accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
We rely significantly on five major tenants (including, for this purpose, all affiliates of such tenants) and therefore are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.
As of June 30, 2015, the following five major tenants represented 5% or more of our consolidated annualized rental income on a straight-line basis including, for this purpose, all affiliates of such tenants:
Tenant | Percentage of Straight-Line Rental Income | |
ManagCare, Inc. | 6.7% | |
Meridian Senior Living, LLC | 9.4% | |
NuVista Living, LLC | 7.5% | |
Pinnacle Health Hospitals | 12.4% | |
Platinum Health Care, LLC | 8.0% | |
Therefore, the financial failure of any of these tenants could have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment is driven by the credit quality of the underlying tenant, and an adverse change in either the tenant's financial condition or a decline in the credit rating of such tenant may result in a decline in the value of our investments.
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Our property portfolio has a high concentration of properties located in seven states. Our properties may be adversely affected by economic cycles and risks inherent to those states.
As of June 30, 2015, the following seven states represented 5% or more of our consolidated annualized rental income on a straight-line basis:
State | Percentage of Straight-Line Rental Income | |
California | 5.1% | |
Florida | 22.6% | |
Georgia | 6.8% | |
Iowa | 12.3% | |
Michigan | 7.8% | |
Missouri | 6.0% | |
Pennsylvania | 13.6% | |
Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term. Declines in the economy or a decline in the real estate market in these states could hurt our financial performance and the value of our properties. Factors that may negatively affect economic conditions in these states include:
• | business layoffs or downsizing; |
• | industry slowdowns; |
• | relocations of businesses; |
• | changing demographics; |
• | increased telecommuting and use of alternative work places; |
• | infrastructure quality; |
• | any oversupply of, or reduced demand for, real estate; |
• | concessions or reduced rental rates under new leases for properties where tenants defaulted; and |
• | increased insurance premiums. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
Unregistered Sales of Equity Securities
On February 11, 2015, we issued 1,333 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration were paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.
Use of Proceeds of Registered Securities
On February 14, 2013 we commenced our IPO on a "reasonable best efforts" basis of up to a maximum of $1.7 billion of common stock, consisting of up to 68.0 million shares, pursuant to the Registration Statement initially filed on October 31, 2012 with the SEC under the Securities Act of 1933, as amended. The Registration Statement, which was declared effective by the SEC on February 14, 2013, also covers 14.7 million shares of common stock pursuant the DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock.
On August 1, 2014, we registered an additional 25.0 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-197802). In August 2014, we completed our issuance of the $1.7 billion of common stock registered in connection with our IPO, and as permitted, reallocated the remaining 13.9 million DRIP shares available under the Registration Statement to our IPO. On November 17, 2014, we closed our IPO following the successful achievement of our target equity raise, including shares reallocated from the DRIP. As of June 30, 2015, we have issued 85.2 million shares of our common stock, including unvested restricted shares and shares issued pursuant to the DRIP, and received $2.1 billion of offering proceeds, including proceeds from shares issued pursuant to the DRIP.
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We have used the net proceeds from our IPO and outstanding secured and unsecured financings as of June 30, 2015 to primarily acquire a diversified portfolio of income producing real estate properties, focusing predominantly on MOBs and other healthcare-related facilities. We may also originate or acquire first mortgage loans secured by real estate. As of June 30, 2015, we have used the net proceeds from our IPO and debt financings to purchase 143 properties. We have used net proceeds from our IPO to fund a portion of our distributions. Once we have reached our desired leverage, we expect that cash flow from our properties will be sufficient to fund operating expenses and the payment of our monthly distributions.
Issuer Purchases of Equity Securities
The following table reflects the number of shares repurchased under the Company's SRP cumulatively through June 30, 2015:
Number of Requests | Number of Shares Repurchased | Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 57 | 74,031 | $ | 24.42 | ||||||
Six Months Ended June 30, 2015 (1) | 124 | 191,895 | 24.24 | |||||||
Cumulative repurchases as of June 30, 2015 (1) | 181 | 265,926 | $ | 24.29 | ||||||
_____________________________
(1) Includes 58 unfulfilled repurchase requests consisting of 105,974 shares at an average repurchase price per share of $24.22, which were approved for repurchase as of June 30, 2015 and were completed in August 2015.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Effective August 10, 2015, we amended our charter to change our name to Healthcare Trust, Inc. The name change was effected pursuant to an amendment to our charter (the “Charter Amendment”), which was filed with the Maryland State Department of Assessments and Taxation on August 10, 2015. The Charter Amendment was duly approved by at least a majority of our board of directors, and was made without action by our stockholders pursuant to Section 2-605(a)(1) of the Maryland General Corporation Law. A copy of the Charter Amendment is attached hereto as Exhibit 3.3.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEALTHCARE TRUST, INC. | ||
By: | /s/ Thomas P. D'Arcy | |
Thomas P. D'Arcy | ||
Chief Executive Officer, President and Secretary (Principal Executive Officer) | ||
By: | /s/ Edward F. Lange, Jr. | |
Edward F. Lange, Jr. | ||
Chief Financial Officer, Chief Operating Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | ||
Dated: August 12, 2015
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EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
3.3 * | Articles of Amendment to the Amended and Restated Charter of American Realty Capital Healthcare Trust II, Inc., effective August 10, 2015 | |
10.56 (1) | Amended and Restated Advisory Agreement by and among American Realty Capital Healthcare Trust II, Inc., American Realty Capital Healthcare Trust II Operating Partnership, L.P. and American Realty Capital Healthcare II Advisors, LLC dated as of June 26, 2015 | |
10.57 * | Second Amendment to Senior Secured Revolving Credit Agreement, dated June 26, 2015, by and among American Realty Capital Healthcare Trust II Operating Partnership, L.P., American Realty Capital Healthcare Trust II, Inc., KeyBank National Association individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties dated as of March 21, 2014 | |
31.1 * | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 * | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 * | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from Healthcare Trust, Inc.'s Quarterly Report on Form 10-Q for the six months ended June 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
____________________
* Filed herewith
(1) | Filed as an exhibit to Healthcare Trust, Inc.’s Current Report on Form 8-K filed with the SEC on June 26, 2015. |
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