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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - CNL Healthcare Properties II, Inc.chpii-ex321_93.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - CNL Healthcare Properties II, Inc.chpii-ex312_92.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - CNL Healthcare Properties II, Inc.chpii-ex311_91.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from              to             

Commission file number:  000-55777

 

CNL Healthcare Properties II, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

47-4524619

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida

 

32801

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (407) 650-1000

 

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   No 

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

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

The number of shares of the registrant’s outstanding Class A, Class T and Class I common stock as of November 1, 2017 was 717,435 shares, 1,640,300 shares and 106,380 shares, respectively.

 

 


 

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Information (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

Condensed Consolidated Statement of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

31

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

Item 1A.

 

Risk Factors

 

33

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

Item 3.

 

Defaults Upon Senior Securities

 

36

 

Item 4.

 

Mine Safety Disclosures

 

36

 

Item 5.

 

Other Information

 

36

 

Item 6.

 

Exhibits

 

36

 

 

 

Exhibits

 

37

Signatures

 

38

 

 


 

Item 1. Financial Statements

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

ASSETS

 

2017

 

 

2016

 

Real estate investment properties, net

 

$

20,407,427

 

 

$

 

Cash

 

 

15,467,018

 

 

 

5,977,241

 

Intangibles, net

 

 

1,029,205

 

 

 

Other assets

 

 

217,443

 

 

 

48,928

 

Restricted cash

 

 

119,478

 

 

 

383,000

 

Total assets

 

$

37,240,571

 

 

$

6,409,169

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage and notes payable

 

$

16,176,403

 

 

$

312,500

 

Accounts payable and accrued liabilities

 

 

606,502

 

 

 

23,263

 

Due to related parties

 

 

640,447

 

 

 

240,651

 

Other liabilities

 

 

112,965

 

 

 

Total liabilities

 

 

17,536,317

 

 

 

576,414

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 10,000,000 shares authorized; none issued or outstanding

 

 

 

 

Class A Common stock, $0.01 par value per share, 1,200,000,000 shares authorized; 708,626 and 325,119 shares issued and outstanding, respectively

 

 

7,087

 

 

 

3,251

 

Class T Common stock, $0.01 par value per share, 700,000,000 shares authorized; 1,434,980 and 308,587 shares issued and outstanding, respectively

 

 

14,349

 

 

 

3,086

 

Class I Common stock, $0.01 par value per share, 100,000,000 shares authorized; 88,880 and 8,454 shares issued and outstanding, respectively

 

 

889

 

 

 

85

 

Capital in excess of par value

 

 

21,509,803

 

 

 

6,226,141

 

Accumulated loss

 

 

(1,293,154

)

 

 

(342,447

)

Accumulated distributions

 

 

(534,720

)

 

 

(57,361

)

Total stockholders' equity

 

 

19,704,254

 

 

 

5,832,755

 

Total liabilities and stockholders' equity

 

$

37,240,571

 

 

$

6,409,169

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

$

1,095,696

 

 

$

 

 

$

2,178,566

 

 

$

 

Total revenues

 

 

1,095,696

 

 

 

 

 

2,178,566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

626,933

 

 

 

 

 

1,236,358

 

 

 

General and administrative expenses

 

 

178,940

 

 

 

93,439

 

 

 

664,727

 

 

 

93,439

 

Property management fees

 

 

64,570

 

 

 

 

 

136,442

 

 

 

Depreciation and amortization

 

 

324,417

 

 

 

 

 

647,185

 

 

 

Total operating expenses

 

 

1,194,860

 

 

 

93,439

 

 

 

2,684,712

 

 

 

93,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(99,164

)

 

 

(93,439

)

 

 

(506,146

)

 

 

(93,439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and loan cost amortization

 

 

196,489

 

 

 

17,149

 

 

 

402,683

 

 

 

17,149

 

Total other expense

 

 

196,489

 

 

 

17,149

 

 

 

402,683

 

 

 

17,149

 

Loss before income taxes

 

 

(295,653

)

 

 

(110,588

)

 

 

(908,829

)

 

 

(110,588

)

Income tax expense

 

 

(12,253

)

 

 

 

 

(41,878

)

 

 

Net loss

 

$

(307,906

)

 

$

(110,588

)

 

$

(950,707

)

 

$

(110,588

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Class A stockholders

 

$

(109,676

)

 

$

(102,794

)

 

$

(346,091

)

 

$

(98,501

)

Net loss per share of Class A common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

Weighted average number of Class A common shares outstanding (basic and diluted)

 

 

683,113

 

 

 

284,747

 

 

 

521,781

 

 

 

103,295

 

Distributions declared per Class A common share

 

$

0.1440

 

 

$

0.0700

 

 

$

0.3930

 

 

$

0.0700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class T common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Class T stockholders

 

$

(188,994

)

 

$

(5,411

)

 

$

(582,723

)

 

$

(10,002

)

Net loss per share of Class T common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

Weighted average number of Class T common shares outstanding (basic and diluted)

 

 

1,177,167

 

 

 

14,990

 

 

 

878,536

 

 

 

10,489

 

Distributions declared per Class T common share

 

$

0.1169

 

 

$

0.0700

 

 

$

0.3087

 

 

$

0.0700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class I common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Class I stockholders

 

$

(9,236

)

 

$

(2,383

)

 

$

(21,893

)

 

$

(2,085

)

Net loss per share of Class I common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

Weighted average number of Class I common shares outstanding (basic and diluted)

 

 

57,534

 

 

 

6,600

 

 

 

33,006

 

 

 

2,187

 

Distributions declared per Class I common share

 

$

0.1328

 

 

$

0.0700

 

 

$

0.3715

 

 

$

0.0700

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

Class I

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Number

 

 

Par

 

 

Number

 

 

Par

 

 

Number

 

 

Par

 

 

Number

 

 

Par

 

 

Excess of

 

 

Accumulated

 

 

Accumulated

 

 

Stockholders'

 

 

 

of Shares

 

 

Value

 

 

of Shares

 

 

Value

 

 

of Shares

 

 

Value

 

 

of Shares

 

 

Value

 

 

Par Value

 

 

Loss

 

 

Distributions

 

 

Equity

 

Balance at December 31, 2016

 

 

 

$

 

 

 

325,119

 

 

$

3,251

 

 

 

308,587

 

 

$

3,086

 

 

 

8,454

 

 

$

85

 

 

$

6,226,141

 

 

$

(342,447

)

 

$

(57,361

)

 

$

5,832,755

 

Subscriptions received for common stock, including distribution reinvestments

 

 

 

 

 

 

378,053

 

 

 

3,781

 

 

 

1,117,844

 

 

 

11,178

 

 

 

80,135

 

 

 

801

 

 

 

16,650,186

 

 

 

 

 

 

 

16,665,946

 

Stock dividends issued

 

 

 

 

 

 

5,454

 

 

 

55

 

 

 

8,549

 

 

 

85

 

 

 

291

 

 

 

3

 

 

 

(143

)

 

 

 

 

 

 

Stock issuance and offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,366,381

)

 

 

 

 

 

 

(1,366,381

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(950,707

)

 

 

 

 

(950,707

)

Cash distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(477,359

)

 

 

(477,359

)

Balance at September 30, 2017

 

 

 

$

 

 

 

708,626

 

 

$

7,087

 

 

 

1,434,980

 

 

$

14,349

 

 

 

88,880

 

 

$

889

 

 

$

21,509,803

 

 

$

(1,293,154

)

 

$

(534,720

)

 

$

19,704,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

20,000

 

 

$

200

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

$

199,800

 

 

$

 

 

$

 

 

$

200,000

 

Conversion of initial common stock shares

 

 

(20,000

)

 

 

(200

)

 

 

20,000

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions received for common stock, including distribution reinvestments

 

 

 

 

 

 

260,180

 

 

 

2,602

 

 

 

9,089

 

 

 

91

 

 

 

8,375

 

 

 

84

 

 

 

2,775,972

 

 

 

 

 

 

 

2,778,749

 

Stock dividends issued

 

 

 

 

 

 

1,047

 

 

 

10

 

 

 

32

 

 

 

 

 

32

 

 

 

 

 

(10

)

 

 

 

 

 

 

Stock issuance and offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,681

)

 

 

 

 

 

 

(2,681

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(110,588

)

 

 

 

 

(110,588

)

Cash distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,662

)

 

 

(20,662

)

Balance at September 30, 2016

 

 

 

$

 

 

 

281,227

 

 

$

2,812

 

 

 

9,121

 

 

$

91

 

 

 

8,407

 

 

$

84

 

 

$

2,973,081

 

 

$

(110,588

)

 

$

(20,662

)

 

$

2,844,818

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net cash flows provided by (used in) operating activities

 

$

82,390

 

 

$

(128,324

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property

 

(21,854,119

)

 

 

Payment of direct acquisition costs

 

(6,187

)

 

 

Capital expenditures

 

(58,781

)

 

 

Net cash used in investing activities

 

(21,919,087

)

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Subscriptions received for common stock through primary offering

 

 

16,448,354

 

 

 

2,778,749

 

Payment of underwriting compensation

 

(967,600

)

 

 

(2,306

)

Payment of cash distributions, net of distribution reinvestments

 

(259,767

)

 

 

(20,662

)

Proceeds from mortgage and notes payable

 

 

16,050,000

 

 

 

312,500

 

Payment of loan costs

 

(208,035

)

 

 

 

Net cash flows provided by financing activities

 

 

31,062,952

 

 

 

3,068,281

 

 

 

 

 

 

 

 

 

 

Net increase in cash and restricted cash

 

 

9,226,255

 

 

 

2,939,957

 

Cash and restricted cash at beginning of period

 

 

6,360,241

 

 

 

200,000

 

Cash and restricted cash at end of period

 

$

15,586,496

 

 

$

3,139,957

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Amounts incurred but not paid (including amounts due to related parties):

 

 

 

 

 

 

 

 

Acquisition fees and expenses related to asset acquisition

 

$

24,900

 

 

$

 

Selling commissions and Dealer Manager fees

 

$

16,438

 

 

$

 

Annual distribution and stockholder servicing fee

 

$

549,449

 

 

$

375

 

REIT Funding escrow

 

$

 

 

$

383,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

1.

Organization

CNL Healthcare Properties II, Inc. is a Maryland corporation organized on July 10, 2015 that intends to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the year ending December 31, 2017 or the year in which the Company commences material operations.  The Company is sponsored by CNL Financial Group, LLC (“Sponsor” or “CNL”) and was formed primarily to acquire and manage a diversified portfolio of healthcare real estate and real estate-related assets it believes will generate a steady current return and provide long-term value to its stockholders.  It intends to focus on investing, primarily in the United States, within the seniors housing, medical office, acute care and post-acute care sectors, as well as other types of real estate and real estate-related securities and loans.

The Company is externally managed and advised by CHP II Advisors, LLC, (“Advisor”) an affiliate of CNL.  The Advisor provides advisory services to the Company relating to substantially all aspects of its investments and operations, including real estate acquisitions, asset management and other operational matters.  During the period from July 10, 2015 to December 31, 2015, the Company sold 20,000 shares of common stock to the Advisor for an aggregate purchase price of $0.2 million, and these shares were converted into 20,000 Class A shares upon the filing of the Company’s Articles of Amendment and Restatement in March 2016.

On March 2, 2016, pursuant to a registration statement on Form S-11 under the Securities Act of 1933, the Company commenced its initial public offering of up to $1.75 billion (“Primary Offering”), in any combination, of Class A, Class T and Class I shares of common stock on a “best efforts” basis, which means that CNL Securities Corp. (“Dealer Manager”), an affiliate of the Sponsor, will use its best efforts but is not required to sell any specific amount of shares.  The Company also intends to offer up to $250 million, in any combination, of Class A, Class T and Class I shares to be issued pursuant to its distribution reinvestment plan (“Reinvestment Plan” and, together with the Primary Offering, the “Offering”).  The Company reserves the right to reallocate the shares offered between the Primary Offering and the Reinvestment Plan.  

From the time of the Company’s formation on July 10, 2015 (inception) through July 10, 2016, the Company had not commenced operations because they were in their development stage and had not received the minimum required offering amount of $2.0 million in shares of common stock.  The Company broke escrow in its Offering effective July 11, 2016, through the sale of 250,000 Class A shares to its Advisor for $2.5 million and commenced operations.

The Company contributes the net proceeds from its Offering to CHP II Partners, LP (“Operating Partnership”) in exchange for partnership interests.  The Company intends to own substantially all of its assets either directly or indirectly through the Operating Partnership in which the Company is the sole limited partner and its wholly-owned subsidiary, CHP II GP, LLC, is the sole general partner.  The Operating Partnership may own assets through: (1) a wholly-owned taxable REIT subsidiary, CHP II TRS Holding, Inc. (“TRS Holdings”) and (2) property owner subsidiaries, which are single purpose entities.  

The Company generally expects to lease its seniors housing properties to single member limited liability companies wholly-owned by TRS Holdings and engage independent third-party managers under management agreements to operate the properties as permitted under the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”) structures; however, the Company may also lease its properties to third-party tenants under triple-net or similar lease structures, where the tenant bears all or substantially all of the costs (including cost increases for real estate taxes, utilities, insurance and ordinary repairs).  Medical office, acute care and post-acute care properties will generally be leased on a triple-net, net or modified gross basis to third-party tenants.  In addition, the Company expects most investments will be wholly-owned, although, it may invest through partnerships with other entities where the Company believes it is appropriate and beneficial.  The Company expects to invest in a combination of stabilized assets, new property developments and properties which have not reached full stabilization.  Finally, the Company may invest in and originate mortgage, bridge or mezzanine loans or in entities that make investments similar to the foregoing investment types.  The Company would generally make loans to the owners of properties to enable them to acquire land, buildings, or to develop property.  In exchange, the owner generally grants the Company a first lien or collateralized interest in a participating mortgage collateralized by the property or by interests in the entity that owns the property.

7


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

2.

Summary of Significant Accounting Policies

Basis of Presentation and Consolidation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States (“GAAP”).  The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair statement of the Company’s results for the interim period presented.  Operating results for the quarter and nine months ended September 30, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017.  Amounts as of December 31, 2016 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date but do not include all disclosures required by GAAP.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership and its other subsidiaries.  All material intercompany accounts and transactions have been eliminated in consolidation.  

Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the Company’s condensed consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

Allocation of Purchase Price for Real Estate Acquisitions Upon acquisition of real estate, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets in order to determine whether the acquisition should be accounted for as an asset acquisition.  If the substantially all threshold is not met, the Company then determines whether the acquisition meets the definition of a business (i.e. does it include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs).

The Company estimates the fair value of acquired tangible assets (consisting of land and improvements, building and improvements, and furniture, fixtures and equipment), intangible assets (consisting of in-place leases and above- or below-market leases) and liabilities assumed in order to allocate the purchase price.  In estimating the fair value of the assets acquired and liabilities assumed, the Company considers information obtained about each property as a result of its due diligence and utilizes various valuation methods, such as estimated cash flow projections using appropriate discount and capitalization rates, estimates of replacement costs net of depreciation and available market information.  The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and building.

The purchase price is allocated to in-place lease intangibles based on management’s evaluation of the specific characteristics of the acquired lease(s).  Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, including estimates of lost rental income during the expected lease-up periods, and costs to execute similar leases such as leasing commissions, legal and other related expenses.  Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual rents to be paid pursuant to the lease and management’s estimate of the fair market lease rates for each in-place lease and may include assumptions for lease renewals of below-market leases.

Mortgages and Notes Payable — Mortgages and notes payable are recorded at the stated principal amount and are generally collateralized by the Company’s property.  Mortgages and notes payable assumed in connection with an acquisition are recorded at fair market value as of the date of the acquisition.

8


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

2.

Summary of Significant Accounting Policies (continued)

Loan Costs — Loan costs paid in connection with obtaining indebtedness are deferred and amortized over the estimated life of the indebtedness using the effective interest method.  Loan costs are presented as a direct deduction from the carrying amount of the related indebtedness in the balance sheet.  

Depreciation and Amortization Real estate costs related to the acquisition and improvement of properties are capitalized.  Repair and maintenance costs are charged to expense as incurred and significant costs incurred for replacements and improvements are capitalized.  Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. The Company considers the period of future benefit of an asset to determine its appropriate useful life.  Real estate assets are stated at cost less accumulated depreciation, which is computed using the straight-line method of accounting over the estimated useful lives of the related assets.  Buildings and improvements are depreciated on the straight-line method over their estimated useful lives, which generally are limited to 39 and 15 years, respectively, or the remaining life of the ground lease.  Furniture, fixtures and equipment are depreciated on the straight-line method over their estimated useful lives, which generally range between three and five years.

Amortization of intangible assets is computed using the straight-line method of accounting over the shorter of the respective lease term or estimated useful life.  If a lease is terminated or modified prior to its scheduled expiration, the Company recognizes a loss on lease termination related to the unamortized lease-related costs not deemed to be recoverable.

Impairment of Real Estate Assets Real estate assets are reviewed on an ongoing basis to determine whether there are any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired.  To assess if an asset group is potentially impaired, management compares the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the asset group over its remaining useful life to the net carrying value of the asset group.  Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors.  In the event that the carrying value exceeds the undiscounted operating cash flows, the Company would recognize an impairment provision to adjust the carrying value of the asset group to the estimated fair value of the asset group.

Revenue Recognition — Resident fees and services are recorded in the period in which the services are performed and generally consist of (1) monthly rent, which covers occupancy of the residents’ unit as well as basic services, such as utilities, meals and certain housekeeping services, and (2) service level charges, such as assisted living care, memory care and ancillary services.  Resident agreements are generally short-term in nature, billed monthly in advance and cancelable by the residents with a 30-day notice.  Resident agreements may require the payment of upfront fees prior to moving into the community with any non-refundable portion of such fees being recorded as deferred revenue and amortized over the estimated resident stay.

Shares Based Payments to Non-Employees — In connection with an expense support arrangement described in Note 6. “Related Party Arrangements,” the Company may issue forfeitable restricted Class A shares of common stock (“Restricted Stock”) to the Advisor on an annual basis in lieu of cash for services rendered, in the event that the Company does not achieve established distribution coverage targets.

The Restricted Stock is forfeited if shareholders do not ultimately receive their original invested capital back with at least a 6% annualized return of investment upon a future liquidity or disposition event of the Company.  Upon issuance of Restricted Stock, the Company measures the fair value at its then-current lowest aggregate fair value pursuant to Accounting Standards Codification (“ASC”) 505-50.  On the date in which the Advisor satisfies the vesting criteria, the Company remeasures the fair value of the Restricted Stock pursuant to ASC 505-50 and records expense equal to the difference between the original fair value and that of the remeasurement date.  In addition, given that performance is outside the control of the Advisor and involves both market conditions and counterparty performance conditions, the shares are treated as unissued for accounting purposes and the Company only includes the Restricted Stock in the calculation of diluted earnings per share to the extent their effect is dilutive and the vesting conditions have been satisfied as of the reporting date.

9


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

2.

Summary of Significant Accounting Policies (continued)

Pursuant to the amended expense support agreement, the Advisor shall be the record owner of the Restricted Stock until the shares of common stock are sold or otherwise disposed of, and shall be entitled to all of the rights of a stockholder of the Company including, without limitation, the right to vote such shares (to the extent permitted by the Company’s articles of incorporation) and receive all cash distributions and stock dividends paid with respect to such shares.  All cash distributions and stock dividends paid to the Advisor related to the Restricted Stock shares shall vest immediately and will not be subject to forfeiture.  The Company recognizes expense related to the cash distributions and stock dividends related to the Restricted Stock shares.

Segment Information Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company has determined that it operates in one operating segment, real estate ownership.  The Company’s chief operating decision maker evaluates the Company’s operations from a number of different operational perspectives including, but not limited to, a property-by-property basis and by tenant or operator.  The Company derives all significant revenues from a single reportable operating segment of business, healthcare real estate, regardless of the type (seniors housing, medical office, etc.) or ownership structure (leased or managed).  Accordingly, the Company does not report segment information; nevertheless, management periodically evaluates whether the Company continues to have one single reportable segment of business.

Adopted Accounting PronouncementsIn August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which made eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.  The ASU further clarified how the predominance principle should be applied to cash receipts and payments relating to more than one class of cash flows.  The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017.  The ASU is to be applied retrospectively for each period presented.  Subsequently, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which modifies the presentation of the statement of cash flows and requires reconciliation to the overall change in the total of cash, cash equivalents, restricted cash and restricted cash equivalents.   As a result, the statement of cash flows will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents.   The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017.  The ASU is to be applied retrospectively for each period presented.  The Company early adopted both ASU 2016-15 and ASU 2016-18 on January 1, 2017; the adoption of which impacts the Company’s presentation of its statement of cash flows for all periods presented, but will not have an impact on the Company’s condensed consolidated balance sheets or condensed consolidated statements of operations.

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties that are under Common Control,” which requires an entity to consider its indirect interests held by related parties that are under common control on a proportionate basis when evaluating whether the entity is a primary beneficiary of a VIE. The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2016.  The Company has adopted ASU 2016-17 on January 1, 2017; the adoption of which did not have a material impact to its condensed consolidated financial statements.  

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business and provides a framework by which to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017.  The ASU is to be applied prospectively for each period presented.  The Company early adopted ASU 2017-01 on January 1, 2017; the adoption of which did have a material impact on the Company’s condensed consolidated financial statements as a result of Summer Vista Assisted Living being considered an asset acquisition.

10


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

2.

Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” as a new ASC topic (Topic 606).  The core principle of this ASU is that an entity should recognize revenue to depict the transfer of 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 ASU further provides guidance for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, lease contracts).  The FASB subsequently issued ASU 2015-14 to defer the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with earlier adoption permitted. In addition, in December 2016, the FASB issued ASU 2016-20, which provides technical corrections and improvements to ASC 606 based on questions that stakeholders have raised while working through the implementation.  ASC 606 can be adopted using one of two retrospective transition methods: (i) retrospectively to each prior reporting period presented or (ii) as a cumulative-effect adjustment as of the date of adoption. The Company continues to execute on its implementation plan for ASC 606; specifically, as it relates to the allocation of consideration to different revenue streams within a given contract and the impact that the adoption of ASC 606 will have on the Company’s financial statement disclosures.  The Company expects to use the modified retrospective approach as its transition method.  The Company does not expect the adoption of this ASU to have a material impact (if any) on the amounts and timing of its revenue recognition.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842): Accounting for Leases,” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors).  The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  The ASU further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases.  The ASU will also require qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases.  The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The ASU is to be applied using a modified retrospective approach.  The Company is currently evaluating the impact this ASU will have on the Company’s condensed consolidated financial statements; specifically, as it relates to arrangements in which the Company is the lessee and the required presentation in the Company’s condensed consolidated financial position and related financial statement disclosures.

In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amended the hedge accounting model to better reflect an entity’s risk management activities.  The ASU expands an entities ability to hedge nonfinancial and financial risk components as well as reduce the complexity related to fair value hedges of interest rate risk. The ASU further eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.  The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018.  The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated results of operations or cash flows until such time as the Company enters into interest protection arrangements.

11


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

3.

Real Estate Acquisitions

During the nine months ended September 30, 2017, the Company acquired Summer Vista Assisted Living (“Summer Vista”), a seniors housing community in Pensacola, Florida, for a purchase price of approximately $21.4 million.  In connection therewith, the Company incurred approximately $0.6 million of acquisition fees and expenses, which have been capitalized as a component of the cost of the assets acquired and allocated on a relative fair value basis.

The seniors housing community features 89 residential units and is operated under a RIDEA structure pursuant to a newly negotiated five-year property management agreement with SRI Management, LLC (“Superior Residences”), the property’s existing third-party property manager who has managed the property since it opened in February 2016.

The following summarizes the purchase price allocation for Summer Vista, and the related assets acquired and liabilities assumed in connection with the acquisition:

Land and land improvements

 

$

2,269,406

 

Buildings and building improvements

 

 

17,611,786

 

Furniture, fixtures and equipment

 

 

857,338

 

In-place lease intangibles (1)

 

 

1,286,507

 

Liabilities assumed

 

 

(170,918

)

   Total purchase price consideration

 

$

21,854,119

 

_____________

FOOTNOTE:

(1)

At the acquisition date, the weighted-average amortization period on the acquired in-place lease intangibles was approximately 2.5 years and is based on the expected unit turnover.

4.

Real Estate Investment Properties, net

The gross carrying amount and accumulated depreciation of the Company’s real estate investment properties as of September 30, 2017 are as follows:

 

September 30,

 

2017

Land and land improvements

$

2,302,242

Building and building improvements

 

17,611,786

Furniture, fixtures and equipment

 

883,283

Less: accumulated depreciation

 

(389,884)

Real estate investment properties, net

$

20,407,427

 

Depreciation expense on the Company’s real estate investment properties, net was approximately $0.2 million and $0.4 million for the quarter and nine months ended September 30, 2017, respectively.

5.

Intangibles, net

The gross carrying amount and accumulated amortization of the Company’s intangibles as of September 30, 2017 are as follows:

 

 

September 30,

 

 

 

2017

 

In-place lease intangibles

 

$

1,286,507

 

Less: accumulated amortization

 

 

(257,302

)

Intangibles, net

 

$

1,029,205

 

12


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

5.

Intangibles, net (continued)

Amortization on the Company’s intangibles was approximately $0.1 million and $0.3 million for the quarter and nine months ended September 30, 2017, respectively, all of which was included in depreciation and amortization in the accompanying condensed consolidated statements of operations.  The weighted average remaining useful life of the Company’s intangibles was 2.0 years as of September 30, 2017.

The estimated future amortization on the Company’s intangibles for the remainder of 2017, each of the next four years and thereafter, in the aggregate, as of September 30, 2017 is as follows:

2017

 

$

128,651

 

2018

 

 

514,603

 

2019

 

 

385,951

 

2020

 

 

2021

 

 

Thereafter

 

 

 

 

$

1,029,205

 

 

6.

Related Party Arrangements

The Company is externally advised and has no direct employees. All of the Company’s executive officers are executive officers, or on the board, of managers of the Advisor. In addition, certain directors and officers hold similar positions with CNL Securities Corp., the Dealer Manager of the Offering and a wholly owned subsidiary of CNL. In connection with services provided to the Company, affiliates are entitled to the following fees:

Dealer Manager — From the commencement of our Offering through March 19, 2017, the Dealer Manager received a selling commission of up to 7% of the sale price for each Class A share and 2% of the sale price for each Class T share sold in the Primary Offering, all or a portion of which was reallowed to participating broker dealers.  In addition, the Dealer Manager received a dealer manager fee in an amount equal to 2.75% of the price of each Class A share or Class T share sold in the Primary Offering, all or a portion of which was reallowed to participating broker dealers.  In March 2017, the Company entered into an amended and restated dealer manager agreement, which reduces the maximum combined sales commissions, dealer manager fees and ongoing annual distribution and stockholder servicing fees payable to the Dealer Manager and participating broker-dealers from 9.75% to 8.5% of the gross proceeds for each share class of common stock sold in the Primary Offering.  Effective March 20, 2017 and subsequently, the Dealer Manager will receive a combined selling commission and dealer manager fee of up to 8.5% of the sale price for each Class A share and up to 4.5% of the sale price for each Class T share sold in the Primary Offering, all or a portion of which may be reallowed to participating broker dealers.  In addition, effective March 20, 2017, for Class T shares sold in the Primary Offering, the Dealer Manager may choose the respective amounts of the commission and dealer manager fee, provided that the selling commission shall not exceed 3.0% of the gross proceeds from the completed sale of such Class T shares.  Effective March 20, 2017, the Company and the Dealer Manager also agreed that the Company will cease paying the annual distribution and stockholder servicing fee of 1.00% and 0.50%, respectively (described further below), if the total underwriting compensation, comprised of the dealer manager fees, selling commissions, and annual distribution and stockholder servicing fees, payable to broker-dealers in connection with the sale of Class T and Class I shares in the Primary Offering exceeds 8.5% of the gross offering price of such Class T or Class I shares, respectively.  Prior to March 20, 2017, the 8.5% cap was set as 9.75%.  Separately, the Company’s stockholders approved an amendment to the Company’s charter to adjust the conversion feature of Class T and Class I shares to match this new 8.5% cap.  To the extent stockholders that purchased Class A shares on the terms in effect prior to March 20, 2017 would have paid lower selling commissions and/or dealer manager fees on the terms in effect subsequently, the Advisor, or one of its affiliates, issued them a refund in March 2017.  To the extent participating broker-dealers that sold Class T or Class I shares on the terms in effect prior to March 20, 2017 were entitled to greater ongoing annual distribution and stockholder servicing fees with respect to such sales compared to sales made on the terms in effect subsequently, the Advisor paid this liability on behalf of the Company.  As a result of the overall reduction in underwriting compensation, the Company recorded an approximate $0.1 million reduction in its liability related to annual distribution and stockholder servicing fees for Class T and Class I shares sold through March 19, 2017.

13


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

6.

Related Party Arrangements (continued)

The Company has and will continue to pay a distribution and stockholder servicing fee, subject to certain underwriting compensation limits, with respect to the Class T and Class I shares sold in the Primary Offering in an annual amount equal to 1% and 0.50%, respectively, of the current gross offering price per Class T or Class I share, respectively, or if the Company is no longer offering shares in a public offering, the estimated per share value per Class T or Class I share, respectively.  The annual distribution and stockholder servicing fee will continue to be calculated as a percentage of the current gross offering price per Class T or Class I share until the Company reports an estimated per share value following the termination of the Primary Offering, at which point the distribution fee will be calculated based on the new estimated per share value, until such underwriting compensation limits are met or the shares are converted to Class A shares pursuant to the terms of the securities.

The Company records the annual distribution and stockholder servicing fees as a reduction to capital in excess of par value and measures the related liability in an amount equal to the maximum fees owed in relation to the Class T and Class I shares on the shares’ issuance date.  The liability is relieved over time, as the fees are paid to the Dealer Manager, or is adjusted if the fees are no longer owed on any Class T or Class I share that is redeemed or repurchased, as well as upon the earliest occurrence of: (i) a listing on a national securities exchange; (ii) a merger or consolidation of the Company with or into another entity, or the sale or other disposition of all or substantially all of the Company’s assets; (iii) after the termination of the Primary Offering in which the initial shares in the account were sold, the end of the month in which total underwriting compensation paid in the Primary Offering is not less than 10% of the gross proceeds from all share classes of the Primary Offering; (iv) the end of the month in which the total underwriting compensation paid in a Primary Offering with respect to shares purchased in a Primary Offering is not less than 8.5% of the gross offering price of those shares purchased in such Primary Offering (excluding shares purchased through the Reinvestment Plan and those received as stock dividends); or (v) any other conditions described in the Company’s prospectus.  

CNL Capital Markets Corp. — The Company will pay CNL Capital Markets Corp., an affiliate of CNL, an annual fee payable monthly based on the average number of total investor accounts that will be open during the term of the capital markets service agreement pursuant to which certain administrative services are provided to the Company.  These services may include, but are not limited to, the facilitation and coordination of the transfer agent’s activities, client services and administrative call center activities, financial advisor administrative correspondence services, material distribution services and various reporting and troubleshooting activities.

14


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

6.

Related Party Arrangements (continued)

Advisor — The Company will pay the Advisor a monthly asset management fee in an amount equal to 0.0667% of the monthly average of the sum of the Company’s and the Operating Partnership’s respective daily real estate asset value, without duplication, plus the outstanding principal amount of any loans made, plus the amount invested in other permitted investments.  For this purpose, “real estate asset value” equals the amount invested in wholly-owned properties, determined on the basis of cost, and in the case of properties owned by any joint venture or partnership in which the Company is a co-venturer or partner the portion of the cost of such properties paid by the Company, exclusive of acquisition fees and acquisition expenses and will not be reduced for any recognized impairment.  Any recognized impairment loss will not reduce the real estate asset value for the purposes of calculating the asset management fee.  The asset management fee, which will not exceed fees which are competitive for similar services in the same geographic area, may or may not be taken, in whole or in part as to any year, in the Advisor’s sole discretion.  All or any portion of the asset management fee not taken as to any fiscal year shall be deferred without interest and may be taken in such other fiscal year as the Advisor shall determine.

The Company will pay the Advisor a construction management fee of up to 1% of hard and soft costs associated with the initial construction or renovation of a property, or with the management and oversight of expansion projects and other capital improvements, in those cases in which the value of the construction, renovation, expansion or improvements exceeds (i) 10% of the initial purchase price of the property and (ii) $1 million in which case such fee will be due and payable as draws are funded for such projects.

The Advisor will receive an investment services fee of 2.25% of the purchase price of properties and funds advanced for loans or the amount invested in the case of other assets for services in connection with the selection, evaluation, structure and purchase of assets.  No investment services fee will be paid to the Advisor in connection with the Company’s purchase of securities.

The Advisor, its affiliates and related parties also are entitled to reimbursement of certain operating expenses in connection with their provision of services to the Company, including personnel costs, subject to the limitation that the Company will not reimburse the Advisor for any amount by which operating expenses exceed the greater of 2% of its average invested assets or 25% of its net income in any expense year unless approved by the independent directors.  The Company commenced its Primary Offering in March 2016 and made its first investment in March 2017.  For the expense year ended September 30, 2017, the Company’s total operating expenses were in excess of this limitation by approximately $0.6 million.  The Company’s independent directors determined that the higher relationship of operating expenses to average invested assets was justified based on the Company being in the early stages of raising and deploying capital and the limited number of investments to date, both of which were impacted by the downtime required to modify the dealer manager agreement to reduce overall underwriting compensation as discussed above, and the cost of operating a public company.

The Advisor will pay all other organizational and offering expenses incurred in connection with the formation of the Company, without reimbursement by the Company.  These expenses include, but are not limited to, Security and Exchange Commission (“SEC”) registration fees, Financial Industry Regulatory Authority (“FINRA”) filing fees, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, due diligence expenses, personnel costs associated with processing investor subscriptions, escrow fees and other administrative expenses of the Offering.

For the quarter and nine months ended September 30, 2017, the Company paid cash distributions of approximately $40,000 and $108,000, respectively, and issued stock dividends of approximately 800 shares and 3,200 shares, respectively, to the Advisor.

 

15


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

6.

Related Party Arrangements (continued)

Pursuant to an expense support arrangement, the Advisor has agreed to accept payment in Restricted Stock in lieu of cash for services rendered, in the event that the Company does not achieve established distribution coverage targets (“Expense Support Agreement”).  Under the terms of the Expense Support Agreement, for each quarter within a calendar expense support year, the Company will record a proportional estimate of the cumulative year-to-date period based on an estimate of the annual expense support expected for the calendar expense support year.  In exchange for services rendered and in consideration of the expense support provided under this arrangement, the Company shall issue, following each determination date, a number of shares of Restricted Stock equal to the quotient of the expense support amount provided by the Advisor for the preceding year divided by the board of directors’ most recent determination of net asset value per share of the Class A common shares, if the board has made such a determination, or otherwise the most recent public offering price per Class A common share, on the terms and conditions and subject to the restrictions set forth in the Expense Support Agreement.  The Restricted Stock is subordinated and forfeited to the extent that shareholders do not receive a Priority Return on their Invested Capital (as such terms are defined in the Company’s prospectus), excluding for the purposes of calculating this threshold any shares of Restricted Stock owned by the Advisor.

The following fees for services rendered are expected to be settled in the form of Restricted Stock pursuant to the Expense Support Agreement for the quarter and nine months ended September 30, 2017 and cumulatively as of September 30, 2017:

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

As of

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2017

 

 

2017

 

Fees for services rendered:

 

 

 

 

 

 

 

 

 

 

 

 

Asset management fees

 

$

42,800

 

 

$

86,060

 

 

$

86,060

 

Advisor personnel expenses (1)

 

 

95,805

 

 

 

320,204

 

 

 

320,204

 

Total fees for services rendered

 

$

138,605

 

 

$

406,264

 

 

$

406,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Then-current public offering price

 

$

10.93

 

 

$

10.93

 

 

$

10.93

 

Restricted Stock shares (2)

 

 

12,681

 

 

 

37,170

 

 

 

37,170

 

_____________

FOOTNOTES:

(1)

Amounts consist of personnel and related overhead costs of the Advisor or its affiliates (which, in general, are those expenses relating to the Company’s administration on an on-going basis) that are reimbursable by the Company.

(2)

Represents Restricted Stock shares expected to be issued to the Advisor as of September 30, 2017 pursuant to the Expense Support Agreement.  No fair value was assigned to the Restricted Stock shares as the shares are expected to be valued at zero upon issuance, which represents the lowest possible value estimated at vesting.  In addition, the Restricted Stock shares will be treated as unissued for financial reporting purposes until the vesting criteria are met.

16


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

6.

Related Party Arrangements (continued)

The fees payable to the Dealer Manager for the quarter and nine months ended September 30, 2017 and 2016, and related amounts unpaid as of September 30, 2017 and December 31, 2016 are as follows:

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

Unpaid amounts as of (1)

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Selling commissions (2)

 

$

138,544

 

 

$

1,550

 

 

$

481,913

 

 

$

1,550

 

 

$

5,020

 

 

$

6,550

 

Dealer Manager fees (2)

 

 

161,461

 

 

 

756

 

 

 

422,112

 

 

 

756

 

 

 

11,418

 

 

 

5,823

 

Distribution and stockholder servicing fees (2)

 

 

239,677

 

 

 

375

 

 

 

462,356

 

 

 

375

 

 

 

549,449

 

 

 

154,733

 

 

 

$

539,682

 

 

$

2,681

 

 

$

1,366,381

 

 

$

2,681

 

 

$

565,887

 

 

$

167,106

 

The fees and expenses incurred by and reimbursable to the Company’s related parties for the quarter and nine months ended September 30, 2017 and 2016, and related amounts unpaid as of September 30, 2017 and December 31, 2016 are as follows:

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

Unpaid amounts as of (1)

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Reimbursable expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (3)

 

$

221,415

 

 

$

132,098

 

 

$

652,824

 

 

$

132,098

 

 

$

74,560

 

 

 

73,545

 

Acquisition fees and expenses

 

 

5,816

 

 

 

 

 

27,705

 

 

 

 

 

 

 

 

 

$

227,231

 

 

$

132,098

 

 

$

680,529

 

 

$

132,098

 

 

$

74,560

 

 

$

73,545

 

Investment Service Fees (4)

 

 

 

 

 

 

481,500

 

 

 

 

 

 

 

Asset Management Fees (5)

 

 

42,800

 

 

 

 

 

86,060

 

 

 

 

 

 

 

 

 

$

270,031

 

 

$

132,098

 

 

$

1,248,089

 

 

$

132,098

 

 

$

74,560

 

 

$

73,545

 

_____________

FOOTNOTES:

(1)

Amounts are recorded as due to related parties in the accompanying condensed consolidated balance sheets.

(2)

Amounts are recorded as stock issuance and offering costs in the accompanying condensed consolidated statements of stockholders’ equity.

(3)

Amounts are recorded as general and administrative expenses in the accompanying condensed consolidated statements of operations unless such amounts represent prepaid expenses, which are capitalized in the accompanying condensed consolidated balance sheets. For the quarter and nine months ended September 30, 2017, approximately $0.1 million and $0.3 million, respectively, of personnel expenses of affiliates of the Advisor are expected to be settled in accordance with the terms of the Expense Support Agreement.

(4)

For the nine months ended September 30, 2017, the Company incurred approximately $0.5 million in investment services fees of which approximately $0.5 million was capitalized and included in real estate investment properties, net in the accompanying condensed consolidated balance sheets. No such fees were incurred for the quarter ended September 30, 2017.

(5)

For the quarter and nine months ended September 30, 2017, the Company incurred approximately $42,800 and $86,100, respectively, in asset management fees, all of which are expected to be settled in accordance with the terms of the Expense Support Agreement.

17


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

7.

Indebtedness

In March 2017, in connection with the Summer Vista acquisition, the Company entered into a secured mortgage loan agreement with Synovus Bank in the amount of approximately $16.1 million (“Summer Vista Loan”).  The Summer Vista Loan matures on April 1, 2022, subject to two one-year extension options provided certain conditions are met. The Summer Vista Loan accrues interest at a rate equal to the sum of the London Interbank Offered Rate (“LIBOR”) plus 2.85%, with monthly payments of interest only for the first 18 months of the term of the Summer Vista Loan, and monthly payments of interest and principal for the remaining 42 months of the term of the Summer Vista Loan using a 30-year amortization period with the remaining principal balance payable at maturity.  Prior to April 1, 2019, the interest payable on the Summer Vista Loan may be reduced to a rate equal to the sum of LIBOR plus 2.70% if, at such time, no event of default exists, certain debt yield thresholds are met, and at least $2,150,000 of the original outstanding principal balance of the Summer Vista Loan has been paid.  The Company may prepay, without a penalty, all or any part of the Summer Vista Loan at any time.

The following table provides details of the Company’s indebtedness as of September 30, 2017 and December 31, 2016:

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Mortgage and notes payable:

 

 

 

 

 

 

 

 

Mortgage loan (1)

 

$

16,050,000

 

 

$

 

Notes payable

 

 

312,500

 

 

 

312,500

 

Mortgage and notes payable

 

 

16,362,500

 

 

 

312,500

 

Loan costs, net

 

 

(186,097

)

 

 

Total mortgage and notes payable, net

 

$

16,176,403

 

 

$

312,500

 

_____________

FOOTNOTE:

(1)

As of September 30, 2017, the Company’s mortgage loan is collateralized by the Summer Vista property.

The fair market value of the mortgage and notes payable was approximately $16.4 million as of September 30, 2017, which is based on current rates and spreads the Company would expect to obtain for similar borrowings.  Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values is categorized as Level 3 on the three-level valuation hierarchy.

The following is a schedule of future principal payments and maturity for the Company’s indebtedness for the remainder of 2017, each of the next four years and thereafter, in the aggregate, as of September 30, 2017:

2017

 

$

 

2018

 

 

32,036

 

2019

 

 

199,072

 

2020

 

 

211,350

 

2021

 

 

224,386

 

Thereafter

 

 

15,695,656

 

 

 

$

16,362,500

 

 

18


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

8.

Equity

Subscription Proceeds — As of September 30, 2017, the Company had received aggregate subscription proceeds of approximately $23.3 million (2.2 million shares), which includes $200,000 (20,000 shares) of subscription proceeds received from the Advisor prior to the commencement of the Offering, approximately $251,250 (25,125 shares) of subscription proceeds received in connection with a private placement made in 2016 and approximately $221,000 (22,100 shares) of subscription proceeds pursuant to the Reinvestment Plan.

Distributions — For the nine months ended September 30, 2017, the Company declared and paid cash distributions of approximately $477,400, which were net of class-specific expenses.  In addition, the Company declared and issued stock dividends of approximately 14,300 shares of common stock during the nine months ended September 30, 2017.

For the nine months ended September 30, 2017, 100% of the cash distributions paid to stockholders were considered a return of capital to stockholders for federal income tax purposes.  The distribution of new common shares to recipients is non-taxable. No amounts distributed to stockholders for the nine months ended September 30, 2017 were required to be or have been treated by the Company as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in the Company’s advisory agreement.  

In September 2017, the Company’s board of directors declared a monthly cash distribution of $0.0480, less class-specific expenses, and a monthly stock dividend of 0.00100625 shares on each outstanding share of common stock on October 1, 2017, November 1, 2017 and December 1, 2017.  These distributions and dividends are to be paid and distributed by December 31, 2017.

9.

Income Taxes

As of September 30, 2017, the Company recorded current deferred tax assets and net current tax expense related to deferred income at its TRS.  The components of the income tax expense as of September 30, 2017 are as follows:

 

 

September 30,

 

 

 

2017

 

Current:

 

 

 

 

Federal

 

$

(63,333

)

State

 

 

(9,133

)

Total current expense

 

$

(72,466

)

Deferred:

 

 

 

 

Federal

 

$

26,446

 

State

 

 

4,142

 

Total deferred benefit

 

 

30,588

 

Income tax expense

 

$

(41,878

)

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of September 30, 2017 are as follows:

Carryforwards of net operating loss

 

$

 

Prepaid rent

 

 

21,043

 

Valuation allowance

 

 

9,545

 

Net deferred tax assets

 

$

30,588

 

 

19


CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)

 

 

9.

Income Taxes (continued)

A reconciliation of the income tax expense computed at the statutory federal tax rate on income before income taxes is as follows:

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2017

 

Tax benefit computed at federal statutory rate

 

$

103,479

 

 

 

35.0

%

 

$

318,090

 

 

 

35.0

%

Impact of REIT election

 

 

(114,441

)

 

 

(38.7

)%

 

 

(354,977

)

 

 

(39.1

)%

State income tax expense

 

 

(1,291

)

 

 

(0.4

)%

 

 

(4,991

)

 

 

(0.5

)%

Income tax expense

 

$

(12,253

)

 

 

(4.1

)%

 

$

(41,878

)

 

 

(4.6

)%

The Company analyzed its material tax positions and determined that it has not taken any uncertain tax positions.  The tax year 2016 remains subject to examination by taxing authorities.

10.

Commitments and Contingencies

From time to time, the Company may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, its business, including proceedings to enforce its contractual or statutory rights.  While the Company cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, the Company does not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on its results of operations or financial condition.

Refer to Note 6. “Related Party Arrangements” for information on contingent Restricted Stock shares due to the Company’s Advisor in connection with the Expense Support Agreement.

11.

Subsequent Events

Subscription Proceeds

During the period from October 1, 2017 through November 1, 2017, the Company received additional subscription proceeds of approximately $2.4 million (0.2 million shares).

 

 

 

20


 

Item 2.

Management’s Discussion and Analysis of Financial Condition of Results of Operations

Caution Concerning Forward-Looking Statements

Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter and nine months ended September 30, 2017 (“Quarterly Report”) that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995.  The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).  Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect managements current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Companys business and its performance, the economy, and other future conditions and forecasts of future events and circumstances.  Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should,” “could” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimates of per share net asset value of the Company’s common stock, and/or other matters.  The Company’s forward-looking statements are not guarantees of future performance.  While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances.  As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized.  The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict.  Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors.  Given these uncertainties, the Company cautions you not to place undue reliance on such statements.  

For further information regarding risks and uncertainties associated with the Company’s business, and other important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the risk factors listed and described in the Company’s  Annual Report on Form 10-K for the year ended December 31, 2016, as supported by Part II, Item 1A in this Quarterly Report, and in the “Risk Factors” heading in the Company’s prospectus, as supplemented, included in Post-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (File No. 333-206017), filed with the Commission on April 17, 2017, copies of which may be obtained from the Company’s website at www.cnlhealthcarepropertiesii.com.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note.  Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

Introduction

The following discussion is based on the condensed consolidated financial statements as of September 30, 2017 (unaudited) and December 31, 2016.  Amounts as of December 31, 2016, included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date.  This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes thereto and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2016.

21


 

Overview

CNL Healthcare Properties II, Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Maryland corporation that incorporated on July 10, 2015 and intends to qualify as a REIT for U.S. federal income tax purposes beginning with the year ending December 31, 2017 or the first year in which we commence material operations.

We are externally managed and advised by our Advisor, CHP II Advisors, LLC.  Our Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.  We had no operations prior to the commencement of our Primary Offering.  

Our investment focus is on acquiring a diversified portfolio of healthcare real estate or real estate-related assets, primarily in the United States, within the seniors housing, medical office, post-acute care and acute care asset classes. The types of seniors housing that we may acquire include active adult communities (age-restricted and age-targeted housing), independent and assisted living facilities, continuing care retirement communities, and memory care facilities.  The types of medical office properties that we may acquire include medical office buildings, specialty medical and diagnostic service facilities, surgery centers, outpatient rehabilitation facilities, and other facilities designed for clinical services. The types of post-acute care facilities that we may acquire include skilled nursing facilities, long-term acute care hospitals and inpatient rehabilitative facilities.  The types of acute care facilities that we may acquire include general acute care hospitals and specialty surgical hospitals.  We view, manage and evaluate our portfolio homogeneously as one collection of healthcare assets with a common goal of maximizing revenues and property income regardless of the asset class or asset type.

We are committed to investing the proceeds of our Offering through strategic investment types aimed to maximize stockholder value by generating sustainable cash flow growth and increasing the value of our healthcare assets.  We generally expect to lease seniors housing properties to single member limited liability companies wholly-owned by TRS Holdings and engage independent third-party managers under management agreements to operate the properties as permitted under RIDEA structures; however, we may also lease our properties to third-party tenants under triple-net or similar lease structures, where the tenant bears all or substantially all of the costs (including cost increases for real estate taxes, utilities, insurance and ordinary repairs).  Medical office, post-acute care and acute care properties will be leased on a triple-net, net or modified gross basis to third-party tenants.  In addition, we expect most investments will be wholly owned, although, we may invest through partnerships with other entities where we believe it is appropriate and beneficial.   We expect to invest in a combination of stabilized assets, new property developments and properties which have not reached full stabilization.  Finally, we also may invest in and originate mortgage, bridge or mezzanine loans or in entities that make investments similar to the foregoing investment types.  We generally make loans to the owners of properties to enable them to acquire land, buildings, or to develop property.  In exchange, the owner generally grants us a first lien or collateralized interest in a participating mortgage collateralized by the property or by interests in the entity that owns the property.

In September 2017, our board of directors unanimously approved $10.00 as the estimated net asset value (“NAV”) per share of each class of our common stock outstanding as of June 30, 2017, based on the estimated value of our assets less the estimated value of our liabilities, divided by 1,634,493 shares issued and outstanding as of June 30, 2017. Also, in September 2017, our board of directors unanimously approved offering prices for each class of shares of our common stock to be sold in our ongoing Primary Offering based on the estimated NAV per share for each class plus applicable upfront selling commissions and dealer manager fees, effective September 19, 2017. Establishing offering prices based on the estimated NAV per share for each class of shares did not cause any change to the previous Primary Offering prices for each class of shares. Accordingly, the Primary Offering prices remain $10.93, $10.50 and $10.00 per share for the purchase of Class A, Class T and Class I shares of our common stock, respectively, in our ongoing Primary Offering.  In addition, effective October 3, 2017, the price for the repurchase of shares under our redemption plan and the price for sales of shares under our Reinvestment Plan became equal to the initial NAV per share for each class, as applicable.  For additional information on the determination of our estimated NAV, please refer to our Current Report on Form 8-K, filed with the Commission on September 19, 2017.

Portfolio Overview

We believe recent demographic trends and compelling supply and demand indicators present a strong case for an investment focus on healthcare real estate or real estate-related assets. We believe that the healthcare sector will continue to provide attractive opportunities as compared to other asset sectors over the long-term.  

22


 

As of November 1, 2017, we owned one seniors housing community in Pensacola, Florida that was acquired in March 2017 for a purchase price of approximately $21.4 million.  The property is comprised of 89 residential units (67 assisted living and 22 memory care units) and operated under a RIDEA structure by Superior Residences, a third-party property manager, who operated the property previously for the seller under a similar structure since it opened in February 2016.

Management reviews certain operating and other statistical measures of the underlying property such as occupancy levels and revenue per occupied unit (“RevPOU”), which we define as total revenue before charges for ancillary and care services offered at the community divided by average number of occupied units.  As of September 30, 2017, 100% of the resident units were occupied at Summer Vista.  The average monthly RevPOU for the quarter ended September 30, 2017 was $3,881 for assisted living units and $4,278 for memory care units.  As of September 30, 2017, there were 42 residents on a waitlist indicating interest for units as they become available.  We believe the aforementioned operating and statistical measures assist us in determining the ability of our properties or operators to achieve market rental rates, to assess the overall performance of our healthcare portfolio, and to review compliance with leases, debt, licensure, etc.

We monitor the performance of our third-party operator(s) to stay abreast of material changes in the operations of underlying property by (1) reviewing the current, historical and prospective operating margins (measured by earnings before interest, taxes, depreciation, amortization and facility rent), (2) monitoring trends in the source of our revenue, including relative mix of payors (including Medicare, Medicaid, etc.) and private payors (including commercial insurance and private pay patients), (3) evaluating the effect of evolving healthcare legislation and other regulations on our profitability and liquidity, and (4) reviewing the competition and demographics of the local and surrounding areas in which we operate.

Liquidity and Capital Resources

General

Our primary source of capital for items other than acquisitions of real estate is expected to be the net proceeds from our Offering.  We will use such amounts for investments in properties and other permitted investments, as well as the payment or reimbursement of fees and expenses relating to the selection, acquisition and development of properties and other permitted investments.  Generally we expect to meet cash needs for items other than acquisitions from our cash flows from operations, and we expect to meet cash needs for acquisitions from net proceeds from our Offering and borrowings.  However, until such time as we are fully invested, we may use proceeds from our Offering and/or borrowings to pay all or a portion of our operating expenses, distributions and debt service.

The number of properties and other permitted investments we may acquire or make will depend on the number of shares sold through our Offering and the resulting net proceeds available for investment.  If the number of shares sold is substantially less than the maximum amount of the Offering, we would likely make a limited number of investments resulting in our healthcare real estate portfolio being less diversified in terms of the type, number and amount of investments.  If our healthcare real estate portfolio is concentrated in a small number of investments, the value of an investment in us will fluctuate with the performance of the specific assets we acquire and, therefore, expose our stockholders to increased risk.  In addition, many of our operating expenses as a public company are fixed regardless of the number of investments in our healthcare real estate portfolio.  Therefore, an inability to raise substantial funds in our Offering or otherwise would increase our fixed operating expenses as a percentage of gross income and, in turn, reduce the amount of proceeds available for distribution to our stockholders.

23


 

We intend to strategically leverage our real estate assets and use debt as a means of providing additional funds for the acquisition of properties and the diversification of our portfolio.  Our ability to increase our diversification through borrowings could be adversely affected by credit market conditions, which could result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate.  We may also be negatively impacted by rising interest rates on any unhedged variable rate debt or the timing of when we seek to refinance existing debt.  During times when interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.  Potential future sources of capital include proceeds from collateralized or uncollateralized financings from banks or other lenders.  If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.  As of September 30, 2017, our debt leverage ratio was approximately 43.4% of the aggregate carrying value of our assets.

From the commencement of our Offering until September 15, 2017, our net investment value per share for Class A, Class T and Class I shares was $10.00 per share, which was based on the “amount available for investment/net investment amount” percentage shown in the Estimated Use of Proceeds section of our prospectus.  In September 2017, our board of directors adopted an estimated NAV of $10.00 per share for each class of our common stock outstanding as of June 30, 2017.

Sources of Liquidity and Capital Resources

Common Stock Subscriptions

In August 2017, we had received gross offering proceeds in excess of $20 million which was sufficient to satisfy the minimum offering amounts in all states where we are conducting our offering except Pennsylvania.

For the nine months ended September 30, 2017, we received aggregate subscription proceeds of approximately $16.4 million (1.6 million shares), and approximately $218,000 (21,800 shares) of subscription proceeds received pursuant to our Reinvestment Plan.  

For the period from October 1, 2017 through November 1, 2017, we received additional subscription proceeds of approximately $2.4 million (0.2 million shares).  We expect to continue to raise capital under our Offering.

Indebtedness

In August 2016, in connection with our private placement, we issued promissory notes to each of 125 separate investors for a total principal amount of $0.3 million (each a “Note” and collectively, “Notes”).  We owe interest on the Notes of approximately $70,000 per annum, which is payable semi-annually in arrears.  The Notes mature on June 30, 2046.  Some or all of the Notes may be prepaid at any time, in whole or in part, provided that (i) such prepayment include all accrued and unpaid interest due on such prepaid principal amount to and including the date of prepayment and (ii) if the prepayment occurs prior to the second anniversary of the issue date of the Note, the operating partnership will pay on the date of such prepayment a one-time premium equal to approximately $31,000.  In connection with the issuance of the Notes, the Company placed approximately $0.4 million into a third-party escrow account to be held to repay the principal of the Notes and two semi-annual interest payments until such time as we raised at least $10 million in gross proceeds in our Offering, which occurred during the nine months ended September 30, 2017 and approximately $0.4 million was released from escrow to us.

In March 2017, we entered into the Summer Vista Loan and received approximately $16.1 million of proceeds from this mortgage loan, which were used to fund the acquisition of Summer Vista.  The Summer Vista Loan matures on April 1, 2022, subject to two one-year extension options provided certain conditions are met. The Summer Vista Loan accrues interest at a rate equal to the sum of LIBOR plus 2.85%, with monthly payments of interest only for the first 18 months, and monthly payments of interest and principal for the remaining 42 months using a 30-year amortization period with the remaining principal balance payable at maturity.  Prior to April 1, 2019, the interest payable on the Summer Vista Loan may be reduced to a rate equal to the sum of LIBOR plus 2.70% if, at such time, no event of default exists, certain debt yield thresholds are met, and at least $2,150,000 of the original outstanding principal balance of the Summer Vista Loan has been paid.  We may prepay, without a penalty, all or any part of the Summer Vista Loan at any time.

24


 

Net Cash Provided By (Used In) Operating Activities

We experienced positive cash flow from operating activities for the nine months ended September 30, 2017 of approximately $0.1 million as compared to cash used in operating activities of approximately ($0.1) million for the nine months ended September 30, 2016.  We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from the net operating income (“NOI”) from our properties.

Expense Support Agreement

During the nine months ended September 30, 2017, our cash flows from operating activities was positively impacted by the Expense Support Agreement with our Advisor pursuant to which our Advisor has agreed to accept payment in Restricted Stock in lieu of cash for services rendered, in the event that the Company does not achieve established distribution coverage targets (as defined in the Expense Support Agreement).  For the nine months ended September 30, 2017, we expect that approximately $0.4 million of asset management fees and Advisor personnel expenses will be settled in the form of Restricted Stock pursuant to the Expense Support Agreement.  Any amounts settled, and for which Restricted Stock shares will be issued, pursuant to the Expense Support Agreement are permanently settled and we have no further obligation to pay such amounts to our Advisor.

Refer to Note 6. “Related Party Arrangements” in Item 1. “Financial Statements” for additional information.

Uses of Liquidity and Capital Resources

Real Estate Acquisition

During the nine months ended September 30, 2017, we acquired Summer Vista, which represents our first acquisition of property, and paid total purchase price consideration of approximately $21.9 million.  We expect to continue to expand our healthcare investment portfolio through additional acquisitions as we raise additional capital from our Offering.

Underwriting Compensation

For the nine months ended September 30, 2017, we paid approximately $1.0 million in underwriting compensation.  Under the terms of the Primary Offering, our Dealer Manager is entitled to receive selling commissions, dealer manager fees and/or annual distribution and stockholder servicing fees, which are based on the respective share class of our common stock sold, all or a portion of which may be reallowed to participating broker dealers.

In March 2017, we entered into an amended and restated dealer manager agreement, which reduces the maximum combined sales commissions, dealer manager fees and ongoing annual distribution and stockholder servicing fees payable to the Dealer Manager and participating broker-dealers from 9.75% to 8.5% of the gross proceeds for each share class of common stock sold in the Primary Offering.  The aforementioned reduction to underwriting compensation will result in a lower amount of commissions and fees being paid to the Dealer Manager in future periods and will further provide for increased net proceeds from our Primary Offering to be available for investment.

Distributions

In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income.  We may make distributions in the form of cash or other property, including distributions of our own securities.  We expect to have little, if any, cash flows from operations available for distribution until we make substantial investments.  There may be a delay between the sale of our common stock and the purchase of properties or other investments, which could result in a delay in our ability to generate cash flows to cover distributions to our stockholders.  Therefore, we may determine to pay some or all of our cash distributions from sources other than cash flows from operations, such as from cash flows provided by financing activities, a component of which may include the proceeds of our Offering and/or borrowings, whether collateralized by our assets or unsecured.  We have not established any limit on the extent to which we may use borrowings or proceeds of our Offering to pay distributions, and there is no assurance we will be able to sustain distributions at any level.

25


 

The following table details our cash distributions per share and our total cash distributions paid, including distribution reinvestments, for the quarter and nine months ended September 30, 2017:

 

 

 

Cash Distributions per Share (1)

 

 

Cash Distributions Paid (2)

 

 

Cash Flows

 

Periods

 

Class A Share

 

 

Class T Share

 

 

Class I Share

 

 

Cash Distributions Declared

 

 

Distribution Reinvestments

 

 

Cash Distributions net of Distribution Reinvestments

 

 

Provided by (Used in) Operating Activities (3)

 

2017 Quarters

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First

 

$

0.1050

 

 

$

0.0750

 

 

$

0.1050

 

 

$

73,202

 

 

$

28,260

 

 

$

44,942

 

 

$

(154,202

)

Second

 

 

0.1440

 

 

 

0.1168

 

 

 

0.1337

 

 

 

172,574

 

 

 

75,925

 

 

 

96,649

 

 

 

33,113

 

Third

 

 

0.1440

 

 

 

0.1169

 

 

 

0.1328

 

 

 

231,583

 

 

 

113,407

 

 

 

118,176

 

 

 

203,479

 

Year

 

$

0.3930

 

 

$

0.3087

 

 

$

0.3715

 

 

$

477,359

 

 

$

217,592

 

 

$

259,767

 

 

$

82,390

 

____________

FOOTNOTES:

(1)

Our board of directors authorized monthly cash distributions on the outstanding shares of all classes of our common stock, beginning in August 2016 and continuing each month through September 2017.

(2)

Represents cash distributions declared, the amount of distributions reinvested in additional shares through our Reinvestment Plan and the amount of proceeds used to fund cash distributions.

(3)

For the nine months ended September 30, 2017, our net loss was approximately $1.0 million while cash distributions and stock dividends declared and issued were approximately $477,400 and 14,300 shares, respectively.  For the nine months ended September 30, 2017, 49% of cash distributions declared to stockholders were considered to be funded with cash provided by operating activities as calculated on a quarterly basis for GAAP purposes and approximately 51% were considered to be funded with proceeds from our Offering. For the nine months ended September 30, 2017, 100% of the cash distributions paid to stockholders were considered a return of capital to stockholders for federal income tax purposes.

In September 2017, the Company’s board of directors declared a monthly cash distribution of $0.0480, less class-specific expenses, and a monthly stock dividend of 0.00100625 shares on each outstanding share of common stock on October 1, 2017, November 1, 2017 and December 1, 2017.  These distributions and dividends are to be paid and distributed by December 31, 2017.

Results of Operations

From the time of our formation on July 10, 2015 (inception) through July 10, 2016, we had not commenced operations because we were in our development stage and had not received the minimum required offering amount of $2.0 million in shares of common stock.  Operations commenced on July 11, 2016, when aggregate subscription proceeds in excess of the minimum offering amount were released to us from escrow.  We made our first acquisition on March 31, 2017 and as a result, the only operations as of September 30, 2016 were general and administrative expenses of approximately $0.1 million and interest expense of approximately $17,000.

The following is a discussion of our operations for the quarter and nine months ended September 30, 2017:

Resident fees and services, property operating expenses, and property management fees for the quarter and nine months ended September 30, 2017 were related entirely to our Summer Vista property, which was acquired on March 31, 2017.  

General and administrative expenses for the quarter and nine months ended September 30, 2017 were approximately $0.3 million and $1.0 million, respectively, and were comprised primarily of directors’ and officers’ insurance, accounting and legal fees, Advisor personnel expenses and board of director fees; however these Advisor personnel expenses are expected to be settled in the form of Restricted Stock pursuant to the Expense Support Agreement and as such our general and administrative expenses were reduced by approximately $0.1 million and $0.3 million for the quarter and nine months ended September 30, 2017, respectively.

26


 

Interest expense and loan cost amortization were approximately $0.2 million and $0.4 million for the quarter and nine months ended September 30, 2017, respectively, and relate to our Summer Vista Loan as well as the Notes issued in connection with our private placement.

We incurred asset management fees payable to our Advisor for the quarter and nine months ended September 30, 2017 of approximately $42,800 thousand and $86,100 thousand, respectively.  These asset management fees are expected to be settled in the form of Restricted Stock pursuant to the Expense Support Agreement and as such no asset management fees were recognized for both the quarter and nine months ended September 30, 2017.  Monthly asset management fees equal to 0.0667% of invested assets are paid to the Advisor for management of our real estate assets, including our pro rata share of our investments in unconsolidated entities, loans and other permitted investments.

Depreciation and amortization expenses were approximately $0.3 million and $0.6 million for the quarter and nine months ended September 30, 2017, respectively.  Depreciation and amortization expenses are comprised of depreciation and amortization of the buildings, equipment, land improvements and in-place leases related to our real estate portfolio.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues and income to be derived from the acquisition and operation of properties and other permitted investments, other than those referred to in the risk factors identified in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by the risk factors included in Part II, Item 1A of this Quarterly Report.

Net Operating Income

We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from net operating income NOI.  We define NOI, a non-GAAP measure, as resident fees and services less property operating expenses and property management fees.  We use NOI as a key performance metric for internal monitoring and planning purposes, including the preparation of annual operating budgets and monthly operating reviews, as well as to facilitate analysis of future investment and business decisions.  It does not represent cash flows generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as an indication of our operating performance or to be an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.  We believe the presentation of this non-GAAP measure is important to the understanding of our operating results for the periods presented because it is an indicator of the return on property investment and provides a method of comparing property performance over time.  From the time of our formation on July 10, 2015 (inception) through July 10, 2016, we had not commenced operations because we were in our development stage and had not received the minimum required offering amount of $2.0 million in shares of common stock.  Operations commenced on July 11, 2016, when aggregate subscription proceeds in excess of the minimum offering amount were released to us from escrow.  The chart below illustrates our net losses, and NOI for the quarter and nine months ended September 30, 2017 and 2016:

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(307,906

)

 

$

(110,588

)

 

$

(950,707

)

 

$

(110,588

)

Adjusted to exclude:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

178,940

 

 

 

93,439

 

 

 

664,727

 

 

 

93,439

 

Depreciation and amortization

 

 

324,417

 

 

 

 

 

647,185

 

 

 

Other expenses, net of other income

 

 

196,489

 

 

 

17,149

 

 

 

402,683

 

 

 

17,149

 

Income tax expense

 

 

12,253

 

 

 

 

 

41,878

 

 

 

NOI

 

$

404,193

 

 

$

 

 

$

805,766

 

 

$

 

 

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the North American Real Estate Investment Trust (“NAREIT”) promulgated a measure known as Funds From Operations (“FFO”),

27


 

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 approved by the Board of Governors of NAREIT.  NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, plus depreciation and amortization of real estate related assets, and after adjustments for unconsolidated partnerships and joint ventures.  Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.  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, 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 or loss. 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 loss in its applicability in evaluating 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.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model) to an expensed-as-incurred model that were put into effect in 2009, and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP and accounted for as operating expenses.  Our 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.  While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases.  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.  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 do not continue to operate with a limited life and targeted exit strategy, as currently intended.  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 fees and expenses that affect our operations only in periods in which properties are acquired, 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 acquired our properties and once our portfolio is in place.  By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired.  We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

28


 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or 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 or loss: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to remove the impact of GAAP straight-line adjustments from rental revenues); 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, and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income 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 related expenses. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us.  All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter.  As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner.  We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.  For example, acquisition costs are funded from our subscription proceeds and other financing sources and not from operations.  By excluding expensed acquisition 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 non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful.  Furthermore, FFO and MFFO are not necessarily indicative of cash flows 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 other GAAP measurements as an indication of our performance.  MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed.  FFO and MFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments 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.

29


 

The following table presents a reconciliation of net loss to FFO and MFFO for the quarter and nine months ended September 30, 2017 and 2016:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(307,906

)

 

$

(110,558

)

 

$

(950,707

)

 

$

(110,558

)

Adjustments to reconcile net loss to FFO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

324,417

 

 

 

 

 

647,185

 

 

 

Total FFO

 

 

16,511

 

 

 

(110,558

)

 

 

(303,522

)

 

 

(110,558

)

Adjustments to reconcile FFO to MFFO

 

 

 

 

 

 

 

 

Total MFFO

 

$

16,511

 

 

$

(110,558

)

 

$

(303,522

)

 

$

(110,558

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Class A common shares outstanding (1)

 

 

683,113

 

 

 

284,747

 

 

 

521,781

 

 

 

103,295

 

Net loss per share of Class A common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

FFO per share of Class A common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

MFFO per share of Class A common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class T common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Class T common shares outstanding (1)

 

 

1,177,167

 

 

 

14,990

 

 

 

878,536

 

 

 

10,489

 

Net loss per share of Class T common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

FFO per share of Class T common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

MFFO per share of Class T common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class I common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Class I common shares outstanding (1)

 

 

57,534

 

 

 

6,600

 

 

 

33,006

 

 

 

2,187

 

Net loss per share of Class I common stock outstanding (basic and diluted)

 

$

(0.16

)

 

$

(0.36

)

 

$

(0.66

)

 

$

(0.95

)

FFO per share of Class I common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

MFFO per share of Class I common stock outstanding (basic and diluted)

 

$

0.01

 

 

$

(0.36

)

 

$

(0.21

)

 

$

(0.95

)

________________

FOOTNOTE:

(1)

For the purposes of determining the weighted average number of shares of common stock outstanding, stock dividends are treated as if such shares were outstanding as of July 11, 2016 (the date we commenced operations).

Related Party Transactions

We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition and advisory services, selling commissions, dealer manager fees, asset management fees and reimbursement of operating costs. See Item 1.

30


 

“Financial Statements” – Note 6 “Related Party Arrangements” in the accompanying condensed consolidated financial statements for additional information.

As of September 30, 2017, our Advisor has incurred aggregate other organizational and offering expenses of approximately $6.1 million in connection with our formation, without reimbursement by us.  These expenses include, but are not limited to, SEC registration fees, FINRA filing fees, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, due diligence expenses, personnel costs associated with processing investor subscriptions, escrow fees and other administrative expenses of the Offering.  

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2017.

Contractual Obligations

The following table presents our contractual obligations by payment period as of September 30, 2017:

 

 

 

Payments Due by Period

 

 

 

2017

 

 

2018-2019

 

 

2020-2021

 

 

Thereafter

 

 

Total

 

Mortgage and notes payable

   (principal and interest)

 

$

183,943

 

 

$

1,699,997

 

 

$

1,875,610

 

 

$

17,658,076

 

 

$

21,417,626

 

 

 

$

183,943

 

 

$

1,699,997

 

 

$

1,875,610

 

 

$

17,658,076

 

 

$

21,417,626

 

 

Critical Accounting Policies and Estimates

See Item 1. “Condensed Consolidated Financial Information (unaudited)” for a summary of our significant accounting policies.

Recent Accounting Pronouncements

See Item 1. “Condensed Consolidated Financial Information (unaudited)” for a summary of the impact of recent accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risks

We are exposed to financial market risks, specifically changes in interest rates to the extent we borrow money to acquire properties or to make loans and other permitted investments.  Our management objectives related to interest rate risk will be to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs.  To achieve our objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating interest rate protection opportunities through swaps or caps.

We expect to hold our fixed-rate note obligations to maturity (or prepayment) and the amounts due under such instruments would be limited to the outstanding principal balance, any accrued and unpaid interest and any prepayment premiums. Accordingly, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed-rate note obligations, would have a significant impact on our operations.  The fair market value of the Notes was approximately $0.3 million as of September 30, 2017, which was determined using discounted cash flows based on current rates and spreads we would expect to obtain for similar borrowings.

31


 

The following is a schedule as of September 30, 2017 of our variable rate debt maturities for the remainder of 2017 and each of the next four years and thereafter (principal maturities only) (in thousands):

 

 

 

Expected Maturities

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

 

Fair Value (1)

 

Variable rate debt

 

$

 

 

$

32

 

 

$

199

 

 

$

211

 

 

$

224

 

 

$

15,384

 

 

$

16,050

 

 

$

16,044

 

Average interest rate on variable rate debt

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

LIBOR + 2.85%

 

 

 

 

 

_____________

FOOTNOTE:

(1)

The estimated fair value of our Summer Vista Loan was determined using discounted cash flows based on current rates and spreads we would expect to obtain for similar borrowings.

Management estimates that a one-percentage point increase or decrease in LIBOR in 2017, compared to LIBOR rates as of September 30, 2017, would result in fluctuation of interest expense on our variable rate debt of approximately $0.2 million for the year ended December 31, 2017. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and actual results will likely vary given that our sensitivity analysis on effects of changes in LIBOR does not factor in a potential change in variable rate debt levels, any offsetting gains on interest swap contracts, or the impact of any LIBOR floors or caps.

32


 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports we filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Controls Over Financial Reporting

We have not evaluated any change in our internal control over financial reporting that occurred during our last fiscal quarter due to a transition period established by the rules of the SEC for newly public companies. We expect to issue management’s first assessment regarding internal control over financial reporting for the year ending December 31, 2017 and to evaluate any changes in our internal controls over financial reporting in each quarterly and annual report thereafter.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, we may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including proceedings to enforce our contractual or statutory rights.  While we cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, we do not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on our results of operations or financial condition.

Item 1A.

Risk Factors

The following risk factors replace and/or supplement the similar risk factors identified in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Our offering prices per share for each class of our shares are primarily based on the estimated NAV per share of each class of our shares plus applicable upfront selling commissions and dealer manager fees, but also based upon subjective judgments, assumptions and opinions by management, which may or may not turn out to be correct. Therefore, our offering prices may not reflect the amount that might be paid to our stockholders for their shares in a market transaction and may not be indicative of the price at which our shares would trade if they were actively traded.

On September 15, 2017, our board of directors approved an estimated NAV per share of $10.00 for each class of shares of our common stock as of June 30, 2017. To assist FINRA members and their associated persons that participate in our offering of common stock in meeting their customer account statement reporting obligations pursuant to applicable FINRA and NASD Conduct Rules, we will disclose in our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and/or in our Current Reports on Form 8-K, our estimated NAV per share of each class of our shares. This estimated value per share will be accompanied by any disclosures required under the FINRA and NASD Conduct Rules.

The estimated NAV per share for each class of our shares will be based on valuations of our assets and liabilities performed at least annually, by, or with the material assistance or confirmation of, a third-party valuation expert or

33


 

service and will generally be consistent with the recommendations in the Investment Program Association Practice Guideline 2013-01- Valuations of Publicly Registered, Non-Listed REITs. The three share classes in our offering are meant to provide broker-dealers with more flexibility to facilitate investment in us and are offered partially in response to recent changes to the applicable FINRA and NASD Conduct Rules regarding the reporting of our estimated NAV per share of each class of our shares.

Our board of directors determined the offering price of each class of our shares based upon a number of factors but primarily based on the estimated NAV per share of our shares determined by our board of directors. Although we established the estimated NAV per share generally in accordance with our valuation policy and certain recommendations and methodologies of the Investment Program Association, the valuation methodologies used by the independent valuation firm retained by our board of directors to estimate the value of our property and the estimated NAV of each class of our shares as of June 30, 2017 involved subjective judgments, assumptions and opinions, which may or may not turn out to be correct. Our board of directors also took into consideration applicable upfront selling commissions and dealer manager fees of our offering in establishing the current offering prices for each class of our shares. As a result of these, as well as other factors, our offering prices for each class of our shares may not reflect the amount that might be paid to our stockholders for their shares in a market transaction or of the proceeds that our stockholders would receive if we were liquidated or dissolved and the proceeds were distributed to our stockholders. See “Description of Capital Stock—Valuation Policy” for a description of our policy with respect to valuations of our common stock.

The estimated NAV per share of each class of our shares is based upon a valuation of our property as of June 30, 2017 and does not take into account how developments subsequent to the valuation date related to individual assets, the financial or real estate markets or other events may have increased or decreased the value of our portfolio. The valuation and appraisal of our property are estimates of fair value and may not necessarily correspond to realizable value upon the sale of the property. Therefore, our estimated NAV per share for each class of our shares may not reflect the amount that would be realized upon a sale of our property.

On September 15, 2017, our board of directors approved a NAV per share of $10.00 for each class of shares of our common stock as of June 30, 2017. We intend to use this NAV as the estimated per share value of each class of our shares until the next net asset valuation approved by our board of directors. We expect to perform a net asset valuation at least annually. We will disclose future estimates of our NAV to stockholders in our filings with the Commission.

Further, our estimated NAV per share is based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of June 30, 2017. We did not make any adjustments to our estimated NAV subsequent to June 30, 2017, including adjustments relating to, among others, the issuance of common stock, the payment of related offering costs, net operating income earned or distributions declared. The NAV of our shares will fluctuate over time in response to a number of factors, including but not limited to the proceeds raised from our offering, future investments, the performance of individual assets in our portfolio, the management of those assets, and the real estate and finance markets.

For the purposes of calculating our estimated NAV per share of each class of our shares, we retained an investment banking firm as valuation expert to provide a range of per share values for our and a valuation of our property as of June 30, 2017. The valuation methodologies used to estimate the NAV of each class of our shares, as well as the value of our property, involved certain subjective judgments, including but not limited to, discounted cash flow analysis. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of our advisor and our valuation expert. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuation of our property may not correspond to the realizable value upon a sale of the asset. Because the price investors will pay for shares in our offering is primarily based on our estimated NAV per share for each class of shares plus applicable upfront selling commissions and dealer manager fees, investors may pay more than realizable value for their investment when they purchase their shares or receive less than realizable value when they sell their shares.

34


 

Because the current offering prices for our shares in our public offering exceed the net tangible book value per share, investors in our offering will experience immediate dilution in the net tangible book value of their shares.

We are currently offering our Class A, Class T and Class I shares in our primary public offering at $10.93, $10.50 and $10.00 per share, respectively, with discounts available as described in the “Plan of Distribution” section of our prospectus. In addition, under our distribution reinvestment plan distributions will be reinvested in additional shares at prices per share equal to the current NAV per share for each class, as applicable. Our current public offering prices for our shares exceed our net tangible book value per share, which amount is the same for all three classes. Our net tangible book value per share is a rough approximation of value calculated as total book value of assets minus total book value of liabilities, divided by the total number of shares of common stock outstanding. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the company in accordance with our investment objectives. However, net tangible book value does reflect certain dilution in value of our common stock from the issue price in our offering primarily as a result of (i) the substantial fees paid in connection with our offering, including selling commissions, dealer manager fees and annual distribution and stockholder servicing fees, (ii) the fees and expenses paid to our advisor and its affiliates in connection with the selection, acquisition, management and sale of our investments, (iii) general and administrative expenses, (iv) accumulated depreciation and amortization of real estate investments, and (v) the issuance of stock dividends. As of December 31, 2016, our net tangible book value per share of shares of our shares was $9.08. To the extent we are able to raise substantial proceeds in our offering, some of the expenses that cause dilution of the net tangible book value per share are expected to decrease on a per share basis, resulting in increases in the net tangible book value per share. This increase would be partially offset by increases in depreciation and amortization expenses related to our real estate investments.

The actual value of shares that we repurchase under our redemption plan may be substantially less than what we pay.

Under our redemption plan, the price for the repurchase of shares shall be equal to the then-current NAV per share, as published from time to time in an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q and/or a Current Report on Form 8-K publicly filed with the Commission. These prices may not accurately represent the current value of our assets per share of our common stock at any particular time and may be higher or lower than the actual value of our assets per share at such time. Accordingly, when we repurchase shares of our common stock, the actual value of the shares that we repurchase may be less than the price that we pay, and the repurchase may be dilutive to our remaining stockholders.

We only own one property, which increases the risk that adverse changes in the performance or value of that property could materially affect our results of operations, our NAV and returns to our investors.

As of the date of this report, we only own one real estate investment consisting of a seniors housing community. As a result, we are subject to greater risks associated with geographic and property-type concentration in a single asset. A decline in in the performance or value of that asset will adversely affect our performance and the value of our stockholders’ investments.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, and we did not repurchase any of our securities.

35


 

Use of Proceeds from Registered Securities

On March 2, 2016, our Registration Statement on Form S-11 (File No. 333-206017), covering a public offering of up to $2.0 billion shares of common stock, was initially declared effective under the Securities Act of 1933, as amended.  Our Primary Offering commenced on a “best efforts” basis wherein we are offering, in any combination, three classes of our common stock: Class A shares, Class T shares and Class I shares.  There are differing selling fees and commissions for each class of common stock.  We will also pay annual distribution and stockholder servicing fees, subject to certain underwriting compensation limits, on the Class T and Class I shares sold in the Primary Offering.  This is a continuous offering that will end no later than two years from March 2, 2016, unless extended in accordance with applicable securities laws.  

The use of proceeds from our Primary Offering was as follows as of September 30, 2017:

 

 

 

Total

 

 

Payments to Affiliates (1)

 

 

Payments to Others

 

Aggregate price of offering amount registered (2)

 

$

1,750,000,000

 

 

 

 

 

 

 

 

 

Shares sold (3)

 

 

2,147,756

 

 

 

 

 

 

 

 

 

Aggregate amount sold (3)

 

$

22,580,454

 

 

 

 

 

 

 

 

 

Payment of underwriting compensation (4)

 

 

(1,086,984

)

 

$

(1,086,984

)

 

$

 

Net offering proceeds to the issuer

 

 

21,493,470

 

 

 

 

 

 

 

 

 

Purchases of real estate and development costs

 

 

(5,379,888

)

 

 

 

 

(5,379,888

)

Payment of investment services fees and acquisition expenses

 

 

(625,037

)

 

 

(503,389

)

 

 

(121,648

)

Payment of capital expenditures

 

 

(17,000

)

 

 

 

 

(17,000

)

Distributions to stockholders (5)

 

 

(162,496

)

 

 

(115,442

)

 

 

(47,054

)

Remaining proceeds from the Offering

 

$

15,309,049

 

 

 

 

 

 

 

 

 

_____________

FOOTNOTES:

(1)

Represents direct or indirect payments to directors, officers, or general partners of the issuer or their associates; to persons owning 10% or more of any class of equity securities of the issuer; and to affiliates of the issuer.

(2)

We are also offering, in any combination, up to $250 million of Class A, Class T and Class I shares pursuant to our Reinvestment Plan and reserve the right to reallocate shares of common stock between our Reinvestment Plan and our Primary Offering.

(3)

Excludes all shares issued as stock dividends, all shares issued pursuant to our Reinvestment Plan, $200,000 of unregistered shares issued to our Advisor in a private transaction exempt from the registration requirements pursuant to section 4(a)(2) of the Securities Act of 1933, as amended, and $251,250 of unregistered equity securities sold in our private placement.

(4)

Underwriting compensation includes selling commissions and fees paid to the Dealer Manager; all or a portion of which may be reallowed to participating broker-dealers.

(5)

Until such time as we have sufficient operating cash flows from our assets, we will pay cash distributions, debt service and/or operating expenses from net proceeds of our Offering.  The amounts presented above represent the net proceeds used for such purposes.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosure Not Applicable

Item 5.

Other Information - None

Item 6.

Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

36


 

EXHIBIT INDEX

The following exhibits are included, or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No.

 

Description

 

 

 

3.1

 

Second Articles of Amendment and Restatement (Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 15, 2017 and incorporated herein by reference.)

 

 

 

3.2

 

Amended and Restated Bylaws (Previously filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed May 6, 2016 and incorporated herein by reference.)

 

 

 

4.1

 

Form of Subscription Agreement (Previously filed as Appendix A to the Company’s Prospectus filed April 26, 2017 and incorporated herein by reference.)

 

 

 

4.2

 

Distribution Reinvestment Plan (Previously filed as Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed May 6, 2016 and incorporated herein by reference.)

 

 

 

4.3

 

Amended and Restated Redemption Plan (Previously filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed April 17, 2017 and incorporated herein by reference.)

 

 

 

4.4

 

Statement regarding transfer restrictions, preferences, limitations and rights of holders of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (Previously filed as Exhibit 4.4 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 (File No. 333-206017), filed January 15, 2016 and incorporated herein by reference.)

 

 

 

10.1

 

Asset Purchase Agreement between MidAmerica Surgery Institute Properties, LLC, and CHP II Partners, LP, dated October 2, 2017 (Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 3, 2017 and incorporated herein by reference.)

 

 

 

31.1

 

Certification of Chief Executive Officer of CNL Healthcare Properties II, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

 

 

 

31.2

 

Certification of Chief Financial Officer of CNL Healthcare Properties II, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer of CNL Healthcare Properties II, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

 

 

 

101

 

The following materials from CNL Healthcare Properties II, Inc. Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

37


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 8th day of November 2017.

 

CNL HEALTHCARE PROPERTIES II, INC.

 

 

By:

/s/ Stephen H. Mauldin

 

STEPHEN H. MAULDIN

 

Chief Executive Officer and President

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Kevin R. Maddron

 

KEVIN R. MADDRON

 

Chief Financial Officer, Chief Operating Officer and Treasurer

 

(Principal Financial Officer)

 

 

38