CNL Healthcare Properties II (CHPII) Financial Report Summaries

Risks

• We have a limited operating history and there is no assurance that we will be able to achieve our investment objectives; the prior performance of other CNL affiliated entities may not be an accurate barometer of our future results.
• We recently terminated our public offering, terminated stock dividends, suspended our distribution reinvestment plan, suspended our share redemption plan (“Redemption Plan”), and appointed a Special Committee to consider strategic alternatives, all of which creates uncertainty about our future and for our stockholders.
• There is no public trading market for the shares of our common stock and our Redemption Plan has been suspended; therefore it will be difficult for our stockholders to sell their shares of common stock.
• If we do not effect a liquidity event, it will be very difficult for our stockholders to have liquidity for their investment in shares of our common stock.
• We only own three properties, which increases the risk that adverse changes in the performance or value of those properties could materially affect our results of operations, our NAV and returns to our investors.
• Our relatively small size increases our fixed operating expenses as a percentage of gross income which has made us reliant on our sponsor for expense support.
• We are required to pay substantial compensation to our advisor and its affiliates or related parties, which may be increased or decreased by a majority of our board of directors, including a majority of the independent directors.
• The estimated NAV per share of our shares is based upon a valuation of three of our properties as of December 31, 2018 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 properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of the properties. Therefore, the estimated NAV per share may not reflect the amount that would be realized upon a sale of our properties.
• We currently do not have research analysts reviewing our performance.
• The availability and timing of cash distributions to our stockholders is uncertain.
• We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of an investment in shares of our common stock.
• Any adverse changes in CNL’s financial health, the public perception of CNL, or our relationship with its sponsor or its affiliates could hinder our operating performance and the return on an investment.
• Investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we or our subsidiaries become an unregistered investment company, we could not continue our business.
• Stockholders have limited control over changes in our policies and operations.
• If we do not successfully implement a liquidity event, investors may have to hold their investment for an indefinite period.
• Adverse changes in affiliated programs could also adversely affect our ability to raise capital.
• There will be competing demands on our officers and directors and they may not devote all of their attention to us, which could have a material adverse effect on our business and financial condition.
• Our advisor, its affiliates and their and our executive officers will face conflicts of interest relating to the management of our business and that of CNL Healthcare Properties, Inc., and such conflicts may not be resolved in our favor.
• Our advisor and its affiliates, including all of our executive officers and affiliated directors, will face conflicts of interest as a result of their compensation arrangements with us, which could result in actions that are not in the best interest of our stockholders.
• None of the agreements with our advisor or any other affiliates were negotiated at arm’s length.
• If we internalize our management functions, a stockholder’s interest in us could be diluted, we could incur other significant costs associated with being self-managed, we may not be able to retain or replace key personnel and we may have increased exposure to litigation as a result of internalizing our management functions.
• We are not in privity of contract with service providers that may be engaged by our advisor to perform advisory services and they may be insulated from liabilities to us, and our advisor has minimal assets with which to remedy any liabilities to us.
• We depend on tenants for a significant portion of our revenue and lease defaults or terminations could have an adverse effect.
• Significant tenant lease expirations may decrease the value of our investments.
• Our long term leases may not result in fair market lease rates over time; therefore, our income and our distributions could be lower than if we did not enter into long term leases.
• The impact of a slow economy could adversely affect certain of the properties in which we invest, and the financial difficulties of our tenants and operators could adversely affect us.
• The inability of seniors to sell their homes could negatively impact occupancy rates, revenues, cash flows and results of operations of the properties we own.
• We do not have control over market and business conditions that may affect our success.
• Our exposure to typical real estate investment risks could reduce our income.
• We may be unable to sell assets if or when we decide to do so.
• An increase in real estate taxes may decrease our income from properties.
• If one or more of our tenants file for bankruptcy protection, we may be precluded from collecting all sums due.
• We rely on various security provisions in our leases for minimum rent payments which could have a material adverse effect on our financial condition.
• Our real estate assets may be subject to impairment charges which could have a material adverse effect on our financial condition.
• We are uncertain of our sources for funding of future capital needs and this may subject us to certain risks associated with the ongoing needs of our properties.
• Increased competition for residents or patients may reduce the ability of certain of our operators to make scheduled rent payments to us or affect our operating results.
• We may be subject to litigation which could have a material adverse effect on our business and financial condition.
• Our properties may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
• We may not be able to compete effectively in those markets where overbuilding exists and our inability to compete in those markets may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to investors.
• We invest in private pay seniors housing properties, an asset class of the seniors housing sector that is highly competitive.
• Events which adversely affect the ability of seniors to afford our daily resident fees could cause the occupancy rates, resident fee revenues and results of operations of our seniors housing properties to decline.
• Significant legal actions brought against the tenants or managers of our seniors housing properties could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us.
• We are exposed to various operational risks, liabilities and claims with respect to our seniors housing properties that may adversely affect our ability to generate revenues and/or increase our costs.
• Our failure or the failure of the tenants and managers of our properties to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect the operations of our seniors housing properties.
• If our operators fail to cultivate new or maintain existing relationships with residents, community organizations and healthcare providers in the markets in which they operate, our occupancy percentage, payor mix and resident rates may deteriorate, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to investors.
• We cannot predict what the effect of new healthcare reform laws or other healthcare proposals would be on those of our properties offering healthcare services and, thus, our business.
• Government budget deficits could lead to a reduction in Medicare and Medicaid reimbursement.
• Adverse trends in healthcare provider operations may negatively affect our lease revenues and our ability to make distributions to our stockholders.
• Termination of resident lease agreements could adversely affect our revenues and earnings for seniors housing properties providing assisted living services.
• Our medical office building may be unable to compete successfully.
• Some tenants of medical office buildings are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.
• Our tenants may generally be subject to risks associated with the employment of unionized personnel for our seniors housing and medical office building properties.
• Our seniors housing properties may not be readily adaptable to other uses.
• We do not control the management of our properties.
• Our properties may be subject to environmental liabilities that could significantly impact our return from the properties and the success of our ventures.
• Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
• Legislation and government regulation may adversely affect the development and operations of properties we own.
• We may be unable to obtain desirable types of insurance coverage at a reasonable cost, if at all, and we may be unable to comply with insurance requirements contained in mortgage or other agreements due to high insurance costs.
• Uninsured losses or losses in excess of insured limits could result in the loss or substantial impairment of one or more of our investments.
• Our TRS structure subjects us to the risk of increased operating expenses.
• Our TRS structure subjects us to the risk that the leases with our TRSs do not qualify for tax purposes as arm’s length, which would expose us to potentially significant tax penalties.
• If our portfolio and risk management systems are ineffective, we may be exposed to material unanticipated losses.
• Changes in accounting pronouncements could adversely impact us or our tenants’ reported financial performance.
• We are highly dependent on information systems and their failure could significantly disrupt our business.
• We could be negatively impacted by cybersecurity attacks.
• If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
• Mortgage indebtedness and other borrowings will increase our business risks.
• Our revenues are highly dependent on operating results of, and lease payments from, our properties. Defaults by our tenants would reduce our cash available for the repayment of our outstanding debt and for distributions.
• Defaults on our borrowings may adversely affect our financial condition and results of operations.
• Financing arrangements involving balloon payment obligations may adversely affect our ability to make distributions.
• Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
• Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
• We may acquire various financial instruments for purposes of “hedging” or reducing our risks which may be costly and/or ineffective and will reduce our cash available for distribution to our stockholders.
• Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and state and local income tax, and would adversely affect our operations and the value of our common stock.
• Even if we remain qualified and maintain our status as a REIT, in certain circumstances we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
• Early investors may receive tax benefits from our election to accelerate depreciation expense deductions of certain components of our investments, including land improvements and fixtures, which later investors may not benefit from.
• To qualify as a REIT we must meet annual distribution requirements, which may force us to forego otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
• Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on an investment in shares of our common stock.
• Our TRSs are subject to corporate level taxes and our dealings with our TRSs may be subject to 100% excise tax.
• The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce our stockholders’ anticipated return from an investment in us.
• Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
• Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
• Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
• Complying with REIT requirements may force us to forego or liquidate otherwise attractive investment opportunities.
• The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
• We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
• The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
• Non U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
• If our assets are deemed “plan assets” for purposes of ERISA and/or the Code, we could be subject to excise taxes on certain prohibited transactions.
• The limit on the percentage of shares of our stock that any person may own may discourage a takeover or business combination that may benefit our stockholders.
• Our board of directors can take many actions without stockholder approval which could have a material adverse effect on the distributions investors receive from us and/or could reduce the value of our assets.
• Investors will be limited in their right to bring claims against our officers and directors.
• Our charter designates the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
• Our use of an operating partnership structure may result in potential conflicts of interest with limited partners other than us, if any, whose interests may not be aligned with those of our stockholders.