UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~FORM 10-Q~~
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2019

☐	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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	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 ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

None

N/A

The number of shares of the registrant’s outstanding common stock as of ~~July~~October 31, 2019 was 4,899,139 Class A shares.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

INDEX



PART I. FINANCIAL INFORMATION			PAGE

Item 1.1.Condensed Consolidated Financial Information (unaudited):
	Condensed Consolidated ~~Financial Information (unaudited)~~Statement of Net Assets (Liquidation Basis):		31
	Condensed Consolidated Balance ~~Sheets~~Sheet (Going Concern Basis)		2
	Condensed Consolidated Statement of Changes in Net Assets (Liquidation Basis)		3
	Condensed Consolidated Statements of Operations (Going Concern Basis)		4
	Condensed Consolidated Statements of ~~Stockholders’~~ Equity (Going Concern Basis)		5
	Condensed Consolidated Statements of Cash Flows (Going Concern Basis)		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.		~~Management’s~~2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		1921
Item 3.		~~Quantitative~~3.Quantitative and Qualitative Disclosures about Market Risk		3228
Item 4.		~~Controls~~4.Controls and Procedures		3228

PART II. OTHER INFORMATION			33

Item 1.		~~Legal~~1.Legal Proceedings		3329
Item ~~1A.~~		~~Risk~~1A.Risk Factors		3329
Item 2.		~~Unregistered~~2.Unregistered Sales of Equity Securities and Use of Proceeds		3929
Item 3.		~~Defaults~~3.Defaults Upon Senior Securities		4029
Item 4.		~~Mine~~4.Mine Safety Disclosures		4029
Item 5.		~~Other~~5.Other Information		4029
Item 6.		~~Exhibits~~6.Exhibits		4029

Exhibit Index			4130
Signatures			4231

~~Item 1.~~

~~Condensed Consolidated~~

Item 1. Condensed Consolidated Financial Information

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~BALANCE SHEETS (UNAUDITED)~~STATEMENT OF NET ASSETS

(Liquidation Basis)

(Unaudited)

June 30,

December 31,

ASSETS

2019

2018

Real estate investment properties, net

$
42,224,947

$
42,969,180

Assets held for sale, net

—

14,202,202

Cash

4,431,446

8,003,576

Intangibles, net

983,925

1,497,809

Other assets

315,869

382,637

Restricted cash

367,035

233,971

Total assets

$
48,323,222

$
67,289,375

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Mortgage loans, net

$
6,047,401

$
18,665,013

Liabilities associated with assets held for sale

—

6,247,187

Accounts payable and accrued liabilities

705,664

497,081

Other liabilities

156,208

128,957

Due to related parties

67,660

85,902

Total liabilities

6,976,933

25,624,140

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; 4,899,139 and 4,899,139 shares both issued
   and outstanding, respectively

48,995

48,995

Class T Common stock, $0.01 par value per share, 700,000,000 shares
   authorized; none issued or outstanding

—

—

Class I Common stock, $0.01 par value per share, 100,000,000 shares
   authorized; none issued or outstanding

—

—

Capital in excess of par value

48,039,220

48,039,220

Accumulated loss

(3,077,633
)

(3,464,160
)
Accumulated distributions

(3,664,293
)

(2,958,820
)
Total stockholders' equity

41,346,289

41,665,235

Total liabilities and stockholders' equity

$
48,323,222

$
67,289,375

		September 30,
ASSETS		2019
Real estate investment properties	$		48,000,000
Cash			4,652,043
Restricted cash			321,115
Other assets			249,320
Total assets	$		53,222,478

LIABILITIES
Mortgage loans	$		6,150,000
Liability for estimated costs in excess of estimated receipts during liquidation			2,369,538
Accounts payable and accrued liabilities			908,002
Other liabilities			38,495
Due to related parties			78,079
Total liabilities			9,544,114
Commitments and contingencies (Note 13)
Net assets in liquidation	$		43,678,364

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Going Concern Basis)

(Unaudited)

	December 31,
ASSETS	2018
Real estate investment properties, net	$	42,969,180
Assets held for sale, net		14,202,202
Cash		8,003,576
Intangibles, net		1,497,809
Other assets		382,637
Restricted cash		233,971
Total assets	$	67,289,375

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans, net	$	18,665,013
Liabilities associated with assets held for sale		6,247,187
Accounts payable and accrued liabilities		497,081
Other liabilities		128,957
Due to related parties		85,902
Total liabilities		25,624,140

Commitments and contingencies (Note 13)

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; 4,899,139 shares both issued and outstanding		48,995
Class T Common stock, $0.01 par value per share, 700,000,000 shares authorized; none issued or outstanding	―
Class I Common stock, $0.01 par value per share, 100,000,000 shares authorized; none issued or outstanding	―
Capital in excess of par value		48,039,220
Accumulated loss		(3,464,160)
Accumulated distributions		(2,958,820)
Total stockholders' equity		41,665,235
Total liabilities and stockholders' equity	$	67,289,375

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(Liquidation Basis)

(Unaudited)

	Period from September 1, 2019 through
	September 30, 2019
Net assets in liquidation, beginning of period (Note 5)	$	43,796,825
Changes in net assets in liquidation:
Cash payments net of cash receipts		(118,461)
Net assets in liquidation, end of period	$	43,678,364

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~(UNAUDITED)~~

(Going Concern Basis)

(Unaudited)

													Two Months		Quarter		Eight Months		Nine Months
	Quarter Ended						Six Months Ended						Ended		Ended		Ended		Ended
	June 30,						June 30,						August 31,		September 30,		August 31,		September 30,
	2019			2018			2019			2018			2019		2018		2019		2018
Revenues:
Resident fees and services	$	2,152,100		$	1,140,235		$	4,350,450		$	2,264,760		$	1,490,631	$	1,483,924	$	5,841,081	$	3,748,684
Total revenues		2,152,100			1,140,235			4,350,450			2,264,760			1,490,631		1,483,924		5,841,081		3,748,684

Operating expenses:
Property operating expenses		1,322,985			622,018			2,715,453			1,239,166			1,020,058		942,446		3,735,511		2,181,612
General and administrative expenses		421,992			285,464			825,239			604,697			371,795		300,989		1,197,034		905,686
Acquisition fees and expenses		—			—			—			818			—		—		—		818
Property management fees		107,879			80,360			217,626			154,322			74,216		73,996		291,842		228,318
Depreciation and amortization		674,109			324,954			1,344,290			648,678			451,154		438,469		1,795,444		1,087,147
Total operating expenses		2,526,965			1,312,796			5,102,608			2,647,681			1,917,223		1,755,900		7,019,831		4,403,581

Operating loss		(374,865	)		(172,561	)		(752,158	)		(382,921	)		(426,592)		(271,976)		(1,178,750)		(654,897)

Other income (expense):
Interest and other income		12,035			40			18,260			62			8,744		9,884		27,004		9,946
Interest expense and loan cost amortization		(258,341	)		(194,099	)		(515,910	)		(375,183	)		(51,505)		(220,314)		(567,415)		(595,497)
Total other expense		(246,306	)		(194,059	)		(497,650	)		(375,121	)		(42,761)		(210,430)		(540,411)		(585,551)
Loss before income taxes		(621,171	)		(366,620	)		(1,249,808	)		(758,042	)		(469,353)		(482,406)		(1,719,161)		(1,240,448)
Income tax expense		—			(13,827	)		(30,533	)		(45,183	)
Income tax benefit (expense)														—		9,938		(30,533)		(35,245)
Loss from continuing operations		(621,171	)		(380,447	)		(1,280,341	)		(803,225	)		(469,353)		(472,468)		(1,749,694)		(1,275,693)
Income from discontinued operations		1,563,821			30,254			1,666,868			62,794			—		13,781		1,666,868		76,575
Net income (loss)	$	942,650		$	(350,193	)	$	386,527		$	(740,431	)
Net loss													$	(469,353)	$	(458,687)	$	(82,826)	$	(1,199,118)

Class A common stock (basic and diluted):
Net income (loss) attributable to Class A stockholders	$	942,650		$	(76,206	)	$	386,527		$	(170,164	)
Net income (loss) per share of Class A common stock outstanding	$	0.19		$	(0.09	)	$	0.08		$	(0.20	)
Net loss attributable to Class A stockholders													$	(469,353)	$	(87,907)	$	(82,826)	$	(257,552)
Net loss per share of Class A common stock outstanding													$	(0.10)	$	(0.10)	$	(0.02)	$	(0.30)
Weighted average number of Class A common shares outstanding		4,899,139			867,723			4,899,139			846,574			4,899,139		879,674		4,899,139		857,729
Distributions declared per Class A common share	$	—		$	0.1440		$	0.1440		$	0.2880		$	—	$	0.1440	$	0.1440	$	0.4320

Class T common stock (basic and diluted):
Net loss attributable to Class T stockholders	$	—		$	(246,458	)	$	—		$	(517,528	)	$	—	$	(327,896)	$	—	$	(845,906)
Net loss per share of Class T common stock outstanding	$	—		$	(0.09	)	$	—		$	(0.20	)	$	—	$	(0.10)	$	—	$	(0.30)
Weighted average number of Class T common shares outstanding		—			2,806,307			—			2,574,718			—		3,281,231		—		2,817,132
Distributions declared per Class T common share	$	—		$	0.1175		$	—		$	0.2354		$	—	$	0.1177	$	—	$	0.3530

Class I common stock (basic and diluted):
Net loss attributable to Class I stockholders	$	—		$	(27,529	)	$	—		$	(52,739	)	$	—	$	(42,884)	$	—	$	(95,660)
Net loss per share of Class I common stock outstanding	$	—		$	(0.09	)	$	—		$	(0.20	)	$	—	$	(0.10)	$	—	$	(0.30)
Weighted average number of Class I common shares outstanding		—			313,463			—			262,378			—		429,142		—		318,577
Distributions declared per Class I common share	$	—		$	0.1314		$	—		$	0.2626		$	—	$	0.1310	$	—	$	0.3936

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ~~(UNAUDITED)~~

~~FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018~~(Going Concern Basis)

(Unaudited)

	Common Stock																													Common Stock
	Class A						Class T						Class I				Capital in									Total					Class A			Class T			Class I			Capital in						Total
	Number			Par			Number			Par			Number		Par		Excess of			Accumulated			Accumulated			Stockholders'					Number	Par		Number	Par		Number	Par		Excess of		Accumulated		Accumulated		Stockholders'
	of Shares			Value			of Shares			Value			of Shares		Value		Par Value			Loss			Distributions			Equity					of Shares	Value		of Shares	Value		of Shares	Value		Par Value		Loss		Distributions		Equity
Balance at March 31, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(4,020,283	)	$	(3,664,293	)	$	40,403,639
Net income		—			—			—			—			—		—		—			942,650			—			942,650
Balance at June 30, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,077,633	)	$	(3,664,293	)	$	41,346,289		Balance at June 30, 2019		4,899,139	$	48,995	―	$	―	―	$	―	$	48,039,220	$	(3,077,633)	$	(3,664,293)	$	41,346,289
Net loss																													Net loss		―		―	―		―	―		―		―		(469,353)		―		(469,353)
Balance at August 31, 2019																													Balance at August 31, 2019		4,899,139	$	48,995	―	$	―	―	$	―	$	48,039,220	$	(3,546,986)	$	(3,664,293)	$	40,876,936

Balance at December 31, 2018		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,464,160	)	$	(2,958,820	)	$	41,665,235		Balance at December 31, 2018		4,899,139	$	48,995	―	$	―	―	$	―	$	48,039,220	$	(3,464,160)	$	(2,958,820)	$	41,665,235
Net income		—			—			—			—			—		—		—			386,527			—			386,527
Net loss																													Net loss		―		―	―		―	―		―		―		(82,826)		―		(82,826)
Cash distributions declared		—			—			—			—			—		—		—		―				(705,473	)		(705,473	)	Cash distributions declared		―		―	―		―	―		―		―		―		(705,473)		(705,473)
Balance at June 30, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,077,633	)	$	(3,664,293	)	$	41,346,289
Balance at August 31, 2019																													Balance at August 31, 2019		4,899,139	$	48,995	―	$	―	―	$	―	$	48,039,220	$	(3,546,986)	$	(3,664,293)	$	40,876,936

Balance at March 31, 2018		839,410		$	8,394			2,620,776		$	26,206			253,489	$	2,535	$	35,549,090		$	(2,049,215	)	$	(1,248,505	)	$	32,288,505
Subscriptions received for common stock, including distribution reinvestments		36,771			367			382,015			3,821			94,274		943		5,355,565			—			—			5,360,696
Balance at June 30, 2018																													Balance at June 30, 2018		866,325	$	8,663	3,010,868	$	30,109	348,644	$	3,487	$	40,355,933	$	(2,399,408)	$	(1,731,573)	$	36,267,211
Subscriptions received for common stock,																													Subscriptions received for common stock,
																													including distribution reinvestments		27,937		280	530,986		5,310	129,978		1,300		7,197,379		―		―		7,204,269
Stock dividends issued		2,758			28			8,257			82			881		9		(119	)		—			—			—		Stock dividends issued		2,819		28	9,622		96	1,229		12		(136)		―		―		―
Redemptions of common stock		(12,614	)		(126	)		(180	)		—			—		—		(126,773	)		—			—			(126,899	)	Redemptions of common stock		—		―	(3,298)		(33)	―		―		(33,146)		―		―		(33,179)
Stock issuance and offering costs		—			—			—			—			—		—		(421,830	)		—			—			(421,830	)	Stock issuance and offering costs		―		―	―		―	―		―		(582,115)		―		―		(582,115)
Net loss		—			—			—			—			—		—		—			(350,193	)		—			(350,193	)	Net loss		―		―	―		―	―		―		―		(458,687)		―		(458,687)
Cash distributions declared		—			—			—			—			—		—		—			—			(483,068	)		(483,068	)	Cash distributions declared		―		―	―		―	―		―		―		―		(554,780)		(554,780)
Balance at June 30, 2018		866,325		$	8,663			3,010,868		$	30,109			348,644	$	3,487	$	40,355,933		$	(2,399,408	)	$	(1,731,573	)	$	36,267,211
Balance at September 30, 2018																													Balance at September 30, 2018		897,081	$	8,971	3,548,178	$	35,482	479,851	$	4,799	$	46,937,915	$	(2,858,095)	$	(2,286,353)	$	41,842,719

Balance at December 31, 2017		808,011		$	8,080			2,049,223		$	20,492			160,490	$	1,605	$	28,984,932		$	(1,658,977	)	$	(846,200	)	$	26,509,932		Balance at December 31, 2017		808,011	$	8,080	2,049,223	$	20,492	160,490	$	1,605	$	28,984,932	$	(1,658,977)	$	(846,200)	$	26,509,932
Subscriptions received for common stock, including distribution reinvestments		65,726			657			949,264			9,493			186,687		1,867		12,536,152			—			—			12,548,169
Subscriptions received for common stock,																													Subscriptions received for common stock,
																													including distribution reinvestments		93,663		937	1,480,250		14,803	316,665		3,167		19,733,531		―		―		19,752,438
Stock dividends issued		5,202			52			14,919			149			1,467		15		(216	)		—			—			—		Stock dividends issued		8,021		80	24,541		245	2,696		27		(352)		―		―		―
Redemptions of common stock		(12,614	)		(126	)		(2,538	)		(25	)		—		—		(152,130	)		—			—			(152,281	)	Redemptions of common stock		(12,614)		(126)	(5,836)		(58)	―		―		(185,276)		―		―		(185,460)
Stock issuance and offering costs		—			—		―				—			—		—		(1,012,805	)		—			—			(1,012,805	)	Stock issuance and offering costs		―		―	―		―	―		―		(1,594,920)		―		―		(1,594,920)
Net loss		—			—		―				—			—		—		—			(740,431	)		—			(740,431	)	Net loss		―		―	―		―	―		―		―		(1,199,118)		―		(1,199,118)
Cash distributions declared		—			—		―				—			—		—		—			—			(885,373	)		(885,373	)	Cash distributions declared		―		―	―		―	―		―		―		―		(1,440,153)		(1,440,153)
Balance at June 30, 2018		866,325		$	8,663			3,010,868		$	30,109			348,644	$	3,487	$	40,355,933		$	(2,399,408	)	$	(1,731,573	)	$	36,267,211
Balance at September 30, 2018																													Balance at September 30, 2018		897,081	$	8,971	3,548,178	$	35,482	479,851	$	4,799	$	46,937,915	$	(2,858,095)	$	(2,286,353)	$	41,842,719

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Going Concern Basis)

(Unaudited)

	Six Months Ended
	June 30,						Eight Months Ended August 31,		Nine Months Ended September 30,
	2019			2018			2019		2018
Operating activities:
Net cash flows provided by (used in) operating activities – continuing operations	$	470,175		$	(429,933	)	$	679,646	$	(336,905)
Net cash flows provided by operating activities – discontinued operations		188,175			345,124			188,175		541,630
Net cash flows provided by (used in) operating activities		658,350			(84,809	)
Net cash flows provided by operating activities								867,821		204,725

Investing activities:
Acquisition of properties							―			(24,740,622)
Capital expenditures		(86,174	)		(16,749	)		(112,713)		(49,179)
Net cash flows used in investing activities – continuing operations		(86,174	)		(16,749	)		(112,713)		(24,789,801)

Capital expenditures		—			(23,520	)	―			(23,151)
Proceeds from sale of real estate		15,044,231			—			15,044,231	―
Net cash flows provided by (used in) investing activities – discontinued operations		15,044,231			(23,520	)		15,044,231		(23,151)

Net cash flows provided by (used in) investing activities		14,958,057			(40,269	)		14,931,518		(24,812,952)

Financing activities:
Subscriptions received for common stock through primary offering		—			12,039,730		―			19,009,962
Payment of underwriting compensation		—			(641,724	)	―			(984,483)
Payment of cash distributions, net of distribution reinvestments during 2018		(705,473	)		(376,934	)		(705,473)		(597,676)
Redemptions of common stock		—			(152,281	)	―			(185,460)
Repayment of mortgage loans		(18,350,000	)		—			(18,350,000)	―
Proceeds from mortgage loans							―			5,000,000
Payment of loan costs		—			(10,397	)	―			(91,649)
Net cash flows (used in) provided by financing activities		(19,055,473	)		10,858,394			(19,055,473)		22,150,694

Net (decrease) increase in cash and restricted cash		(3,439,066	)		10,733,316
Net decrease in cash and restricted cash								(3,256,134)		(2,457,533)
Cash and restricted cash at beginning of period, including held for sale		8,237,547			12,421,919			8,237,547		12,421,919
Cash and restricted cash at end of period, including held for sale	$	4,798,481		$	23,155,235		$	4,981,413	$	9,964,386

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							$	—	$	91,097
Loan costs							$	—	$	27,807
Selling commissions and Dealer Manager fees	$	—		$	20,711		$	—	$	41,651
Annual distribution and stockholder servicing fee	$	—		$	1,177,044		$	—	$	1,395,460
Assumption of liabilities on acquisition of property							$	—	$	115,779

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

1.	Organization

CNL Healthcare Properties II, Inc. (“Company”) is a Maryland corporation that incorporated on July 10, 2015 and elected to be taxed as a real estate investment trust (“REIT”) for United States (“U.S.”) federal income tax purposes beginning with the year ended December 31, 2017. The Company is sponsored by CNL Financial Group, LLC (“Sponsor” or “CNL”) and 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 and dispositions, asset management and other operational matters.

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 meant that CNL Securities Corp. (“Dealer Manager”), an affiliate of the Sponsor, used its best efforts but was not required to sell any specific amount of shares. The Company also offered up to $250 million, in any combination, of Class A, Class T and Class I shares pursuant to its distribution reinvestment plan (“Reinvestment Plan” and, together with the Primary Offering, the “Offering”). The Company has contributed the net proceeds from its Offering to CHP II Partners, LP (“Operating Partnership”) in exchange for partnership interests. The Company owns 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 owns assets through: (1) a wholly-owned taxable REIT subsidiary (“TRS”), CHP II TRS Holding, Inc. (“TRS Holdings”) and (2) property owner subsidiaries, which are single purpose entities.

On August 31, 2018, the Company’s board of directors approved the termination of its Offering and the suspension of its Reinvestment Plan, effective October 1, 2018. The Company also suspended its share redemption plan (“Redemption Plan”) and discontinued its stock dividends concurrently. In October 2018, the Company deregistered the unsold shares of its common stock under its previous registration statement on Form S-11. Through the close of its Offering, the Company had received aggregate proceeds of approximately $51.2 million (4.9 million shares), including approximately $1.2 million (0.1 million shares) of proceeds pursuant to the Reinvestment Plan.

In 2018, the Company announced it had formed a special committee consisting solely of its independent directors (“Special Committee”) to consider possible strategic alternatives available to the Company, including, without limitation, (i) an orderly disposition of the Company’s assets or one or more of the Company’s asset classes and the distribution of the net sale proceeds thereof to the stockholders of the Company and (ii) a potential business combination or other transaction with an unrelated third-party or affiliated party of the Company’s Sponsor. In January 2019, the Special Committee engaged SunTrust Robinson Humphrey, Inc., an investment banker, to act as a financial advisor to the aforementioned Special Committee and, subsequently, the Company committed to a plan to sell its medical office building (“MOB”), Mid America Surgery Institute (“Mid America Surgery”).

In March 2019, the Company entered into an asset purchase agreement (“Sale Agreement”) with HCP Medical Office Buildings, LLC related to the sale of Mid America Surgery for a gross sales price of $15.4 million (“MOB Sale”), subject to certain pro-rations and other adjustments as described in the Sale Agreement. In May 2019, the Company completed the MOB Sale.

In March 2019, in connection with the exploration of strategic alternatives, the Company’s board of directors suspended regular cash distributions to stockholders effective April 1, 2019. In addition, in March 2019, the Company’s advisory agreement was amended and restated to eliminate acquisition fees and dispositions fees as well as to reduce the asset management fees (“AUM Fees”) to 0.40% per annum of average invested assets. The Company’s board of directors and its Advisor also agreed to terminate the Expense Support Agreement effective April 1, 2019; refer to Note 8.11. “Related Party Arrangements” for additional information. Moreover, effective April 1, 2019, the Advisor waived its rights to any AUM Fees going forward, with such waiver to remain in effect through the Company’s dissolution and liquidation.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

1.	Organization (continued)

As of ~~June~~September 30, 2019, the Company owned two seniors housing communities that are leased to single member limited liability companies wholly-owned by TRS Holdings, a subsidiary of the Company. TRS Holdings has engaged 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.

In ~~July~~September 2019, the ~~Company filed a definitive proxy statement with the Securities and Exchange Commission (“SEC”) requesting, among other items, the stockholders' approval of~~Company's stockholders approved a plan of dissolution ("Plan of Dissolution") ~~authorizing~~as further described in Note 2. “Plan of Dissolution.” As a result of the adoption of the Plan of Dissolution, all of the Company's real estate properties are considered held for sale and the Company has adopted the liquidation basis of accounting ("Liquidation Basis of Accounting") effective September 1, 2019 as described in Note 4. "Net Assets in Liquidation." There can be no assurance that the Company will have a liquidity event in the near term.

2.	Plan of Dissolution

As described in Note 1. “Organization,” the Plan of Dissolution approved by stockholders in September 2019 authorizes the Company to undertake the sale of all its assets, distribute the net proceeds after payment of all of the Company's liabilities to stockholders as liquidating distributions, wind-up the Company’s operations and dissolve the Company in accordance with Maryland law. ~~There can be no assurance that stockholders will approve~~The Company is permitted to provide for the payment of any unascertained or contingent liabilities and may do so by purchasing insurance, establishing a reserve fund or in other ways deemed necessary.

The Plan of Dissolution ~~or that~~enables the Company ~~will have a liquidity event~~to sell any and all of its assets without further approval of the stockholders and provides that liquidating distributions be made to the stockholders as determined by the board. Pursuant to applicable REIT rules, in order to be able to deduct liquidating distributions as dividends, the ~~near term. The~~ Company ~~expects to~~must distribute all of the net proceeds from the sale of its assets to stockholders ~~within~~by September 2021, which represents 24 months following the stockholders’ approval of the Plan of Dissolution. However, if the Company cannot sell its assets and pay its debts within 24 months, or if the board of directors and the Special Committee determine that it is otherwise advisable to do so, the Company may transfer and assign its remaining assets to a liquidating trust. Upon such transfer and assignment, stockholders will receive interests in the liquidating trust. The liquidating trust will pay or provide for all of the Company’s liabilities and distribute any remaining net proceeds from the sale of its assets to the holders of interests in the liquidating trust.

The dissolution process and the amount and timing of liquidating distributions to stockholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the accompanying condensed consolidated statement of net assets.

The Company expects to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. The board of directors shall use commercially reasonable efforts to continue to cause the Company to maintain its REIT status, provided however, the board of directors may elect to terminate the Company's status as a REIT if it determines that such termination would be in the best interest of the stockholders.

2.3.	Summary of Significant Accounting Policies

Basis of Presentation - As a result of the approval of the Plan of Dissolution by its stockholders in September 2019, the Company’s financial position and ~~Consolidation —~~ results of operations for the nine months ended September 30, 2019 will be presented using two different presentations. The Company adopted the Liquidation Basis of Accounting as of September 1, 2019 and for the periods subsequent to September 1, 2019. As a result, a new statement of financial position (Statement of Net Assets) is presented, which represents the estimated amount of cash that the Company expects to collect on disposal of its assets as it carries out its Plan of Dissolution. In addition, a new statement of operations (Statement of Changes in Net Assets) reflects any changes in net assets from the original estimated values as of September 1, 2019 through the most recent period presented.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

3.	Summary of Significant Accounting Policies (continued)

All financial results and disclosures up through August 31, 2019, prior to adopting the Liquidation Basis of Accounting, are presented based on a going concern basis (“Going Concern Basis”), which contemplated the realization of assets and liabilities in the normal course of business. As a result, the balance sheet as of December 31, 2018, and the statements of operations and the statements of cash flows for the eight months ended August 31, 2019 and the comparative nine months ended September 30, 2018 used the Going Concern Basis consistent with the presentation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying unaudited 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.

Basis of Presentation Liquidation Basis (Post-Plan of Dissolution) – As a result of the approval of the Plan of Dissolution by its stockholders in September 2019, the Company adopted the Liquidation Basis of Accounting as of September 1, 2019 and for the periods subsequent to September 1, 2019 in accordance with generally accepted accounting principles of the United States (“GAAP”). Accordingly, as of September 1, 2019, the Company’s assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company will collect on disposal of its assets as it carries out the Plan of Dissolution. The liquidation value of the Company's operating properties is presented on an undiscounted basis. Estimated costs to dispose of its assets have been presented separately from the related assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts.

The Company accrues costs and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation in the accompanying condensed consolidated statement of net assets. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4. "Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation" for further discussion. Actual costs incurred but unpaid as of September 30, 2019 are included in accounts payable and accrued liabilities, due to related parties and other liabilities in the accompanying condensed consolidated statement of net assets.

Net assets in liquidation represents the estimated liquidation value available to stockholders upon liquidation. Due to the uncertainty in the timing of the anticipated sale date(s) and the estimated cash flows, actual operating results and sale proceeds may differ materially from the amounts estimated.

Basis of Presentation - Going Concern Basis (Pre-Plan of Dissolution)- The accompanying unaudited condensed consolidated financial statements through August 31, 2019 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 U.S. (“GAAP”).~~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 operating results for the interim period presented. Operating results for the ~~six months~~periods ended ~~June~~August 31, 2019 and September 30, ~~2019 may not be indicative~~2018 were prepared on the going concern basis of accounting, which contemplates the ~~results that may be expected for~~realization of assets and liabilities in the ~~year ending December 31, 2019.~~normal course of business. Amounts as of December 31, 2018 included in the unaudited condensed consolidated financial statements have been derived from the 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, 2018.

Use of Estimates — The ~~accompanying unaudited~~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 ~~include the accounts of the Company, the Operating Partnership~~ and ~~its other subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.~~accompanying notes. Actual results could differ from those estimates.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

3.	Summary of Significant Accounting Policies (continued)

Assets Held for Sale, net and Discontinued Operations — The Company determines to classify a property as held for sale once management has the authority to approve and commits to a plan to sell the property, the property is available for immediate sale, there is an active program to locate a buyer, the sale of the property is probable and the transfer of the property is expected to occur within one year. Upon the determination to classify a property as held for sale, the Company ceases recording further depreciation and amortization relating to the associated assets and those assets are measured at the lower of its carrying amount or fair value less disposition costs and are presented separately in the consolidated balance sheets for all periods presented. In addition, the Company classifies assets held for sale as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. For any disposal(s) qualifying as discontinued operations, the Company allocates interest expense and loan cost amortization that directly relates to any mortgage loan(s) collateralized by properties classified as discontinued operations.

~~CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)~~

2.	~~Summary of Significant Accounting Policies (continued)~~

Reclassifications – Certain amounts in the prior year’s condensed consolidated balance sheet, statement of operations and statement of cash flows have been reclassified to conform to the current year’s presentation, primarily related to the classification of the Company’s MOB property as held for sale and discontinued operations, with no effect on the other previously reported consolidated financial statements.

~~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.

Adopted Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 also requires qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which includes a practical expedient for lessors that allows them to elect to not separate lease and non-lease components in a contract for the purpose of revenue recognition and disclosure if certain criteria are met. The Company elected the practical expedient and applied the guidance to all of the leases that qualified under the established criteria. In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which addressed challenges encountered in determining certain lessor costs paid by the lessee directly to third parties by allowing lessors to exclude these costs from its variable lease payments. This amendment did not have a material impact on the Company’s financial statements and related disclosures as it conformed Accounting Standard Codification (“ASC”) 842 to the Company’s historical accounting under ASC 840. In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements,” which clarified the transition guidance related to interim disclosure requirements in the year of adoption. All of the ASC 842 ASUs are effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018.

The Company adopted these ASUs on January 1, 2019 using a modified retrospective approach, the adoption of these ASUs did not have a material impact on the Company’s consolidated results of operations or cash flows. However, the adoption of these ASUs did impact the Company’s consolidated financial position for arrangements such as ground or other leases in which the Company is the lessee. More specifically, the adoption of ASC 842 resulted in the Company recording operating lease assets and liabilities on January 1, 2019. The following table provides additional details by financial statement line item of the adjusted presentation in the Company’s consolidated financial position:

	As Presented			Effect of			As Adjusted			As Presented		Effect of		As Adjusted
	December 31,			ASC 842			January 1,			December 31,		ASC 842		January 1,
	2018			Adoption			2019			2018		Adoption		2019
Other assets	$	382,637		$	32,500		$	415,137		$	382,637	$	32,500	$	415,137
Total assets	$	67,289,375		$	32,500		$	67,321,875		$	67,289,375	$	32,500	$	67,321,875

Other liabilities	$	(128,957	)	$	(32,500	)	$	(161,457	)	$	(128,957)	$	(32,500)	$	(161,457)
Total liabilities	$	(25,624,140	)	$	(32,500	)	$	(25,656,640	)	$	(25,624,140)	$	(32,500)	$	(25,656,640)

910

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

2.3.	Summary of Significant Accounting Policies (continued)

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payments. The amendments also clarify that this ASU does not apply to share-based payments used to provide financing to the issuer or awards granted in conjunction with selling of goods or services to customers as a part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company adopted this ASU prospectively on January 1, 2019; the adoption of which did not have a material impact on the Company’s consolidated results of operations or cash flows.

~~Other~~

4.	Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation

The Liquidation Basis of Accounting ~~Pronouncements~~ ~~— As described in Note 1. “Organization,” in July 2019,~~requires the Company filed a definitive proxy statement with the SEC requesting, among other items, the stockholders' approval of a Plan of Dissolution. If and upon approval by stockholders of a Plan of Dissolution, the Company’s financial position and results of operations will prospectively be presented using the liquidation basis of accounting (“Liquidation Basis”) as of the approval date and for each subsequent period thereafter. As a result, a new statement of financial position (Statement of Net Assets) will be presented, which will reflect the estimated amount ofto estimate net cash ~~proceeds that the Company expects~~flows from operations and to ~~collect from the sale of~~accrue all ~~its assets as it completes~~costs associated with implementing and completing the Plan of Dissolution. ~~In addition, a new statement~~The Company currently estimates that it will have costs in excess of ~~operations (Statement~~estimated receipts during the liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for occupancy, the timing of ~~Changes in Net Assets) will~~any property sale(s), direct costs incurred to complete the sale(s), the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be ~~presented, which will reflect changes in net assets from~~paid out over the ~~original estimated net cash proceeds~~liquidation period.

Upon transition to the Liquidation Basis of Accounting as of September 1, 2019, the ~~approval date through each subsequent period presented. All financial results~~Company accrued the following estimated receipts and ~~disclosures up through the approval date (if any) will~~costs expected to be ~~presented on a going concern basis (“Going Concern Basis”), which contemplates the realization of assets and liabilities~~incurred during liquidation:


Resident fees and services	$	4,549,487
Property operating expenses	(3,125,538)
Property management fees	(245,763)
General and administrative	(713,957)
Interest expense	(131,554)
Liquidation transaction costs	(2,605,872)
Liability for estimated costs in excess of estimated receipts during liquidation	$	(2,273,197)

The change in the ~~normal course~~liability for estimated costs in excess of ~~business.~~

3.	~~Revenue~~

~~The following table presents disaggregated revenue related to the Company’s resident fees and services~~estimated receipts during ~~the six months ended June~~liquidation as of September 30, 2019 ~~and 2018:~~

Six Months Ended June 30,

Type of Investment

Number of Units

Revenues

Percentage
of Revenues

Resident fees and services:

2019

2018

2019

2018

2019

2018

Assisted living

125

63

$
2,996,810

$
1,651,054

68.9
%

72.9
%
Memory care

50

20

1,304,913

584,920

30.0
%

25.8
%
Other revenues

—

—

48,727

28,786

1.1
%

1.3
%

175

83

$
4,350,450

$
2,264,760

100.0
%

100.0
%

4. ~~Real Estate Assets, net~~

~~The gross carrying amount and accumulated depreciation of the Company’s real estate assets as of June 30, 2019 and December 31, 2018, excluding assets held for sale, are~~is as follows:

June 30,

December 31,

2019

2018

Land and land improvements

$
4,075,733

$
4,075,733

Building and building improvements

38,714,651

38,700,052

Furniture, fixtures and equipment

1,944,534

1,872,959

Less: accumulated depreciation

(2,509,971
)

(1,679,564
)
Real estate investment properties, net

$
42,224,947

$
42,969,180

	September 1, 2019		Cash Payments (Receipts)		Remeasurement of Assets and Liabilities		September 30, 2019
Assets:
Net inflows from real estate investments	$	1,178,186	$	(207,906)	$	—	$	970,280

Liabilities:
Corporate expenditures	(713,957)		87,636		—		(626,321)
Interest expense on mortgage loans	(131,554)		23,929		—		(107,625)
Liquidation transaction costs	(2,605,872)		—		—		(2,605,872)
	(3,451,383)		111,565		—		(3,339,818)
Total liability for estimated costs in excess of estimated receipts during liquidation	$	(2,273,197)	$	(96,341)	$	—	$	(2,369,538)

Depreciation expense on the Company’s real estate investment properties, net was approximately $0.4 million and $0.8 million for the quarter and six months ended June 30, 2019, respectively, and approximately $0.2 million and $0.4 million for the quarter and six months ended June 30, 2018, respectively.

1011

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

5.	~~Intangibles, net~~Net Assets in Liquidation

The following is a reconciliation of stockholders’ equity under the Going Concern Basis to net assets in liquidation under the Liquidation Basis of Accounting as of September 1, 2019:

Stockholders’ equity as of August 31, 2019	$	40,876,936
Increase due to estimated net realizable value of investments in real estate		5,215,743
Decrease due to adjustment of assets and liabilities to net realizable value		(22,657)
Liability for estimated costs in excess of estimated receipts during liquidation		(2,273,197)
Adjustment to reflect the change to the liquidation basis of accounting		2,919,889
Estimated value of net assets in liquidation as of September 1, 2019	$	43,796,825

Net assets in liquidation decreased by approximately $118,000 during the period from September 1, 2019 through September 30, 2019. The primary reason for the decrease in net assets was due to net outflows for corporate expenditures exceeding net inflows from real estate investments.

Net assets in liquidation include projections of costs and expenses to be incurred during the period required to complete the Plan of Dissolution. There is inherent uncertainty with these projections, and the projections could change materially based on the timing of any property sale(s), the performance of the underlying properties and any changes in the underlying assumptions of the projected cash flows.

Revenue

Prior to adopting the Liquidation Basis of Accounting, the following table presents disaggregated revenue related to resident fees and services for the eight months ended August 31, 2019 and nine months ended September 30, 2018:

Eight Months Ended August 31, 2019 and Nine Months Ended September 30, 2018
Type of Investment	Number of Units				Revenues				Percentage of Revenues
Resident fees and services:	2019		2018		2019		2018		2019			2018
Assisted living		129		129	$	4,006,041	$	2,706,757		68.6	%		72.2	%
Memory care		52		52		1,758,522		998,661		30.1	%		26.6	%
Other revenues	―		―			76,518		43,266		1.3	%		1.2	%
		181		181	$	5,841,081	$	3,748,684		100.0	%		100.0	%

7.	Real Estate Assets, net

As a result of adopting Liquidation Basis of Accounting in September 2019, real estate assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company expects to collect on the disposal of its assets as it carries out its Plan of Dissolution. Prior to adopting Liquidation Basis of Accounting, the gross carrying amount and accumulated ~~amortization~~depreciation of the Company’s ~~intangibles~~real estate assets as of ~~June 30, 2019 and~~ December 31, 2018, excluding assets held for sale, are as follows:

June 30,

December 31,

2019

2018

In-place resident agreement intangibles

$
2,569,419

$
2,569,419

Less: accumulated amortization

(1,585,494
)

(1,071,610
)
Intangible assets, net

$
983,925

$
1,497,809


Land and land improvements	$	4,075,733
Building and building improvements	38,700,052
Furniture, fixtures and equipment	1,872,959
Less: accumulated depreciation	(1,679,564)
Real estate investment properties, net	$	42,969,180

Depreciation expense on the Company’s real estate investment properties, net was approximately $1.1 million and $0.7 million for the eight months ended August 31, 2019 and nine months ended September 30, 2018, respectively, and approximately $0.3 million for each of the two months ended August 31, 2019 and the quarter ended September 30, 2018, respectively.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

8.	Intangibles, net

Prior to adopting Liquidation Basis of Accounting, the gross carrying amount and accumulated amortization of the Company’s intangible assets as of December 31, 2018, excluding assets held for sale, are as follows:


	December 31,
	2018
In-place resident agreement intangibles	$	2,569,419
Less: accumulated amortization		(1,071,610)
Intangible assets, net	$	1,497,809

For the ~~quarter~~two months and ~~six~~eight months ended ~~June 30,~~August 31, 2019, amortization on the Company’s intangibles was approximately ~~$0.3~~$0.2 million and ~~$0.5~~$0.7 million, respectively, all of which was included in depreciation and amortization. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, amortization on the Company’s intangibles was approximately ~~$0.1~~$0.2 million and ~~$0.3~~$0.4 million, respectively, all of which was included in depreciation and amortization.

6.9.	Assets and Associated Liabilities Held for Sale and Discontinued Operations

~~As part~~Prior to adopting the Liquidation Basis of ~~executing on strategic alternatives,~~Accounting, the Company committed to a plan to sell its MOB, Mid America Surgery, and classified the property as held for sale. The Company believed the sale of Mid America Surgery would cause a strategic shift in the Company’s operations and, therefore, classified the corresponding revenues and expenses for its MOB property as discontinued operations. In March 2019, the Company entered into a Sale Agreement with HCP Medical Office Buildings, LLC related to the MOB Sale. In May 2019, the Company completed the MOB Sale and recognized a gain on the sale of approximately $1.6 million for financial reporting purposes.

As of ~~June 30, 2019 and~~ December 31, 2018, the amounts classified as assets held for sale and the liabilities associated with those assets held for sale consisted of the following:

	June 30,		December 31,		December 31,
	2019		2018		2018
Real estate investment properties, net	$	—	$	10,603,833	$	10,603,833
Intangibles, net		—		3,485,818		3,485,818
Other assets		—		112,551		112,551
Assets held for sale, net	$	—	$	14,202,202	$	14,202,202
Mortgage loan, net	$	—	$	5,532,346	$	5,532,346
Accounts payable and accrued liabilities		—		391,735		391,735
Other liabilities		—		323,106		323,106
Liabilities associated with assets held for sale	$	—	$	6,247,187	$	6,247,187

1113

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

6.9.	Assets and Associated Liabilities Held for Sale and Discontinued Operations(continued)

The following table is a summary of the Company’s income from discontinued operations for the two months and eight months ended August 31, 2019 and the quarter and ~~six~~nine months ended ~~June~~September 30, ~~2019 and~~ 2018:

	Quarter Ended						Six Months Ended						Two Months Ended		Quarter Ended		Eight Months Ended		Nine Months Ended
	June 30,						June 30,						August 31,		September 30,		August 31,		September 30,
	2019			2018			2019			2018			2019		2018		2019		2018
Revenues:
Rental income and related revenues	$	144,022		$	421,426		$	486,294		$	830,242		$	—	$	422,967	$	486,294	$	1,253,209

Operating expenses:
Property operating expenses		54,097			178,987			165,782			350,220		—			196,932		165,782		547,152
General and administrative expenses		232			934			791			1,385		—			(110)		791		1,275
Property management fees		5,941			11,343			13,869			21,393		—			11,538		13,869		32,931
Depreciation and amortization		—			131,235			43,793			261,929		—			131,636		43,793		393,565
Total operating expenses		60,270			322,499			224,235			634,927		—			339,996		224,235		974,923
Gain on sale of real estate		1,566,321			—			1,566,321			—		—		—			1,566,321	—
Operating income		1,650,073			98,927			1,828,380			195,315		—			82,971		1,828,380		278,286

Other expense:
Interest expense and loan cost amortization		(86,252	)		(68,673	)		(161,512	)		(132,521	)	—			(69,190)	(161,512)			(201,711)
Total other expense		(86,252	)		(68,673	)		(161,512	)		(132,521	)	—			(69,190)	(161,512)			(201,711)
Income before income taxes		1,563,821			30,254			1,666,868			62,794							1,666,868		76,575
Income tax expense		—			—			—			—		—		—		—		—
Income from discontinued operations	$	1,563,821		$	30,254		$	1,666,868		$	62,794		$	—	$	13,781	$	1,666,868	$	76,575

As of September 30, 2019, all of the Company’s real estate assets are considered held for sale due to the adoption of Liquidation Basis of Accounting effective September 1, 2019, as discussed above in Note 3. “Summary of Significant Accounting Policies.”

7.10.

Indebtedness

In May 2019, in connection with the MOB Sale, the Company strategically paid down approximately $12.8 million of debt secured by its Summer Vista Assisted Living (“Summer Vista”) property. In connection therewith, the Company wrote-off approximately $0.1 million in unamortized loan costs as a loss on the early extinguishment of debt, which is included in interest expense and loan cost amortization in the accompanying condensed consolidated statements of operations for the ~~quarter and six~~eight months ended ~~June 30,~~August 31, 2019.

The following table provides details of the Company’s indebtedness as of ~~June~~September 30, 2019 and December 31, 2018:

June 30,

December 31,

2019

2018

Mortgage loans, net:

Mortgage loans (1)

$
6,150,000

$
18,900,000

Loan costs, net

(102,599
)

(234,987
)
Total mortgage loans, net

$
6,047,401

$
18,665,013


			September 30,			December 31,
			2019			2018
Mortgage loans, net:
	Mortgage loans ⁽¹⁾		$	6,150,000		$	18,900,000
	Loan costs, net			—	⁽²⁾		(234,987)
		Total mortgage loans, net	$	6,150,000		$	18,665,013

~~FOOTNOTE:~~FOOTNOTES:

(1)

As of ~~June~~September 30, 2019, the Company’s mortgage loans are collateralized by its Summer Vista and Riverview properties.

(2)	As described in Note 3. "Summary of Significant Accounting Policies," the Company adopted the Liquidation Basis of Accounting which requires the Company to record indebtedness at its contractual amounts.

1214

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

7.10.

Indebtedness (continued)

The fair market value of the Company’s mortgage loans was approximately $6.1 million and $18.9 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively, which is based on then-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 mortgage loans for the remainder of 2019, each of the next four years and thereafter, in the aggregate, as of ~~June~~September 30, 2019:


2019	$	—
2020		31,849
2021		85,947
2022		1,192,460
2023		4,839,744
Thereafter		—
	$	6,150,000

8.11.

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 connection with services provided to the Company, affiliates are entitled to the following fees:

Dealer Manager — Through the termination of the Offering in October 2018, the Dealer Manager received 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 4.75% of the sale price for each Class T share sold in the Primary Offering, all or a portion of which could be reallowed to participating broker dealers. In addition, for Class T shares sold in the Primary Offering, the Dealer Manager could choose the respective amounts of the commission and dealer manager fee, provided that the selling commission did not exceed 3.0% of the gross proceeds from the completed sale of such Class T shares.

The Company paid 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 then-current gross offering price per Class T or Class I share.

The Company recorded the annual distribution and stockholder servicing fees as a reduction to capital in excess of par value and measured 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 was relieved over time, as the fees were paid to the Dealer Manager. In connection with the close of the Offering effective October 1, 2018, certain underwriting compensation limits were met and, effective October 31, 2018, each Class T and Class I share automatically converted into a Class A share pursuant to the terms of the Company’s charter. The Class T and Class I shares converted into Class A shares on a one-for-one basis because the then-current estimated net asset value (“NAV”) per share of $10.06 was the same for all share classes. Effective October 31, 2018, Class T and Class I shares were no longer subject to class specific expenses upon conversion into Class A shares. The Company’s obligation to pay the remaining distribution and stockholder servicing fees liability of approximately $1.4 million to the Dealer Manager ceased effective October 31, 2018 upon the conversion of the Class T and Class I shares into Class A Shares.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

11.	Related Party Arrangements (continued)

CNL Capital Markets, LLC — The Company will pay CNL Capital Markets, LLC, an affiliate of CNL, an annual fee payable monthly based on the average number of total investor accounts that are 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.

~~CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)~~

8.	~~Related Party Arrangements (continued)~~

Advisor — Pursuant to the Company’s advisory agreement, dated as of March 2, 2016, the Company paid the Advisor AUM Fees in an amount equal to 0.80% per annum of average invested assets. In March 2019, the Company’s advisory agreement was amended and restated to eliminate acquisition fees and dispositions fees as well as to reduce the AUM Fees to 0.40% per annum of average invested assets. The reduced AUM Fees were further subject and subordinate to an agreed upon hurdle relating to the total operating expenses (as described in the amended and restated advisory agreement) of the Company, though to the extent any portion of the AUM Fees are not paid as a result of total operating expenses exceeding the prescribed limits, it may be recovered by the Advisor if certain Company performance thresholds are subsequently met. The Company’s board of directors approved renewing the amended and restated advisory agreement through March 2020. Effective as of April 1, 2019, the Advisor waived its rights to any AUM Feesgoing forward, with such waiver to remain in effect through the Company’s dissolution and liquidation.

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 four consecutive fiscal quarters (“Expense Year”) unless approved by the independent directors. For the Expense Year ended ~~June~~September 30, 2019, the ~~Company did not incur~~Company’s total operating expenses were in excess of ~~the limitation.~~this limitation by approximately $35,000. As of ~~June~~September 30, 2019, the Company had received cumulative approvals from its independent directors for total operating expenses in excess of this limitation of approximately $0.9 million. The Company’s independent directors determined that the higher relationship of operating expenses to average invested assets for the Expense Year ended September 30, 2019, was justified given the cost of operating a public company and the MOB Sale undertaken in the second quarter of 2019 in connection with the exploration of strategic alternatives, which further reduced the Company’s already limited number of investments.

For the ~~six~~nine months ended ~~June~~September 30, 2019, the Company paid cash distributions of approximately $38,000 to the Advisor related to the Class A common stock held by the Advisor. ~~There were no cash distributions for the quarter ended June 30, 2019 as the~~The Company suspended regular cash distributions to stockholders effective April 1, ~~2019. In addition,~~2019 and there were no ~~stock dividends for~~cash distributions declared subsequent to the ~~quarter and six months ended June 30, 2019 as~~suspension. In addition, the Company discontinued its stock dividends in October ~~2018.~~2018 so there were no stock dividends declared subsequent to the suspension. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, the Company paid cash distributions of approximately ~~$62,000~~$38,000 and ~~$176,000,~~$114,000, respectively, and issued stock dividends of approximately 1,000 shares and 2,000 shares, respectively, to the Advisor related to the Class A common stock held by the Advisor.

Pursuant to an expense support arrangement, the Advisor agreed to accept payment in restricted stock in lieu of cash for services rendered, in the event that the Company did not achieve established distribution coverage targets (“Expense Support Agreement”). In exchange for services rendered and in consideration of the expense support provided under this arrangement, the Company issued, 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 NAV per share of the Class A common shares 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 advisory agreement), excluding for the purposes of calculating this threshold any shares of restricted stock owned by the Advisor. In March 2019, the Company’s board of directors and the Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019. Any restricted stock shares granted to the Advisor under the Expense

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

11.	Related Party Arrangements (continued)

Support Agreement shall continue to be held by the Advisor, subject to the vesting and forfeiture provisions of the Expense Support Agreement which survive termination.

~~CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)~~

8.	~~Related Party Arrangements (continued)~~

The following fees for services rendered were settled in the form of restricted stock pursuant to the Expense Support Agreement for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 and cumulatively through the termination date effective April 1, 2019:

	Quarter Ended				Six Months Ended				Cumulative			Quarter Ended				Nine Months Ended				Cumulative
	June 30,				June 30,				Fees			September 30,				September 30,				Fees
	2019		2018		2019		2018		Settled			2019		2018		2019		2018		Settled
Fees for services rendered:											Fees for services rendered:
Asset management fees	$	—	$	70,800	$	99,417	$	141,600	$	578,171
Advisor personnel expenses ⁽¹⁾		—		123,142		127,950		249,771		1,058,676
											Asset management fees	$	―	$	87,488	$	99,417	$	229,088	$	578,171
											Advisor personnel expenses ⁽¹⁾		―		112,784		127,950		362,555		1,058,676
Total fees for services rendered	$	—	$	193,942	$	227,367	$	391,371	$	1,636,847	Total fees for services rendered	$	―	$	200,272	$	227,367	$	591,643	$	1,636,847

Then-current NAV	$	9.92	$	10.06	$	9.92	$	10.06	$	9.92	Then-current NAV	$	9.92	$	10.06	$	9.92	$	10.06	$	9.92
Restricted stock shares ⁽²⁾		—		19,279		22,920		38,904		164,210	Restricted stock shares ⁽²⁾		―		19,908		22,920		58,811		164,210

Cash distributions on restricted stock ⁽³⁾	$	—	$	8,113	$	8,113	$	8,113	$	16,226	Cash distributions on restricted stock ⁽³⁾	$	―	$	8,113	$	8,113	$	16,226	$	16,226
Stock dividends on restricted stock ⁽⁴⁾		—		170		—		170		340	Stock dividends on restricted stock⁽⁴⁾		―		170		―		340		340

~~FOOTNOTES:~~FOOTNOTES:

(1)

Amounts consisted 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 issued to the Advisor pursuant to the Expense Support Agreement through its termination effective April 1, 2019. No fair value was assigned to the restricted stock shares as the shares do not vest until a liquidity event is consummated and certain market conditions are achieved. In addition, the restricted stock shares will be treated as unissued for financial reporting purposes until the vesting criteria are met.

(3)

The cash distributions were recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

(4)

The par value of the stock dividends was recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

~~CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)~~

8.	~~Related Party Arrangements (continued)~~

The fees payable through the termination of the Offering in October 2018 to the Dealer Manager for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, and related amounts unpaid as of ~~June~~September 30, 2019 and December 31, 2018 were as follows:

	Quarter Ended				Six Months Ended				Unpaid amounts as of ⁽¹⁾				Quarter Ended				Nine Months Ended				Unpaid amounts as of ⁽¹⁾
	June 30,				June 30,				June 30,		December 31,		September 30,				September 30,				September 30,		December 31,
	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
Selling commissions ⁽²⁾	$	—	$	89,834	$	—	$	221,675	$	—	$	—	$	—	$	121,413	$	—	$	343,087	$	—	$	—
Dealer manager fees ⁽²⁾		—		110,527		—		276,283		—		—		—		153,073		—		429,356		—		—
Distribution and stockholder
servicing fees ⁽²⁾		—		221,469		—		514,847		—		—		—		307,630		—		822,477		—		—
	$	—	$	421,830	$	—	$	1,012,805	$	—	$	—	$	—	$	582,116	$	—	$	1,594,920	$	—	$	—

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED)

11.	Related Party Arrangements (continued)

The expenses incurred by and reimbursable to the Company’s related parties, including amounts included in income from discontinued operations, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, and related amounts unpaid as of ~~June~~September 30, 2019 and December 31, 2018 are as follows:

	Quarter Ended				Six Months Ended				Unpaid amounts as of ⁽¹⁾				Quarter Ended				Nine Months Ended				Unpaid amounts as of ⁽¹⁾
	June 30,				June 30,				June 30,		December 31,		September 30,				September 30,				September 30,		December 31,
	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
Reimbursable expenses:
Operating expenses ⁽³⁾	$	178,746	$	263,201	$	409,570	$	526,795	$	67,660	$	85,902	$	170,893	$	227,393	$	580,462	$	754,188	$	78,079	$	85,902
Acquisition fees and expenses		—		601		—		1,503		—		—	―			8,680	―			10,183	―			—
		178,746		263,802		409,570		528,298		67,660		85,902		170,893		236,073		580,462		764,371		78,079		85,902
Asset management fees ⁽⁴⁾		51,069		70,800		150,486		141,600		—		—		45,650		87,488		196,136		229,088	―			—
Investment services fee ⁽⁵⁾													―			545,625	―			545,625	―			—
	$	229,815	$	334,602	$	560,056	$	669,898	$	67,660	$	85,902	$	216,543	$	869,186	$	776,598	$	1,539,084	$	78,079	$	85,902

FOOTNOTES:

⁽¹⁾

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

⁽²⁾⁽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. In March 2019, the Company’s board of directors and its Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019. As such, there were was no expense support provided by the Advisor for the quarter ended ~~June~~September 30, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2019, approximately $0.1 million of personnel expenses of affiliates of the Advisor were settled in accordance with the terms of the Expense Support Agreement and as such general and administrative expenses were reduced by approximately $0.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, approximately $0.1 million and ~~$0.2~~$0.4 million, respectively, of personnel expenses of affiliates of the Advisor were settled in accordance with the terms of the Expense Support Agreement and as such general and administrative expenses were reduced by approximately $0.1 million and ~~$0.2~~$0.4 million, respectively, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2018.

⁽⁴⁾⁽⁴⁾

In March 2019, the Company’s board of directors and its Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019; as such, no further expense support was provided effective April 1, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2019, approximately $0.1 million of asset management fees were settled in accordance with the terms of the Expense Support Agreement through its termination and, as such, asset management fees were reduced by approximately $0.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, approximately ~~$70,000~~$0.1 million and ~~$0.1~~$0.2 million, respectively, of asset management fees were settled in accordance with the terms of the Expense Support Agreement and, as such, asset management fees were reduced by approximately ~~$70,000~~$0.1 million and ~~$0.1~~$0.2 million, respectively, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2018. In addition, for the quarter and nine months ended ~~June~~September 30, 2019, the Advisor earned and waived approximately ~~$51,000~~$46,000 and $0.1 million, respectively, of asset management fees, which will not be reimbursed by the Company in future periods, and as such asset management fees were reduced by approximately ~~$51,000~~$46,000 and $0.1 million, respectively, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019.

⁽⁵⁾

For the quarter and nine months ended September 30, 2018, the Company incurred approximately $0.5 million in investment services fees, all of which were capitalized and included in real estate investment properties, net in the accompanying condensed consolidated balance sheets. No such fees were incurred for the quarter and nine months ended September 30, 2019.

16In connection with adopting the Liquidation Basis of Accounting, the Company accrues costs it expects to incur through the end of the liquidation. As of September 30, 2019, the Company has accrued Advisor personnel expenses of approximately $0.1 million and included in its liability for estimated costs in excess of estimated receipts.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

9.12.

Equity

Subscription Proceeds — In October 2018, in light of the Company’s decision to terminate its Offering, the Company suspended the Reinvestment Plan and the Redemption Plan. As such, there were no subscriptions proceeds received for either the quarter or ~~six~~nine months ended ~~June~~September 30, 2019. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, the Company received subscription proceeds of approximately ~~$5.4~~$7.2 million ~~(0.5~~(0.7 million shares) and ~~$12.5~~$19.8 million ~~(1.2~~(2.0 million shares), respectively, through its Offering and Reinvestment Plan.

Distributions — In October 2018, in light of the Company’s decision to terminate its Offering, the Company suspended the Reinvestment Plan and discontinued the issuance of stock dividends concurrently. In March 2019, in connection with the Company’s strategic alternatives discussed in Note 1. “Organization,” the Company’s board of directors suspended regular cash distributions to stockholders effective April 1, 2019. As such, there were no cash distributions declared ~~for the quarter ended June 30,~~subsequent to April 1, 2019. For the ~~six~~eight months ended ~~June 30,~~August 31, 2019, the Company declared cash distributions of approximately $0.7 million, all of which were paid in cash to stockholders. None of the cash distributions were reinvested during ~~either the quarter or six months ended June 30,~~ 2019 due to the suspension of the Reinvestment Plan effective October 2018. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, the Company declared cash distributions of approximately ~~$0.5~~$0.6 million and ~~$0.9~~$1.4 million, respectively, of which approximately $0.3 million and ~~$0.5~~$0.8 million, respectively, was reinvested pursuant to the Reinvestment Plan.

Redemptions — In October 2018, in light of the Company’s decision to terminate its Offering, the Company suspended the Reinvestment Plan and the Redemption Plan. As such, there were no requests for the redemption of common stock ~~during either~~subsequent to the ~~quarter or six months ended June 30, 2019.~~suspension in October 2018. During the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, the Company received requests for the redemption of common stock of approximately ~~$0.1 million~~$33,000 and $0.2 million, respectively, which were approved for redemption at an average price of ~~$10.06~~$10.05 and $10.05, respectively.

~~10.~~13.

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.

14.	Income Taxes

~~11.~~ ~~Income Taxes~~

~~The~~Prior to adopting the Liquidation Basis of Accounting, the accompanying condensed consolidated financial statements include an interim tax provision for the two months and eight months ended August 31, 2019 and the quarter and ~~six~~nine months ended ~~June~~September 30, ~~2019 and~~ 2018. The components of income tax expense for ~~the quarter and six months ended June 30, 2019 and 2018~~each period are as follows:

Quarter Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Current:

Federal

$
—

$
(9,250
)

$
—

$
(34,500
)
State

—

(3,450
)

—

(8,600
)
Total current expense

—

(12,700
)

—

(43,100
)

Deferred:

Federal

—

(735
)

(25,300
)

(1,328
)
State

—

(392
)

(5,233
)

(755
)
Total deferred expense

—

(1,127
)

(30,533
)

(2,083
)
Income tax expense

$
—

$
(13,827
)

$
(30,533
)

$
(45,183
)


		Two Months Ended		Quarter Ended		Eight Months Ended		Nine Months Ended
		August 31,		September 30,		August 31,		September 30,
		2019		2018		2019		2018
Current:
	Federal	$	―	$	8,150	$	―	$	(26,350)
	State		―		3,040		―		(5,560)
Total current expense			―		11,190		―		(31,910)

Deferred:
	Federal		―		(838)		(25,300)		(2,164)
	State		―		(414)		(5,233)		(1,171)
Total deferred expense			―		(1,252)		(30,533)		(3,335)
	Income tax expense	$	―	$	9,938	$	(30,533)	$	(35,245)

1719

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX MONTHS ENDED JUNE~~SEPTEMBER 30, 2019 (UNAUDITED)

~~11.~~14.

Income Taxes (continued)

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 ~~June 30, 2019 and~~ December 31, 2018 are as follows:

	June 30,			December 31,
	2019			2018		December 31,
Carryforward of net operating loss	$	63,060		$	—
						2018
Carryforwards of net operating loss						$	―
Prepaid rent		42,734			30,533		30,533
Valuation allowance		(105,794	)		—		―
Deferred tax assets, net	$	—		$	30,533	$	30,533

The recording of a valuation allowance relates primarily to a change in judgment about the Company’s ability to realize deferred tax assets in future years, due to its current and foreseeable operations.

A reconciliation of the income tax expense for the two months and eight months ended August 31, 2019 and the quarter and ~~six~~nine months ended ~~June~~September 30, ~~2019 and~~ 2018 computed at the statutory federal tax rate on income (loss) before income taxes is as follows:

Quarter Ended June 30,

2019

2018

Tax benefit computed at federal statutory rate

$
130,446

21.0
%

$
70,637

21.0
%
Impact of REIT election

(130,446
)

(21.0
)%

(80,622
)

(24.0
)%
State income tax expense

—

—
%

(3,842
)

(1.1
)%
Impact of change in deferred tax asset

(14,984
)

(2.4
)%

—

—
%
Impact of change in valuation allowance

14,984

2.4
%

—

—
%
Income tax expense

$
—

—
%

$
(13,827
)

(4.1
)%

	Six Months Ended June 30,										Two Months Ended August 31,				Quarter Ended September 30,
	2019					2018					2019				2018
Tax benefit computed at federal statutory rate	$	262,460		21.0	%	$	146,002		21.0	%	$	98,564	21.0	%	$	101,305	21.0	%
Impact of REIT election		(257,227	)	(20.6	)%		(181,830	)	(26.2	)%		(98,564)	(21.0)	%		(93,991)	(19.5)	%
State income tax expense		(5,233	)	(0.4	)%		(9,355	)	(1.3	)%		―	―	%		2,624	0.5	%
Impact of change in deferred tax asset		75,261		6.0	%		—		—	%		11,297	3.6	%		―	―	%
Impact of change in valuation allowance		(105,794	)	(8.5	)%		—		—	%		(11,297)	(3.6)	%		―	―	%
Income tax expense	$	(30,533	)	(2.5	)%	$	(45,183	)	(6.5	)%	$	―	―	%	$	9,938	2.0	%

											Eight Months Ended August 31,				Nine Months Ended September 30,
											2019				2018
Tax benefit computed at federal statutory rate											$	361,024	21.0	%	$	260,494	21.0	%
Impact of REIT election												(355,791)	(20.7)	%		(289,008)	(23.3)	%
State income tax expense												(5,233)	(0.3)	%		(6,731)	(0.5)	%
Impact of change in deferred tax asset												86,558	5.0	%		―	―	%
Impact of change in valuation allowance												(117,091)	(6.8)	%		―	―	%
Income tax expense											$	(30,533)	(1.8)	%	$	(35,245)	(2.8)	%

The Company analyzed its material tax positions and determined that it has not taken any uncertain tax positions. The tax years 2016 and forward remain subject to examination by taxing authorities throughout the United States.

~~Item 2.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and 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 six months ended June~~September 30, 2019 (“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 ~~management’s~~management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the ~~Company’s~~Company’s 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, 2018, copies of which may be obtained from the Company’s website at ~~www.cnlhealthcarepropertiesii.com.~~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.~~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 ~~June~~September 30, 2019 (unaudited) and December 31, 2018. Amounts as of December 31, 2018, 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, 2018.

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. We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with the year ended December 31, 2017 and our intention is to be organized and operate in a manner that allows us to remain qualified as a REIT for federal income tax purposes.

We are externally managed and advised by our Advisor, CHP II Advisors, LLC. Our Advisor is responsible for managing substantially all aspects of our investments and operations, including real estate acquisitions and dispositions, asset management and other operational matters.

Strategic Alternatives

On August 31, 2018, our board of directors approved the termination of our Offering and the suspension of our Reinvestment Plan, effective October 1, 2018. We also suspended our Redemption Plan and discontinued our stock dividends concurrently. In October 2018, we deregistered the unsold shares of common stock under our previous registration statement on Form S-11. Since inception, we received aggregate proceeds of approximately $51.2 million, which was comprised of the following: (1) approximately $50.8 million of proceeds through the close of our Offering, including approximately $1.2 million of proceeds pursuant to our Reinvestment Plan; $0.2 million of proceeds from our Advisor as our initial capitalization; and (3) approximately $0.3 million of proceeds from a private placement. In 2018, our board of directors appointed a Special Committee comprised solely of our independent board members to oversee the process of exploring strategic alternatives to maximize value for our stockholders, including, without limitation, (i) an orderly disposition of our assets or one or more of our asset classes and the distribution of the net sale proceeds thereof to our stockholders and (ii) a potential business combination or other transaction with an unrelated third-party or affiliated party of our Sponsor. In January 2019, the Special Committee engaged SunTrust Robinson Humphrey, Inc., an investment banker, to act as a financial advisor to the aforementioned Special Committee and, subsequently, we committed to a plan to sell Mid America Surgery. Although we have formed the Special Committee for the exploration of strategic alternatives, we are not obligated to enter into any particular transaction or any transaction at all. In the meantime, we continue to strategically manage and position our portfolio to drive performance and maximize value for our stockholders.

In March 2019, we entered into a Sale Agreement with HCP Medical Office Buildings, LLC related to the MOB Sale for a gross sales price of $15.4 million, subject to certain pro-rations and other adjustments as described in the Sale Agreement. In May 2019, we completed the MOB Sale resulting in net cash proceeds of approximately $15.0 million, a portion of which was used to repay approximately $5.6 million of debt secured by our Mid America Surgery property. We used the remaining proceeds, along with a portion of our available cash on hand, to strategically pay down approximately $12.8 million of debt secured by our Summer Vista property.

In March 2019, in connection with exploring strategic alternatives, our board of directors suspended our regular cash distributions to stockholders effective April 1, 2019. In addition, in March 2019, our board of directors and our Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019. Any restricted stock shares granted to our Advisor under the Expense Support Agreement shall continue to be held by the Advisor, subject to the vesting and forfeiture provisions of the Expense Support Agreement which survive termination.

In ~~July~~September 2019, ~~we filed a definitive proxy statement with the SEC requesting, among other items, the stockholders' approval of~~our stockholders approved a Plan of Dissolution authorizing us to undertake the sale of all of our assets, distribute the net proceeds after ~~the~~ payment of all of our liabilities to stockholders as liquidating distributions, wind-up our operations and dissolve in accordance with Maryland law. ~~There can be no assurance that stockholders will approve~~As a result of the adoption of our Plan of Dissolution, ~~or that~~all of our real estate properties are considered held for sale and we have adopted the Liquidation Basis of Accounting effective September 1, 2019.

Although our stockholders approved our Plan of Dissolution, there is no assurance we will have a final liquidity event in the near term. Our Plan of Dissolution enables us to sell any and all of our assets without further approval of our stockholders. We expect to distribute all of the net proceeds from the sale of our assets to our stockholders ~~within 24 months following the stockholders’ approval of the Plan of Dissolution.~~by September 2021. However, if we cannot sell our assets and pay our debts within ~~24 months,~~this 24-month period, or if ~~the~~our board ~~of directors~~ and the Special Committee determine that it is otherwise advisable to do so, we may transfer and assign our remaining assets to a liquidating trust. Upon such transfer and assignment, our stockholders will receive interests in the liquidating trust. The liquidating trust will pay or provide for all of our liabilities and distribute any remaining net proceeds from the sale of ~~our~~its assets to the holders of interests in the liquidating trust.

The dissolution process and the amount and timing of distributions to stockholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the consolidated statement of net assets.

We expect to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. Our board shall use commercially reasonable efforts to continue to cause us to maintain our REIT status, provided however, our board may elect to terminate our status as a REIT if it determines that such termination would be in the best interest of our stockholders.

Portfolio Overview

As of ~~June~~September 30, 2019, our healthcare investment portfolio consists of two seniors housing properties that are both located in Florida: Summer Vista and The Crossings at Riverview (“Riverview”). We have leased our two seniors housing properties to single member limited liability companies wholly-owned by TRS Holdings and engaged independent third-party property managers under management agreements to operate the properties as permitted under RIDEA structures.

While we are not directly impacted by the performance of our property managers, to the extent that our property managers experience operating difficulties and become unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated operating results, liquidity and/or financial condition. Our property managers are generally contractually required to provide financial information to us in accordance with their management agreements, which we monitor in order to mitigate the aforementioned risk.

We monitor the performance of our third-party operators 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.

We also review 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 ~~June~~September 30, 2019, ~~100%~~96% and ~~76%~~79% of resident units were occupied at Summer Vista and Riverview, respectively. The average monthly RevPOU as of ~~June~~September 30, 2019 and 2018 was ~~$4,118~~$4,283 and ~~$4,059,~~$3,680, respectively, for assisted living units and ~~$5,257~~$5,192 and ~~$4,415,~~$4,072, respectively, for memory care units.

Liquidity and Capital Resources

~~General~~

As described above under “Strategic Alternatives,” we began evaluating strategic alternatives to maximize value for our stockholders. ~~During~~In September 2019, our ~~principal demands for funds have been and are expected~~stockholders approved a Plan of Dissolution pursuant to ~~be for:~~

~~the payment~~which our board of ~~operating expenses;~~

~~the payment~~directors is authorized to undertake a sale of ~~debt service on our outstanding indebtedness; and~~

~~to a lesser extent, the payment of distributions through the suspension of cash distributions effective April 1, 2019.~~

~~We strategically leveraged our real estate assets and used debt as a means of providing additional funds for the acquisition of properties. As of June 30, 2019,~~ all of our ~~debt is unhedged variable rate debt. We may be negatively impacted by rising interest rates on~~assets and distribute the net proceeds to our ~~unhedged variable rate debt.~~stockholders after payment of all of our liabilities. As of ~~June~~September 30, 2019, our cash totaled $4.7 million. We will use our cash on hand and ~~December 31, 2018,~~net sales proceeds received from the sale of real estate to pay all obligations, pay liquidating distributions and any other corporate purposes deemed appropriate. Our total assets and net assets in liquidation were $53.2 million and $43.7 million, respectively, as of September 30, 2019. Our ability to meet our ~~debt leverage ratio was approximately 12.5% and 36.0%, respectively, of~~obligations is contingent upon the ~~aggregate carrying value~~disposition of our assets ~~including properties classified~~in accordance with our Plan of Dissolution. We estimate that the proceeds from the sale of assets pursuant to our Plan of Dissolution will be adequate to pay our obligations, however, we cannot provide any assurance as ~~held for sale.~~to the prices or net proceeds we will receive from the disposition of our assets.

We believe that cash flows provided by operating activities along with cash on hand will continue to provide adequate capital to fund our operating, administrative and other expenses incurred during liquidation as well as debt service obligations. As a REIT, we must distribute annually at least 90% of our REIT taxable income.

Our cash flows from operating and investing activities through August 31, 2019, as described within “Sources of Liquidity and Capital Resources” and “Uses of Liquidity and Capital Resources” represent cash flows from continuing operations, which includes our two seniors housing properties and excludes our MOB property that was classified as discontinued operations and sold in May 2019. The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto.

Sources of Liquidity and Capital Resources

Expense Support Agreement

During the ~~six~~eight months ended ~~June,~~August 31, 2019 and the nine months ended September 30, 2018, our cash ~~flows~~flow from operating activities was positively impacted by approximately $0.2 million and ~~$0.4~~$0.6 million, respectively, of expense support received pursuant to the Expense Support Agreement with our Advisor that was in effect through its termination date of April 1, 2019. Pursuant to the Expense Support Agreement, our Advisor agreed to accept payment in restricted stock in lieu of cash for services rendered, in the event that the Company did not achieve established distribution coverage targets (as defined in the Expense Support Agreement). In March 2019, as further described above under “Strategic Alternatives,” our board of directors and our Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019. Any restricted stock shares granted to our Advisor under the Expense Support Agreement shall continue to be held by the Advisor, subject to the vesting and forfeiture provisions of the Expense Support Agreement which survive termination. As a result of terminating the Expense Support Agreement effective April 1, 2019, the amount of expense support we receive from our Advisor ceased April 1, 2019. Accordingly, there was no expense support received ~~for the quarter ended June 30,~~subsequent to April 1, 2019. Any amounts settled, and for which restricted stock shares were issued, pursuant to the Expense Support Agreement are permanently settled and we have no further obligation to pay such amounts to our Advisor. ~~In future periods,~~Effective April 1, 2019, we ~~will~~ have ~~to settle~~settled Advisor personnel expenses in cash rather than restricted stock, unless such amounts ~~are~~were otherwise subordinated or waived.

Effective March 2, 2019, our advisory agreement was amended and restated to eliminate acquisition fees and dispositions fees as well as to reduce our AUM Fees to 0.40% per annum of average invested assets. Our AUM Fees were further subject and subordinate to an agreed upon hurdle relating to the total operating expenses (as described in the amended and restated advisory agreement) of the Company, though to the extent any portion of the AUM Fees are not paid as a result of total operating expenses exceeding the prescribed limits, it may be recovered by our Advisor if certain Company performance thresholds are subsequently met. Our board of directors approved renewing the amended and restated advisory agreement through March 2020. Effective as of April 1, 2019, our Advisor waived its rights to any AUM Fees going forward, with such waiver to remain in effect through our dissolution and liquidation.

Proceeds from Sale of Real Estate

Subscription Proceeds

In October 2018, in light of the decision to terminate our Offering, we suspended our Reinvestment Plan and our Redemption Plan. As such, there were no subscriptions proceeds received for the ~~six~~nine months ended ~~June~~September 30, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2018, we received subscription proceeds of approximately ~~$12.0~~$19.0 million ~~(1.2~~(1.9 million shares) and ~~$0.5~~$0.8 million ~~(0.05~~(0.08 million shares) through our Offering and Reinvestment Plan, respectively.

Uses of Liquidity and Capital Resources

Net Cash Provided ~~By (Used In)~~by Operating Activities – Continuing Operations

WePrior to adopting the Liquidation Basis of Accounting, we experienced positive cash flow from operating activities for the ~~six~~eight months ended ~~June 30,~~August 31, 2019 of approximately ~~$0.5~~$0.7 million as compared to negative cash flow from operating activities for the ~~six~~nine months ended ~~June~~September 30, 2018 of approximately ~~$0.4~~$0.3 million. The fluctuation across periods was primarily the result of our second seniors housing property, Riverview, being acquired on August 31, 2018 and, as such, the prior period consisted entirely of operations for Summer Vista while the current period included operations for both Summer Vista and Riverview. In addition, our cash flow from operating activities during 2019 was positively impacted by our decision to use the remaining proceeds ~~for~~from the MOB Sale, along with a portion of our available cash on hand, to strategically pay down approximately $12.8 million of debt secured by our Summer Vista property, which resulted in lower interest ~~expense and loan cost amortization.~~expense.

During the ~~six~~eight months ended ~~June 30,~~August 31, 2019 and nine months ended September 2018, our cash flow from operating activities was also positively impacted by the expense support received from our ~~Advisor.~~Advisor of approximately $0.2 million. As a result of terminating the Expense Support Agreement effective April 1, 2019, as described above under “Expense Support Agreement,” the amount of expense support we receive from our Advisor ceased April 1, 2019 and there was no expense support received ~~for the quarter ended June,~~subsequent to April 1, 2019. ~~In future periods,~~Effective April 1, 2019, we ~~will settle~~have settled Advisor personnel expenses in cash rather than restricted stock, unless such amounts ~~are~~were otherwise subordinated or waived.

Capital Expenditures

We paid approximately ~~$86,000~~$113,000 and ~~$17,000~~$49,000 in capital expenditures during the ~~six~~eight months ended ~~June 30,~~August 31, 2019 and nine months ended September 2018, respectively. The increase across periods primarily relates to additions at our Riverview property during 2019.

Underwriting Compensation

As further described above under “Strategic Alternatives,” we terminated and closed our Offering effective October 1, 2018. As such, there was no underwriting compensation for the ~~six~~eight months ended ~~June 30,~~August 31, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2018, we paid approximately ~~$0.6~~$1.0 million in underwriting compensation. Under the terms of the Primary Offering, our Dealer Manager was entitled to receive selling commissions, dealer manager fees and/or annual distribution and stockholder servicing fees, which were based on the respective share class of our common stock sold, all or a portion of which could be reallowed to participating broker dealers. Refer to Note 8.11. “Related Party Arrangements” for additional information related to amounts incurred for the ~~six~~nine months ended ~~June~~September 30, 2018.

Debt Repayments

During the ~~six~~eight months ended ~~June 30,~~August 31, 2019, we used the net proceeds from our MOB Sale, along with a portion of our available cash on hand, to make approximately $18.4 million of total debt repayments, which were comprised of approximately $5.6 million of debt secured by our Mid America Surgery property and approximately $12.8 million of debt secured by our Summer Vista property. As of September 30, 2019, we had approximately $6.2 million of borrowings collateralized by our properties; substantially all of which matures after September 2021 (our required liquidation date as a REIT). Therefore, we do not expect debt repayments to represent a significant use of liquidity until such time as we sell our two remaining real estate properties.

Common Stock Redemptions

Our Redemption Plan was designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any liquidity event. In connection with the termination of our Offering and our board of directors’ decision to consider possible strategic alternatives available to us, our Redemption Plan was suspended effective October 1, 2018 and we no longer accept or process any redemption requests received after such date. During the ~~six~~nine months ended ~~June~~September 30, 2018, we received requests for the redemption of common stock of approximately $0.2 ~~million. The redemptions~~million, which were approved by our board of directors and paid as of ~~June~~September 30, 2018.

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. To the extent we did not have sufficient cash flows from operations available for cash distributions, we paid some or all of our cash distributions from sources other than cash flows from operations, such as cash flows provided by financing activities, a component of which included proceeds of our Offering and/or borrowings, whether collateralized by our assets or unsecured. As further described above under “Strategic Alternatives,” we terminated and closed our Offering effective October 1, 2018. We suspended our Reinvestment Plan and discontinued stock dividends concurrently. As a consequence of suspending our Reinvestment Plan, effective October 1, 2018, stockholders who were participants in our Reinvestment Plan began to receive cash distributions instead of additional shares of our common stock. In March 2019, our board of directors suspended regular cash distributions effective April 1, 2019 and our board of directors has not declared any regular distributions on our common stock after the effective date of the suspension.

The following table details our cash distributions per share and our cash distributions paid, including distribution reinvestments as applicable, by quarter for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands, except per share data):

	Cash Distributions per Share ⁽¹⁾						Cash Distributions Paid ⁽²⁾						Cash Flows
													Provided by
							Cash				Cash Distributions		(Used in)
	Class A		Class T		Class I		Distributions		Distribution		net of Distribution		Operating			Cash Distributions per Share ⁽¹⁾						Cash Distributions Paid ⁽²⁾						Cash Flows Provided by (Used in) Operating Activities ⁽³⁾
Periods	Share		Share		Share		Declared		Reinvestments		Reinvestments		Activities ⁽³⁾			Class A Share		Class T Share		Class I Share		Cash Distributions Declared		Distribution Reinvestments		Cash Distributions net of Distribution Reinvestments		Cash Flows Provided by (Used in) Operating Activities ⁽³⁾
2019 Quarters
First	$	0.1440	$	—	$	—	$	705	$	—	$	705	$	426		$	0.1440	$	—	$	—	$	705	$	—	$	705	$	426
Second		—		—		—		—		—		—		232			—		—		—		—		—		—		232
Third ⁽⁴⁾																	—		—		—		—		—		—		210
Year	$	0.1440	$	—	$	—	$	705	$	—	$	705	$	658		$	0.1440	$	—	$	—	$	705	$	—	$	705	$	868

2018 Quarters
First	$	0.1440	$	0.1178	$	0.1312	$	402	$	225	$	177	$	157		$	0.1440	$	0.1178	$	0.1312	$	402	$	225	$	177	$	157
Second		0.1440		0.1175		0.1314		483		283		200		(242	)		0.1440		0.1175		0.1314		483		283		200		(242	)
Third																	0.1440		0.1177		0.1310		555		334		221		290
Year	$	0.2880	$	0.2353	$	0.2626	$	885	$	508	$	377	$	(85	)	$	0.4320	$	0.3530	$	0.3936	$	1,440	$	842	$	598	$	205

FOOTNOTES:

⁽¹⁾

Our board of directors authorized through March 31, 2019, regular cash distributions on the outstanding shares of all classes of our common stock were declared in monthly amounts equal to $0.0480 per share, less class-specific expenses with respect to each class (as applicable). In March 2019, our board of directors suspended our regular cash distributions effective April 1, 2019.

⁽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⁾

Amounts herein include cash flows from discontinued operations. For the ~~six~~eight months ended ~~June 30,~~August 31, 2019 and nine months ended September 2018, our net ~~income (loss)~~loss was approximately ~~$0.4~~$0.1 million and ~~($0.7)~~$1.2 million, respectively, while cash distributions declared were approximately $0.7 million and ~~$0.9~~$1.4 million, respectively. For the ~~six~~eight months ended ~~June 30,~~August 31, 2019 and nine months ended September 2018, approximately 60% and ~~18%~~36%, respectively, 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. For the ~~six~~eight months ended ~~June 30,~~August 31, 2019 and nine months ended September 2018, approximately 40% and ~~82%~~64%, respectively, of the cash distributions paid to stockholders were considered to be funded with flows provided by financing activities, a component of which included proceeds of our Offering and/or borrowings, whether collateralized by our assets or unsecured.

⁽⁴⁾	Amounts herein are presented for the eight months ended August 31, 2019.

In March 2019, our board of directors suspended our regular cash distributions effective April 1, 2019. Accordingly, our board of directors has not declared any regular distributions on our common stock after the effective date of the suspension.

Results of Operations

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 operation of properties and other permitted investments, other than those referred to in Part II, Item 1A of this report and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

The following discussion focuses on continuing operations, which includes our two seniors housing properties and excludes our MOB property classified as discontinued operations and sold in May 2019. The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto.

~~The following is a discussion~~Comparability of ~~our continuing operations for the quarter and six months ended June 30, 2019 as compared~~Financial Data from Period to ~~the quarter and six months ended June 30, 2018:~~Period

Resident fees and services for the quarter and six months ended June 30, 2019 were approximately $2.2 million and $4.4 million, respectively, as compared to approximately $1.1 million and $2.3 million, respectively, for the six months ended June 30, 2018. As a result of our second seniors housing property, Riverview, being acquired on August 31, 2018, the prior period consisted entirely of resident fees and services for Summer Vista while the current period included resident fees and services for both Summer Vista and Riverview.

Property operating expenses for the quarter and six months ended June 30, 2019 were approximately $1.3 million and $2.7 million, respectively, as compared to approximately $0.6 million and $1.2 million, respectively, for the quarter and six months ended June 30, 2018. As a resultstockholders' approval of our ~~second seniors housing property, Riverview, being acquired on August 31, 2018, the prior period consisted entirely~~Plan of ~~property operating expenses for Summer Vista while the current period included property operating expenses for both Summer Vista~~Dissolution in September 2019 and ~~Riverview.~~

General and administrative expenses for the quarter and six months ended June 30, 2019 were approximately $0.4 million and $0.8 million, respectively, as compared to approximately $0.3 million and $0.6 million, respectively, for the quarter and six months ended June 30, 2018. General and administrative expenses are comprised primarily of directors’ and officers’ insurance, accounting and legal fees, Advisor personnel expenses and board of director fees. Beginning in 2017 and through the terminationour adoption of the ~~Expense Support Agreement~~Liquidation Basis of Accounting effective April 1, 2019, as described above under “Expense Support Agreement,” Advisor personnel expenses were 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 for the six months ended June 30, 2019, and approximately $0.1 million and $0.2 million, respectively, for the six months ended June 30, 2018. As a result of terminating the Expense Support Agreement effective AprilSeptember 1, 2019, the amount of expense support we receive from our Advisor ceased on April 1, 2019. Accordingly, in future periods, Advisor personnel expenses that are settled in cash rather than restricted stock will be reflected within our financial results ~~as we will no longer receive the aforementioned expense reductions that resulted from the expense support arrangement with our Advisor.~~

Asset management fees incurred for the quarter and six months ended June 30, 2019 were approximately $51,000 and $0.2 million, respectively, as compared to approximately $70,000 and $0.1 million, respectively, for the quarter and six months ended June 30, 2018. From inception through the termination of the Expense Support Agreement effective April 1, 2019, as described above under “Expense Support Agreement,” asset management fees were settled in the form of restricted stock pursuant to the Expense Support Agreement and, as such, our asset management fees were reduced by $0.1 million for the six months ended June 30, 2019, and approximately $70,000 and $0.1 million, respectively, for the six months ended June 30, 2018. As a result of terminating the Expense Support Agreement effective April 1, 2019, the amount of expense support we receive from our Advisor ceased on April 1, 2019. In addition, effective April 1, 2019, our Advisor waived its rights to any asset management fees going forward, with such waiver to remain in effect through our dissolution and liquidation. Accordingly, for the quarter ended June 30, 2019, our Advisor earned and waived approximately $51,000 of asset management fees and, as such, asset management fees were reduced by approximately $51,000 for the quarter ended June 30, 2019.

Depreciation and amortization for the quarter and six months ended June 30, 2019 were approximately $0.7 million and $1.3 million, respectively, as compared to approximately $0.3 million and $0.6 million, respectively for the quarter and six months ended June 30, 2018. As a result of our second seniors housing property, Riverview, being acquired on August 31, 2018, the prior period consisted entirely of depreciation and amortization for Summer Vista while the current period included depreciation and amortization for both Summer Vista and Riverview.

•

Interest expense and loan cost amortization for the quarter and six months ended June 30, 2019 was approximately $0.2 million and $0.5 million, respectively, as compared to approximately $0.2 million and $0.4 million for the quarter and six months ended June 30, 2018. The increase is reflective of the current period consisting of mortgage loans for both Summer Vista and Riverview, which we acquired on August 31, 2018; whereas, the prior period consisted of our Summer Vista loan as well as the notes issued in connection with our private placement, which we repaid in October 2018. In addition, we wrote-off approximately $0.1 million in unamortized loan costs as a loss on the early extinguishment of debt related to the strategic pay down of approximately $12.8 million in debt secured by our Summer Vista property using a portion of the net sales proceeds from our MOB sale as further described above in “Sources of Liquidity and Capital Resources - Proceeds from Sale of Real Estate.” We expect lower interest expense in future periods as a result of our strategic decision to repay the majority of our Summer Vista debt prior to its scheduled maturity.

Income from discontinued operations for the quarter and six months ended June 30, 2019, was approximately $1.6 million and $1.7 million, respectively, as compared to approximately $30,000 and $63,000, respectively, for the quarter and six months ended June 30, 2018. As discussed above under “Strategic Alternatives,” we classified our Mid America Surgery property as held for sale. In May 2019, we completed the MOB Sale, which we believe will cause a strategic shift in our operations and, therefore, we have classified the corresponding revenues and expenses as discontinued operations. In connection with our completion of the MOB Sale, during the quarter and six months ended June 30, 2019, we recognized a gain on sale of real estate of approximately $1.6 million for financial reporting purposes.

~~Net Operating Income~~

We define NOI, a non-GAAP measure, as total revenues 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. In addition, we have aggregated NOI on a “same-store” basis only for comparable properties that we have owned during the entirety of all periods presented. Non-same-store NOI represents NOI from our Riverview acquisition completed after both April 1, 2018 and January 1, 2018 as we did not own the property during the entirety of all periods presented. The chart below reconciles our net loss and NOI for the quarter and six months ended June 30, 2019 and 2018, excluding our MOB property classified as discontinued operations (in thousands):

Quarter Ended

Six Months Ended

June 30,

Change

June 30,

Change

2019

2018

$

%

2019

2018

$

%

Net income (loss)

$
943

$
(350
)

$
387

$
(740
)

Adjusted to exclude:

General and administrative
   expenses

422

286

825

605

Acquisition fees and expenses

—

—

—

1

Depreciation and amortization

674

324

1,344

649

Other expenses, net of other
   income

246

194

497

375

Income tax expense

—

14

31

45

Income from discontinued
   operations

(1,564
)

(30
)

(1,667
)

(63
)

NOI

$
721

$
438

$
283

64.6
%

$
1,417

$
872

$
545

62.5
%
Less: Non-same-store NOI

(342
)

—

(614
)

—

Same-store NOI

$
379

$
438

$
(59
)

-13.5
%

$
803

$
872

$
(69
)

-7.9
%

Overall, our NOI for the quarter and six months ended June 30, 2019 increased by approximately $0.3 million and $0.5 million, respectively, as compared to the six months ended June 30, 2018, which was primarily the result of our second seniors housing property, Riverview, being acquired on August 31, 2018 and, as such, the prior period consisted entirely of operations for ~~Summer Vista while the~~our current period included operations for both Summer Vista and Riverview. Accordingly, our non-same-store NOI increased by approximately $0.3 million and $0.6 million, respectively, for the quarter and six months ended June 30, 2019 and related entirelyyear periods are not comparable to our ~~Riverview property.~~ prior year periods.

In addition, due to the adoption of our ~~same-store NOI for~~Plan of Dissolution, we are no longer reporting net operating income, funds from operations or modified fund from operations as we no longer consider these to be relevant key performance metrics since we have adopted the ~~quarter ended June~~Liquidation Basis of Accounting.

Changes in Net Assets in Liquidation

Period from September 1, 2019 through September 30, 2019

Net assets in liquidation decreased by approximately ~~$59,000, or 13.5%, and~~$118,000 during the period from September 1, 2019 through September 30, 2019. The primary reason for the ~~six months ended June 30, 2019 $70,000, or 8.0%. Our same-store NOI related entirely~~decrease in net assets was due to our Summer Vista property, which was negatively impacted by new market competition that resulted in lower resident fees and services across periods as concessions/incentives were offered to new residents.

~~Funds~~net outflows for corporate expenditures exceeding net inflows 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”), 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.investments.

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 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 the offering and acquisition phases are complete. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

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. 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.

~~The following table reconciles our net income (loss) to FFO and MFFO for the quarter and six months ended June 30, 2019 and 2018 (in thousands, except per share data):~~

Quarter Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Net loss

$
943

$
(350
)

$
387

$
(740
)
Adjustments to reconcile net loss to FFO

Depreciation and amortization:

Continuing operations

674

325

1,344

649

Discontinued operations

—

131

44

262

Gain on sale of real estate:

Discontinued operations

(1,566
)

—

(1,566
)

—

Total FFO

51

106

209

171

Straight-line rent adjustments: ⁽¹⁾

Continuing operations

12

8

17

27

Discontinued operations

(5
)

(19
)

(18
)

(70
)
Amortization of above and below market intangibles: ⁽²⁾

Discontinued operations

—

2

1

5

Acquisition fees and expenses: ⁽³⁾

Continuing operations

—

—

—

1

Loss on extinguishment of debt: ⁽⁴⁾

Continuing operations

107

—

107

—

Discontinued operations

56

—

56

—

Total MFFO

$
221

$
97

$
372

$
134

Class A common stock (basic and diluted):

Weighted average number of Class A common
shares outstanding ^{(5) (6)}

4,899

868

4,899

847

Net loss per share of Class A common stock outstanding

$
0.19

$
(0.09
)

$
0.08

$
(0.20
)
FFO per share of Class A common stock outstanding

$
0.01

$
0.03

$
0.04

$
0.05

MFFO per share of Class A common stock outstanding

$
0.05

$
0.02

$
0.08

$
0.04

Class T common stock (basic and diluted):

Weighted average number of Class T common shares outstanding ^{(5) (6)}

—

2,806

—

2,575

Net loss per share of Class T common stock outstanding

$
—

$
(0.09
)

$
—

$
(0.20
)
FFO per share of Class T common stock outstanding

$
—

$
0.03

$
—

$
0.05

MFFO per share of Class T common stock outstanding

$
—

$
0.02

$
—

$
0.04

Class I common stock (basic and diluted):

Weighted average number of Class I common
shares outstanding ^{(5) (6)}

—

313

—

262

Net loss per share of Class I common stock outstanding

$
—

$
(0.09
)

$
—

$
(0.20
)
FFO per share of Class I common stock outstanding

$
—

$
0.03

$
—

$
0.05

MFFO per share of Class I common stock outstanding

$
—

$
0.02

$
—

$
0.04

~~FOOTNOTES:~~

⁽¹⁾

Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (from a GAAP accrual basis in order to reflect such payments on a cash basis of amounts expected to be received for such lease and rental payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

⁽²⁾

Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

⁽³⁾

In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. By adding back acquisition expenses, management believes MFFO provides useful supplemental information of its operating performance and will also allow comparability between different real estate entities regardless of their level of acquisition activities. Acquisition expenses include payments to our Advisor or third-parties. Acquisition expenses for business combinations under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid or accrued acquisition 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 properties are generated to cover the purchase price of the property.

⁽⁴⁾	Management believes that adjusting for the realized loss on the early extinguishment of debt is appropriate because the adjustments are not reflective of our ongoing operating performance and, as a result, the adjustments better align results with management’s analysis of operating performance.

⁽⁵⁾

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). Effective October 1, 2018, in connection with the close of our Offering, we discontinued our stock dividends.

⁽⁶⁾

In connection with the close of the Offering effective October 1, 2018, we reached certain underwriting compensation limits, and, effective October 31, 2018, each Class T and Class I share automatically converted into a Class A share pursuant to the terms of our charter. As such, there were no Class T or Class I shares outstanding effective October 31, 2018.

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 advisory services, selling commissions, dealer manager fees, asset management fees and reimbursement of operating costs.

Our Advisor and its affiliates and related parties also are entitled to reimbursement of certain operating expenses in connection with their provision of services to us, including personnel costs, subject to the limitation that, beginning on the earlier of the Expense Year after (i) we make our first investment or (ii) six months after the commencement of the Offering, we will not reimburse the Advisor for any amount by which operating expenses exceed the greater of 2% of our average invested assets or 25% of our net income in any Expense Year unless approved by the independent directors. For the Expense Year ended ~~June~~September 30, 2019, ~~we did not incur~~our total operating expenses were in excess of ~~the limitation.~~this limitation by approximately $35,000. As of ~~June~~September 30, 2019, we had received cumulative approvals by our independent directors for total operating expenses in excess of this limitation of approximately $0.9 million. Our independent directors determined that the higher relationship of operating expenses to average invested assets for the Expense Year ended September 30, 2019, was justified given the cost of operating a public company and the MOB Sale undertaken in the second quarter of 2019 in connection with our exploration of strategic alternatives, which further reduced our already limited number of investments.

See Note 8.11. “Related Party Arrangements” in the accompanying condensed consolidated financial statements for additional information.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of ~~June~~September 30, 2019.

Contractual Obligations

The following table presents our contractual obligations by payment period as of ~~June~~September 30, 2019 (in thousands):

Payments Due by Period

2019

2020-2021

2022-2023

Thereafter

Total

Mortgage loans, net
(principal and interest)

$
138

$
685

$
6,435

$
—

$
7,258

$
138

$
685

$
6,435

$
—

$
7,258

	Payments Due by Period
	2019		2020-2021		2022-2023		Thereafter		Total
Mortgage loans, net (principal and interest)	$	69	$	667	$	6,419	$	—	$	7,155
	$	69	$	667	$	6,419	$	—	$	7,155

Critical Accounting Policies and Estimates

See Item 1. “Condensed Consolidated Financial Information (unaudited)” and our Annual Report on Form 10-K for the year ended December 31, 2018 for a summary of our critical accounting policies and estimates.

Recent Accounting Pronouncements

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

~~Item 3.~~

Item 3. Quantitative and Qualitative Disclosures about Market Risks

We may be exposed to financial market risks, specifically changes in interest rates as we have borrowed money to acquire properties. As of ~~June~~September 30, 2019, all of our debt is unhedged variable rate debt. Our management objectives related to interest rate risk is 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 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.

The following is a schedule as of ~~June~~September 30, 2019 of our variable rate debt maturities for the remainder of 2019, and each of the next four years and thereafter (principal maturities only) (in thousands):

	Expected Maturities																Expected Maturities														Fair
	2019		2020		2021		2022		2023		Thereafter		Total		Fair Value ⁽¹⁾		2019		2020		2021		2022		2023		Thereafter		Total		Value ⁽¹⁾
Variable rate debt	$	—	$	32	$	86	$	1,192	$	4,840	$	—	$	6,150	$	6,113	$	—	$	32	$	86	$	1,192	$	4,840	$	—	$	6,150	$	6,117
Average interest rate on variable rate debt		—	LIBOR + 2.45%		LIBOR + 2.33%		LIBOR + 2.67%		LIBOR + 2.25%				LIBOR + 2.33%					—	LIBOR + 2.45%		LIBOR + 2.33%		LIBOR + 2.67%		LIBOR + 2.25%				LIBOR + 2.33%

FOOTNOTE:

⁽¹⁾	The estimated fair value of our variable rate debt 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 2019, compared to LIBOR rates as of ~~June~~September 30, 2019, would result in annualized fluctuation of interest expense on our current variable rate debt of approximately $0.1 million for the year ending December 31, 2019. 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, or the impact of any LIBOR floors or caps that may exist under our debt arrangements.

~~Item 4.~~

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

During the most recent fiscal quarter, there were no changes in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

~~PART II.~~

PART II. OTHER INFORMATION

~~Item 1.~~

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~~Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors ~~are risks, together with the other risk factors~~from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that we currently believe are the material risks of which our stockholders should be aware. However, additional risks that are not presently known to us, or that we currently believe are not material, may also prove to be important.

~~RISKS THAT MAY DELAY OR REDUCE OUR LIQUIDATING DISTRIBUTIONS~~

~~We estimated~~as supplemented by those set forth in our proxy statement regarding the proposed Plan of Dissolution that our net proceeds from liquidation could range between approximately $8.80 and $9.83 per share, which we anticipate paying to stockholders within 24 months after stockholder approval of the Plan of Dissolution. However, our expectations about the amount of liquidating distributions that we will make and when we will make them were basedQuarterly Report on many estimates and assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of liquidating distributions we pay to stockholders may be more or less than we estimated. In addition, the liquidating distributions may be paid later than we predict. In addition to the risks that we generally face in our business, factors that could cause actual payments to be lower or made later than we expect include, among others, the risks set forth below:

~~If any of the parties to our future sale agreements default thereunder, or if these sales do not otherwise close, our liquidating distributions may be delayed or reduced.~~

If stockholders approve the Plan of Dissolution, we will seek to enter into binding sale agreements for each of our properties. The consummation of the potential sales for which we will enter into sale agreements in the future will be subject to satisfaction of closing conditions. If any of the transactions contemplated by these future sale agreements do not close because of a buyer default, failure of a closing condition or for any other reason, we will need to locate a new buyerForm 10-Q for the assets which we may be unable to do promptly or at prices or on terms that are as favorable as the original sale agreement. We will also incur additional costs involved in locating a new buyer and negotiating a new sale agreement for this asset. These additional costs are not included in our projections. In the event that we incur these additional costs, our liquidating payments to our stockholders would be delayed or reduced.period ended June 30, 2019.

~~If we are unable to find buyers for our assets at our expected sales prices, our liquidating distributions may be delayed or reduced.~~

Currently neither of our two properties are subject to agreements providing for their sale. In calculating our estimated range of liquidating distributions, we assumed that we will be able to find buyers for all of our assets at amounts based on our estimated range of market values for each property. However, we may have overestimated the sales prices that we will ultimately be able to obtain for these assets. For example, in order to find buyers in a timely manner, we may be required to lower our asking price below the low end of our current estimate of the property’s market value. If we are not able to find buyers for these assets in a timely manner or if we have overestimated the sales prices we will receive, our liquidating payments to our stockholders would be delayed or reduced. Furthermore, the projected liquidating distribution is based upon the Advisor’s estimates of the range of market value for each property, but real estate market values are constantly changing and fluctuate with changes in interest rates, supply and demand dynamics, occupancy percentages, lease rates, the availability of suitable buyers, the perceived quality and dependability of income flows from tenancies and a number of other factors, both local and national. In addition, transactional fees and expenses, environmental contamination at our properties or unknown liabilities, if any, may adversely impact the net liquidation proceeds from those assets.

If we are unable to find buyers that want to keep our property managers, our asset sales prices will likely be in the lower end of our expected range, it may take longer to sell our assets, and our liquidating distributions may be delayed or reduced.

Currently, our portfolio consists of two seniors housing properties managed by independent third-party managers as permitted under RIDEA structures. Some potential buyers of these assets may wish to replace our property managers, which is a change that could create transition costs and otherwise reduce what they would be willing to pay for the properties. If we are unable to find buyers that want to keep our property managers, our asset sales prices will likely be in the lower end of our expected range, it may take longer to sell our assets, and our liquidating distributions may be delayed or reduced.

~~If our liquidation costs or unpaid liabilities are greater than we expect, our liquidating distributions may be delayed or reduced.~~

Before making the final liquidating distribution, we will need to pay or arrange for the payment of all of our transaction costs in the liquidation, all other costs and all valid claims of our creditors. Our Board may also decide to acquire one or more insurance policies covering unknown or contingent claims against us, for which we would pay a premium which has not yet been determined. Our Board may also decide to establish a reserve fund to pay these contingent claims. The amounts of transaction costs in the liquidation are not yet final, so we have used estimates of these costs in calculating the amounts of our projected liquidating distributions. To the extent that we have underestimated these costs in calculating our projections, our actual net liquidation value may be lower than our estimated range. In addition, if the claims of our creditors are greater than we have anticipated or we decide to acquire one or more insurance policies covering unknown or contingent claims against us, our liquidating distributions may be delayed or reduced. Further, if a reserve fund is established, payment of liquidating distributions to our stockholders may be delayed or reduced.

~~Pursuing the Plan of Dissolution may cause us to fail to qualify as a REIT, which would dramatically lower the amount of our liquidating distributions.~~

For so long as we qualify as a REIT and distribute all of our taxable income, we generally are not subject to federal income tax. Although our Board does not presently intend to terminate our REIT status prior to the final distribution of the net proceeds from the sale of our assets and our dissolution, our Board may take actions pursuant to the Plan of Dissolution that would result in such a loss of REIT status. Upon the final distribution of the net proceeds from the sale of our assets and our dissolution, our existence and our REIT status will terminate. However, there is a risk that our actions in pursuit of the Plan of Dissolution may cause us to fail to meet one or more of the requirements that must be met in order to qualify as a REIT prior to completion of the Plan of Dissolution. For example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws, mainly interest and dividends. We may encounter difficulties satisfying these requirements as part of the liquidation process. In addition, in connection with that process, we may recognize ordinary income in excess of the cash received. The REIT rules require us to pay out a large portion of our ordinary income in the form of a dividend to our stockholders. However, to the extent that we recognize ordinary income without any cash available for distribution, and if we were unable to borrow to fund the required dividend or find another way to meet the REIT distribution requirements, we may cease to qualify as a REIT. While we expect to comply with the requirements necessary to qualify as a REIT in any taxable year, if we are unable to do so, we will, among other things (unless entitled to relief under certain statutory provisions):

~~not be allowed a deduction for dividends paid to stockholders in computing our taxable income;~~

~~be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income, including recognized gains, at regular corporate rates;~~

~~be subject to increased state and local taxes; and~~

~~be disqualified from treatment as a REIT for the taxable year in which we lose our qualification and for the four following taxable years.~~

~~As a result of these consequences, our failure to qualify as a REIT could substantially reduce the funds available for distribution to our stockholders.~~

~~Pursuing the Plan of Dissolution may cause us to be subject to federal income tax, which would reduce the amount of our liquidating distributions.~~

We generally are not subject to federal income tax to the extent that we distribute to our stockholders during each taxable year (or, under certain circumstances, during the subsequent taxable year) dividends equal to our taxable income for the year. However, we are subject to federal income tax to the extent that our taxable income exceeds the amount of dividends paid to our stockholders for the taxable year. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of 85% of our ordinary income for that year, plus 95% of our capital gain net income for that year, plus 100% of our undistributed taxable income from prior years. While we intend to make distributions to our stockholders sufficient to avoid the imposition of any federal income tax on our taxable income and the imposition of the excise tax, differences in timing between the actual receipt of income and actual payment of deductible expenses, and the inclusion of such income and deduction of such expenses in arriving at our taxable income, could cause us to have to either borrow funds on a short-term basis to meet the REIT distribution requirements, find another alternative for meeting the REIT distribution requirements, or pay federal income and excise taxes. The cost of borrowing or the payment of federal income and excise taxes would reduce the funds available for distribution to our stockholders.

So long as we continue to qualify as a REIT, any net gain from “prohibited transactions” will be subject to a 100% tax. “Prohibited transactions” are sales of property held primarily for sale to customers in the ordinary course of a trade or business. The prohibited transactions tax is intended to prevent a REIT from retaining any profit from ordinary retailing activities such as sales to customers of condominium units or subdivided lots in a development project. The Internal Revenue Code of 1986, as amended (“Code”), provides for a “safe harbor” which, if all its conditions are met, would protect a REIT’s property sales from being considered prohibited transactions. Whether a real estate asset is property held primarily for sale to customers in the ordinary course of a trade or business is a highly factual determination. We believe that all of our properties are held for investment and the production of rental income, and that none of the sales of our properties will constitute a prohibited transaction. We do not believe that the sales of the Company’s properties pursuant to the Plan of Dissolution should be subject to the prohibited transactions tax. However, due to the anticipated sales volume and other factors, the contemplated sales may not qualify for the protective safe harbor. There can be no assurance that the Internal Revenue Service will not successfully challenge the characterization of properties we hold for purposes of applying the prohibited transaction tax.

~~Distributing interests in a liquidating trust may cause our stockholders to recognize gain prior to the receipt of cash.~~

The REIT provisions of the Code generally require that each year we distribute as a dividend to our stockholders 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). Liquidating distributions we make pursuant to the Plan of Dissolution will qualify for the dividends paid deduction, provided that they are made within 24 months of the adoption of such plan. Conditions may arise which cause us not to be able to liquidate within such 24-month period. For instance, it may not be possible to sell our assets at acceptable prices during such period. In such event, rather than retain our assets and risk losing our status as a REIT, we may elect to transfer our remaining assets and liabilities to a liquidating trust in order to meet the 24-month requirement. We may also elect to transfer our remaining assets and liabilities to a liquidating trust within such 24-month period to avoid the costs of operating as a public company. Such a transfer would be treated as a distribution of our remaining assets to our stockholders, followed by a contribution of the assets to the liquidating trust. As a result, a Company stockholder would recognize gain to the extent such stockholder’s share of the cash and the fair market value of any assets received by the liquidating trust was greater than the stockholder’s adjusted tax basis in the stock, notwithstanding that the stockholder would not contemporaneously receive a distribution of cash or any other assets with which to satisfy the resulting tax liability. To the extent such stockholder’s share of the cash and the fair market value of any assets received by the liquidating trust is less than the stockholder’s adjusted tax basis in the stock, such loss is expected to be recognizable at the time of the transfer to the liquidating trust, but not before such time. In addition, it is possible that the fair market value of the assets received by the liquidating trust, as estimated for purposes of determining the extent of the stockholder’s gain at the time interests in the liquidating trust are distributed to the stockholders, will exceed the cash or fair market value of property received by the liquidating trust on a sale of the assets. In this case, the stockholder would recognize a loss in a taxable year subsequent to the taxable year in which the gain was recognized, which loss may be limited under the Code.

You may not receive any profits resulting from the sale of one or more of our properties, or receive such profits in a timely manner, because we may provide financing to the purchaser of such property.

If our stockholders approve the Plan of Dissolution, you may experience a delay before receiving your share of the net proceeds of such liquidation. In a liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We do not have any limitations or restrictions on taking such purchase money obligations. To the extent we receive promissory notes or other property in lieu of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. We may receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments may be spread over a number of years. In such event, you may experience a delay in the distribution of the net proceeds of a sale until such time as the installment payments are received.

~~OTHER RISKS OF THE PROPOSALS~~

There can be no assurance that our adoption of the Plan of Dissolution will result in greater returns to you on your investment within a reasonable period of time than you would receive through other alternatives reasonably available to us at this time.

If our stockholders approve the Plan of Dissolution, you will no longer participate in any future earnings or growth of our assets or benefit from any increases in the value of our assets once such assets are sold. While our Board and the Special Committee each believe that a liquidation at this time will be more likely to provide you with a greater return on your investment within a reasonable period of time than you would receive through other alternatives reasonably available to us at this time, such belief relies on certain assumptions and judgments concerning future events. Therefore, it is possible that continuing with the status quo or pursuing one or more of the other alternatives could provide you with a greater return within a reasonable period of time. In that case, we will be foregoing those attractive opportunities if we implement the Plan of Dissolution. If the Plan of Dissolution is not approved by you and our other stockholders, our Board and the Special Committee intends to evaluate our remaining strategic alternatives.

~~Our Board may abandon or delay implementation of the Plan of Dissolution even if it is approved by our stockholders.~~

Our Board has adopted and approved a Plan of Dissolution for the liquidation and dissolution of the Company. Nevertheless, our Board may terminate the Plan of Dissolution for any reason. This power of termination may be exercised both before and after any approval of the Plan of Dissolution Proposal by our stockholders, up to the time that the Articles of Dissolution have been accepted for record by the Maryland Department of Assessments and Taxation. Notwithstanding approval of the Plan of Dissolution Proposal by our stockholders, our Board may modify or amend the Plan of Dissolution without further action by our stockholders to the extent permitted under then current law. Although our Board has no present intention to pursue any alternative to the Plan of Dissolution, our Board may conclude either that its duties under applicable law require it to pursue business opportunities that present themselves or that abandoning the Plan of Dissolution is otherwise in the best interests of the Company and its stockholders. If our Board elects to pursue any alternative to the Plan of Dissolution, our stockholders may not receive any of the consideration currently estimated to be available for distribution to our stockholders pursuant to the Plan of Dissolution.

~~The Board will have the authority to sell our assets under terms less favorable than those assumed for the purpose of estimating our net liquidation value range.~~

If our stockholders approve the Plan of Dissolution, our directors will have the authority to sell any and all of our assets on such terms and to such parties as the Board determines in its sole discretion. Notably, our stockholders will have no subsequent opportunity to vote on such matters and will, therefore, have no right to approve or disapprove the terms of such sales.

Distributions, if any, to our stockholders could be delayed and our stockholders could, in some circumstances, be held liable for amounts they received from the Company in connection with our dissolution.

Although our Board has not established a firm timetable for distributions to our stockholders, our Board intends, subject to contingencies inherent in the winding-up of our business and the payment of our obligations and liabilities, to completely liquidate as soon as practicable after the adoption of the Plan of Dissolution. If we are unable to dispose of all of our assets within 24 months after adoption of the Plan of Dissolution or if it is otherwise advantageous or appropriate to do so, our Board may establish a liquidating trust to which we could distribute in kind its unsold assets. Depending upon the Company’s cash flow and cash requirements and the progress of the sale process for our assets under the Plan of Dissolution, we may not make any distributions to our stockholders until we have repaid all of our known retained obligations and liabilities, paid all of our expenses, and complied with the requirements of Maryland law for companies in dissolution, including requirements for the creation and maintenance of adequate contingency reserves as required by Maryland law. Thereafter, we anticipate making distributions to our stockholders as promptly as practicable in accordance with the Plan of Dissolution and the liquidation and dissolution process selected by our Board in its sole discretion.

If we fail to create an adequate contingency reserve for payment of its expenses and liabilities, or if we transfer our assets to a liquidating trust and the contingency reserve and the assets held by the liquidating trust are less than the amount ultimately found payable in respect of expenses and liabilities, each of our stockholders could be held liable for the payment to our creditors of such stockholder’s pro rata portion of the excess, limited to the amounts previously received by the stockholder in distributions from the Company or the liquidating trust, as applicable. If a court holds at any time that we failed to make adequate provision for its expenses and liabilities or if the amount ultimately required to be paid in respect of such liabilities exceeds the amount available from the contingency reserve and the assets of the liquidating trust, our creditors could seek an injunction to prevent us from making distributions under the Plan of Dissolution on the grounds that the amounts to be distributed are needed to provide for the payment of such expenses and liabilities. Any such action could delay or substantially diminish the cash distributions to be made to our stockholders and/or holders of beneficial interests of any liquidation trust.

~~We will continue to incur the expenses of complying with public company reporting requirements.~~

Until our liquidation and dissolution is complete, we have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, even if compliance with these reporting requirements is economically burdensome. In order to curtail expenses, we may, after filing our Articles of Dissolution, seek relief from the U.S. (SEC) from the reporting requirements under the Exchange Act. We anticipate that, if such relief is granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution, along with any other reports that the SEC might require, but would discontinue filing annual and quarterly reports on Forms 10-K and 10-Q. However, the SEC may not grant any such relief. To the extent that we delay filing the Articles of Dissolution, we would be obligated to continue complying with the applicable reporting requirements of the Exchange Act. The expenses we incur in complying with the applicable reporting requirements will reduce the assets available for ultimate distribution to our stockholders.

~~Approval of the Plan of Dissolution may lead to stockholder litigation which could result in substantial costs and distract our management.~~

Historically, extraordinary corporate actions by a company, such as our proposed Plan of Dissolution, sometimes lead to securities class action lawsuits being filed against that company. We may become involved in this type of litigation as a result of the Plan of Dissolution Proposal, which risk may be increased if our stockholders approve the Plan of Dissolution Proposal. As of the date of this proxy statement, no such lawsuits relative to the Plan of Dissolution were pending or, to our knowledge, threatened. However, if such a lawsuit is filed against us, the litigation is likely to be expensive and, even if we ultimately prevail, the process will divert management’s attention from implementing the Plan of Dissolution. If we were not to prevail in such a lawsuit, we may be liable for damages. We cannot predict the amount of any such damages, however, if applicable, they may be significant and may reduce the cash available for distribution to our stockholders.

Our officers and directors and the Advisor have conflicts of interest that may influence their support of the Plan of Dissolution and may cause them to manage our liquidation in a manner not solely in the best interests of our stockholders.

In considering the recommendations of our Board and the Special Committee with respect to the Plan of Dissolution Proposal, stockholders should be aware that some of our directors and officers and the Advisor have interests in the liquidation that are different from interests as a stockholder. Our Board and the Special Committee are aware of these actual and potential conflicts of interest. Some of the conflicts of interest presented by the liquidation are summarized below.

All of our executive officers are officers of the Advisor and/or one or more of the Advisor’s affiliates and are compensated by those entities, in part, for their service rendered to the Company. We currently do not pay any direct compensation to our executive officers.

The Advisor may be entitled to subordinated incentive fees in connection with the sale of the Company’s assets, depending upon and correlated to the price received by us for the sale of our properties, but these fees are currently estimated to be zero.

•

The Advisor currently owns 164,210 restricted shares of our common stock, which may vest in connection with the sale of the Company’s assets, depending upon and correlated to the price received by us for the sale of our properties, but we currently expect all of these restricted shares to be forfeited rather than vest.

In addition to our Advisor’s restricted shares, our Advisor, executive officers and directors own a total of 268,860 shares of our common stock, for which we estimate they will receive distributions of between approximately $2.4 million and $2.6 million in connection with our liquidation.

Consequently, our officers and directors and the Advisor may be more likely to support the Plan of Dissolution than might otherwise be the case if they did not have these interests. Our Board and the Special Committee each were aware of these interests and considered them in making their recommendations.

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

~~Issuer Purchases of Equity~~Item 3. Defaults Upon Senior Securities - None

~~Use of Proceeds from Registered Securities~~Item 4. Mine Safety Disclosure –Not Applicable

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 closed effective October 1, 2018 and was conducted on a “best efforts” basis wherein we offered, in any combination, three classes of our common stock: Class A shares, Class T shares and Class I shares. There were differing selling fees and commissions for each class of common stock. We also paid 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.

~~The use of proceeds from our Primary Offering was as follows as of June 30, 2019 (in thousands):~~

Total

Payments to
Affiliates ⁽¹⁾

Payments to
Others

Aggregate price of offering amount registered ⁽²⁾

$
1,750,000

Shares sold ⁽³⁾

4,715

Aggregate amount sold ⁽³⁾

$
49,479

Payment of underwriting compensation ⁽⁴⁾

(2,257
)

$
(2,257
)

$
—

Net offering proceeds to the issuer

47,222

Purchases of real estate and development costs

(32,783
)

—

(32,783
)
Payment of investment services fees and acquisition expenses

(1,727
)

(1,382
)

(345
)
Payment of capital expenditures

(354
)

—

(354
)
Redemptions of common stock

(447
)

—

(447
)
Payment of operating expenses ⁽⁵⁾

(295
)

—

(295
)
Repayments of mortgages and notes payable ⁽⁵⁾

(5,472
)

—

(5,472
)
Reserves for general corporate purposes ⁽⁵⁾

(4,790
)

—

(4,790
)
Distributions to stockholders ⁽⁵⁾

(1,334
)

(382
)

(952
)
Payment of loan costs

(20
)

—

(20
)
Remaining proceeds from the Offering

$
—

~~FOOTNOTES:~~

Item 5. Other Information ⁽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 also offered, in any combination, up to $250 million of Class A, Class T and Class I shares pursuant to our Reinvestment Plan, which was suspended effective October 1, 2018.~~

⁽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. In October 2018, we discontinued our stock dividends, suspended our Reinvestment Plan and redeemed all shares of common stock sold pursuant to our private placement.

⁽⁴⁾	Underwriting compensation includes selling commissions and fees paid to the Dealer Manager through the close of our Offering; all or a portion of which could be reallowed to participating broker-dealers.

⁽⁵⁾	We have and may continue to pay cash distributions, debt service and/or operating expenses from remaining net proceeds of our Offering and/or borrowings. The amounts presented herein 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.~~

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.

~~EXHIBIT~~EXHIBIT INDEX

The following exhibits are included, or incorporated by reference in this Quarterly Report on Form 10-Q for ~~the quarter and six months ended June~~September 30, 2019 (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		Articles of Amendment (Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 11, 2019.)

3.3		Amended and Restated Bylaws ~~(Previously~~(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 included as Appendix B to the Prospectus filed with the Company’s Post-Effective Amendment No. 8 to the Registration Statement on Form S-11 (File No. 333-206017), filed April 13, 2018 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		Amended and Restated Advisory Agreement (Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 6, 2019 and incorporated herein by reference.)

10.2		Asset Purchase Agreement for Overland Park (Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10).) (Previously filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed May 9, 2019 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 six~~nine months ended ~~June~~September 30, 2019, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Statement of Net Assets, (ii) Condensed Consolidated Balance Sheets, ~~(ii)~~(iii) Condensed Consolidated Statement of Changes in Net Assets, (iv) Condensed Consolidated Statements of Operations, ~~(iii)~~(v) Condensed Consolidated Statements of Stockholders’ Equity, ~~(iv)~~(vi) Condensed Consolidated Statements of Cash Flows, and ~~(v)~~(vii) Notes to the Condensed Consolidated Financial Statements.

~~SIGNA~~SIGNAT~~TURES~~URES

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 ~~9th~~14th day of ~~August~~November 2019.


CNL HEALTHCARE PROPERTIES II, INC.

By:	/s/ Stephen H. Mauldin
	STEPHEN H. MAULDIN
	Chief Executive Officer and President
	(Principal Executive Officer)


By:	/s/ Ixchell C. Duarte
	IXCHELL C. DUARTE
	Chief Financial Officer, Senior Vice President and Treasurer
	(Principal Financial Officer)

4231

	Quarter Ended June 30,
	2019					2018
Tax benefit computed at federal statutory rate	$	130,446		21.0	%	$	70,637		21.0	%
Impact of REIT election		(130,446	)	(21.0	)%		(80,622	)	(24.0	)%
State income tax expense		—		—	%		(3,842	)	(1.1	)%
Impact of change in deferred tax asset		(14,984	)	(2.4	)%		—		—	%
Impact of change in valuation allowance		14,984		2.4	%		—		—	%
Income tax expense	$	—		—	%	$	(13,827	)	(4.1	)%

	Total			Payments to Affiliates ⁽¹⁾			Payments to Others
Aggregate price of offering amount registered ⁽²⁾	$	1,750,000
Shares sold ⁽³⁾		4,715
Aggregate amount sold ⁽³⁾	$	49,479
Payment of underwriting compensation ⁽⁴⁾		(2,257	)	$	(2,257	)	$	—
Net offering proceeds to the issuer		47,222
Purchases of real estate and development costs		(32,783	)		—			(32,783	)
Payment of investment services fees and acquisition expenses		(1,727	)		(1,382	)		(345	)
Payment of capital expenditures		(354	)		—			(354	)
Redemptions of common stock		(447	)		—			(447	)
Payment of operating expenses ⁽⁵⁾		(295	)		—			(295	)
Repayments of mortgages and notes payable ⁽⁵⁾		(5,472	)		—			(5,472	)
Reserves for general corporate purposes ⁽⁵⁾		(4,790	)		—			(4,790	)
Distributions to stockholders ⁽⁵⁾		(1,334	)		(382	)		(952	)
Payment of loan costs		(20	)		—			(20	)
Remaining proceeds from the Offering	$	—