Sentio Healthcare Properties 10-Q 2015 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

or

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

For the transition period from             to

Commission File Number 000-53969

SENTIO HEALTHCARE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

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

407-999-7679

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	¨

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

As of August 6, 2015, there were 11,495,216 shares of common stock of Sentio Healthcare Properties, Inc. outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

FORM 10-Q

SENTIO HEALTHCARE PROPERTIES, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of  June 30, 2015 (unaudited) and December 31, 2014	3
Condensed Consolidated Statements of Operations for the Three and Six months ended June 30, 2015 (unaudited) and 2014 (unaudited)	4
Condensed Consolidated Statement of Equity for the Six months ended June 30, 2015 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2015 (unaudited) and 2014 (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II. OTHER INFORMATION	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 5. Other Information	25
Item 6. Exhibits	26
SIGNATURES	27

2

  SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2015			2014
	(Unaudited)
ASSETS
Cash and cash equivalents	$	24,493,000		$	35,564,000
Investments in real estate:
Land		47,820,000			42,266,000
Buildings and improvements, net		379,946,000			306,788,000
Furniture, fixtures and vehicles, net		12,630,000			8,987,000
Construction in progress		16,556,000			-
Intangible lease assets, net		9,413,000			11,028,000
		466,365,000			369,069,000
Real estate note receivable		2,783,000			-
Deferred financing costs, net		3,793,000			3,338,000
Investment in unconsolidated entities		1,183,000			5,146,000
Tenant and other receivables, net		5,384,000			4,037,000
Deferred costs and other assets		6,114,000			5,554,000
Restricted cash		6,141,000			5,161,000
Goodwill		5,965,000			5,965,000
Total assets	$	522,221,000		$	433,834,000
LIABILITIES AND EQUITY
Liabilities:
Notes payable, net	$	333,459,000		$	276,476,000
Accounts payable and accrued liabilities		21,937,000			10,178,000
Prepaid rent and security deposits		4,991,000			3,029,000
Distributions payable		1,432,000			1,446,000
Total liabilities		361,819,000			291,129,000
Equity:
Preferred Stock Series C, $0.01 par value; 1,000 shares authorized; 1,000 and 1,000 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively.		-			-
Common stock, $0.01 par value; 580,000,000 shares authorized; 11,487,916 and 11,472,765 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		115,000			115,000
Additional paid-in capital		64,121,000			66,792,000
Accumulated deficit		(25,128,000	)		(18,714,000	)
Total stockholders' equity		39,108,000			48,193,000
Noncontrolling interests:
Series B preferred OP units		116,581,000			91,088,000
Other noncontrolling interest		4,713,000			3,424,000
Total equity		160,402,000			142,705,000
Total liabilities and equity	$	522,221,000		$	433,834,000

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

3

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Rental revenues	$	19,967,000		$	12,175,000		$	37,397,000		$	23,202,000
Resident fees and services		7,793,000			6,939,000			15,458,000			14,207,000
Tenant reimbursements and other income		898,000			378,000			1,427,000			718,000
		28,658,000			19,492,000			54,282,000			38,127,000
Expenses:
Property operating and maintenance		18,353,000			12,404,000			34,836,000			24,530,000
General and administrative		988,000			421,000			1,703,000			966,000
Asset management fees		1,554,000			984,000			2,914,000			1,941,000
Real estate acquisition costs		769,000			311,000			1,350,000			346,000
Depreciation and amortization		5,521,000			3,191,000			9,976,000			6,111,000
		27,185,000			17,311,000			50,779,000			33,894,000
Income from operations		1,473,000			2,181,000			3,503,000			4,233,000
Other expense:
Interest expense, net		3,522,000			2,394,000			6,687,000			4,603,000
Change in fair value of contingent consideration		600,000			-			600,000			-
Equity in loss from unconsolidated entities		45,000			115,000			173,000			200,000
Net loss before income taxes		(2,694,000	)		(328,000	)		(3,957,000	)		(570,000	)
Income tax benefit		(1,196,000	)		(161,000	)		(1,725,000	)		(311,000	)
Net loss		(1,498,000	)		(167,000	)		(2,232,000	)		(259,000	)
Preferred return to Series B preferred OP units		2,147,000			482,000			3,948,000			843,000
Net income attributable to other noncontrolling interests		96,000			156,000			234,000			312,000
Net loss attributable to common stockholders	$	(3,741,000	)	$	(805,000	)	$	(6,414,000	)	$	(1,414,000	)
Basic and diluted weighted average number of common shares		11,486,143			12,487,384			11,481,112			12,575,560
Basic and diluted net loss per common share attributable to common stockholders	$	(0.33	)	$	(0.06	)	$	(0.56	)	$	(0.11	)

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

4

 SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2015

(Unaudited)

	Preferred Stock				Common Stock
	Number of shares		Stock Par Value		Number of Shares		Stock Par Value		Additional Paid-In Capital			Accumulated Deficit			Total Stockholders' Equity			Noncontrolling Interest			Total
BALANCE - December 31, 2014		1,000	$	-		11,472,765	$	115,000	$	66,792,000		$	(18,714,000	)	$	48,193,000		$	94,512,000		$	142,705,000
Issuance of Common Stock						15,151				176,000						176,000						176,000
Issuance of Series B preferred OP Units, net																-			26,468,000			26,468,000
Noncontrolling Interest Contribution																-			1,498,000			1,498,000
Distributions										(2,847,000	)					(2,847,000	)		(5,366,000	)		(8,213,000	)
Net (loss) income													(6,414,000	)		(6,414,000	)		4,182,000			(2,232,000	)
BALANCE - June 30, 2015		1,000	$	-		11,487,916	$	115,000	$	64,121,000		$	(25,128,000	)	$	39,108,000		$	121,294,000		$	160,402,000

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

5

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(2,232,000	)	$	(259,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred financing costs		404,000			280,000
Depreciation and amortization		9,976,000			6,111,000
Straight-line rent and above/below market lease amortization		(434,000	)		(258,000	)
Amortization of loan discount/premium		(31,000	)		(33,000	)
Change in fair value of contingent consideration		600,000			-
Equity in loss from unconsolidated entities		173,000			200,000
Bad debt expense		80,000			173,000
Deferred tax benefit		(869,000	)		(582,000	)
Changes in operating assets and liabilities:
Tenant and other receivables		(940,000	)		(34,000	)
Deferred costs and other assets		(251,000	)		(201,000	)
Restricted cash		-			229,000
Prepaid rent and tenant security deposits		1,087,000			986,000
Accounts payable and accrued expenses		154,000			(108,000	)
Net cash provided by operating activities		7,717,000			6,504,000
Cash flows from investing activities:
Real estate acquisitions		(69,311,000	)		(5,364,000	)
Additions to real estate		(1,266,000	)		(770,000	)
Construction in progress		(2,029,000	)		-
Real estate note receivable		(2,783,000	)		-
Purchase of an interest in an unconsolidated entity		-			(1,161,000	)
Restricted cash		(194,000	)		(184,000	)
Acquisition deposits		-			(419,000	)
Distributions from unconsolidated entities		114,000			522,000
Net cash used in investing activities		(75,469,000	)		(7,376,000	)
Cash flows from financing activities:
Proceeds from issuance of Series B OP units, net		26,612,000			14,025,000
Redeemed shares		-			(10,599,000	)
Proceeds from notes payable		40,195,000			-
Repayment of notes payable		(1,531,000	)		(1,412,000	)
Offering costs		-			(129,000	)
Deferred financing costs		(492,000	)		(235,000	)
Distributions paid to Series B preferred OP units and other noncontrolling interests		(5,366,000	)		(1,484,000	)
Distributions paid to stockholders		(2,685,000	)		(3,014,000	)
Restricted cash		(52,000	)		-
Net cash provided by (used in) financing activities		56,681,000			(2,848,000	)
Net decrease in cash and cash equivalents		(11,071,000	)		(3,720,000	)
Cash and cash equivalents - beginning of year		35,564,000			21,792,000
Cash and cash equivalents - end of year	$	24,493,000		$	18,072,000
Supplemental disclosure of cash flow information:
Cash paid for interest	$	6,072,000		$	4,382,000
Cash paid for income taxes	$	137,000		$	403,000
Supplemental disclosure of non-cash financing and investing activities:
Note payable assumed in connection with a real estate acquisition	$	18,350,000		$	6,314,000
Equity contribution by noncontrolling interest	$	1,498,000		$	293,000
Consolidation of a previously held investment in an unconsolidated entity	$	3,493,000		$	-
Distributions declared not paid	$	1,347,000		$	1,452,000
Distributions reinvested	$	6,000		$	27,000
Accrued preferred stock offering costs	$	144,000		$	156,000
Accrued tender offer costs	$	-		$	168,000
Accrued additions to real estate	$	57,000		$	129,000
Accrued deferred acquisition costs	$	-		$	144,000

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

6

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

1. Organization

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

Sentio Healthcare Properties OP, LP, a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. As of June 30, 2015, we owned 100% of the outstanding common units in the Operating Partnership and the HC Operating Partnership, LP, a subsidiary of the Operating Partnership. Pursuant to the terms of the KKR Equity Commitment (as described in Note 11), we have issued Series B Convertible Preferred Units in the Operating Partnership (“Series B Preferred Units”) to the Investor (as described in Note 11), the terms of which provide that the Investor may convert its preferred units into common units at its discretion. On an as-converted basis, as of June 30, 2015, the Investor owns 57.9% and we own the remaining interest in the Operating Partnership and the HC Operating Partnership, LP. We anticipate that we will conduct all or a portion of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

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

Principles of Consolidation and Basis of Presentation

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

Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Our accompanying interim condensed consolidated financial statements should be read in conjunction with our audited condensed consolidated financial statements and the notes thereto included on our 2014 Annual Report on Form 10-K, as filed with the SEC.

Construction in Progress

The Company records construction in progress at cost, including acquisition fees and closing costs incurred. The cost of the construction in progress includes direct and indirect costs of development, including interest and miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Interest and loan costs attributable to funds used to finance construction in progress are capitalized as additional costs of development.

Reclassifications

Reclassifications have been made to the prior year’s combined condensed consolidated financial statements to conform to current year’s presentation. The Company had previously recorded income tax benefit as a component of general and administrative expenses. As of June 30, 2015, income tax benefit has been reclassified and is separately presented in the condensed consolidated statement of operations. The reclassification has no impact on net loss.

3. Acquisitions

Sumter Grand

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

Gables of Kentridge

On April 1, 2015, through wholly owned subsidiaries, we acquired real estate property (“Gables of Kentridge”) from Kentridge at Golden Pond, LTD and Great-Kent, LLC (collectively, the “Sellers”), neither of which are affiliated with us or our Advisor, for a purchase price of $15.4 million. Gables of Kentridge is located in Kent, Ohio and has a total of 92 beds in 91 units, which are dedicated to both assisted living and memory care. Prior to the completion of this transaction, Gables of Kentridge was operated by Gables Management Company, Inc. (“Gables Management”). We have retained Gables Management on a fee basis to operate Gables of Kentridge, which currently manages the Gables of Hudson property we acquired in 2014. We funded the purchase of Gables of Kentridge with proceeds from the sale of Series B Preferred Units to the Investor pursuant to the KKR Equity Commitment, as described in Note 11, and an assumption of HUD debt in the amount of $9.1 million ($9.0 million, net of discount), as described in Note 10.

7

Armbrook Village

On April 6, 2015, through wholly owned subsidiaries, we acquired a 95% interest in a joint venture entity that owns Armbrook Village for an initial purchase price of $30.0 million, with additional proceeds, of up to $3.6 million payable to the seller if certain net operating income thresholds are met, for a maximum purchase price of $33.6 million. We funded the purchase of our interest in Armbrook Village with proceeds from the sale of Series B Preferred Units to the Investor, as described in Note 11, and with proceeds from a mortgage loan from M&J Bank, an unaffiliated lender, as described in Note 10. Armbrook Village, which opened in April 2013, is a senior living community that consists of 46 independent living units, 51 assisted living units, and 21 memory care units located in Westfield, Massachusetts. Senior Living Residences, LLC and its affiliates (collectively, “SLR”), which is not affiliated with us, is our joint venture partner. Prior to the completion of this transaction, Armbrook Village was operated by SLR and owned by a local Westfield commercial developer, which is not affiliated with us. SLR currently manages Standish Village and Compass on the Bay.

Parkway

In October 2014, we invested approximately $3.5 million to acquire a 65% interest in a joint venture entity that was formed to develop The Parkway, in Blue Springs, Missouri. We funded our investment in the joint venture from available cash. The Parkway, a 142-unit, senior housing facility will offer a continuum of care including independent living, assisted living, and memory care. O’Reilly Development Company (“ODC”), which is not affiliated with us, invested approximately $1.5 million for a 32.5% interest in the joint venture entity. ODC is the developer and our joint venture partner in the $22.4 million project. The Company’s initial investment of $3.5 million was accounted for as an equity method investment because the Company was deemed to have limited control or direction of the activities that most significantly impact the entity’s performance during the development phase. As of June 30, 2015, certain construction risks assumed by ODC, have been significantly mitigated due to the execution of the development phase and initial lease up of the project. Therefore, as of June 30, 2015, the Company determined it is the primary beneficiary and holds a controlling financial interest due to its power to direct the activities that most significantly impact the economic performance of the project, as well as its obligation to absorb the losses and its right to receive benefits from the project that could potentially be significant in nature. The Parkway’s expected opening date of the independent living portion of the property is August 2015. As of June 30, 2015, we have consolidated our interest in The Parkway and as a result recorded approximately $14.5 million in construction in progress and a $9.3 million construction loan in the accompanying condensed consolidated balance sheet and the remaining development budget is approximately $7.9 million. The remaining development budget will be funded by future draws of the construction loan (see Note 10).

Golden

In April 2015, we closed on a commitment to fund the development of a 120 bed, 112,500 square foot transitional care skilled nursing facility in Golden, Colorado for a total budget of approximately $18.5 million. The project will be net leased to a joint venture between StoneGate Senior Living, LLC and Panorama Orthopedics, one of the largest independent orthopedics physicians groups in the west Denver area. The project is expected to be complete in May 2016. The Company intends to fund the development with proceeds from the sale to the Investor of Series B Preferred Units pursuant to the KKR Equity Commitment (as described in Note 11) on May 1, 2015 and with proceeds from a development loan from Synovus Bank, an unaffiliated lender. As of June 30, 2015, the Company has funded approximately $4.0 million from equity to close the purchase of the land for $2.0 million and recorded construction in progress costs of $2.0 million. As of June 30, 2015, the remaining development budget is approximately $14.5 million.

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

	Armbrook Village			Gables of Kentridge		Sumter Grand
Land	$	2,782,000		$	640,000	$	-
Buildings and improvements		27,864,000			12,939,000		37,295,000
Furniture, fixtures and vehicles		1,401,000			870,000		1,580,000
Intangible assets		1,098,000			921,000		-
Intangible liability (1)		-			-		(516,000	)
Contingent liability (2)		(3,145,000	)		-		(6,859,000	)
Real estate acquisition	$	30,000,000		$	15,370,000	$	31,500,000
Acquisition expenses	$	485,000		$	256,000	$	428,000

(1) This balance represents the Company’s fair value estimate of the above market ground lease associated with the land in the Sumter Grand acquisition and is recorded in accounts payable and accrued liabilities.

(2) This balance represents the Company’s fair value estimate of contingent liabilities the sellers of Armbrook Village and Sumter Grand are entitled to based on a net operating income threshold and is recorded in accounts payable and accrued liabilities. The contingent liabilities will expire if not achieved.

The following unaudited pro forma information for the six month periods ended June 30, 2015 and 2014 have been prepared to reflect the incremental effect of the Gables of Kentridge and Armbrook Village acquisitions as if such acquisitions had occurred on January 1, 2014. Sumter Grand opened in December 2014, therefore the Company has excluded this acquisition from the pro forma financial statements. We have not adjusted the pro forma information for any items that may be directly attributable to the business combination or are non-recurring in nature.

	Period ended June 30, 2015			Period ended June 30, 2014
Revenues	$	56,796,000		$	42,298,000
Net loss	$	(6,068,000	)	$	(1,497,000	)
Basic and diluted net loss per common share attributable to common stockholders	$	(0.53	)	$	(0.12	)

The Company recorded revenues of $1.6 million and a net loss of $1.0 million for the six month period ended June 30, 2015 for the Sumter Grand acquisition.

The Company recorded revenues of $1.1 million and a net loss of $0.5 million for the six month period ended June 30, 2015 for the Gables of Kentridge acquisition.

The Company recorded revenues of $1.3 million and a net loss of $0.8 million for the six month period ended June 30, 2015 for the Armbrook Village acquisition.

8

4. Real Estate Note Receivable

On January 16, 2015, the Company, through an indirect wholly owned subsidiary, originated a development loan in the amount of $41.9 million for the development of The Delaney at Georgetown Village located in Georgetown, Texas (the “Georgetown Loan”). The borrower, Westminster-LCS Georgetown LLC, is not affiliated with the Company or the Advisor. The borrower, a joint venture between Life Care Companies, LLC (“LCS”) and a fund sponsored by Westminster Capital (“Westminster”), will use the proceeds of the Georgetown Loan to develop a senior living facility with 207 units including independent living, assisted living and memory care. On January 14, 2015, the Company closed a put exercise to fund the Georgetown Loan with proceeds from the sale of Series B Preferred Units to the Investor pursuant to the KKR Equity Commitment (as described in Note 11).

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

Upon funding of the Georgetown Loan, interest income on the loan receivable is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectability risks. As of June 30, 2015, the borrower has made draws totaling $2.8 million, and the remaining commitment from the Company is approximately $39.1 million.

5. Investments in Real Estate

As of June 30, 2015, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Land		Buildings and Improvements			Furniture, Fixtures and Equipment			Intangible Lease Assets
Cost	$	47,820,000	$	406,522,000		$	17,697,000		$	28,712,000
Accumulated depreciation and amortization		-		(26,576,000	)		(5,067,000	)		(19,299,000	)
Net	$	47,820,000	$	379,946,000		$	12,630,000		$	9,413,000

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

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

Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended June 30, 2015 and 2014 was approximately $3.4 million and $1.9 million, respectively. Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the six months ended June 30, 2015 and 2014 was approximately $6.4 million and $3.8 million, respectively.

Amortization associated with intangible assets for the three months ended June 30, 2015 and 2014 was $2.1 million and $1.3 million, respectively. Amortization associated with intangible assets for the six months ended June 30, 2015 and 2014 was $3.6 million and $2.3 million, respectively.

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

	Intangible Assets
July 1,2015 - December 31, 2015		2,872,000
2016		556,000
2017		555,000
2018		543,000
2019		461,000
2020 and thereafter		4,426,000

The estimated useful lives for intangible assets range from approximately one to 22 years. As of June 30, 2015, the weighted-average amortization period for intangible assets was 12 years.

9

6. Investments in Unconsolidated Entities

As of June 30, 2015, the Company owns interests in the following entities that are accounted for under the equity method of accounting:

Entity (1)	Property Type	Acquired	Investment(2)		Ownership %
Physicians Center MOB	Medical Office Building	April 2012	$	98,000		71.9	%
Buffalo Crossings	Assisted-Living Facility	January 2014		1,085,000		25.0	%
			$	1,183,000

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

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

	June 30,		December 31,
	2015(2)		2014(1)(2)
Cash and cash equivalents	$	188,000	$	48,000
Investments in real estate, net		24,783,000		27,737,000
Other assets		817,000		769,000
Total assets	$	25,788,000	$	28,554,000
Notes payable	$	21,753,000	$	17,444,000
Accounts payable and accrued liabilities		242,000		1,676,000
Other liabilities		311,000		68,000
Total stockholders’ equity		3,482,000		9,366,000
Total liabilities and equity	$	25,788,000	$	28,554,000

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014(1)			2015			2014(1)
Total revenues	$	560,000		$	393,000		$	988,000		$	790,000
Net loss	$	(179,000	)	$	(160,000	)	$	(423,000	)	$	(273,000	)
Company’s equity in loss from unconsolidated entities	$	45,000		$	115,000		$	173,000		$	200,000

(1) On January 28, 2014, through a wholly-owned subsidiary, we acquired a 25% interest in a joint venture entity that has developed Buffalo Crossings, a 108-unit, assisted living community. Buffalo Crossings was accounted for under the equity method of accounting beginning with the first quarter of 2014.

(2) As of December 31, 2014, the Company’s initial investment of $3.5 million in The Parkway was accounted for as an equity method investment. As of June 30, 2015, the Company began consolidating The Parkway and as a result, it is no longer accounted for under the equity method of accounting. See Note 3.

7. Income Taxes

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

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

The Master TRS recognized a $1.2 million benefit and a $0.2 million benefit for Federal and State income taxes in the three months ended June 30, 2015 and 2014, respectively, and a $1.7 million benefit and a $0.3 million benefit for Federal and State income taxes in the six months ended June 30, 2015 and 2014, respectively. Net deferred tax assets related to the TRS entities totaled approximately $3.6 million at June 30, 2015 and $2.5 million at December 31, 2014, respectively, related primarily to book and tax basis differences for straight-line rent and accrued liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. Deferred tax assets are included in deferred costs and other assets in our condensed consolidated balance sheets. We have not recorded a valuation allowance against our deferred tax assets as of June 30, 2015, as we have determined that the future projected taxable income from the operations of the TRS entities are sufficient to cover the additional future expenses resulting from these book tax differences.

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8. Segment Reporting

As of June 30, 2015, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in senior living, skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

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

The following tables reconcile the segment activity to consolidated net loss for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended June 30,2015									Three Months Ended June 30 ,2014
	Senior living operations		Triple- net leased properties		Medical office building		Consolidated			Senior living operations		Triple- net leased properties		Medical office building		Consolidated
Rental revenue	$	17,423,000	$	2,328,000	$	216,000	$	19,967,000		$	10,653,000	$	1,309,000	$	213,000	$	12,175,000
Resident services and fee income		7,780,000		-		13,000		7,793,000			6,939,000		-		-		6,939,000
Tenant reimbursements and other income		535,000		298,000		65,000		898,000			94,000		208,000		76,000		378,000
		25,738,000		2,626,000		294,000		28,658,000			17,686,000		1,517,000		289,000		19,492,000
Property operating and maintenance expenses		17,953,000		318,000		82,000		18,353,000			12,115,000		219,000		70,000		12,404,000
Net operating income	$	7,785,000	$	2,308,000	$	212,000	$	10,305,000		$	5,571,000	$	1,298,000	$	219,000	$	7,088,000
General and administrative								988,000									421,000
Asset management fees and expenses								1,554,000									984,000
Real estate acquisition costs								769,000									311,000
Depreciation and amortization								5,521,000									3,191,000
Interest expense, net								3,522,000									2,394,000
Change in fair value of contingent consideration								600,000									-
Equity in loss from unconsolidated entities								45,000									115,000
Income tax benefit								(1,196,000	)								(161,000	)
Net loss							$	(1,498,000	)							$	(167,000	)
	Six Months Ended June 30, 2015									Six Months Ended June 30, 2014
	Senior living operations		Triple- net leased properties		Medical office building		Consolidated			Senior living operations		Triple- net leased properties		Medical office building		Consolidated
Rental revenue	$	32,308,000	$	4,657,000	$	432,000	$	37,397,000		$	20,157,000	$	2,618,000	$	427,000	$	23,202,000
Resident services and fee income		15,445,000		-		13,000		15,458,000			14,207,000		-		-		14,207,000
Tenant reimbursements and other income		668,000		616,000		143,000		1,427,000			193,000		372,000		153,000		718,000
		48,421,000		5,273,000		588,000		54,282,000			34,557,000		2,990,000		580,000		38,127,000
Property operating and maintenance expenses		34,072,000		602,000		162,000		34,836,000			23,944,000		438,000		148,000		24,530,000
Net operating income	$	14,349,000	$	4,671,000	$	426,000	$	19,446,000		$	10,613,000	$	2,552,000	$	432,000	$	13,597,000
General and administrative								1,703,000									966,000
Asset management fees and expenses								2,914,000									1,941,000
Real estate acquisition costs								1,350,000									346,000
Depreciation and amortization								9,976,000									6,111,000
Interest expense, net								6,687,000									4,603,000
Change in fair value of contingent consideration								600,000									-
Equity in loss from unconsolidated entities								173,000									200,000
Income tax benefit								(1,725,000	)								(311,000	)
Net loss							$	(2,232,000	)							$	(259,000	)

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The following table reconciles the segment activity to consolidated financial position as of June 30, 2015 and December 31, 2014.

	June 30, 2015		December 31, 2014
Assets
Investment in real estate:
Senior living operations	$	373,539,000	$	278,880,000
Triple-net leased properties		85,443,000		82,648,000
Medical office building		7,383,000		7,541,000
Total reportable segments	$	466,365,000	$	369,069,000
Reconciliation to consolidated assets:
Cash and cash equivalents		24,493,000		35,564,000
Real estate note receivable		2,783,000		-
Deferred financing costs, net		3,793,000		3,338,000
Investment in unconsolidated entities		1,183,000		5,146,000
Tenant and other receivables, net		5,384,000		4,037,000
Deferred costs and other assets		6,114,000		5,554,000
Restricted cash		6,141,000		5,161,000
Goodwill		5,965,000		5,965,000
Total assets	$	522,221,000	$	433,834,000

As of June 30, 2015 and December 31, 2014, goodwill had a balance of approximately $6.0 million, all of which related to the senior living operations segment. The Company has not recorded any impairment charges for goodwill.

9. Fair Value Measurements

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

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.  Quoted prices in active markets for identical instruments.

Level 2.  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3.  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument.

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

We generally determine or calculate the fair value of financial instruments using present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

As of June 30, 2015, the estimated fair value of the contingent consideration related to the Sumter Grand, Gables of Hudson, and Armbrook acquisitions is $12.3 million, which represents a change in fair value of $0.6 million for the three and six month periods ended June 30, 2015, respectively. The liabilities are included in accounts payable and accrued liabilities in our accompanying condensed consolidated balance sheets.

The fair value of the contingent consideration based on significant inputs which are not observable to the market and as a result are classified in Level 3 of the fair value hierarchy. The fair value is derived by making assumptions on the timing of the lease up process based on actual performance as compared to internal underwriting models and applying a discount rate in the range of 9.0% to 10.0% to the actual liabilities to obtain a present value.

The fair value of the Company’s notes payable is estimated by discounting future cash flows of each instrument at rates that reflect the current market rates available to the Company for debt of the same terms and maturities. The fair value of the notes payable was determined using Level 2 inputs of the fair value hierarchy. Based on the estimates used by the Company, the fair value of notes payable was $332.9 million and $275.8 million, compared to the carrying values of $333.5 million ($333.5 million, net of discount) and $276.4 million ($276.5 million, net of premium) at June 30, 2015 and December 31, 2014, respectively.

There were no transfers between Level 1 or 2 during the three and six months ended June 30, 2015.

10. Notes Payable

Notes payable were $333.5 million ($333.5 million, net of discount) and $276.4 million ($276.5 million, net of premium) as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.39% to 6.43% per annum and a weighted average effective interest rate of 3.98% per annum. As of June 30, 2015, notes payable consisted of $173.5 million of fixed rate debt, or approximately 52% of notes payable, at a weighted average interest rate of 4.81% per annum and $160.0 million of variable rate debt, or approximately 48% of notes payable, at a weighted average interest rate of 3.08% per annum. As of December 31, 2014, we had $156.4 million of fixed rate debt, or 57% of notes payable, at a weighted average interest rate of 4.89% per annum and $120 million of variable rate debt, or 43% of notes payable, at a weighted average interest rate of 3.15% per annum.

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

On April 1, 2015, in connection with the acquisition of the Gables of Kentridge in Kent, Ohio, the Company assumed a note payable in the amount of approximately $9.1 million ($9.0 million, net of discount) at a fixed interest rate of 4.41% and a 35-year term. This note payable is secured by the underlying real estate.

On April 6, 2015, in connection with the acquisition of Armbrook Village in Westfield, Massachusetts, we entered into a loan agreement with M&T Bank, an unaffiliated lender, with an outstanding principal balance of approximately $21.0 million, with a maturity date of May 1, 2020. Loan payments are interest only for the first two years at a floating interest rate of one month LIBOR plus 2.20% subject to increase in certain circumstances. Thereafter, loan payments include principal amortization based on a 28-year amortization schedule at per annum interest rate of 6.00%.

On June 30, 2015, the Company began to consolidate a 65% interest in a joint venture entity Blue Springs Senior Community, LLC (“The Parkway JV”) that has been developing The Parkway Senior Living Community. The Parkway JV entered into a secured construction loan agreement with Springfield First Community Bank, an unaffiliated lender, in the amount of up to $17.3 million in connection with the development of The Parkway in Blue Springs, Missouri. The construction loan has a term of five years with a fixed interest rate of 3.90%. Loan payments are interest only for the first two years. Loan payments for the remaining three years will be principal and interest of the lesser of a fixed amount or accrued interest plus principal payments based on a 20-year amortization of the amount fully advanced. We have the right to make prepayments on the loan, in whole or in part, without prepayment penalty. As of June 30, 2015 a total of $9.3 million was drawn on the construction loan.

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of June 30, 2015, we were in compliance with all such covenants and requirements.

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

Year	Principal Amount
July 1, 2015 to December 31, 2015	$	26,066,000
2016		2,900,000
2017		99,482,000
2018		28,479,000
2019		67,608,000
2020 and thereafter		108,973,000
	$	333,508,000
Less: discount		(49,000	)
	$	333,459,000

Interest Expense and Deferred Financing Cost

For the three months ended June 30, 2015 and 2014, the Company incurred interest expense, including amortization of deferred financing costs of $3.5 million and $2.4 million, respectively. For the six months ended June 30, 2015 and 2014, the Company incurred interest expense, including amortization of deferred financing costs of $6.7 million and $4.6 million, respectively. As of June 30, 2015 and December 31, 2014, the Company’s net deferred financing costs were approximately $3.8 million and $3.3 million, respectively. All deferred financing costs are capitalized and amortized over the life of the respective loan agreement.

11. Stockholders’ Equity

Common Stock

Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of June 30, 2015 and December 31, 2014, including distributions reinvested, we had issued approximately 13.3 million shares of common stock for a total of approximately $132.3 million of gross proceeds, respectively, in our public offerings.

Preferred Stock and OP Units

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

As of June 30, 2015 and December 31, 2014 we had issued 1,000 and 1,000 shares of Series C Preferred Stock and 1,586,000 and 946,560 Series B Preferred Units to the Investor for gross proceeds of $158.7 million and $94.8 million, respectively. The Series B Preferred Units outstanding are classified within noncontrolling interests and are convertible into approximately 15,830,938 and 9,446,707 shares of the Company’s common stock, respectively.

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

The Series B Preferred Units rank senior to the Operating Partnership’s common units with respect to distribution rights and rights on liquidation. The Series B Preferred Units are entitled to receive cash distributions at an annual rate equal to 7.5% (with respect to put exercises associated with real property acquisitions) and 6.0% (with respect to put exercises associated with construction loan originations) of the Series B liquidation preference to any distributions paid to common units of the Operating Partnership. If the Operating Partnership is unable to pay cash distributions, distributions will be paid in kind at an annual rate of 10% of the Series B liquidation preference. After payment of the preferred distributions, additional distributions will be paid first to the common units until they have received an aggregate blended return equal to a weighted average interest rate determined taking into account the Series B Preferred Units receiving a 6.0% return and the Series B Preferred Units receiving a 7.5% return per unit in annual distributions commencing from February 10, 2013, and thereafter to the common units and Series B Preferred Units pro rata. For the three and six months ended June 30, 2015, the Company paid distributions on the Series B Preferred Units in the amount of $2.1 million and $4.9 million, respectively.

13

At June 30, 2015, no securities remain issuable under the Purchase Agreement.

Distributions Available to Common Stockholders 

The following are the distributions declared during the six months ended June 30, 2015 and 2014:

	Distributions Declared(1)						Cash Flow from
Period	Cash		Reinvested		Total		Operations
First quarter 2014	$	1,486,000	$	69,000	$	1,555,000	$	3,652,000
Second quarter 2014		1,452,000		88,000		1,540,000		2,852,000
First quarter 2015	$	1,330,000	$	85,000	$	1,415,000	$	3,348,000
Second quarter 2015		1,347,000		85,000		1,432,000		4,369,000

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

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

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

Stock Repurchase Program

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

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

12. Earnings Per Share

We report earnings (loss) per share pursuant to ASC Topic 260, “Earnings per Share.” Basic earnings (loss) per share attributable for all periods presented are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of our common stock outstanding during the period. Diluted earnings (loss) per share are computed based on the weighted average number of shares of our common stock and all potentially dilutive securities, if any. The Series B Preferred Units give rise to potentially dilutive securities of our common stock. As of June 30, 2015 there were 1,586,000 Series B Preferred Units outstanding, but such units were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during these periods.

13. Related Party Transactions

Advisory Relationship with the Advisor

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

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Pursuant to the provisions of the Advisory Agreement, the Advisor is responsible for managing, operating, directing and supervising the operation of our company and its assets. Generally, the Advisor is responsible for providing us with (i) property acquisition, disposition and financing services, (ii) asset management and operational services, including real estate services and financial and administrative services, (iii) stockholder services, and (iv) in the event we conduct a public offering of our securities, offering-related services. The Advisor is subject to the supervision and ultimate authority of our board of directors and has a fiduciary duty to us and our stockholders. The Advisory Agreement with our Advisor and the terms of the Transition Agreement are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2014.

The fees and expense reimbursements payable to the Advisor under the advisory agreement for the three and six months ended June 30, 2015 and June 30, 2014 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Asset Management Fees	$	1,554,000	$	984,000	$	2,914,000	$	1,941,000

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

For the four fiscal quarters ended June 30, 2015, our management fees and expenses and operating expenses totaled did not exceed the greater of 2% of our average invested assets and 25% of our net income.

KKR Equity Commitment

Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of three years, up to $158.7 million in aggregate issuance amount of shares of newly issued Series C Preferred Stock and newly issued Series B Preferred Units to fund real estate acquisitions, a self-tender offer and the origination of a development loan. As a result of the transactions contemplated by the KKR Equity Commitment, the Investor currently beneficially owns an aggregate of 15,830,938 shares of common stock of the Company, which represents, in the aggregate, approximately 57.9% of the outstanding shares of common stock as of June 30, 2015. At June 30, 2015, no securities remain issuable under the Purchase Agreement.

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

14. Commitments and Contingencies

We monitor our properties for the presence of hazardous or toxic substances. We are not currently aware of any environmental liability with respect to the properties that we believe would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

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

Refer to Note 3 “Acquisitions” and Note 4 “Real Estate Note Receivable” for additional information on the remaining commitment to develop projects and our real estate note receivable.

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

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

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

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

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

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

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

• changes in interest rates;

• competition in the real estate industry;

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

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

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

Overview

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

Our business has been managed by an external advisor since the commencement of our initial public offering in June 2008. Since January 1, 2012, our Advisor has managed our business pursuant to the Advisory Agreement. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf under the terms of the Advisory Agreement. Our Advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms of the Advisory Agreement, our Advisor will use commercially reasonable efforts to present to us investment opportunities and to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors.

On February 10, 2013, we entered into a series of agreements, which have been amended at various points after February 10, 2013, with the Investor for the purpose of obtaining up to a $158.7 million of equity funding to be used to finance investment opportunities (such investments and the related agreements are referred to herein collectively as the “KKR Equity Commitment”). Pursuant to the KKR Equity Commitment, we could issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of up to three years, up to $158.7 million in aggregate issuance amount of preferred securities in the Company and the Operating Partnership. As of June 30, 2015, the KKR Equity Commitment was fully committed.

As of June 30, 2015, we had issued and outstanding 11,487,916 shares of common stock, and 1,000 shares of Senior Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”). All 1,000 shares of the Series C Preferred Stock were issued to the Investor pursuant to the KKR Equity Commitment. In addition, as of June 30, 2015 the Operating Partnership had issued and outstanding 11,487,916 Common Units, 1,000 Series A Preferred Units (the “Series A Preferred Units”), and 1,586,000 Series B Convertible Preferred Units (the “Series B Preferred Units”).

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

We commenced our initial public offering of our common stock on June 20, 2008. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan. On February 4, 2011, we commenced a follow-on offering of our common stock. We suspended primary offering sales in our follow-on offering on April 29, 2011 and completed the final sale of shares under the distribution reinvestment plan on May 10, 2011. We raised gross offering proceeds under the follow-on offering of $8.4 million from the sale of approximately 800,000 shares, including shares sold under the distribution reinvestment plan. On June 12, 2013, we deregistered all remaining unsold follow-on offering shares.

On June 19, 2013, we filed a registration statement on Form S-3 to register up to $99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to the DRIP offering. The DRIP offering shares were initially offered at a purchase price of $10.02 per share, which was 100% of the then-current estimated per-share value of our common stock.  The DRIP offering shares are currently offered at a purchase price of $11.63 per share, which is our most recent estimated per-share value of common stock as of February 28, 2014.

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

Market Outlook — Real Estate and Real Estate Finance Markets

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

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

Critical Accounting Policies

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

Results of Operations

As of June 30, 2015, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment invests in and directs the operations of assisted-living, memory care and other senior housing communities located in the United States. We engage independent third party managers to operate these properties. Our triple-net leased properties segment invests in healthcare properties in the United States leased under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings and leases those properties to healthcare providers under long-term “full service” leases which may require tenants to reimburse property related expenses to us.

As of June 30, 2015, we owned or had joint venture interests in 33 properties. These properties included 23 assisted-living facilities and two independent-living facilities, which comprise our senior housing segment, one medical office building, which comprises our MOB segment, four operating healthcare facilities, which comprise our triple-net leased segment, two development stage assisted living facilities, and one medical office building held as an unconsolidated entity. As of June 30, 2014, we owned or had joint venture interests in 24 properties. These properties included 17 assisted-living facilities and one independent-living facility, which comprised our senior housing segment, one medical office building, which comprised our MOB segment, three operating healthcare facilities, which comprised our triple-net leased segment, one development stage assisted-living facility, and one medical office building held in unconsolidated entity. Compass on the Bay was acquired in the second quarter of 2014, St. Andrews Village was acquired in the third quarter of 2014, and Live Oaks Village of Hammond and Slidell, Spring Village at Wildewood, Gables of Hudson, and Sumter Place were acquired in the fourth quarter of 2014. Sumter Grand was acquired in the first quarter of 2015, and Gables of Kentridge and Armbrook Village were acquired in the second quarter of 2015. The results of our operations for the three and six months ended June 30, 2015 and 2014 vary accordingly.

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Comparison of the Three Months Ended June 30, 2015 and 2014

	Three Months Ended June 30,
	2015			2014			$ Change			% Change
Net operating income, as defined(1)
Senior living operations	$	7,785,000		$	5,571,000		$	2,214,000			40	%
Triple-net leased properties		2,308,000			1,298,000			1,010,000			78	%
Medical office building		212,000			219,000			(7,000	)		(3	)%
Total portfolio net operating income	$	10,305,000		$	7,088,000		$	3,217,000			45	%
Reconciliation to net loss:
Net operating income, as defined(1)	$	10,305,000		$	7,088,000		$	3,217,000			45	%
Other (income) expense:
General and administrative		988,000			421,000			567,000			135	%
Asset management fees and expenses		1,554,000			984,000			570,000			58	%
Real estate acquisition costs		769,000			311,000			458,000			147	%
Depreciation and amortization		5,521,000			3,191,000			2,330,000			73	%
Interest expense, net		3,522,000			2,394,000			1,128,000			47	%
Change in fair value of contingent consideration		600,000			-			600,000			100	%
Equity in loss from unconsolidated entities		45,000			115,000			(70,000	)		(61	)%
Income tax benefit		(1,196,000	)		(161,000	)		(1,035,000	)		643	%
Net loss	$	(1,498,000	)	$	(167,000	)	$	(1,331,000	)		797	%

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

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the three months ended June 30, 2015 increased to $7.8 million from $5.6 million for the three months ended June 30, 2014 primarily as a result of the acquisition of Live Oaks Village of Hammond and Slidell, Spring Village at Wildewood, Gables of Hudson, and Sumter Place in the fourth quarter of 2014, Sumter Grand in the first quarter of 2015, and Gables of Kentridge and Armbrook Village in the second quarter of 2015.

	Three Months Ended June 30,
	2015		2014		$ Change		% Change
Senior Living Operations — Net operating income
Rental revenue	$	17,423,000	$	10,653,000	$	6,770,000		64	%
Resident services and fee income		7,780,000		6,939,000		841,000		12	%
Tenant reimbursement and other income		535,000		94,000		441,000		469	%
Less:
Property operating and maintenance expenses		17,953,000		12,115,000		5,838,000		48	%
Total portfolio net operating income	$	7,785,000	$	5,571,000	$	2,214,000		40	%

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income for the three month period ended June 30, 2015 increased to $2.3 million from $1.3 million for the three months ended June 30, 2014 primarily as a result of the acquisition of St. Andrews Village in the third quarter of 2014.

	Three Months Ended June 30,
	2015		2014		$ Change		% Change
Triple-Net Leased Properties — Net operating income
Rental revenue	$	2,328,000	$	1,309,000	$	1,019,000		78	%
Tenant reimbursement and other income		298,000		208,000		90,000		43	%
Less:
Property operating and maintenance expenses		318,000		219,000		99,000		45	%
Total portfolio net operating income	$	2,308,000	$	1,298,000	$	1,010,000		78	%

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Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the three month period ended June 30, 2015 of $0.2 million was comparable to net operating income for the three month period ended June 30, 2014

	Three Months Ended June 30,
	2015		2014		$ Change			% Change
Medical Office Buildings — Net operating income
Rental revenue	$	216,000	$	213,000	$	3,000			1	%
Resident services and fee income		13,000		-		13,000			100	%
Tenant reimbursement and other income		65,000		76,000		(11,000	)		(14	)%
Less:
Property operating and maintenance expenses		82,000		70,000		12,000			17	%
Total portfolio net operating income	$	212,000	$	219,000	$	(7,000	)		(3	)%

Unallocated (expenses) income

General and administrative expenses increased to $1.0 million for the three months ended June 30, 2015 from $0.4 million for the three months ended June 30, 2014. The increase was primarily due to $0.6 million in costs incurred by our board of directors, along with its advisors, to evaluate strategic alternatives in order to maximize shareholder value.

Asset management fees for the three months ended June 30, 2015 increased to $1.6 million from $1.0 million for the three months ended June 30, 2014 as a result of a higher asset base.

Depreciation and amortization for the same periods increased to $5.5 million from $3.2 million as a result of additional depreciation and amortization resulting from acquisitions, particularly amortization of the in-place leases for senior living facilities acquired in the fourth quarter of 2014 and the first and second quarters of 2015, which is generally amortized in the first twelve months after closing. 

Interest expense, net, for the three months ended June 30, 2015 increased to $3.5 million from $2.4 million for the three months ended June 30, 2014 primarily due to higher debt levels associated with the acquisitions that occurred in the fourth quarter of 2014 and the first and second quarters of 2015.

The Company recognized a loss from unconsolidated entities of $0.0 million for the three months ended June 30, 2015 as compared to a loss of $0.1 million for the three months ended June 30, 2014. The Company’s allocation of loss from unconsolidated entities relates to the operations of Physicians Center MOB and Buffalo Crossings.

During the three months ended June 30, 2015 and 2014, we recognized state and federal income tax benefit of approximately $1.2 million and $0.2 million, respectively, related to our senior living properties consolidated into our Master TRS.

Comparison of the Six Months Ended June 30, 2015 and 2014

	Six Months Ended June 30,
	2015			2014			$ Change			% Change
Net operating income, as defined(1)
Senior living operations	$	14,349,000		$	10,613,000		$	3,736,000			35	%
Triple-net leased properties		4,671,000			2,552,000			2,119,000			83	%
Medical office building		426,000			432,000			(6,000	)		(1	)%
Total portfolio net operating income	$	19,446,000		$	13,597,000			5,849,000			43	%
Reconciliation to net loss:
Net operating income, as defined(1)	$	19,446,000		$	13,597,000			5,849,000			43	%
Other (income) expense:
General and administrative		1,703,000			966,000			737,000			76	%
Asset management fees and expenses		2,914,000			1,941,000			973,000			50	%
Real estate acquisition costs		1,350,000			346,000			1,004,000			290	%
Depreciation and amortization		9,976,000			6,111,000			3,865,000			63	%
Interest expense, net		6,687,000			4,603,000			2,084,000			45	%
Change in fair value of contingent consideration		600,000			-			600,000			100	%
Equity in loss from unconsolidated entities		173,000			200,000			(27,000	)		(14	)%
Income tax benefit		(1,725,000	)		(311,000	)		(1,414,000	)		455	%
Net loss	$	(2,232,000	)	$	(259,000	)	$	(1,973,000	)		762	%

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

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the six months ended June 30, 2015 increased to $14.3 million from $10.6 million for the six months ended June 30, 2014. The increase is primarily due to the acquisition of Live Oaks Village of Hammond and Slidell, Spring Village at Wildewood, Gables of Hudson and Sumter Place in the fourth quarter of 2014 and Sumter Grand, Gables of Kentridge, and Armbrook Village in the first and second quarters of 2015. The increase also reflects charges for higher levels of care at several senior living properties in the portfolio.

	Six Months Ended June 30,
	2015		2014		$ Change		% Change
Senior Living Operations — Net operating income
Rental revenue	$	32,308,000	$	20,157,000	$	12,151,000		60	%
Resident services and fee income		15,445,000		14,207,000		1,238,000		9	%
Tenant reimbursement and other income		668,000		193,000		475,000		246	%
Less:
Property operating and maintenance expenses		34,072,000		23,944,000		10,128,000		42	%
Total portfolio net operating income	$	14,349,000	$	10,613,000	$	3,736,000		35	%

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income for the six month period ended June 30, 2015 increased to $4.7 million from $2.6 million primarily as a result of the acquisition of St. Andrews Village in the third quarter of 2014.

	Six Months Ended June 30,
	2015		2014		$ Change		% Change
Triple-Net Leased Properties — Net operating income
Rental revenue	$	4,657,000	$	2,618,000	$	2,039,000		78	%
Tenant reimbursement and other income		616,000		372,000		244,000		66	%
Less:
Property operating and maintenance expenses		602,000		438,000		164,000		37	%
Total portfolio net operating income	$	4,671,000	$	2,552,000	$	2,119,000		83	%

Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the six month period ended June 30, 2015 of $0.4 million is comparable to net operating income for the six months ended June 30, 2014.

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	Six Months Ended June 30,
	2015		2014		$ Change			% Change
Medical Office Buildings — Net operating income
Rental revenue	$	432,000	$	427,000	$	5,000			1	%
Resident services and fee income		13,000		-		13,000			100	%
Tenant reimbursement and other income		143,000		153,000		(10,000	)		(7	)%
Less:
Property operating and maintenance expenses		162,000		148,000		14,000			9	%
Total portfolio net operating income	$	426,000	$	432,000	$	(6,000	)		(1	)%

Unallocated (expenses) income

General and administrative expenses increased to $1.7 million for the six months ended June 30, 2015 from $1.0 million for the six months ended June 30, 2014. The increase was primarily due to $0.6 million in costs incurred by our board of directors, along with its advisors, to evaluate strategic alternatives in order to maximize shareholder value.

Asset management fees for the six months ended June 30, 2015 increased to $2.9 million from $1.9 million in the six months ended June 30, 2014 as a result of a higher asset base.

Depreciation and amortization for the same periods increased to $10.0 million from $6.1 million, as a result of additional depreciation and amortization resulting from acquisitions, particularly amortization of the in-place leases for senior living facilities acquired in the fourth quarter of 2014 and the first and second quarters of 2015, which is generally amortized in the first twelve months after closing.  

For the six months ended June 30, 2015, real estate acquisition costs increased to $1.4 million from $0.3 million for the six months ended June 30, 2014, primarily due to costs associated with the acquisition of Sumter Grand, Gables of Kentridge and Armbrook Village.

Interest expense, net, for the six months ended June 30, 2015 increased to $6.7 million from $4.6 million for the six months ended June 30, 2014, primarily due to higher debt levels associated with acquisitions that occurred in the fourth quarter of 2014 and the first and second quarters of 2015.

The Company recognized a loss from unconsolidated entities of $0.2 million for the six months ended June 30, 2015, which was comparable to the loss recognized for six months ended June 30, 2015. The Company’s allocation of loss from unconsolidated entities relates to the operations of Physicians Center MOB and Buffalo Crossings.

During the three months ended June 30, 2015 and 2014, we recognized state and federal income tax benefit of approximately $1.7 million and $0.3 million, respectively, related to our senior living properties consolidated into our Master TRS.

Liquidity and Capital Resources

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

On February 10, 2013, we entered into the KKR Equity Commitment for the purpose of obtaining up to $158.7 million of equity funding to be used to finance investment opportunities. Pursuant to the KKR Equity Commitment, we could issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of up to three years, up to $158.7 million in aggregate issuance amount of shares of newly issued Series C Preferred Stock and newly issued Series B Preferred Units of our Operating Partnership. As of June 30, 2015, this commitment was fully committed.

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

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

In addition, one of our principal liquidity requirements includes debt service payments and the repayment of maturing debt. As of June 30, 2015, our notes payable were $333.5 million.

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of June 30, 2015, we were in compliance with all such covenants and requirements.

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As of June 30, 2015 we had approximately $24.5 million in cash and cash equivalents on hand. Our liquidity will increase from refinancings that result in excess loan proceeds and increased cash flows from operations. The Company’s liquidity will decrease if distributions are made in excess of cash available from operating cash flows.

Cash flows provided by operating activities for the six months ended June 30, 2015 and 2014 were $7.7 million and $6.5 million, respectively. The increase in cash flows from operations was primarily due to an increase in operating income of $3.2 million and the timing of cash receipts and payments.

Cash flows used in investing activities for the six months ended June 30, 2015 and 2014 were $75.5 million and $7.4 million, respectively. The 2015 increase was due primarily to the acquisition of Sumter Grand, Gables of Kentridge and Armbrook Village. Additionally, the Company invested in construction in progress related to the development of a skilled nursing facility in Golden, Colorado as well as a real estate note receivable related to the development of Georgetown.

Cash flows provided by (used in) financing activities for the six months ended June 30, 2015 and 2014 were $56.7 million and ($2.8) million, respectively. The change was due primarily to activity related to the KKR Equity Commitment and proceeds from notes payable in the first and second quarters of 2015. During the six months ended June 30, 2015, the Company received $26.6 million of net proceeds from the issuance of Series B Preferred Units related to the KKR Equity Commitment and received proceeds from notes payable of $40.2 million related to the acquisitions of Sumter Grand, Gables of Kentridge and Armbrook Village. These proceeds were offset by the distributions paid to stockholders of $2.7 million and distributions paid to noncontrolling interests of $5.4 million. During the six months ended June 30, 2014, the Company received $14.0 million of net proceeds from the issuance of Series B Preferred Units related to the KKR Equity Commitment and received proceeds from notes payable of $0.0 million related to acquisitions. During the six months ended June, 2014, the Company paid distributions to stockholders of $3.0 million and paid distributions to noncontrolling interests of $1.5 million. Additionally, the Company redeemed $10.6 million of its common shares for the six months ended June 30, 2014.

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

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

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

Funds from Operations and Modified Funds from Operations

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

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

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

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

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

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

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

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

Our calculations of FFO and MFFO for the three and six months ended June 30, 2015 and 2014 are presented below:

	Three Months Ended						Six  Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net loss attributable to common stockholders	$	(3,741,000	)	$	(805,000	)	$	(6,414,000	)	$	(1,414,000	)
Adjustments:
Real estate depreciation and amortization		5,521,000			3,191,000			9,976,000			6,111,000
Joint venture depreciation and amortization		60,000			146,000			224,000			290,000
Funds from operations (FFO)		1,840,000			2,532,000			3,786,000			4,987,000
Adjustments:
Straight-line rent and above/below market lease amortization		(215,000	)		(111,000	)		(416,000	)		(258,000	)
Real estate acquisition costs		769,000			311,000			1,350,000			346,000
Change in fair value of contingent consideration		600,000			-			600,000			-
Modified funds from operations (MFFO)		2,994,000			2,732,000			5,320,000			5,075,000
Weighted average shares		11,486,143			12,487,384			11,481,112			12,575,560
FFO per weighted average shares	$	0.16		$	0.20		$	0.33		$	0.40
MFFO per weighted average shares	$	0.26		$	0.22		$	0.46		$	0.40

Distributions Available to Common Stockholders

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

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

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	Distributions Declared(1)						Distributions		Cash Flow from
Period	Cash		Reinvested		Total		Paid		Operations		Net Loss
First quarter 2014	$	1,486,000	$	69,000	$	1,555,000	$	1,528,000	$	3,652,000	$	(92,000	)
Second quarter 2014		1,452,000		88,000		1,540,000		1,486,000		2,852,000		(167,000	)
	$	2,938,000	$	157,000	$	3,095,000	$	3,014,000	$	6,504,000	$	(259,000	)
First quarter 2015	$	1,330,000	$	85,000	$	1,415,000	$	1,355,000	$	3,348,000	$	(734,000	)
Second quarter 2015		1,347,000		85,000		1,432,000		1,330,000		4,369,000		(1,498,000	)
	$	2,677,000	$	170,000	$	2,847,000	$	2,685,000	$	7,717,000	$	(2,232,000	)

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

For the six months ended June 30, 2015 and 2014, we declared distributions, including distributions reinvested, aggregating approximately $2.8 million and $3.1 million, respectively to our stockholders. The distributions declared in the second quarter of 2015 to be reinvested in the Company’s common stock resulted in 7,300 shares of common stock being issued in July 2015. FFO for the six months ended June 30, 2015 was approximately $3.8 million and cash flow from operations was approximately $7.7 million. We funded our total distributions paid with cash flows from operations. For the purposes of determining the source of our distributions paid, we assume first that we use cash flows from operations from the relevant periods to fund distribution payments. See the reconciliation of FFO to net loss above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We invest our cash and cash equivalents in government-backed securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate fluctuations. However, we believe that the primary market risk to which we will be exposed is interest rate risk relating the variable portion of our debt financing. As of June 30, 2015, we had approximately $160.0 million of variable rate debt, the majority of which is at a rate tied to the one-month LIBOR. A 1.0% change in one-Month LIBOR would result in a change in annual interest expense of approximately $1.6 million per year. Our interest rate risk management objectives are to monitor and manage the impact of interest rate changes on earnings and cash flows. We may use certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.

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

Item 4. Controls and Procedures

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

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

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

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PART II — OTHER INFORMATION

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

(a)	Previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on May 6, 2015.
(c)	During the quarter ended June 30, 2015, none of our shares were repurchased by us.

Item 5. Other Information

Annual Meeting of Stockholders

Our 2015 Annual Meeting of Stockholders will be held on November 5, 2015 at 10:00 a.m. local time at our principal offices located at 189 South Orange Ave., Suite 1700, Orlando, Florida 32801.

In accordance with Rules 14a-5(f) and 14a-8(e)(2) under the Securities Exchange Act of 1934, as amended, we will consider stockholder proposals submitted in connection with our 2015 Annual Meeting to have been submitted in a timely fashion if such proposals are received by us at our principal offices, no later than August 24, 2015. Under applicable SEC rules, we are not required to include stockholder proposals in our proxy materials unless certain other conditions specified in such rules are also met.

In addition, pursuant to the advance notice provisions in our bylaws, August 24, 2015 is the notification deadline for stockholders who wish to present a proposal for nominations or other business for consideration at the 2015 Annual Meeting, but who do not intend for the proposal to be included in our proxy statement.

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Item 6.  Exhibits

Ex.	Description
3.1	Articles of Amendment and Restatement of the Registrant, as amended on December 29, 2009 and January 24, 2012 (incorporated by reference to Exhibit 3.1 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2011).
3.2	Articles of Amendment of the Registrant, dated August 6, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.3	Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series A, dated August 6, 2013 (incorporated by reference to Exhibit 3.3 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.4	Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series C, dated August 6, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.5	Second Amended and Restated Bylaws of the Registrant as adopted on August 6, 2013 as amended by Amendment No. 1 to the Second Amendment and Restated Bylaws of the Registrant, effective as of March 20, 2015 (incorporated by reference to Exhibit 3.5 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2014).
3.6	Second Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).
3.7	First Amendment dated December 22, 2014 to the Second Amendment and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on December 30, 2014).
4.1	Form of Distribution Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Registrant’s prospectus filed on June 19, 2013).
4.2	Statement regarding restrictions on transferability of the Registrant’s shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007 (“Pre-Effective Amendment No. 2”).
4.3	Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on June 19, 2013).
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 11^th day of August 2015.

SENTIO HEALTHCARE PROPERTIES, INC.
By:	/s/ JOHN MARK RAMSEY
	John Mark Ramsey,President and Chief
	Executive Officer
	(Principal Executive Officer)
By:	/s/ SHARON C. KAISER
	Sharon C. Kaiser,Chief Financial Officer
	(Principal Financial Officer and Principal
	Accounting Officer)

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