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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 September 30, 2012
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 incorporation or organization) | (I.R.S. Employer 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 | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of November 12, 2012, there were 12,835,755 shares of common stock of Sentio Healthcare Properties, Inc. outstanding.
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PART I — FINANCIAL INFORMATION
FORM 10-Q
SENTIO HEALTHCARE PROPERTIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||||
Item 1. Financial Statements: | ||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 37 | |||
37 | ||||
38 | ||||
38 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 38 | |||
39 | ||||
41 |
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SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 21,741,000 | $ | 27,972,000 | ||||
Investments in real estate: | ||||||||
Land | 23,193,000 | 20,713,000 | ||||||
Buildings and improvements, net | 158,880,000 | 100,687,000 | ||||||
Furniture, fixtures and equipment, net | 3,473,000 | 2,562,000 | ||||||
Intangible lease assets, net | 6,371,000 | 3,865,000 | ||||||
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191,917,000 | 127,827,000 | |||||||
Deferred financing costs, net | 1,715,000 | 824,000 | ||||||
Investment in unconsolidated entities | 3,499,000 | 3,387,000 | ||||||
Tenant and other receivables, net | 1,677,000 | 1,366,000 | ||||||
Restricted cash | 3,664,000 | 3,806,000 | ||||||
Deferred costs and other assets | 1,686,000 | 1,938,000 | ||||||
Goodwill | 5,965,000 | 5,965,000 | ||||||
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Total assets | $ | 231,864,000 | $ | 173,085,000 | ||||
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LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 145,460,000 | $ | 85,978,000 | ||||
Accounts payable and accrued liabilities | 3,174,000 | 3,899,000 | ||||||
Prepaid rent and security deposits | 1,677,000 | 1,535,000 | ||||||
Distributions payable | 807,000 | 814,000 | ||||||
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Total liabilities | 151,118,000 | 92,226,000 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.01 par value per share; 20,000,000 shares authorized; no shares were issued or outstanding at September 30, 2012 and December 31, 2011 | — | — | ||||||
Common stock, $0.01 par value per share; 580,000,000 shares authorized; 12,840,319, and 12,916,612 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 129,000 | 129,000 | ||||||
Additional paid-in capital | 93,416,000 | 96,542,000 | ||||||
Accumulated deficit | (17,291,000 | ) | (17,054,000 | ) | ||||
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Total stockholders’ equity | 76,254,000 | 79,617,000 | ||||||
Noncontrolling interests | 4,492,000 | 1,242,000 | ||||||
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Total equity | 80,746,000 | 80,859,000 | ||||||
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Total liabilities and equity | $ | 231,864,000 | $ | 173,085,000 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue: | ||||||||||||||||
Rental revenue | $ | 8,422,000 | $ | 7,942,000 | $ | 24,525,000 | $ | 23,013,000 | ||||||||
Resident services and fee income | 3,655,000 | 1,945,000 | 8,243,000 | 5,667,000 | ||||||||||||
Tenant reimbursements and other income | 312,000 | 362,000 | 1,121,000 | 876,000 | ||||||||||||
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12,389,000 | 10,249,000 | 33,889,000 | 29,556,000 | |||||||||||||
Expenses: | ||||||||||||||||
Property operating and maintenance | 7,473,000 | 6,750,000 | 20,921,000 | 18,751,000 | ||||||||||||
General and administrative expenses | 423,000 | 1,243,000 | 1,632,000 | 3,201,000 | ||||||||||||
Asset management fees and expenses | 559,000 | 390,000 | 1,543,000 | 1,197,000 | ||||||||||||
Real estate acquisition costs and contingent consideration | 1,016,000 | 22,000 | 1,229,000 | 1,453,000 | ||||||||||||
Depreciation and amortization | 1,689,000 | 1,946,000 | 4,653,000 | 5,658,000 | ||||||||||||
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11,160,000 | 10,351,000 | 29,978,000 | 30,260,000 | |||||||||||||
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Income (loss) from operations | 1,229,000 | (102,000 | ) | 3,911,000 | (704,000 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 2,000 | 4,000 | 10,000 | 10,000 | ||||||||||||
Interest expense | (1,790,000 | ) | (1,436,000 | ) | (4,818,000 | ) | (4,161,000 | ) | ||||||||
Other | — | — | (151,000 | ) | — | |||||||||||
Equity in income (loss) from unconsolidated entities | 14,000 | 121,000 | (363,000 | ) | 105,000 | |||||||||||
Fair value adjustment for equity method investment | — | — | 1,282,000 | — | ||||||||||||
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Net loss | (545,000 | ) | (1,413,000 | ) | (129,000 | ) | (4,750,000 | ) | ||||||||
Net (loss) income attributable to noncontrolling interests | (16,000 | ) | (20,000 | ) | 108,000 | (66,000 | ) | |||||||||
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Net loss attributable to common stockholders | $ | (529,000 | ) | $ | (1,393,000 | ) | $ | (237,000 | ) | $ | (4,684,000 | ) | ||||
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Basic and diluted net loss per common share attributable to common stockholders | $ | (0.04 | ) | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.37 | ) | ||||
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Weighted-average number of common shares | 12,853,483 | 12,985,804 | 12,877,929 | 12,629,155 | ||||||||||||
Distribution declared, per common share | $ | 0.06 | $ | 0.06 | $ | 0.19 | $ | 0.44 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||
Number of Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
Balance — December 31, 2011 | 12,916,612 | $ | 129,000 | $ | 96,542,000 | $ | (17,054,000 | ) | $ | 79,617,000 | $ | 1,242,000 | $ | 80,859,000 | ||||||||||||||
Redeemed shares | (76,293 | ) | — | (719,000 | ) | — | (719,000 | ) | — | (719,000 | ) | |||||||||||||||||
Noncontrolling interest contribution | 3,444,000 | 3,444,000 | ||||||||||||||||||||||||||
Distributions | — | — | (2,407,000 | ) | — | (2,407,000 | ) | (302,000 | ) | (2,709,000 | ) | |||||||||||||||||
Net (loss) income | — | — | — | (237,000 | ) | (237,000 | ) | 108,000 | (129,000 | ) | ||||||||||||||||||
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Balance — September 30, 2012 | 12,840,319 | $ | 129,000 | $ | 93,416,000 | $ | (17,291,000 | ) | $ | 76,254,000 | $ | 4,492,000 | $ | 80,746,000 | ||||||||||||||
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Common Stock | ||||||||||||||||||||||||||||
Number of Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
Balance — December 31, 2010 | 11,592,883 | $ | 116,000 | $ | 91,588,000 | $ | (11,722,000 | ) | $ | 79,982,000 | $ | 1,709,000 | $ | 81,691,000 | ||||||||||||||
Issuance of common stock | 1,575,250 | 16,000 | 15,628,000 | — | 15,644,000 | — | 15,644,000 | |||||||||||||||||||||
Redeemed shares | (195,998 | ) | (2,000 | ) | (1,889,000 | ) | — | (1,891,000 | ) | — | (1,891,000 | ) | ||||||||||||||||
Offering costs | — | — | (1,890,000 | ) | — | (1,890,000 | ) | — | (1,890,000 | ) | ||||||||||||||||||
Distributions | — | — | (5,529,000 | ) | — | (5,529,000 | ) | — | (5,529,000 | ) | ||||||||||||||||||
Net loss | — | — | — | (4,684,000 | ) | (4,684,000 | ) | (66,000 | ) | (4,750,000 | ) | |||||||||||||||||
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Balance — September 30, 2011 | 12,972,135 | $ | 130,000 | $ | 97,908,000 | $ | (16,406,000 | ) | $ | 81,632,000 | $ | 1,643,000 | $ | 83,275,000 | ||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (129,000 | ) | $ | (4,750,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Amortization of deferred financing costs | 356,000 | 321,000 | ||||||
Depreciation and amortization | 4,653,000 | 5,658,000 | ||||||
Straight-line rent amortization | (527,000 | ) | (375,000 | ) | ||||
Real estate acquisition costs and contingent consideration | 110,000 | 535,000 | ||||||
Fair value adjustment for equity method investment | (1,282,000 | ) | — | |||||
Equity in loss (income) from unconsolidated entities | 363,000 | (121,000 | ) | |||||
Bad debt expense | 40,000 | — | ||||||
Change in deferred taxes | (191,000 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Tenant and other receivables | 205,000 | 180,000 | ||||||
Prepaid expenses and other assets | 441,000 | (1,091,000 | ) | |||||
Restricted cash | 95,000 | (774,000 | ) | |||||
Prepaid rent and tenant security deposits | 142,000 | 737,000 | ||||||
Payable to related parties | — | (38,000 | ) | |||||
Accounts payable and accrued liabilities | 3,172,000 | 2,509,000 | ||||||
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Net cash provided by operating activities | 7,448,000 | 2,791,000 | ||||||
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Cash flows from investing activities: | ||||||||
Real estate acquisitions | (20,941,000 | ) | (19,751,000 | ) | ||||
Additions to real estate | (620,000 | ) | (342,000 | ) | ||||
Payments for construction in progress | — | (471,000 | ) | |||||
Purchase of an interest in an unconsolidated entity | (2,490,000 | ) | (896,000 | ) | ||||
Changes in restricted cash | 47,000 | (31,000 | ) | |||||
Acquisition deposits | — | 100,000 | ||||||
Distributions from unconsolidated joint ventures | 143,000 | 466,000 | ||||||
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Net cash used in investing activities | (23,861,000 | ) | (20,925,000 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | — | 14,160,000 | ||||||
Redeemed shares | (719,000 | ) | (1,891,000 | ) | ||||
Proceeds from notes payable | 40,763,000 | 14,561,000 | ||||||
Repayments of notes payable | (25,529,000 | ) | (584,000 | ) | ||||
Offering costs | — | (1,917,000 | ) | |||||
Deferred financing costs | (1,247,000 | ) | (274,000 | ) | ||||
Noncontrolling interest contribution | 603,000 | — | ||||||
Payment of real estate contingent consideration | (980,000 | ) | (1,000,000 | ) | ||||
Distributions paid to stockholders | (2,407,000 | ) | (3,950,000 | ) | ||||
Distributions paid to noncontrolling interests | (302,000 | ) | — | |||||
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Net cash provided by financing activities | 10,182,000 | 19,105,000 | ||||||
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Net (decrease) increase in cash and cash equivalents | (6,231,000 | ) | 971,000 | |||||
Cash and cash equivalents — beginning of period | 27,972,000 | 29,718,000 | ||||||
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Cash and cash equivalents — end of period | $ | 21,741,000 | $ | 30,689,000 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 4,694,000 | $ | 3,761,000 | ||||
Cash paid for income taxes | 549,000 | 509,000 | ||||||
Supplemental disclosure of non-cash financing and investing activities: | ||||||||
Distributions declared not paid | 807,000 | 817,000 | ||||||
Distribution reinvested | — | 1,484,000 | ||||||
Notes payable assumed and non-cash equity contribution in connection with real estate acquisition in connection with real estate acquisition | 47,082,000 | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(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”). Sentio Investments, LLC is controlled by John Mark Ramsey, our Chief Executive Officer and formerly an owner of our prior sub-advisor, Servant Healthcare Investments, LLC. Prior to January 1, 2012, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited liability company that was formed on October 16, 2006, was our advisor (the “Prior Advisor”).
Sentio Healthcare Properties OP, LP, a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. At September 30, 2012, we owned 100% of the interest in the Operating Partnership and HC Operating Partnership, LP, a subsidiary of the Operating Partnership. 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 and its subsidiaries are consolidated in the accompanying condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.
For federal income tax purposes, we have elected to be taxed as a real estate investment trust 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. REIT status 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.
2. Public Offering
Our charter authorizes the issuance of up to 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.
On June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000 shares for sale pursuant to our distribution reinvestment plan. 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 12.4 million shares, including shares sold under the distribution reinvestment plan.
On February 4, 2011, the U.S. Securities and Exchange Commission (“SEC”) declared the registration statement for our follow-on offering effective and we commenced a follow-on offering of up to 55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan. As of September 30, 2012, we had sold a total of 12.7 million shares of our common stock pursuant to our initial and follow-on public offerings for aggregate gross proceeds of $127.0 million.
On April 29, 2011 we informed our stockholders that the Independent Directors Committee of our board of directors had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. On October 18, 2011, we announced that the Independent Directors Committee had suspended its analysis of strategic alternatives for the Company and concluded that the Company was well positioned as an investment program with a continued focus on healthcare real estate. The Independent Directors
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Committee identified strategies in its evaluation process that it believes will enhance this position and is implementing operating changes designed to increase portfolio cash flow and increase shareholder value. In particular, the Company is focused on enhancing portfolio performance by identifying investment and financing opportunities, implementing operational efficiencies and evaluating the potential for growth in the future. As of September 30, 2012, sales pursuant to our follow-on offering remained suspended.
3. 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, 2011.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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.
Investments in Unconsolidated Entities
We account for our investments in unconsolidated joint ventures under the equity method of accounting. We exercise significant influence, but do not control these entities or direct the activities that most significantly impact the venture’s performance. Investments in unconsolidated entities are recorded initially at cost and subsequently adjusted for cash contributions and distributions. We recognize our allocable share of the equity in earnings of our unconsolidated entities based on the respective venture’s structure and preferences.
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
Comprehensive Income
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05,Comprehensive Income: Presentation of Comprehensive Income,which eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity and requires the presentation of components of net income and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB deferred the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.
As of September 30, 2012, the Company had no components of other comprehensive income. Accordingly, net loss is equal to comprehensive loss for all periods presented.
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 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 nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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 2011 Annual Report on Form 10-K, as filed with the SEC.
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Fair Value of Financial Instruments and Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) 825-10,“Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. In May 2011, the FASB issued ASU 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). The amendments in this update result in additional fair value measurement and disclosure requirements within U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The adoption of ASU 2011-04 on January 1, 2012 did not have a material impact on the Company’s consolidated financial position or results of operations. The impact on the Company’s disclosures was not material. Financial assets and liabilities recorded at fair value on the condensed consolidated balance sheets and disclosed in the financial statements 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.
We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate 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.
Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. With the exception of an equity method investment the Company obtained control of in April 2012 and notes payable 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.
The fair market value of notes payable is estimated using lending rates available to us for financial instruments with similar terms and maturities and are classified as Level 2. As of September 30, 2012 and December 31, 2011, the fair value of notes payable was $147.1 million and $87.0 million, compared to the carrying values of $145.0 million and $86.0 million, respectively. Upon acquiring control of a previously unconsolidated entity, the Company recorded its equity method investment at fair value of $6.0 million, and recorded a gain of approximately $1.3 million. The fair value of the equity method investment was estimated using appraisals of the respective investment.
There were no transfers between Levels 1 or 2 during the three months and nine months ended September 30, 2012. The Company has no financial instruments classified using level 3 measurements as of September 30, 2012.
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4. Investment in Real Estate and Unconsolidated Entities
The following table provides summary information regarding our current property portfolio.
Property | Location | Date Purchased | Gross Square Feet | Purchase Price | Sept. 30, 2012 Debt | Sept. 30, 2012 % Occupancy | ||||||||||||
Caruth Haven Court | Highland Park, TX | 01/22/09 | 74,647 | $ | 20,500,000 | $ | 9,707,000 | 95 | % | |||||||||
The Oaks Bradenton | Bradenton, FL | 05/01/09 | 18,172 | $ | 4,500,000 | $ | 4,085,000 | 97 | % | |||||||||
GreenTree at Westwood (1) | Columbus, IN | 12/30/09 | 50,249 | $ | 5,150,000 | $ | 3,865,000 | 98 | % | |||||||||
Mesa Vista Inn Health Center | San Antonio, TX | 12/31/09 | 55,525 | $ | 13,000,000 | $ | 6,981,000 | 100 | % | |||||||||
Rome LTACH Project (2) | Rome, GA | 01/12/10 | 52,944 | $ | 18,900,000 | $ | 13,461,000 | 100 | % | |||||||||
Oakleaf Village Portfolio | ||||||||||||||||||
Oakleaf Village at — Lexington | Lexington, SC | 04/30/10 | 67,000 | $ | 14,512,000 | $ | 9,391,000 | 89 | % | |||||||||
Oakleaf Village at — Greenville | Greer, SC | 04/30/10 | 65,000 | $ | 12,488,000 | $ | 8,094,000 | 70 | % | |||||||||
Global Rehab Inpatient Rehab Facility | Dallas, TX | 08/19/10 | 40,828 | $ | 14,800,000 | $ | 7,373,000 | 100 | % | |||||||||
Terrace at Mountain Creek (3) | Chattanooga, TN | 09/03/10 | 109,643 | $ | 8,500,000 | $ | 5,453,000 | 95 | % | |||||||||
Littleton Specialty Rehabilitation Facility | Littleton, CO | 12/16/10 | 26,808 | (4 | ) | (4 | ) | 100 | % | |||||||||
Carriage Court of Hilliard | Hilliard, OH | 12/22/10 | 69,184 | $ | 17,500,000 | $ | 13,325,000 | 94 | % | |||||||||
Hedgcoxe Health Plaza | Plano, TX | 12/22/10 | 32,109 | $ | 9,094,000 | $ | 5,600,000 | 100 | % | |||||||||
River’s Edge of Yardley | Yardley, PA | 12/22/10 | 26,146 | $ | 4,500,000 | $ | 6,484,000 | 100 | % | |||||||||
Forestview Manor | Meredith, NH | 01/14/11 | 34,270 | $ | 10,750,000 | $ | 8,754,000 | 100 | % | |||||||||
Woodland Terrace at the Oaks | Allentown, PA | 04/14/11 | 50,400 | $ | 9,000,000 | $ | 6,276,000 | 93 | % | |||||||||
Physicians Centre MOB | Bryan, TX | 04/02/12 | 114,583 | (5 | ) | (5 | ) | 68 | % | |||||||||
Amber Glen | Urbana, IL | 08/31/12 | 26,146 | $ | 13,440,000 | $ | 8,650,000 | 97 | % | |||||||||
Mill Creek | Springfield, IL | 08/31/12 | 34,270 | $ | 12,180,000 | $ | 8,349,000 | 98 | % | |||||||||
Sugar Creek | Normal, IL | 08/31/12 | 50,400 | $ | 11,880,000 | $ | 7,836,000 | 95 | % | |||||||||
Hudson Creek | Bryan, TX | 08/31/12 | 114,583 | $ | 11,500,000 | $ | 7,997,000 | 70 | % |
(1) | The earn-out agreement associated with this acquisition was estimated to have a fair value of $1.0 million as of December 31, 2011 and an earn-out payment of approximately $1.0 million was made in January of 2012. For the three month periods ended September 30, 2011, expense approximately $0.2 million related to the increased earn-out liability associated with the earn-out payment have been included in the condensed consolidated statements of operations under real estate acquisition costs and contingent consideration. For the nine month periods ended September 30, 2011, expense of approximately $0.5 million related to the increased earn-out liability associated with the earn-out payment have been included in the condensed consolidated statements of operations under real estate acquisition costs and contingent consideration. |
(2) | Rome LTACH, a development project, was completed in February 2011 and its first tenant moved in on February 1, 2011. In April 2012, the Company acquired the interests of Cornerstone Private Equity Fund Operating Partnership, LP and the Cirrus Group affiliates in Rome LTH Partners, LP for a total payment of approximately $5.2 million. We previously held an equity method investment in this property. As of April 2012, the Company owned 100% of Rome LTH Partners, LP and consolidated its existing equity method investment and the acquired interest at fair value in the amount of $18.9 million. Refer to Note 5 and 14 for more information on the acquisition and preliminary purchase price allocation. |
(3) | Under the purchase and sale agreement executed in connection with the acquisition, a portion of the purchase price for the property was to be calculated and paid to the seller as earn-out payments based upon the net operating income, as defined, of the property during each of the three years following our acquisition of the property. The earn-out value of $1.0 million was paid during the second quarter of 2011. |
(4) | Littleton Specialty Rehabilitation Facility, a development project and unconsolidated entity accounted for on the equity method, was completed in April 2012, and the single tenant began paying rent in July 2012, in accordance with the terms of the lease. Tenant operations commenced upon licensure of the facility in July 2012. As of September 30, 2012, real estate asset costs for the property were approximately $7.1 million and we had invested a total of approximately $1.6 million in this project. |
(5) | On April 2, 2012, through a wholly owned subsidiary, the Company invested $2.5 million to acquire an interest in the Physicians Centre MOB along with Caddis Partners and related affiliates and a group of physician investors. This investment is accounted for on the equity method and discussed further in Note 5. |
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As of September 30, 2012, cost and 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 | $ | 23,193,000 | $ | 166,785,000 | $ | 5,052,000 | $ | 14,757,000 | ||||||||
Accumulated depreciation and amortization | — | (7,905,000 | ) | (1,579,000 | ) | (8,386,000 | ) | |||||||||
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Net | $ | 23,193,000 | $ | 158,880,000 | $ | 3,473,000 | $ | 6,371,000 | ||||||||
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As of December 31, 2011, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:
Land | Buildings and improvements | Furniture, fixtures and equipment | Intangible lease assets | |||||||||||||
Cost | $ | 20,713,000 | $ | 105,340,000 | $ | 3,578,000 | $ | 10,649,000 | ||||||||
Accumulated depreciation and amortization | — | (4,653,000 | ) | (1,016,000 | ) | (6,784,000 | ) | |||||||||
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Net | $ | 20,713,000 | $ | 100,687,000 | $ | 2,562,000 | $ | 3,865,000 | ||||||||
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Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended September 30, 2012 and 2011 was approximately $1.2 million and $1.0 million, respectively. Depreciation expense associated with building and improvements, site improvements and furniture and fixtures for the nine months ended September 30, 2012 and 2011 was $3.2 million and $2.7 million, respectively.
Amortization associated with intangible assets for the three months ended September 30, 2012 and 2011 was $0.5 million and $1.0 million, respectively. Amortization associated with intangible assets for the nine months ended September 30, 2012 and 2011 was $1.5 million and $3.0 million, respectively. Estimated amortization for October 1, 2012 through December 31, 2012 and each of the subsequent years is as follows:
Intangible assets | ||||
October 2012 — December 2012 | $ | 407,000 | ||
2013 | $ | 2,712,000 | ||
2014 | $ | 330,000 | ||
2015 | $ | 330,000 | ||
2016 | $ | 329,000 | ||
2017 | $ | 328,000 | ||
2018 and thereafter | $ | 1,935,000 |
The estimated useful lives for intangible assets range from approximately one to seventeen years. As of September 30, 2012, the weighted-average amortization period for intangible assets was seven years.
5. Investments in Consolidated Joint Ventures and Unconsolidated Entities
Consolidated Joint Ventures
Oakleaf Joint Venture
On April 30, 2010, we invested approximately $21.6 million to acquire 80% equity interests in Royal Cornerstone South Carolina Portfolio, LLC (“Portfolio LLC”) and Royal Cornerstone South Carolina Tenant Portfolio, LLC (“Tenant LLC”) (collectively, we refer to the Portfolio LLC and the Tenant LLC as the “Oakleaf Joint Venture”). In accordance with the joint venture agreement, the Company is deemed the managing member and consolidates these entities. The Oakleaf Joint Venture owns and operates two assisted-living properties located in Lexington and Greenville, South Carolina. As of September 30, 2012, total assets related to Oakleaf Joint Venture were approximately $25.6 million, which includes approximately $22.6 million of real estate assets, and total liabilities were approximately $17.9 million, which includes approximately $17.5 million of secured mortgage debt. We may be required to fund additional capital contributions, including funding of any capital expenditures deemed necessary to continue to operate the entity and any operating cash shortfalls that the entity may experience.
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Rome LTACH Project
On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the campus of the Floyd Medical Center in Rome, Georgia. We contributed approximately $2.7 million of capital to acquire a 75% limited partnership interest in Rome LTH Partners, LP (“Rome LTH”). Cornerstone Private Equity Fund Operating Partnership, LP, an affiliate of our Prior Advisor, contributed approximately $0.5 million of capital to acquire a 15% limited partnership interest in Rome LTH. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.3 million to acquire an aggregate 9.5% limited partnership interest in Rome LTH. A fourth affiliate of the Cirrus Group acted as the general partner and held the remaining 0.5% interest in Rome LTH. The terms of the Rome LTH operating agreement included provisions obligating the joint venture to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. The obligation was exercisable by our partners at their sole discretion between years two and four of the joint venture. In February 2011, construction of the Rome LTACH project was completed.
In December 2011, The Cirrus Group notified us of their intended exercise of the promote monetization provisions of the Rome LTH operating agreement. On April 6, 2012, we acquired the interests of Cornerstone Private Equity Fund Operating Partnership, LP in the Rome LTH for $1.1 million. On April 12, 2012, we acquired the interests of The Cirrus Group in Rome LTH for $4.1 million, which included a $3.0 million payment of the promote termination amount. As of April 12, 2012, we owned 100% of Rome LTH. Upon acquiring control of Rome LTH, the Company recorded a gain on the fair value adjustment of this previously recorded equity method investment in the amount of $1.3 million during the period ended June 30, 2012 which is presented as a fair value adjustment for equity method investment in our statement of operations. The acquisition of interests was funded by approximately $2.6 million of equity raised in our offerings and $2.6 million of debt proceeds.
As of September 30, 2012, total assets related to this project were $19.2 million, which includes $18.4 million of net real estate related assets. Total liabilities were $13.5 million at September 30, 2012, which includes $13.5 million of secured mortgage debt. As of December 31, 2011, total assets related to this project were $16.5 million, which included $15.6 million of net real estate related assets. Total liabilities were $14.1 million at December 31, 2011, which includes $10.9 million of secured mortgage debt. For the three and nine months ended September 30, 2011, Rome LTH recorded revenue of $0.6 million and $1.6 million, and net income of $0.1 million and $0.1 million, respectively.
Leah Bay Joint Venture
On August 31, 2012, we invested approximately $49.5 million, to acquire an 80% joint venture interest in Sentio Leah Bay Portfolio, LLC (“Landlord LLC”) and Sentio Leah Bay TRS Portfolio, LLC (“Tenant LLC”) (collectively, we refer to the Landlord LLC and the Tenant LLC as the “Leah Bay Joint Venture”). Through two wholly-owned subsidiaries, the Company controls Landlord LLC and Tenant LLC and consolidates these entities. The Leah Bay Joint Venture owns and operates four memory care facilities located in Urbana, IL (Amber Glen), Springfield, IL (Mill Creek), Normal, IL (Sugar Creek) and Bryan, TX (Hudson Creek). As of September 30, 2012, total assets related to Leah Bay joint venture were approximately $50.5 million, which includes approximately $49.1 million of real estate assets and total liabilities were approximately $33.8 million, which includes approximately $32.8 million of secured mortgage debt.
Unconsolidated Entities
Littleton Specialty Rehabilitation Facility
On December 16, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in Littleton, CO. We agreed to contribute approximately $1.6 million of capital to acquire a 90.0% limited partnership interest in Littleton Med Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.2 million to acquire an aggregate 9.5% limited partnership interest in the Littleton Med Partners, LP. A fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Littleton Med Partners, LP. As of September 30, 2012 and December 31, 2011, we owned a 90.0% limited partnership interest in Littleton Med Partners, LP. Our net investment in this property as of September 30, 2012 and December 31, 2011 was $1.6 million. For the three months ended September 30, 2012 and 2011, we recorded income from this unconsolidated entity of $0.1 million and $0, respectively. For the nine months ended September 30, 2012 and 2011, we recorded a loss from this unconsolidated entity of $0.1 million and $0, respectively. As of September 30, 2012, total assets related to this project were $7.3 million, which includes $7.0 million of net real estate related assets. Total liabilities were $5.6 million at September 30, 2012, which includes $5.5 million of secured mortgage debt. As of December 31, 2011, total assets related to this project were $6.0 million, which included $5.8 million of net real estate related assets. Total liabilities were $4.2 million at December 31, 2011, which includes $3.2 million of secured mortgage debt. The joint venture began operations in July 2012.
Under the terms of the joint venture agreement, the joint venture may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint venture. The amount that would be paid upon monetization is subject to change based on a number of
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factors, including the value of the property, net income earned by the property and payment of preferred returns on equity, and, under certain circumstances, the Company may elect to satisfy the promote monetization obligation connection with a disposition of the property. If the promote monetization liability is satisfied other than in connection with a sale of the property, the Company would be required to fund additional capital into the partnership.
Physicians Centre MOB
On April 2, 2012, through a wholly-owned subsidiary, we entered into a joint venture with affiliates of Caddis Partners, an unaffiliated entity, and a group of unaffiliated physicians to acquire an on-campus medical office building (the “Physicians Centers MOB”) located in Bryan, Texas.
The Company invested approximately $2.5 million of capital to acquire a 71.9% limited partnership interest in Bryan MOB Partners, L.P the (“Bryan LP”). Affiliates of Caddis Partners contributed an aggregate of approximately $0.35 million to acquire an aggregate 10.1% limited partnership interest in the Bryan LP and another affiliate of the Caddis Partners acts as the Bryan LP general partner, but does not own a partnership interest. The physician partners contributed approximately $0.625 million to acquire a 18.0% interest in Bryan LP. The Company’s equity investment in the joint venture was funded from proceeds from its public offering.
For the three and nine months ended September 30, 2012, we recorded a loss from this unconsolidated entity of $0.1 million and $0.4 million, respectively. As of September 30, 2012, total assets related to this joint venture were approximately $10.3 million, which includes approximately $9.4 million of real estate assets and total liabilities were approximately $7.4 million, which includes approximately $7.1 million of secured mortgage debt. Under the terms of the joint venture agreement, the joint venture may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint venture. The amount that would be paid upon monetization is subject to change based on a number of factors, including the value of the property, net income earned by the property and payment of preferred returns on equity, and, under certain circumstances, the Company may elect to satisfy the promote monetization obligation connection with a disposition of the property. We may be required to fund additional capital contributions, including funding of any capital expenditures deemed necessary to continue to operate the entity, any operating cash shortfalls that the entity may experience and the promote monetization if not satisfied in connection with a sale of the property.
6. Allowance for Doubtful Accounts
As of September 30, 2012 and December 31, 2011, we had recorded $71,000 and $76,000, respectively, as allowances for doubtful accounts related to tenants and other receivables.
7. Concentration of Risks
Our senior living operations segment accounted for approximately 85.3% and 82.4% of total revenues for the three months ended September 30, 2012 and 2011, respectively and approximately 85.6% and 83.2% of total revenues for the nine months ended September 30, 2012 and 2011. The following table provides information about our senior living operation segment concentration for the three and nine months ended September 30, 2012:
Three Months Ended | Nine Months Ended | |||||||||||||||
Operators | Percentage of Segment Revenues | Percentage of Total Revenues | Percentage of Segment Revenues | Percentage of Total Revenues | ||||||||||||
Good Neighbor Care | 29.6 | % | 25.3 | % | 31.1 | % | 26.6 | % | ||||||||
Royal Senior Care | 17.1 | % | 14.6 | % | 18.3 | % | 15.7 | % | ||||||||
Woodbine Senior Living | 18.2 | % | 15.5 | % | 19.7 | % | 16.9 | % | ||||||||
12 Oaks Senior Living | 15.7 | % | 13.4 | % | 17.2 | % | 14.7 | % | ||||||||
JEA Senior Living | 10.3 | % | 8.7 | % | 3.7 | % | 3.2 | % | ||||||||
Provision Living | 4.8 | % | 4.1 | % | 5.3 | % | 4.5 | % | ||||||||
Legend Senior Living | 4.3 | % | 3.7 | % | 4.7 | % | 4.0 | % | ||||||||
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100 | % | 85.3 | % | 100 | % | 85.6 | % | |||||||||
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Our triple-net leased segment accounted for approximately 12.2% and 10.2% of total revenues for the three months ended September 30, 2012 and 2011, respectively and approximately 11.9% and 9.8% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. The following table provides information about our triple-net leased segment for the three and nine months ended September 30, 2012:
Three Months Ended | Nine Months Ended | |||||||||||||||
Tenant | Percentage of Segment Revenues | Percentage of Total Revenues | Percentage of Segment Revenues | Percentage of Total Revenues | ||||||||||||
Babcock PM Management | 32.8 | % | 4.0 | % | 37.2 | % | 4.4 | % | ||||||||
Global Rehab Hospitals | 30.2 | % | 3.7 | % | 34.2 | % | 4.1 | % | ||||||||
The Specialty Hospital | 29.6 | % | 3.6 | % | 22.9 | % | 2.7 | % | ||||||||
Floyd Healthcare Management | 7.4 | % | 0.9 | % | 5.7 | % | 0.7 | % | ||||||||
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100 | % | 12.2 | % | 100 | % | 11.9 | % | |||||||||
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Our medical office building segment accounted for approximately 2.5% and 2.4% of total revenues for the three months ended September 30, 2012 and 2011, respectively, and approximately 2.5% of total revenues for the nine months ended September 30, 2012 and 2011.
As of September 30, 2012, we owned or had joint venture interests in 20 properties, geographically located in ten states. The following table provides information about our geographic risks by operating segment for the three and nine months ended September 30, 2012:
Three Months Ended | Nine Months Ended | |||||||||||||||
State | Percentage of Segment Revenues | Percentage of Total Revenues | Percentage of Segment Revenues | Percentage of Total Revenues | ||||||||||||
Senior living operations | ||||||||||||||||
South Carolina | 17.2 | % | 14.6 | % | 18.4 | % | 15.7 | % | ||||||||
Texas | 17.7 | % | 15.1 | % | 17.9 | % | 15.4 | % | ||||||||
Ohio | 11.6 | % | 9.9 | % | 12.6 | % | 10.7 | % | ||||||||
Pennsylvania | 16.7 | % | 14.3 | % | 17.2 | % | 14.7 | % | ||||||||
New Hampshire | 9.9 | % | 8.5 | % | 10.7 | % | 9.1 | % | ||||||||
Tennessee | 9.6 | % | 8.2 | % | 10.3 | % | 8.8 | % | ||||||||
Illinois | 8.2 | % | 7.0 | % | 3.0 | % | 2.5 | % | ||||||||
Indiana | 4.8 | % | 4.1 | % | 5.3 | % | 4.5 | % | ||||||||
Florida | 4.3 | % | 3.6 | % | 4.6 | % | 4.2 | % | ||||||||
Triple-net leased properties | ||||||||||||||||
Texas | 63.0 | % | 7.7 | % | 71.4 | % | 8.5 | % | ||||||||
Georgia | 37.0 | % | 4.5 | % | 28.6 | % | 3.4 | % | ||||||||
Medical office building | ||||||||||||||||
Texas | 100 | % | 2.5 | % | 100 | % | 2.5 | % |
8. Income Taxes
For federal income tax purposes, we have elected to be taxed as a REIT, under Sections 856 through 860 of the Code beginning with our taxable year ended December 31, 2008, which imposes limitations related to operating assisted-living properties. As of September 30, 2012, we had acquired fourteen assisted-living facilities and formed eleven wholly owned taxable REIT subsidiaries, or TRSs, which includes a Master TRS that consolidates our wholly owned TRSs.
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 $0.1 million expense and a $0.1 million expense for Federal and State income taxes in the three months ended September 30, 2012 and 2011, respectively, and a $0.1 million expense and benefit of $0.1 million for Federal and State income taxes in the nine months ended September 30, 2012 and 2011, respectively, which have been recorded in general and administrative expenses. Net deferred tax assets related to the TRS entities totaled approximately $1.3 million and $1.1 million at September 30, 2012 and December 31, 2011, respectively, related primarily to book and tax basis differences for straight-line rent and accrued
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liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. These 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 September 30, 2012 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.
9. Segment Reporting
As of September 30, 2012, 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 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 medical office building 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.
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The following tables reconcile the segment activity to consolidated net income for the three months and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | |||||||||||||||||||||||||||||||
Senior living operations | Triple-net leased properties | Medical office building | Consolidated | Senior living operations | Triple-net leased properties | Medical office building | Consolidated | |||||||||||||||||||||||||
Rental revenues | $ | 6,910,000 | $ | 1,298,000 | $ | 214,000 | $ | 8,422,000 | $ | 6,915,000 | $ | 826,000 | $ | 201,000 | $ | 7,942,000 | ||||||||||||||||
Resident services and fee income | 3,655,000 | — | — | 3,655,000 | 1,945,000 | — | — | 1,945,000 | ||||||||||||||||||||||||
Tenant reimbursements and other income | 15,000 | 222,000 | 75,000 | 312,000 | 73,000 | 234,000 | 55,000 | 362,000 | ||||||||||||||||||||||||
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$ | 10,580,000 | $ | 1,520,000 | $ | 289,000 | $ | 12,389,000 | $ | 8,933,000 | $ | 1,060,000 | $ | 256,000 | $ | 10,249,000 | |||||||||||||||||
Property operating and maintenance expenses | 7,159,000 | 220,000 | 94,000 | 7,473,000 | 6,365,000 | 258,000 | 127,000 | 6,750,000 | ||||||||||||||||||||||||
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Net operating income | $ | 3,421,000 | $ | 1,300,000 | $ | 195,000 | $ | 4,916,000 | $ | 2,568,000 | $ | 802,000 | $ | 129,000 | $ | 3,499,000 | ||||||||||||||||
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General and administrative expenses | 423,000 | 1,243,000 | ||||||||||||||||||||||||||||||
Asset management fees and expenses | 559,000 | 390,000 | ||||||||||||||||||||||||||||||
Real estate acquisition costs and contingent consideration | 1,016,000 | 22,000 | ||||||||||||||||||||||||||||||
Depreciation and amortization | 1,689,000 | 1,946,000 | ||||||||||||||||||||||||||||||
Interest income | 2,000 | 4,000 | ||||||||||||||||||||||||||||||
Interest expense | (1,790,000 | ) | (1,436,000 | ) | ||||||||||||||||||||||||||||
Equity in (loss) income from unconsolidated entities | (14,000 | ) | 121,000 | |||||||||||||||||||||||||||||
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Net loss | $ | (545,000 | ) | $ | (1,413,000 | ) | ||||||||||||||||||||||||||
Net loss attributable to non controlling interests | (16,000 | ) | (20,000 | ) | ||||||||||||||||||||||||||||
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Netloss attributable to common stockholders | $ | (529,000 | ) | $ | (1,393,000 | ) | ||||||||||||||||||||||||||
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Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | |||||||||||||||||||||||||||||||
Senior living operations | Triple-net leased properties | Medical office building | Consolidated | Senior living operations | Triple-net leased properties | Medical office building | Consolidated | |||||||||||||||||||||||||
Rental revenues | $ | 20,453,000 | $ | 3,436,000 | $ | 636,000 | $ | 24,525,000 | $ | 19,983,000 | $ | 2,427,000 | $ | 603,000 | $ | 23,013,000 | ||||||||||||||||
Resident services and fee income | 8,243,000 | — | — | 8,243,000 | 5,667,000 | — | — | 5,667,0000 | ||||||||||||||||||||||||
Tenant reimbursements and other income | 294,000 | 593,000 | 234,000 | 1,121,000 | 248,000 | 462,000 | 166,000 | 876,000 | ||||||||||||||||||||||||
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$ | 28,990,000 | $ | 4,029,000 | $ | 870,000 | $ | 33,889,000 | $ | 25,898,000 | $ | 2,889,000 | $ | 769,000 | $ | 29,556,000 | |||||||||||||||||
Property operating and maintenance expenses | 20,084,000 | 594,000 | 243,000 | 20,921,000 | 18,023,000 | 468,000 | 260,000 | 18,751,000 | ||||||||||||||||||||||||
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Net operating income | $ | 8,906,000 | $ | 3,435,000 | $ | 627,000 | $ | 12,968,000 | $ | 7,875,000 | $ | 2,421,000 | $ | 509,000 | $ | 10,805,000 | ||||||||||||||||
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General and administrative expenses | 1,632,000 | 3,201,000 | ||||||||||||||||||||||||||||||
Asset management fees and expenses | 1,543,000 | 1,197,000 | ||||||||||||||||||||||||||||||
Real estate acquisition costs and contingent consideration | 1,229,000 | 1,453,000 | ||||||||||||||||||||||||||||||
Depreciation and amortization | 4,653,000 | 5,658,000 | ||||||||||||||||||||||||||||||
Interest income | 10,000 | 10,000 | ||||||||||||||||||||||||||||||
Interest expense | (4,818,000 | ) | (4,161,000 | ) | ||||||||||||||||||||||||||||
Other expense | (151,000 | ) | — | |||||||||||||||||||||||||||||
Equity in (loss) income from unconsolidated entities | (363,000 | ) | 105,000 | |||||||||||||||||||||||||||||
Fair value adjustment for equity method investment | 1,282,000 | — | ||||||||||||||||||||||||||||||
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Net loss | $ | (129,000 | ) | $ | (4,750,000 | ) | ||||||||||||||||||||||||||
Net income (loss) attributable to the noncontrolling interests | 108,000 | (66,000 | ) | |||||||||||||||||||||||||||||
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Net loss attributable to common stockholders | $ | (237,000 | ) | $ | (4,684,000 | ) | ||||||||||||||||||||||||||
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The following table reconciles the segment activity to consolidated financial position as of September 30, 2012 and December 31, 2011.
September 30, 2012 | December 31, 2011 | |||||||
Assets | ||||||||
Investment in real estate: | ||||||||
Senior living operations | $ | 139,471,000 | $ | 92,975,000 | ||||
Triple-net leased properties | 44,197,000 | 26,366,000 | ||||||
Medical office building | 8,249,000 | 8,486,000 | ||||||
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Total reportable segments | $ | 191,917,000 | $ | 127,827,000 | ||||
Reconciliation to consolidated assets: | ||||||||
Cash and cash equivalents | 21,741,000 | 27,972,000 | ||||||
Deferred financing costs, net | 1,715,000 | 824,000 | ||||||
Investment in unconsolidated entities | 3,499,000 | 3,387,000 | ||||||
Tenant and other receivables, net | 1,677,000 | 1,366,000 | ||||||
Deferred costs and other assets | 1,686,000 | 1,938,000 | ||||||
Restricted cash | 3,664,000 | 3,806,000 | ||||||
Goodwill | 5,965,000 | 5,965,000 | ||||||
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Total assets | $ | 231,864,000 | $ | 173,085,000 | ||||
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As of September 30, 2012 and December 31, 2011, goodwill had a balance of approximately $6.0 million and $6.0 million, respectively, all related to senior the living operations segment. The Company historically has not recorded any impairment charges for goodwill.
10. Notes Payable
Notes payable were $145.5 million ($145.0 million, net of premium) and $86.0 million as of September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 4.45% to 6.50% per annum and a weighted average effective interest rate of 5.70% per annum. As of September 30, 2012, we had $113.8 million of fixed rate debt, or approximately 79% of notes payable, at a weighted average interest rate of 5.66% per annum and $31.1 million of variable rate debt, or approximately 21% of notes payable, at a weighted average interest rate of 5.83% per annum. As of December 31, 2011, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 3.45% to 6.50% per annum and a weighted-average effective interest rate of 5.91% per annum. As of December 31, 2011, we had $32.7 million of fixed rate debt, or 38% of notes payable, at a weighted average interest rate of 6.01% per annum and $53.3 million of variable rate debt, or 62% of notes payable, at a weighted average interest rate of 5.85% per annum.
On June 11, 2012, we entered into MultiFamily Loan and Securities Agreements (the “Loans”) with KeyCorp Real Estate Capital Markets, Inc., originated under Fannie Mae’s Delegated Underwriting and Servicing Product Line, to refinance our Terrace at Mountain Creek, River’s Edge at Yardley, Forestview Manor, GreenTree at Westwood and Windsor Oaks of Bradenton properties. The Loans are at a fixed rate of 4.45% for a term of seven years. Proceeds from the Loans of $32.0 million exceeded the debt repaid and loan fees and expenses by approximately $11.5 million. The Loans are secured by first priority liens on the refinanced properties. In connection with the documentation and closing of the Loans, we paid fees and expenses totaling approximately $791,000. In addition, the Company recognized a loss on debt extinguishment of approximately $148,000, which is included in other income/expense in the accompanying condensed consolidated statements of operations.
In November 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution (“KeyBank”), to obtain a $25,000,000 revolving credit facility. Effective August 2011, the KeyBank agreement was amended to convert the credit facility to a term loan, revised certain loan covenants and changed the maturity date to July 31, 2012, with an option to extend the maturity to October 30, 2012 subject to satisfaction of certain conditions. This option was exercised and the term was extended on July 31, 2012. On August 14, 2012, the Company repaid the final amount outstanding on the Key Bank credit facility. The amount outstanding under the credit facility was $0 and $16.3 million at September 30, 2012 and December 31, 2011, respectively.
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 September 30, 2012, we were in compliance with all such covenants and requirements.
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The following table details the notes payable by property as of September 30, 2012 and December 31, 2011.
Property Name | Payment Type | Interest Rate | Outstanding Principal Balance as of September 30, 2012(1) | Outstanding Principal Balance as of December 31, 2011(1) | Maturity Date | |||||||||
Amber Glen | Principal and interest at a 30-year amortization rate | 6.40%—fixed | $ | 8,650,000 | (5 | ) | June 1, 2019 | |||||||
Carriage Court of Hilliard | Principal and interest at a 35-year amortization rate | 5.40%—fixed | $ | 13,325,000 | $ | 13,440,000 | August 1, 2044 | |||||||
Caruth Haven Court | Principal and interest at a 30-year amortization rate | 6.43%—fixed | $ | 9,707,000 | $ | 9,793,000 | December 16, 2019 | |||||||
Greentree (2) | Principal and interest at a 30-year amortization rate | 4.45%—fixed | $ | 3,856,000 | 2,832,000 | July 1, 2019 | ||||||||
Forestview Manor (2) | Principal and interest at a 30-year amortization rate | 4.45%—fixed | $ | 8,754,000 | 5,935,000 | July 1, 2019 | ||||||||
Global Rehab Inpatient Rehab Facility | Principal and interest at a 30-year amortization rate | 6.25%—fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR +3.25% | $ | 7,373,000 | $ | 7,441,000 | December 22, 2016 | |||||||
Hedgcoxe Health Plaza (3) | Principal and interest at a 30-year amortization rate | 4.9%—fixed | $ | 5,600,000 | $ | 5,060,000 | August 14, 2022 | |||||||
Hudson Creek | Principal and interest at a 30-year amortization rate | 6.11%—fixed | $ | 7,997,000 | (5 | ) | June 1, 2019 | |||||||
Mesa Vista Inn Health Center | Principal and interest at a 20-year amortization rate | 6.50%—fixed | $ | 6,981,000 | $ | 7,136,000 | January 5, 2015 | |||||||
Mill Creek | Principal and interest at a 30-year | 6.40%—fixed | $ | 8,349,000 | (5 | ) | June 1, 2019 | |||||||
Oakleaf Village Portfolio | Principal and interest at a 30-year amortization rate | 5.45% plus the greater of 1% or the 3 month LIBOR | $ | 17,485,000 | $ | 17,644,000 | April 30, 2015 | |||||||
River’s Edge of Yardley (2) | Principal and interest at a 30-year amortization rate | 4.45%—fixed | $ | 6,484,000 | $ | 2,500,000 | July 1, 2019 | |||||||
Rome LTACH Project | Principal and interest at a 25-year amortization rate | 4.5%—fixed | $ | 13,461,000 | (4 | ) | March 31, 2017 | |||||||
Sugar Creek | Principal and interest at a 30-year amortization rate | 6.20%—fixed | $ | 7,836,000 | (5 | ) | June 1, 2019 | |||||||
The Oaks Bradenton (2) | Principal and interest at a 30-year amortization rate. | 4.45%—fixed | $ | 4,085,000 | $ | 2,697,000 | July 1, 2019 | |||||||
Terrace at Mountain Creek (2) | Principal and interest at a 30-year amortization rate | 4.45%—fixed | $ | 8,754,000 | $ | 5,700,000 | July 1, 2019 | |||||||
Woodland Terrace at the Oaks | Months 1-22 interest only. Month 23 to maturity principal and interests at a 25-year amortization rate | 3Mo LIBOR +3.75% with a floor of 5.75% | $ | 6,276,000 | $ | 5,800,000 | May 1, 2014 | |||||||
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$ | 144,973,000 | $ | 85,978,000 | |||||||||||
Add: premium | 487,000 | |||||||||||||
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Notes payable, net | $ | 145,460,000 | $ | 85,978,000 | ||||||||||
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(1) | As of September 30, 2012 and December 31, 2011, all notes payable are secured by the underlying real estate. |
(2) | These loans were refinanced in June 2012 under the Multifamily Loan and Securities Agreement discussed above. |
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(3) | On August 14, 2012, this loan was refinanced with the KeyBank National Association. |
(4) | Not applicable because this entity was an unconsolidated joint venture at December 31, 2011. |
(5) | On August 31, 2012, the Company acquired an interest in the Leah Bay joint venture subject to existing indebtedness of approximately $32.9 million. These notes payable are secured by the underlying real estate. |
Principal payments due on our notes payable for October 1, 2012 to December 31, 2012 and each of the subsequent years is as follows:
Year | Principal amount | |||
October 1, 2012 to December 31, 2012 | $ | 546,000 | ||
2013 | 2,318,000 | |||
2014 | 8,578,000 | |||
2015 | 25,439,000 | |||
2016 | 9,024,000 | |||
2017 and thereafter | 99,068,000 | |||
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$ | 144,973,000 | |||
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Interest Expense and Deferred Financing Cost
For the three months ended September 30, 2012 and 2011, the Company incurred interest expense, including amortization of deferred financing costs of $1.8 million and $1.4 million, respectively. For the nine months ended September 30, 2012 and 2011, the Company incurred interest expense, including amortization of deferred financing costs of $4.8 million and $4.2 million, respectively. As of September 30, 2012 and December 31, 2011, the Company’s net deferred financing costs were approximately $1.7 million and $0.8 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 September 30, 2012, 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 in our initial and follow-on public offerings.
Distributions
We have adopted a distribution reinvestment plan that allows our stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of our common stock at their election. We have registered 10,000,000 shares of our common stock for sale pursuant to the distribution reinvestment plan. The purchase price per share provided in the plan is 95% of the price paid by the purchaser for our common stock, but not less than $9.50 per share. As of September 30, 2012 and December 31, 2011, approximately 551,000 shares had been issued under the distribution reinvestment plan.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on public offering, our dividend reinvestment plan and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. As a result, we suspended our distribution reinvestment plan effective as of May 10, 2011.
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The following are the distributions declared during the nine months ended September 30, 2012 and 2011:
Distribution Declared(1) | ||||||||||||
Period | Cash | Reinvested | Total | |||||||||
First quarter 2011 | $ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 | ||||||
Second quarter 2011 | $ | 2,436,000 | $ | — | $ | 2,436,000 | ||||||
Third quarter 2011 | $ | 817,000 | $ | — | $ | 817,000 | ||||||
First quarter 2012 | $ | 801,000 | $ | — | $ | 801,000 | ||||||
Second quarter 2012 | $ | 799,000 | $ | — | $ | 799,000 | ||||||
Third quarter 2012 | $ | 807,000 | $ | — | $ | 807,000 |
(1) | Distributions declared represented a return of capital and taxable ordinary income for tax purposes. 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. Some of our distributions have been paid from sources other than operating cash flow, such as offering proceeds. Until proceeds from our offering are fully invested and generating operating cash flow sufficient to fully cover distributions to stockholders, we intend to pay all or a portion of our distributions from the proceeds of our offerings or from borrowings in anticipation of future cash flow. |
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. On September 30, 2011, our board of directors resolved to lower our distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of $10.00) from the prior annualized rate of $0.75 per share (7.5% based on a share price of $10.00), effective July 1, 2011 and continuing until and including September 30, 2012. Distributions are paid quarterly commencing with the third quarter distribution paid in October 2011. Effective October 1, 2012, our board of directors declared distributions for daily record dates occurring in the fourth quarter of 2012 in amounts per share that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.475 per share (4.75% based on share price of $10.00). The rate and frequency of distributions is subject to the discretion of our board of directors and may change from time to time based on our operating results and cash flow.
From our inception in October 2006 through September 30, 2012, we declared aggregate distributions of $17.0 million and our cumulative net loss during the same period was $17.3 million.
Stock Repurchase Program
We adopted a stock repurchase program for investors who have held their shares for at least one year, unless the shares are being repurchased in connection with a stockholder’s death. Under our stock repurchase program, the repurchase price varies depending on the purchase price paid by the stockholder and the number of years the shares are held. Our board of directors may amend, suspend or terminate the program at any time on 30 days prior notice to stockholders. Our board of directors may modify our stock repurchase program so that we can repurchase stock using the proceeds from the sale of our real estate investments or other sources, however, we have no obligation to repurchase our stockholders’ shares. Our board of directors waived the one-year holding period in the event of the death of a stockholder and adjusted the repurchase price to 100% of such stockholders purchase price if the stockholder held the shares for less than three years. Our board of directors reserves the right in its sole discretion at any time and from time to time, upon 30 days prior notice to our stockholders, to adjust the repurchase price for our shares of stock, or suspend or terminate our stock repurchase program.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholder value. As a result, we suspended our stock repurchase program effective as of May 29, 2011. On December 22, 2011, our Board of Directors approved a net asset valuation of $9.02 per share, and revised the share repurchase price upon the death of a shareholder to this amount.
During the three and nine months ended September 30, 2012, we repurchased shares pursuant to our stock repurchase program as follows:
Period | Total Number of Shares Redeemed | Average Price Paid per Share | ||||||
January | 33,008 | $ | 9.98 | |||||
February | — | $ | — | |||||
March | — | $ | — | |||||
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First quarter 2012 | 33,008 | $ | 9.98 | |||||
April | 9,203 | $ | 9.00 | |||||
May | 17,582 | $ | 9.00 | |||||
June | — | $ | — | |||||
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Second quarter 2012 | 26,785 | $ | 9.00 | |||||
July | — | $ | — | |||||
August | 3,000 | $ | 9.00 | |||||
September | 13,500 | $ | 9.00 | |||||
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Third quarter 2012 | 16,500 | $ | — | |||||
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76,293 | ||||||||
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During the three and nine months ended September 30, 2011, we repurchased 28,729 and 195,997 shares, respectively, pursuant to our stock repurchase program.
During the nine months ended September 30, 2012, we received requests to have an aggregate of 78,793 shares repurchased pursuant to our stock repurchase program. Of these requests 2,500 shares were not able to be repurchased due to the limitations contained in the terms of our stock repurchase program and the suspension of ordinary repurchases under our stock repurchase program as of May 29, 2011.
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12. Related Party Transactions
The Company has no employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the policies established by our board of directors. We have an advisory agreement that entitles the Advisor to specified fees upon the provision of certain services to us, as well as reimbursement for organizational and offering costs incurred by the Advisor on our behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to us. Effective January 1, 2012, Sentio Investments, LLC became our Advisor under a new advisory agreement (the “2012 Advisory Agreement”). On July 29, 2011, the Company executed the Omnibus Agreement, which provided for a number of significant changes to the Company’s Advisory Agreement with the Prior Advisor (the “2011 Advisory Agreement”). The 2012 Advisory Agreement and the 2011 Advisory Agreement are collectively referred to as the “Advisory Agreements.”
Advisory Agreements
Under the terms of the 2012 Advisory Agreement, the Advisor is required to use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. The 2012 Advisory Agreement calls for the Advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties. The 2011 Advisory Agreement had similar provisions.
The fees and expense reimbursements payable to the Advisor and Prior Advisor (collectively, the “Advisors”) under the 2012 Advisory Agreement and the 2011 Advisory Agreement are described below.
Organizational and Offering Costs. Organizational and offering costs of our offerings paid by the Prior Advisor on our behalf were reimbursed to the Prior Advisor from the proceeds of our offerings. Organizational and offering costs consisted of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with our offerings, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. At times during our offering stage, the amount of organization and offering expenses that we incur, or that the Advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds then raised, but our Advisor is required to reimburse us to the extent that our organization and offering expenses exceed 3.5% of aggregate gross offering proceeds at the conclusion of our offering. In addition, the Advisor will also pay any organization and offering expenses to the extent that such expenses, plus sales commissions and the dealer manager fee (but not the acquisition fees or expenses) are in excess of 13.5% of gross offering proceeds. In no event will we have any obligation to reimburse the Advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from our primary offerings. As of September 30, 2012 and December 31, 2011, the Prior Advisor and its affiliates had incurred organizational and offering costs totaling approximately $5.1 million, including $0.1 million of organizational costs that have been expensed and $5.0 million of offering costs that reduce net proceeds of our offerings. Of this amount $4.0 million reduced the net proceeds of our initial public offering and $1.0 million reduced the net proceeds of our follow-on offering. Upon the execution of the Omnibus Agreement, we forgave $0.8 million of organization and offering costs in excess of the 3.5% of gross offering proceeds advanced to Prior Advisor pursuant to the 2011 Advisory Agreement. This amount reduced our offering proceeds and has therefore been treated as a reduction in additional paid-in capital in our condensed consolidated balance sheet.
Acquisition Fees and Expenses. The 2012 Advisory Agreement requires us to pay the Advisor acquisition fees in an amount equal to 1.0% of the investments acquired, including any debt attributable to such investments. In addition, we are required to reimburse the Advisor for direct costs the Advisor incurs and amounts the Advisor pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. The 2011 Advisory Agreement required us to pay the Prior Advisor acquisition fees in an amount equal to 2.0% of the investments acquired, including any debt attributable to such investments. A portion of the acquisition fees were paid upon receipt of offering proceeds, and the balance were paid at the time we acquired a property. However, if the 2011 Advisory Agreement was terminated or not renewed, the Prior Advisor was obligated to return acquisition fees not yet allocated to one of our investments. In addition, we were required to reimburse the Prior Advisor for direct costs the Prior Advisor incurred and amounts the Prior Advisor paid to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. For the three months and nine months ended September 30, 2012 the Advisor earned approximately $0.4 million and $0.5 million of acquisition fees. For the three months and nine months ended September 30, 2011, the Prior Advisor earned approximately $0.0 million and $0.5 million in acquisition fees, respectively. As of September 30, 2011, the amount of acquisition fees that had been paid to the Prior Advisor but not allocated to one of our investments was $0.9 million. That amount was expensed and included in real estate acquisition costs and earn out costs in our condensed consolidated statements of operations. Upon the execution of the Omnibus Agreement, we forgave the advance not earned through services rendered in connection with future acquisitions.
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Financing Coordination Fee. The 2012 Advisory Agreement requires us to pay the Advisor a financing coordination fee equal to 0.5% of the gross amount of any refinancing, provided, however, that the Advisor shall not be entitled to a financing coordination fee in connection with the refinancing of any debt obligations secured by any particular asset that was previously subject to a refinancing in which the Advisor received a financing coordination fee within the immediately preceding three year period. For the three months and nine months ended September 30, 2012 the Advisor earned approximately $28,000 and $0.3 million of financing coordination fees. The 2011 Advisory Agreement did not provide for a financing coordination fee.
Management Fees.The 2012 Advisory Agreement requires us to pay the Advisor a monthly asset management fee of one-twelfth of 1.0% of the greater of the (i) the average GAAP basis book carrying value of such asset before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period (or if such specified period is a single month, then the average of such values during such month), or (ii) an amount determined as follows: (A) if such property, loan, or other permitted investment has been appraised by an independent appraiser within the immediately preceding twelve month period, the appraised value of such property, loan, or other permitted investment, or (B) if such property, loan, or other permitted investment has not been appraised by an independent appraiser within the immediately preceding twelve month period, the estimated fair market value of such property, loan, or other permitted investment, as approved by the Independent Directors Committee. The value of each property, loan, or other permitted investment owned by a joint venture shall be the product of the Company’s pro rata ownership interest in such joint venture, multiplied by the greater of (i) the average GAAP basis book carrying value of such asset before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period (or if such specified period is a single month, then the average of such values during such month), or (ii) an amount determined as follows: (A) if such property, loan, or other permitted investment has been appraised by an independent appraiser within the immediately preceding twelve month period, the appraised value of such property, loan, or other permitted Investment, or (B) if such property, loan, or other permitted investment has not been appraised by an independent appraiser within the immediately preceding twelve month period, the estimated fair market value of such property, loan, or other permitted investment, as approved by the Independent Directors Committee. These fees and expenses are in addition to management fees that we expect to pay to third party property managers.
The Prior Advisory Agreement required us to pay the Advisor a monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis in book carrying values of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in accordance with GAAP. In addition, we reimbursed the Prior Advisor for the direct and indirect costs and expenses incurred by the Prior Advisor in providing asset management services to us, including personnel and related employment costs related to providing asset management services on our behalf and amounts paid by our Advisor to Servant Investments, LLC and Servant Healthcare Investments, LLC for portfolio management services provided on our behalf. These fees and expenses are in addition to management fees paid to third party property managers.
For the three months and nine months ended September 30, 2012, the Advisor earned approximately $0.6 million and $1.5 million of management fees, respectively. For the three months and nine months ended September 30, 2011, the Prior Advisor earned approximately $0.2 million and $0.6 million of management fees, respectively. These fees were expensed. For the three months and nine months ended September 30, 2011, the Prior Advisor also incurred approximately $0.2 million and $0.5 million of direct and indirect costs and expenses, which are included in asset management fees and expensed in the condensed consolidated statement of operations. No comparable charges were made by the Advisor in 2012.
Operating Expenses. The 2012 Advisory Agreement does not provide for the reimbursement of the Advisor’s direct or indirect costs of providing administrative services to us. Accordingly, there were no such charges for the three months and nine months ended September 30, 2012. The 2011 Advisory Agreement provided for reimbursement of the Prior Advisor’s direct and indirect costs of providing administrative and management services to us. For the three months and nine months ended September 30, 2011, approximately $0.2 million and $0.9 million of such costs were reimbursed and included in general and administrative expenses on our condensed consolidated statements of operations.
Consistent with limitations set forth in our charter, the Advisory Agreements further provide 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 approve such excess as being so justified, the advisory agreement requires that any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our charter provides that, 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.
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For the three months ended September 30, 2012, our management fees and expenses and operating expenses did not exceed the greater of 2% of our average invested assets and 25% of our net income. For the four quarters ended September 30, 2012, our management fees and expenses and operating expenses totaled $4.4 million. This amount exceeded the greater of 2% of our average invested assets and 25% of our net loss by $0.7 million.
Disposition Fee. The 2012 Advisory Agreement provides that if the Advisor or an Affiliate provides a substantial amount of the services (as determined by a majority of the Directors, including a majority of the Independent Directors Committee) in connection with the sale of one or more properties, other than a sale in connection with a transaction in which the Company sells, grants, transfers, conveys or relinquishes its ownership of all or substantially all of the Company’s assets, the Advisor or such Affiliate shall receive at the closing of such sale a disposition fee equal to the lesser of (i) 1.0% of the sales price of such property or properties, or (ii) one-half of the Competitive Real Estate Commission for such property. Any disposition fee payable may be paid in addition to real estate commissions paid to non-Affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by the Company for each property shall not exceed an amount equal to the lesser of (i) 6.0% of the aggregate contract sales price of each property or (ii) the competitive real estate commission for each property.
Subordinated Participation Provisions. The Advisor is entitled to receive a subordinated participation upon the sale of our properties, listing of our common stock or termination of the Advisor, as follows:
• | After we pay stockholders cumulative distributions equal to their invested capital plus a 7% cumulative, non-compounded return, the Advisor will be paid a subordinated participation in net sale or refinancing proceeds of 10%. Following a listing, this fee will no longer be payable. |
• | Upon termination of the advisory agreement, other than for cause, the Advisor will receive the subordinated performance fee due upon termination in the form of a promissory note bearing simple interest at a rate of 5% per annum, in a principal amount equal to 10% the amount, if any, which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total distributions (other than stock distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 7%, less any prior payment to the Advisor of a subordinated share of cash from sales or refinancing’s. |
• | In the event we list our stock for trading, the Advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds in an amount equal to 10% of the amount by which the market value of our common stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 7% less any prior payment to the Advisor of a subordinated share of cash from sales or refinancing’s. |
Dealer Manager Agreements
Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Prior Advisor, was the dealer manager for our initial and follow-on public offerings, prior to the suspension of our follow-on offering on April 29, 2011. As such, PCC was entitled to receive a sales commission of up to 7% of gross proceeds from sales in the primary offerings. PCC is also entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the primary offerings. PCC was also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales in the primary offerings. The 2011 Advisory Agreement required the Prior Advisor to reimburse us to the extent that offering expenses including sales commissions, dealer manager fees and organization and offering expenses (but excluding acquisition fees and acquisition expenses discussed above) were in excess of 13.5% of gross proceeds from our primary offerings. For the three months and nine months ended September 30, 2011, PCC earned sales commission and dealer manager fees of approximately $0.0 million and $1.6 million, respectively. Dealer manager fees and sales commissions paid to PCC are a cost of capital raised and, as such, are included as a reduction of additional paid in capital in the accompanying condensed consolidated balance sheets.
13. 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.
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14. Business Combinations
On January 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property, Forestview Manor, from 153 Parade Road, LLC a non-related party, for a purchase price of approximately $10.8 million. The acquisition was funded with our revolving credit facility from KeyBank National Association and with proceeds from our initial public offering.
On April 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property, Sunrise of Allentown, from an affiliate of Sunrise Senior Living, Inc., for $9.0 million. The property has been rebranded as Woodland Terrace at the Oaks at the Oaks Senior Living. The acquisition of Woodland Terrace at the Oaks was funded with proceeds from our public offerings and a mortgage loan from an unaffiliated lender, post-closing.
On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the campus of the Floyd Medical Center in Rome, Georgia. We contributed approximately $2.7 million of capital to acquire a 75% limited partnership interest in Rome LTH Partners, LP (“Rome LTH”). Cornerstone Private Equity Fund Operating Partnership, LP, an affiliate of our Prior Advisor, contributed approximately $0.5 million of capital to acquire a 15% limited partnership interest in Rome LTH. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.3 million to acquire an aggregate 9.5% limited partnership interest in Rome LTH. A fourth affiliate of the Cirrus Group acted as the general partner and held the remaining 0.5% in Rome LTH. In April 2012, we acquired the interest of Cornerstone Private Equity Fund Operating Partnership, LP and the Cirrus Group affiliates in Rome LTH for a total payment of approximately $5.2 million. As of September 30, 2012 and December 31, 2011, we owned a 100% and 75% limited partnership interest in Rome LTH. We began consolidating Rome LTH when we obtained control of this venture in April 2012.
On August 31, 2012, through wholly-owned subsidiaries, we invested approximately $49.5 million, to acquire an 80% interest in the Leah Bay joint venture from non-related parties. The joint venture owns four memory care facilities in Illinois and Texas (the “Leah Bay Portfolio”). The acquisition was funded with proceeds from our public offerings and mortgage loans from unaffiliated lenders.
As of September 30, 2012, the Leah Bay purchase price allocation to the fair value of assets acquired and liabilities assumed is not yet complete. Accounting and valuation activity that could impact the opening balance estimates shown below is expected to be complete by the end of 2012.
The following summary provides the allocation of the acquired assets and liabilities as of the acquisition date. We have accounted for the acquisitions as business combinations under U.S. GAAP. Under business combination accounting, the assets and liabilities of the acquired properties were recorded as of the acquisition date, at their respective fair values, and consolidated in our financial statements. The detail of the purchase price of the acquired property is set forth below:
Forestview Manor | Sunrise of Allentown | Rome LTACH Project | Leah Bay Portfolio | |||||||||||||
Land | $ | 1,320,000 | $ | 1,000,000 | $ | — | $ | 2,481,000 | ||||||||
Buildings & improvements | 6,803,000 | 6,395,000 | 17,800,000 | 41,364,000 | ||||||||||||
Site improvements | 1,040,000 | 350,000 | — | 1,539,000 | ||||||||||||
Furniture & fixtures | 350,000 | 220,000 | — | 1,199,000 | ||||||||||||
Intangible assets | 960,000 | 590,000 | 1,100,000 | 2,904,000 | ||||||||||||
Goodwill | 277,000 | 445,000 | — | — | ||||||||||||
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Real estate acquisition | $ | 10,750,000 | 9,000,000 | 18,900,000 | 49,487,000 | |||||||||||
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Acquisition expenses | $ | 160,000 | $ | 142,000 | $ | 182,000 | $ | 908,000 |
The following unaudited pro forma information for the three and nine months ended September 30, 2012 and 2011 have been prepared to reflect the incremental effect of the Forestview Manor, Sunrise of Allentown, Rome LTACH Project and the Leah Bay Portfolio acquisitions as if such acquisitions had occurred on January 1, 2011. We have not adjusted the proforma information for any items that may be directly attributable to the business combination or non-recurring in nature.
Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | |||||||
Revenues | $ | 14,532,000 | $ | 13,040,000 | ||||
Net (loss) income | $ | (81,000 | ) | $ | 114,000 | |||
Basic and diluted net (loss) income per common share attributable to common stockholders | $ | (0.01 | ) | $ | 0.01 |
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Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | |||||||
Revenues | $ | 42,920,000 | $ | 38,496,000 | ||||
Net income (loss) | $ | 1,341,000 | $ | (3,752,000 | ) | |||
Basic and diluted net income (loss) per common share attributable to common stockholders | $ | 0.10 | $ | (0.30 | ) |
The Company recorded revenues of $1.0 million and $2.8 million for the three and nine months ended September 30, 2011, respectively, and net loss of $0.3 million and $0.5 million for the three and nine months ended September 30, 2011 and revenues of $1.1 million and $3.1 million for the three and nine months ended September 30, 2012, respectively, and net income of $0.2 million and $0.1 million for the three and nine months ended September 30, 2012, respectively, for Forestview Manor.
The Company recorded revenues of $0.7 million and $1.3 million for the three and nine months ended September 30, 2011, respectively, and net loss of $0.1 million and $0.5 million for the three and nine months ended September 30, 2011 and revenues of $0.9 million and $2.4 million for the three and nine months ended September 30, 2012, respectively, and net loss of $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively, for Sunrise of Allentown.
The Company recorded revenues of $0.6 million and $1.2 million for the three and nine months ended September 30, 2012 and net income of $0.2 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, for the Rome LTACH Project. Prior to April of 2012, the Rome LTACH Project was being accounted for under the equity method.
The Company recorded revenues of $1.1 million and a net loss of $0.9 million for the three and nine months ended September 30, 2012, for the Leah Bay Portfolio.
15. Subsequent Events
On October 25, 2012, the Company completed a refinancing of the loan on the Carriage court of Hilliard with HUD. This loan has a thirty five year term with the rate of interest fixed at 2.8% and payments of principal on a 35 year amortization rate.
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16. Immaterial Corrections to Prior Period Financial Statements
Subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2011, the Company determined that it should have been accounting for certain investments in joint ventures on the equity method rather than by consolidating these investments. The Company reviewed the impact of these errors on the prior period financial statements and determined that the errors were not material to the financial statements. However, the Company has corrected the accompanying condensed consolidated financial statements and related footnotes to reflect these joint venture investments on the equity method of accounting.
A summary of the effects of the correction of these immaterial errors on our consolidated financial statements for the three and nine month periods ended September 30, 2011 and as of December 31, 2011 are presented in the tables below:
December 31, 2011 | ||||||||
As Previously Reported | As Corrected | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 28,258,000 | $ | 27,972,000 | ||||
Investments in real estate | ||||||||
Land | 21,270,000 | 20,713,000 | ||||||
Buildings and improvements, net | 114,584,000 | 100,687,000 | ||||||
Furniture, fixtures and equipment, net | 2,562,000 | 2,562,000 | ||||||
Construction in progress | 5,218,000 | — | ||||||
Intangible lease assets, net | 5,581,000 | 3,865,000 | ||||||
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Total | 149,215,000 | 127,827,000 | ||||||
Deferred financing costs, net | 1,121,000 | 824,000 | ||||||
Investments in unconsolidated entities | — | 3,387,000 | ||||||
Tenant and other receivables | 1,808,000 | 1,366,000 | ||||||
Deferred costs and other assets | 1,948,000 | 1,938,000 | ||||||
Restricted cash | 3,873,000 | 3,806,000 | ||||||
Goodwill | 5,965,000 | 5,965,000 | ||||||
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Total assets | $ | 192,188,000 | $ | 173,085,000 | ||||
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LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 100,059,000 | $ | 85,978,000 | ||||
Accounts payable and accrued liabilities | 7,683,000 | 3,899,000 | ||||||
Prepaid rent and security deposits | 1,740,000 | 1,535,000 | ||||||
Dividends payable | 814,000 | 814,000 | ||||||
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Total liabilities | 110,296,000 | 92,226,000 | ||||||
Stockholders’ equity (deficit): | ||||||||
Common stock | 129,000 | 129,000 | ||||||
Additional paid-in capital | 96,542,000 | 96,542,000 | ||||||
Accumulated deficit | (17,054,000 | ) | (17,054,000 | ) | ||||
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Total controlling stockholders’ equity (deficit) | 79,617,000 | 79,617,000 | ||||||
Noncontrolling interest | 2,275,000 | 1,242,000 | ||||||
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Total equity (deficit) | 81,892,000 | 80,859,000 | ||||||
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Total liabilities and equity | $ | 192,188,000 | $ | 173,085,000 | ||||
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2011 Three months ended September 30 | 2011 Nine months ended September 30 | |||||||||||||||
As Previously Reported | As Corrected | As Previously Reported | As Corrected | |||||||||||||
Revenues: | ||||||||||||||||
Rental revenues | $ | 8,458,000 | $ | 7,942,000 | $ | 24,389,000 | $ | 23,013,000 | ||||||||
Resident fees and services | 1,945,000 | 1,945,000 | 5,667,000 | 5,667,000 | ||||||||||||
Tenant reimbursements and other income | 433,000 | 362,000 | 1,064,000 | 876,000 | ||||||||||||
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10,836,000 | 10,249,000 | 31,120,000 | 29,556,000 | |||||||||||||
Expenses: | ||||||||||||||||
Property operating and maintenance expenses | 6,821,000 | 6,750,000 | 18,973,000 | 18,751,000 | ||||||||||||
General and administrative expenses | 1,240,000 | 1,243,000 | 3,201,000 | 3,201,000 | ||||||||||||
Asset management fees and expenses | 390,000 | 390,000 | 1,197,000 | 1,197,000 | ||||||||||||
Real estate acquisition costs and contingent consideration | 22,000 | 22,000 | 1,663,000 | 1,453,000 | ||||||||||||
Depreciation and amortization | 2,100,000 | 1,946,000 | 6,090,000 | 5,658,000 | ||||||||||||
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10,573,000 | 10,351,000 | 31,124,000 | 30,260,000 | |||||||||||||
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Income/(loss) from operations | 263,000 | (102,000 | ) | (4,000 | ) | (704,000 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Interest income | 4,000 | 4,000 | 10,000 | 10,000 | ||||||||||||
Interest expense | (1,640,000 | ) | (1,436,000 | ) | (4,719,000 | ) | (4,161,000 | ) | ||||||||
Equity in income from unconsolidated entities | — | 121,000 | — | 105,000 | ||||||||||||
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Net loss | (1,373,000 | ) | (1,413,000 | ) | (4,713,000 | ) | (4,750,000 | ) | ||||||||
Net income (loss) attributable to noncontrolling interests | 20,000 | (20,000 | ) | (29,000 | ) | (66,000 | ) | |||||||||
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Net loss attributable to common stockholders | $ | (1,393,000 | ) | $ | (1,393,000 | ) | $ | (4,684,000 | ) | $ | (4,684,000 | ) | ||||
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Basic and diluted net loss per common share attributable to common stockholders | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.37 | ) | $ | (0.37 | ) |
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2011 Nine Months ended September 30 | ||||||||
As Previously Reported | As Corrected | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (4,713,000 | ) | $ | (4,750,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Amortization of deferred financing costs | 414,000 | 321,000 | ||||||
Depreciation and amortization | 6,090,000 | 5,658,000 | ||||||
Straight-line rent amortization | (695,000 | ) | (375,000 | ) | ||||
Real estate earn out costs | 745,000 | 535,000 | ||||||
Equity loss from an unconsolidated entity | — | (121,000 | ) | |||||
Bad debt expense | — | — | ||||||
Change in operating assets/liabilities: | ||||||||
Tenant and other receivables | 440,000 | 180,000 | ||||||
Prepaid expenses and other assets | (1,030,000 | ) | (1,091,000 | ) | ||||
Restricted cash | (774,000 | ) | (774,000 | ) | ||||
Prepaid rent and security deposits | 763,000 | 737,000 | ||||||
Payable to related parties | (38,000 | ) | (38,000 | ) | ||||
Accounts payable and accrued liabilities | 2,403,000 | 2,509,000 | ||||||
Receivable from related parties | — | — | ||||||
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Net cash provided by operating activities | 3,605,000 | 2,791,000 | ||||||
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Cash flows from investing activities: | ||||||||
Real estate acquisitions | (19,751,000 | ) | (19,751,000 | ) | ||||
Additions to real estate | (342,000 | ) | (342,000 | ) | ||||
Payments for construction in progress | — | (471,000 | ) | |||||
Purchase of an interest in an unconsolidated entity | — | (896,000 | ) | |||||
Changes in Restricted cash | (98,000 | ) | (31,000 | ) | ||||
Development of real estate | (4,024,000 | ) | — | |||||
Acquisition deposits | 100,000 | 100,000 | ||||||
Distributions from unconsolidated joint ventures | — | 466,000 | ||||||
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Net cash used in investing activities | (24,115,000 | ) | (20,925,000 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 14,160,000 | 14,160,000 | ||||||
Redeemed shares | (1,891,000 | ) | (1,891,000 | ) | ||||
Proceeds from issuance of notes payable | 17,251,000 | 14,561,000 | ||||||
Repayment of notes payable | (584,000 | ) | (584,000 | ) | ||||
Payment of real estate earn out costs | (1,000,000 | ) | (1,000,000 | ) | ||||
Offering costs | (1,917,000 | ) | (1,917,000 | ) | ||||
Deferred financing costs | (324,000 | ) | (274,000 | ) | ||||
Distributions paid to stockholders | (3,950,000 | ) | (3,950,000 | ) | ||||
Distributions paid to noncontrolling interest | (133,000 | ) | — | |||||
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Net cash provided by financing activities | 21,612,000 | 19,105,000 | ||||||
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Net increase in cash and cash equivalents | 1,102,000 | 971,000 | ||||||
Cash and cash equivalents - beginning of period | 29,819,000 | 29,718,000 | ||||||
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Cash and cash equivalents - end of period | $ | 30,921,000 | $ | 30,689,000 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 4,226,000 | $ | 3,761,000 | ||||
Cash paid for income taxes | 509,000 | 509,000 | ||||||
Supplemental disclosure of non-cash financing and investing activities: | ||||||||
Distribution declared not paid | 817,000 | 817,000 | ||||||
Distribution reinvested | 1,484,000 | 1,484,000 | ||||||
Accrued real estate development costs | 1,404,000 | — | ||||||
Accrued promote monetization liability | 2,018,000 | — | ||||||
Deferred financing amortization capitalized to real estate development | 27,000 | — |
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2011 | ||||||||
As Previously Reported | As Corrected | |||||||
Retained Earnings (Accumulated Deficit) | ||||||||
Beginning of period – December 31, 2010 | $ | (11,722,000 | ) | $ | (11,722,000 | ) | ||
End of period – September 30, 2011 | (16,406,000 | ) | (16,406,000 | ) |
The Company notes that certain balances within the condensed consolidated statement of equity from December 31, 2010 and September 30, 2011 were corrected as a result of the correction of the immaterial error noted above. The noncontrolling interest balance at December 31, 2010 was reported as $2.8 million and has been adjusted to $1.7 million, which changed total equity from a reported balance of $82.8 million to an adjusted balance of $81.7 million. The noncontrolling interest balance at September 30, 2011 was reported as $2.6 million and has been adjusted to $1.6 million, which changed total equity from a reported balance of $84.3 million to an adjusted balance of $83.3 million. There were no other changes in the condensed consolidated statement of equity as a result of the correction of the above noted immaterial error.
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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. The 2011 financial information reflects the effects of the corrections described in Note 16, Immaterial Corrections to Prior Period financial statements included in Item 1. financial statements of 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, 2011 as filed with the SEC, and the risks identified in Part II, Item 1A of this quarterly report.
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:
• | Macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets. |
• | 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; |
• | 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 proposed 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, 2011 and this quarterly report on Form 10-Q. |
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 intend to invest the net proceeds from our offerings primarily in investment real estate including health care properties and other real estate related assets located in markets in the United States. As of September 30, 2012, we had raised approximately $127.0 million of gross proceeds from the sale of approximately 12.7 million shares of our common stock in our initial and follow-on public offerings.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee evaluation of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration was the hiring of a new dealer manager for our follow-on offering, however the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced.
Effective January 1, 2012, our business is managed by Sentio Investments, LLC (the “Advisor”), under the terms of the 2012 Advisory Agreement. Prior to January 1, 2012, Cornerstone Leveraged Realty Advisors, LLC was our advisor (the “Prior Advisor”) under the terms of the Company’s Advisory Agreement with the Prior Advisor (the “2011 Advisory Agreement”).
Our revenues, which are comprised largely of rental income, include rents reported on a straight-line basis over the initial term of the 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; (ii) maximize tenant recoveries given the underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market-specific, general economic and other conditions.
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Market Outlook — Real Estate and Real Estate Finance Markets
In recent years, both the national and most global economies have experienced substantially increased unemployment and a downturn in economic activity. 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. The Centers for Medicare and Medicaid Services estimates national health expenditures at 17.9% of GDP and projects that healthcare expenditures will increase at a rate of 4.2% in 2012, 3.8% in 2013, 7.4% in 2014 and an average of 6.2% from 2015 to 2019. The elderly are an important component of health care utilization, especially independent living services, assisted-living services, skilled nursing services, inpatient and outpatient hospital services and physician ambulatory care. The elderly population aged 65 and over is projected to increase to approximately 16% of the total population by 2019 from approximately 13% of the total population in 2009.
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, 2011, as filed with the SEC.
Results of Operations
As of September 30, 2012, 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.
We began accepting subscriptions for shares under our initial public offering on June 20, 2008. We purchased our first property in January 2009, and as of September 30, 2012, we owned 20 properties. These properties included fourteen assisted-living facilities which comprise our senior housing segment, one medical office building, which comprises our MOB segment, three operating healthcare facilities, which comprise our triple-net leased segment and one medical office building and one development healthcare facility held in unconsolidated entities. One of the senior living properties, Woodland Terrace at the Oaks, was acquired in April 2011 and four senior living properties, the Leah Bay portfolio, were acquired at the end of August 2012. Physicians Centre MOB, which is held in an unconsolidated entity, was acquired in April 2012. In April 2012, we also acquired our partners’ interests in the Rome LTACH investment, and as a result of the acquisition, the investment is consolidated in our September 30, 2012 condensed consolidated financial statements. The Rome LTACH investment is presented under the equity method in periods prior to the April 2012 acquisition. As of September 30, 2011, we owned 15 properties, including ten assisted-living facilities, one medical office building and four operating healthcare facilities including one development healthcare facility, held in an unconsolidated joint venture. Accordingly, the results of our operations for the three and nine months ended September 30, 2012 and 2011 are impacted by our acquisitions and consolidations that have occurred during the presented periods.
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Comparison of the Three Months Ended September 30, 2012 and 2011
Three Month Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) | ||||||||||||||||
Senior living operations | $ | 3,421,000 | $ | 2,568,000 | $ | 853,000 | 33 | % | ||||||||
Triple-net leased properties | 1,300,000 | 802,000 | 498,000 | 62 | % | |||||||||||
Medical office building | 195,000 | 129,000 | 66,000 | 51 | % | |||||||||||
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Total portfolio net operating income | $ | 4,916,000 | $ | 3,499,000 | $ | 1,417,000 | 41 | % | ||||||||
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Reconciliation to net loss: | ||||||||||||||||
Net operating income, as defined (1) | $ | 4,916,000 | $ | 3,499,000 | $ | 1,417,000 | 41 | % | ||||||||
Unallocated (expenses) income: | ||||||||||||||||
General and administrative expenses | (423,000 | ) | (1,243,000 | ) | (820,000 | ) | (66 | )% | ||||||||
Asset management fees and expenses | (559,000 | ) | (390,000 | ) | 169,000 | 43 | % | |||||||||
Real estate acquisitions costs and earn out costs | (1,016,000 | ) | (22,000 | ) | 994,000 | 4,518 | % | |||||||||
Depreciation and amortization | (1,689,000 | ) | (1,946,000 | ) | (257,000 | ) | (13 | )% | ||||||||
Interest income | 2,000 | 4,000 | (2,000 | ) | (50 | )% | ||||||||||
Interest expense | (1,790,000 | ) | (1,436,000 | ) | 354,000 | 25 | % | |||||||||
Equity in (loss) income from unconsolidated entities | (14,000 | ) | 121,000 | (107,000 | ) | (88 | )% | |||||||||
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Net loss | $ | (545,000 | ) | $ | (1,413,000 | ) | $ | 868,000 | 61 | % | ||||||
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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 three months ended September 30, 2012 increased to $3.3 million from $2.6 million for the three months ended September 30, 2011. The increase is primarily due to the acquisition and consolidation of the Leah Bay joint venture in August of 2012,
Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Senior Living Operations — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 6,910,000 | $ | 6,915,000 | $ | (5,000 | ) | (1 | )% | |||||||
Resident services and fee income | 3,655,000 | 1,945,000 | 1,710,000 | 88 | % | |||||||||||
Tenant reimbursement and other income | 15,000 | 73,000 | (58,000 | ) | (79 | )% | ||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (7,159,000 | ) | (6,365,000 | ) | 794,000 | 12 | % | |||||||||
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Total portfolio net operating income | $ | 3,421,000 | $ | 2,568,000 | $ | 853,000 | 33 | % | ||||||||
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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 increased to $1.3 million for the three months ended September 30, 2012 compared to $0.8 million for the three months ended September 30, 2011, due to the acquisition of a controlling interest in the Rome LTACH in April 2012. As a result of this acquisition, Rome LTACH operations are consolidated in our condensed consolidated financial statements and included in the operations of our triple-net leased segment for the three months ended September 30, 2012. In the comparable period of 2011, Rome LTACH was accounted for as an equity method investment and its operating results were not included in our triple-net leased properties segment.
Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 1,298,000 | $ | 826,000 | $ | 472,000 | 57 | % | ||||||||
Tenant reimbursement and other income | 222,000 | 234,000 | (12,000 | ) | (5 | )% | ||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (220,000 | ) | (258,000 | ) | (38,000 | ) | (15 | )% | ||||||||
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Total portfolio net operating income | $ | 1,300,000 | $ | 802,000 | $ | 498,000 | 62 | % | ||||||||
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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 months period ended September 30, 2012 of $0.2 million was favorably affected by a reduction in property taxes, compared to net operating income for the three months ended June 30, 201l.
Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Medical Office Buildings — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 214,000 | $ | 201,000 | $ | 13,000 | 6 | % | ||||||||
Tenant reimbursement and other income | 75,000 | 55,000 | 20,000 | 36 | % | |||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (94,000 | ) | (127,000 | ) | (33,000 | ) | (26 | )% | ||||||||
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Total portfolio net operating income | $ | 195,000 | $ | 129,000 | $ | 66,000 | 51 | % | ||||||||
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Unallocated (expenses) income
General and administrative expenses decreased to $0.4 million for the three months ended September 30, 2012 from $1.2 million for the three months ended September 30, 2011. The decrease was due to lower legal, other professional fees and board of director fees (approximately $0.6 million) and the elimination of reimbursement of direct or indirect costs of providing administrative services to the Prior Advisor (approximately $0.4 million). Direct and indirect expenses incurred by the Prior Advisor were reimbursed by the Company under the terms of that 2011 Advisory Agreement. The 2012 Advisory Agreement does not have such a provision. Legal, professional and board of director fees were higher in the third quarter of 2011 as a result of consideration of strategic alternatives in that period. These reductions in expenses were partially offset by higher recurring expenses in 2012, principally income taxes, tax services and insurance.
As a result of the change in calculation of asset management fees provided for in the 2012 Advisory Agreement, asset management fees for the three months ended September 30, 2012 and 2011 increased to $0.6 million from $0.4 million. Depreciation and amortization for the same periods decreased to $1.7 million from $1.9 million, as a result of lower in-place lease and tenant relationship amortization costs, partially offset by increases in depreciation of buildings, improvements and tenant improvements, resulting from acquisitions. In-place lease and tenant relationship costs, which relate to the allocation of the purchase price, were completely amortized in 2011 for several properties and partially offset by the in-place lease value assigned in the Leah Bay purchase price allocation. For the three months ended September 30, 2012 and 2011, real estate acquisition costs and earn out costs were $0.9 million and $0.1 million, respectively. Real estate acquisition costs in 2012 consisted primarily of costs associated with the acquisition of the Leah Bay Joint Venture and the minority interest in the Rome LTACH property, while 2011 real estate acquisition costs consisted of fees paid to the Prior Advisor for the acquisition of Woodland Terrace at the Oaks and
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upon the receipt of offering proceeds, acquisition costs paid directly to third-parties and, an earn out provision related to GreenTree at Westwood. A portion of the acquisition fees due to our Prior Advisor were paid upon receipt of offering proceeds and the balance was paid at the time of investment acquisition.
Interest expense for the three months ended September 30, 2012 increased to $1.8 million from $1.4 million for the three months ended September 30, 2011 principally due to higher debt levels associated with refinanced debt, and the acquisitions of the Rome LTACH and Leah Bay properties which were completed during the third quarter of 2012.
The loss from unconsolidated entities of approximately $14,000 for the three months ended September 30, 2012 was primarily due to the acquisition of the Physicians Centre MOB in April 2012 and consolidation of the Rome LTACH property in the same period. Third quarter 2011 income of approximately $0.1 million related to the operations of the Rome LTACH joint venture, in which we acquired a controlling interest in April 2012 and which, as a result, was consolidated in the 2012 period.
Comparison of the Nine months Ended September 30, 2012 and 2011
Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Net operating income, as defined (1) | ||||||||||||||||
Senior living operations | $ | 8,906,000 | $ | 7,875,000 | $ | 1,031,000 | 13 | % | ||||||||
Triple-net leased properties | 3,435,000 | 2,421,000 | 1,014,000 | 42 | % | |||||||||||
Medical office building | 627,000 | 509,000 | 118,000 | 23 | % | |||||||||||
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Total portfolio net operating income | $ | 12,968,000 | $ | 10,805,000 | $ | 2,163,000 | 20 | % | ||||||||
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Reconciliation to net loss: | ||||||||||||||||
Net operating income, as defined (1) | $ | 12,968,000 | $ | 10,805,000 | $ | 2,163,000 | 20 | % | ||||||||
Unallocated (expenses) income: | ||||||||||||||||
General and administrative expenses | (1,632,000 | ) | (3,201,000 | ) | (1,569,000 | ) | (49 | )% | ||||||||
Asset management fees and expenses | (1,543,000 | ) | (1,197,000 | ) | 346,000 | 29 | % | |||||||||
Real estate acquisitions costs and earn out costs | (1,229,000 | ) | (1,453,000 | ) | (224,000 | ) | 15 | % | ||||||||
Depreciation and amortization | (4,653,000 | ) | (5,658,000 | ) | (1,005,000 | ) | 18 | % | ||||||||
Interest income | 10,000 | 10,000 | (0 | ) | 0 | % | ||||||||||
Interest expense | (4,818,000 | ) | (4,161,000 | ) | 657,000 | 16 | % | |||||||||
Other income/expense | (151,000 | ) | 0 | 151,000 | 100 | % | ||||||||||
Equity in (loss) income from unconsolidated entities | (363,000 | ) | 105,000 | (468,000 | ) | (446 | )% | |||||||||
Fair value adjustment for equity method investment | 1,282,000 | 0 | 1,282,000 | 100 | % | |||||||||||
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Net loss | $ | (129,000 | ) | $ | (4,750,000 | ) | $ | 4,621,000 | 97 | % | ||||||
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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. |
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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 nine months ended September 30, 2012 increased to $8.8 million from $7.9 million for the nine months ended September 30, 2011. This increase is primarily due to lease up of a new memory care floor at Woodland Terrace, higher occupancy at Forestview Manor, the acquisition of the Leah Bay properties in August 2012 and rate and occupancy increases in the 2012 period.
Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Senior Living Operations — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 20,453,000 | $ | 19,983,000 | $ | 470,000 | 2 | % | ||||||||
Resident services and fee income | 8,243,000 | 5,667,000 | 2,576,000 | 45 | % | |||||||||||
Tenant reimbursement and other income | 294,000 | 248,000 | 46,000 | 19 | % | |||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (20,084,000 | ) | (18,023,000 | ) | 2,061,000 | 11 | % | |||||||||
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Total portfolio net operating income | $ | 8,906,000 | $ | 7,875,000 | $ | 1,031,000 | 13 | % | ||||||||
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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 increased to $3.4 million for the nine months ended September 30, 2012, compared to $2.4 million for the nine months ended September 30, 2011, due to the acquisition of a controlling interest in the Rome LTACH in April 2012. As a result of this acquisition, Rome LTACH operations are consolidated in our consolidated condensed financial statements and included in the operations of our triple-net leased segment for the nine months ended September 30, 2012. In the comparable period of 2011, Rome LTACH was presented as an equity method investment and its operating results were not included in our triple-net leased properties segment.
Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Triple-Net Leased Properties — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 3,436,000 | $ | 2,427,000 | $ | 1,009,000 | 42 | % | ||||||||
Tenant reimbursement and other income | 593,000 | 462,000 | 131,000 | 28 | % | |||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (594,000 | ) | (468,000 | ) | 126,000 | 27 | % | |||||||||
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Total portfolio net operating income | $ | 3,435,000 | $ | 2,421,000 | $ | 1,014,000 | 42 | % | ||||||||
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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 nine months ended September 30, 2012 was comparable to the nine months ended September 30, 2011.
Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Medical Office Buildings — Net operating income | ||||||||||||||||
Total revenues | ||||||||||||||||
Rental revenue | $ | 636,000 | $ | 603,000 | $ | 33,000 | 5 | % | ||||||||
Tenant reimbursement and other income | 234,000 | 166,000 | 68,000 | 41 | % | |||||||||||
Less: | ||||||||||||||||
Property operating and maintenance expenses | (243,000 | ) | (260,000 | ) | (17,000 | ) | (7 | )% | ||||||||
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Total portfolio net operating income | $ | 627,000 | $ | 509,000 | $ | 118,000 | 23 | % | ||||||||
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Unallocated (expenses) income
General and administrative expenses decreased to $1.6 million for the nine months ended September 30, 2012 from $3.2 million for the nine months ended September 30, 2011. The decrease was due to lower legal, other professional fees and board of director fees (approximately $0.6 million) and the elimination of direct or indirect costs of providing administrative services reimbursed to the Prior Advisor (approximately $0.8 million). Legal, professional and board of director fees were higher in the third quarter of 2011 as a result of consideration of strategic alternatives in that period. Direct and indirect expenses incurred by the Prior Advisor were reimbursed by the Company under the terms of that 2011 Advisory Agreement. The 2012 Advisory Agreement does not have such a provision. These reductions in expenses were partially offset by higher recurring expenses in 2012, principally income taxes, audit fees and insurance. The Company recognized a non recurring tax benefit in the second quarter of 2011, which decreased income tax expense.
As a result of the change in calculation of asset management fees provided for in the 2012 Advisory Agreement, asset management fees for the nine months ended September 30, 2012 increased to $1.5 million from $1.2 million for the comparable period of 2011. Depreciation and amortization for nine months ended September 30, 2012 decreased to $4.7 million from $5.7 million for the comparable period of 2011, as a result of lower in-place lease and tenant relationship amortization costs. These costs, which relate to the allocation of property purchase price, were completely amortized in 2011 for several properties, and partially offset by the in-place lease value assigned in the Leah Bay purchase price allocation.
For the nine months ended September 30, 2012 and 2011, real estate acquisition costs and contingent consideration were $1.1 million and $1.5 million, respectively. Real estate acquisition costs in 2012 consisted primarily of costs associated with the acquisition of the Rome LTACH minority interests and the Leah Bay joint venture, while 2011 real estate acquisition costs consisted of costs and fees associated with the acquisition of the Forestview and Woodland Terrace properties as well as acquisition fees advanced to the Prior Advisor on equity raised in the Company’s offering ($0.2 million), and an earn out provision related to GreenTree at Westwood ($0.7 million). A portion of the acquisition fees due to our Prior Advisor were paid upon receipt of offering proceeds and the balance was paid at the time of investment acquisition.
Interest expense for the nine months ended September 30, 2012 increased to $4.8 million from $4.2 million for the nine months ended September 30, 2011 principally due to higher debt levels associated with refinanced debt, the acquisition of a controlling interest in the Rome LTACH property and the acquisition of the Leah Bay joint venture which was completed during the third quarter of 2012.
Our equity interest in the Rome LTACH joint venture was revalued in connection with the acquisition of our partners’ joint venture interests resulting in a $1.3 million gain.
Loss from unconsolidated entities increased to $0.4 million for the nine months ended September 30, 2012 from income from an unconsolidated entity of $0.1 million in the comparable period of the prior year. The 2012 loss related primarily to the operations of the Physicians Centre MOB joint venture purchased in April 2012, while the 2011 income related to the operations of Rome LTACH joint venture in which we acquired a controlling interest in April 2012 and which, as a result, was consolidated in the second quarter of 2012.
Liquidity and Capital Resources
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with their consideration of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration was the hiring of a new dealer manager for our follow-on offering, however the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced, if at all. In addition to uncertainties associated with potentially engaging a new dealer manager and possibly restarting our public offering, financial markets continue to experience volatility and uncertainty. Our ability to fund property acquisitions or development projects, as well as our ability to repay or refinance debt maturities, could be adversely affected by an inability to successfully raise additional capital and to secure financing at reasonable terms, if at all.
We expect that primary sources of capital over the long-term will include net proceeds from the sale of our capital stock, debt financing, and net cash flows from operations. We expect that our primary uses of capital will be for property acquisitions, including promote monetization payments, for the payment of tenant improvements and capital improvements for the payment of operating expenses, including interest expense on any outstanding indebtedness, reducing outstanding indebtedness and for the payment of distributions.
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As of September 30, 2012, a total of approximately 12.7 million shares of our common stock had been sold in our initial and follow-on public offerings for aggregate gross proceeds of approximately $127.0 million. We intend to own our core plus properties with low to moderate levels of debt financing. We will incur moderate to high levels of indebtedness when acquiring our value-added and opportunistic 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 the value-added and opportunistic 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 value-added and opportunistic 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 plus 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 our public offering, debt financing, or a combination of the two 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.
As of September 30, 2012, we had approximately $21.7 million in cash and cash equivalents on hand. Our liquidity will increase if additional subscriptions for shares are accepted in our follow-on public offering and if refinancing results in excess loan proceeds and decrease as net offering proceeds are expended in connection with the acquisition, operation of properties and distributions made in excess of cash available from operating cash flows.
On November 19, 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution, to obtain a $25.0 million revolving credit facility (the “Facility”). In August 2011, the terms of the agreement were amended to convert the Facility from a revolving loan commitment to a term loan and reduced the maximum amount of the commitment from $25.0 million to $16.3 million. The amendment also changed the maturity date of the Facility from November 18, 2012 to July 31, 2012 (subject to one ninety-day extension option). On June 11, 2012, we entered into MultiFamily Loan and Securities Agreements (the “Loans”) with KeyCorp Real Estate Capital Markets, Inc., originated under Fannie Mae’s Delegated Underwriting and Servicing Product Line, to refinance five properties, including three of the properties previously on the facility. On August 14, 2012, the Company repaid the KeyBank credit facility with refinancing proceeds of a $5.6 million loan from KeyBank National Association.
We expect to have sufficient cash available from cash on hand and operations to fund capital improvements and principal payments due on our borrowings in the next twelve months. We expect to fund stockholder distributions from the excess of cash on hand and from the excess of 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.
We will not rely on advances from our Advisor to acquire properties but our Advisor and its affiliates may loan funds to special purposes entities that may acquire properties on our behalf pending our raising sufficient proceeds from our offerings to purchase the properties from the special purpose entity.
There may be a delay between the sale of our shares and the purchase of properties. During this period, our public offering net proceeds 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.
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Distributions
Through June 30, 2011, we made cash distributions to our stockholders at an annualized rate of 7.5%, based on a $10.00 per-share purchase price. On September 30, 2011, our board of directors resolved to lower our distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of $10.00) to more closely align distributions to funds available from operations at that date. The distribution rate was effective July 1, 2011. This distribution rate is expected to more closely align distributions to funds available from operations. Effective October 1, 2012, our board of directors declared distributions for daily record dates occurring in the fourth quarter of 2012 in amounts that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.475 per share (4.75% based on share price of $10.00). The rate and frequency of distributions is subject to the discretion of our board of directors and may change from time to time based on our operating results and cash flow.
Historically, we have used a portion of the proceeds from our distribution reinvestment plan for general corporate purposes, including capital expenditures on our real estate investments, tenant improvement costs and leasing costs related to our investments in real estate properties; reserves required by financings of our investments in real estate properties; and the repayment of debt. Because our distribution reinvestment plan was suspended on May 10, 2011, we will no longer have distribution reinvestment plan proceeds available for such general corporate purposes. Because such funds will not be available from the distribution reinvestment plan offering, we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions.
Distributions Declared | Cash Flow from Operations | |||||||||||||||
Period | Cash | Reinvested | Total | |||||||||||||
First quarter 2011 | $ | 1,152,000 | $ | 1,124,000 | $ | 2,276,000 | $ | 1,583,000 | ||||||||
Second quarter 2011 | 2,436,000 | — | 2,436,000 | 92,000 | ||||||||||||
Third quarter 2011 | 817,000 | — | 817,000 | 1,106 | ||||||||||||
First quarter 2012 | 801,000 | — | 801,000 | 1,544,000 | ||||||||||||
Second quarter 2012 | 799,000 | — | 799,000 | 2,374,000 | ||||||||||||
Third quarter 2012 | 807,000 | — | 807,000 | 3,530 |
From our inception through September 30, 2012, we had declared aggregate distributions of $17.0 million and our cumulative net loss during the same period was $17.3 million.
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 September 30, 2012, we had approximately $31.1 million of variable rate debt, the majority of which is at a rate tied to the 3-month LIBOR. A 1.0% change in 3-Month LIBOR would result in a change in annual interest expense of approximately $0.3 million per year. Our interest rate risk management objectives will be to monitor and manage the impact of interest rate changes on earnings and cash flows by using 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 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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Item 1A. | Risk Factors |
The following risk supplements the risks disclosed in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2011.
We have paid, and may in the future pay, distributions from sources other than cash provided from operations.
Until proceeds from our offerings are invested and generating operating cash flow sufficient to support distributions to stockholders, we may pay a portion of our distributions from the proceeds of our offerings or from borrowings in anticipation of future cash flow. Our organizational documents do not limit the amount of distributions we can fund from sources other than from operating cash flow. To the extent that we use offering proceeds to fund distributions to stockholders, the amount of cash available for investment in properties will be reduced. For the four quarters ended September 30, 2012, our cash flow from operations was approximately $8.5 million. During that period we paid distributions to investors of approximately $3.2 million, all of which was paid to investors in cash.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | We did not sell any equity securities that we did not register under the Securities Act of 1933 during the period covered by this Form 10-Q. |
(b) | On August 10, 2007, our Registration Statement on Form S-11 (File No. 333-139704), covering a public offering of up to 40,000,000 shares of common stock for an aggregate offering amount of $400.0 million, was declared effective under the Securities Act of 1933 (the “IPO”). We stopped making offers under our IPO on February 3, 2011 after raising gross offering proceeds of approximately $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan. On February 4, 2011, our Registration Statement on Form S-11 (File No. 333-168013), covering a public offering of up to 55,000,000 shares of our common stock for an aggregate offering amount of $550.0 million, was declared effective under the Securities Act of 1933 (the “Follow-on Offering”). The Follow-on Offering has not terminated yet although as of September 30, 2012 we had suspended sales pursuant to this offering. As of September 30, 2012, we had sold an aggregate of 12.7 million shares of common stock in our IPO and the Follow-on Offering and raised aggregate gross proceeds of $127.0 million. From this amount, we incurred $12.3 million in selling commissions and dealer manager fees payable to our dealer manager and $4.2 million in acquisition fees payable to the Prior Advisor. As of March 31, 2011, we had also incurred organizational and offering costs related to the IPO and the Follow-on Offering totaling $5.1 million. We had acquired 18 properties and two investments that are unconsolidated entities as of September 30, 2012. |
(c) | During the nine months ended September 30, 2012, we repurchased shares pursuant to our stock repurchase program as follows: |
Period | Total Number of Shares Redeemed | Average Price Paid per Share | ||||||
January | 33,008 | $ | 9.98 | |||||
February | — | $ | — | |||||
March | — | $ | — | |||||
April | 9,203 | $ | 9.00 | |||||
May | 17,582 | $ | 9.00 | |||||
June | — | $ | — | |||||
July | — | $ | — | |||||
August | 3,000 | $ | 9.00 | |||||
September | 13,500 | $ | 9.00 | |||||
|
| |||||||
76,293 | ||||||||
|
|
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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 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s current report on Form 8-K filed January 25, 2012). | |
3.3 | Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated January 25, 2012 (incorporated by reference to Exhibit 3.2 to the Registrant’s current report on Form 8-K filed January 25, 2012). | |
4.1 | Subscription Agreement (incorporated by reference to Appendix A to the Registrant’s prospectus filed on February 7, 2011). | |
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 | Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on February 7, 2011). | |
10.1 | Second Amendment dated as of July 25, 2012 to Purchase and Sale Agreement dated as of May 7, 2012 by and among Sentio Leah Bay, LLC, as Buyer, and Urbana Care Group LLC, Springfield Care Group LLC, Bryan Care Group, LP and Erwin Family Properties I, L.L.C., as Seller, and Fidelity National Title Agency, Inc., as Escrow Agent. | |
10.2 | Limited Liability Company Agreement of Sentio Leah Bay Portfolio, LLC, a Delaware limited liability company, by and between Sentio Leah Bay, LLC, a Delaware limited liability company, as a member and Erwin Family Properties I, LLC, a Washington limited liability company, as a member, dated August 31, 2012. | |
10.3 | Limited Liability Company Agreement of Sentio Leah Bay TRS Portfolio, LLC, a Delaware limited liability company, by and between Sentio Leah Bay TRS, LLC, a Delaware limited liability company, as a member and Erwin Family Properties I, LLC, a Washington limited liability company, as a member, dated August 31, 2012. | |
10.4 | Assumption and Release Agreement dated August 31, 2012 by and among Urbana Care Group, LLC, Craig Spaulding, Amber Glenn Landlord, LLC and Jerry Erwin Associates, Inc., with Schedule disclosing other essentially similar Assumption and Release Agreements. | |
10.5 | Subordination, Assignment and Security Agreement August 31, 2012 by and between Amber Glenn Landlord, LLC, Fannie Mae, Amber Glenn TRS, LLC and Jerry Erwin Associates, Inc., with Schedule disclosing other essentially similar Subordination, Assignment and Security Agreements. | |
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. |
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Ex. | Description | |
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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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 14th day of November 2012.
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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