Chief financial officer
2016 Highlights and Accomplishments
- Completed fourth quarter and 2016 property acquisitions totaling approximately
$72.3 millionand $514.1 million, respectively, based on aggregate contract purchase price. As of Dec. 31, 2016, the company had completed the acquisition of a diversified portfolio of medical office buildings, hospitals, senior housing facilities, skilled nursing facilities, integrated senior health campuses and real estate-related investments for an aggregate contract purchase price of approximately $2.9 billion.
- The company declared and paid daily distributions equal to an annualized rate of 6.0 percent to stockholders of record, based upon a
$10.00per share purchase price, from Jan. 1 to Dec. 31, 2016.
Feb. 3, 2016, the company entered into credit facilities totaling $500 millionwith Bank of America, N.A., KeyBank, National Association, and other financial institutions. The credit facilities are comprised of a revolving line of credit with an aggregate maximum principal amount of $300 millionand a term loan credit facility in the maximum principal amount of $200 million. The maximum principal amount of the credit facilities may be increased up to $1 billionin the aggregate upon meeting certain conditions.
Oct. 5, 2016, the company's board of directors unanimously approved and established an estimated per share net asset value, or NAV, of our common stock of $9.01. Consistent with the Investment Program Association's, or IPA, practice guideline regarding valuations of publicly registered non-listed REITs, the valuation upon which the NAV was based does not include a portfolio premium that may accrue in a typical real estate valuation process conducted for transaction purposes, nor does it reflect an enterprise value. Changes to the company's distribution reinvestment plan and share repurchase plan were implemented as a result of the determination of the estimated per share NAV. Please refer to the company's Current Report on Form 8-K filed with the U.S. Securities and Exchange Commissionon Oct. 7, 2016for more information.
- As of
Dec. 31, 2016, the company's non-RIDEA2 property portfolio achieved a leased percentage of 94.4 percent and weighted average remaining lease term of 8.9 years. The company's portfolio of senior housing — RIDEA facilities and integrated senior health campuses achieved a leased percentage of 86.1 percent and 87.3 percent, respectively, for the 12 months ended Dec. 31, 2016. Portfolio leverage3 was 41.7 percent.
- Modified funds from operations, as defined by the IPA, attributable to controlling interest, or MFFO, equaled approximately
$96.5 millionfor the year ended Dec. 31, 2016, representing growth in excess of 159.2 percent compared to MFFO of approximately $37.2 millionfor the year ended Dec. 31, 2015. MFFO during the fourth quarter 2016 equaled approximately $24.2 million, representing an 86.4 percent growth compared to MFFO of approximately $13.0 millionduring the same period in 2015. Funds from operations, as defined by the National Association of Real Estate Investment Trusts, or NAREIT, attributable to controlling interest, or FFO, equaled approximately $62.9 millionfor the year ended Dec. 31, 2016, as compared to approximately $(30.8) millionfor the year ended Dec. 31, 2015. FFO equaled approximately $15.3 millionduring the fourth quarter 2016 compared to fourth quarter 2015 FFO of approximately $(22.2) million. Year-over-year growth in MFFO is primarily due to the acquisition of additional properties. (Please see financial reconciliation tables and notes at the end of this release for more information regarding MFFO attributable to controlling interest and FFO attributable to controlling interest.)
- Net loss for the year ended
Dec. 31, 2016was approximately $(203.9) million, as compared to net loss of $(115.0) millionfor the year ended Dec. 31, 2015. Net loss during the fourth quarter 2016 equaled approximately $(48.6) million, compared with net loss during the fourth quarter 2015 of approximately $(76.2) million. Net loss is due largely to depreciation and amortization expense of our properties, a non-cash item, in accordance with accounting principles generally accepted in the United States of America, or GAAP. (Please see financial reconciliation tables and notes at the end of this release for more information regarding net loss.)
- Net operating income, or NOI, totaled approximately
$195.0 millionfor the year ended Dec. 31, 2016, representing an increase of approximately 224.3 percent compared to NOI of approximately $60.1 millionfor the year ended Dec. 31, 2015. NOI during the fourth quarter 2016 equaled approximately $46.6 million, an increase of approximately 87.4 percent compared to fourth quarter 2015 NOI of approximately $24.9 million. (Please see financial reconciliation tables and notes at the end of this release for more information regarding NOI.)
Jan. 18, 2017, the company completed the acquisition of an assisted living facility in Huntersville, North Carolinafor a contract purchase price of $15 million, which was added to the company's existing North Carolina Assisted Living Facility Portfolio. The other four buildings in the portfolio were acquired in Jan. 2015and June 2015.
- Additionally, on
Feb. 1, 2017, the company, through a majority-owned subsidiary of Trilogy Healthcare Investors, of which the company owned approximately 67.7 percent at the time of acquisition, acquired the real estate underlying six previously leased integrated senior health campuses located in Indiana, Kentuckyand Ohio. The aggregate contract purchase price of these properties was $72.2 million.
Based on aggregate contract purchase price of real estate and real estate-related investments, including development projects, as of
The operation of healthcare-related facilities utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 is commonly referred to as a "RIDEA" structure.
Total debt, excluding capital lease obligations, divided by total assets.
FINANCIAL TABLES AND NOTES FOLLOW
CONSOLIDATED BALANCE SHEETS
Real estate investments, net
Real estate notes receivable and debt security investment, net
Cash and cash equivalents
Accounts and other receivables, net
Real estate deposits
Identified intangible assets, net
Other assets, net
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgage loans payable, net
Lines of credit and term loan
Accounts payable and accrued liabilities
Accounts payable due to affiliates
Identified intangible liabilities, net
Capital lease obligations
Security deposits, prepaid rent and other liabilities
Commitments and contingencies
Redeemable noncontrolling interests
Additional paid-in capital
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities, redeemable noncontrolling interests and equity
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended
Resident fees and services
Real estate revenue
Property operating expenses
General and administrative
Acquisition related expenses
Depreciation and amortization
Loss from operations
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt discount/premium)
Gain in fair value of derivative financial instruments
Foreign currency loss
Interest and other income
Loss from unconsolidated entities
Loss before income taxes
Income tax expense
Less: net loss attributable to noncontrolling interests
Net loss attributable to controlling interest
Net loss per common share attributable to controlling interest — basic and diluted
Weighted average number of common shares outstanding — basic and diluted
Other comprehensive loss:
Foreign currency translation adjustments
Total other comprehensive loss
Less: comprehensive loss attributable to noncontrolling interests
Comprehensive loss attributable to controlling interest
NET OPERATING INCOME RECONCILIATION
For the Three Months and Years Ended
NOI is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense, foreign currency loss, interest and other income, loss from unconsolidated entities and income tax expense. Acquisition fees and expenses are paid in cash by us, and we have not set aside cash on hand to be used to fund acquisition fees and expenses. The purchase of real estate and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate operating revenues and cash flows to make distributions to our stockholders. Acquisition fees and expenses include payments to our advisor or its affiliates and third parties. Such fees and expenses are not reimbursed by our advisor or its affiliates and third parties, and therefore, if there is no further cash on hand to fund future acquisition fees and expenses, such fees and expenses will need to be paid from additional debt. As a result, the amount of proceeds available for investment, operations and non-operating expenses would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from cash on hand. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.
NOI is not equivalent to our net income (loss) or income (loss) from continuing operations as determined under GAAP and may not be a useful measure in measuring operational income or cash flows. Furthermore, NOI is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. NOI should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. Investors are also cautioned that NOI should only be used to assess our operational performance in periods in which we have not incurred or accrued any acquisition related expenses.
We believe that NOI is an appropriate supplemental performance measure to reflect the operating performance of our operating assets because NOI excludes certain items that are not associated with the management of the properties. We believe that NOI is a widely accepted measure of comparative operating performance in the real estate community. However, our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.
To facilitate understanding of this financial measure, the following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to NOI for the three months and years ended
Three Months Ended
General and administrative
Acquisition related expenses
Depreciation and amortization
Foreign currency loss
Interest and other income
Loss from unconsolidated entities
Income tax expense
Net operating income
FFO AND MFFO RECONCILIATION
For the Three Months and Years Ended
Due to certain unique operating characteristics of real estate companies, NAREIT, an industry trade group, has promulgated a measure known as funds from operations, a non-GAAP measure, which we believe is an appropriate supplemental performance measure to reflect the operating performance of a REIT. The use of funds from operations is recommended by the REIT industry as a supplemental performance measure, and our management uses FFO to evaluate our performance over time. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on funds from operations approved by the
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which is the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. In addition, we believe it is appropriate to exclude impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. Testing for an impairment of an asset is a continuous process and is analyzed on a quarterly basis. If certain impairment indications exist in an asset, and if the asset's carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property and any other ancillary cash flows at a property or group level under GAAP) from such asset, an impairment charge would be recognized. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a further understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, which may not be immediately apparent from net income (loss).
However, FFO and MFFO as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting rules under GAAP that were put into effect and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed as operating expenses under GAAP. We believe these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We have used the proceeds raised in our initial offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets or another similar transaction) within five years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA, an industry trade group, has standardized a measure known as modified funds from operations, which the IPA has recommended as a supplemental performance measure for publicly registered, non-listed REITs and which we believe to be another appropriate supplemental performance measure to reflect the operating performance of a publicly registered, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering stage has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering stage and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering stage has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in
Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses (which include gains and losses on contingent consideration), amortization of above- and below-market leases, amortization of loan and closing costs, change in deferred rent receivables, fair value adjustments of derivative financial instruments, gains or losses on foreign currency transactions, fair value adjustment to investments in unconsolidated entities and the adjustments of such items related to unconsolidated properties and noncontrolling interests. The other adjustments included in the IPA's Practice Guideline are not applicable to us for the three months and years ended
Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence, that the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our initial offering and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate funds from operations and modified funds from operations the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.
The following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three months and years ended
Three Months Ended
Depreciation and amortization — consolidated properties
Depreciation and amortization — unconsolidated properties
Net loss attributable to redeemable noncontrolling interests and noncontrolling interests
Depreciation and amortization related to redeemable noncontrolling interests and noncontrolling interests
FFO attributable to controlling interest
Acquisition related expenses(1)
Amortization of above- and below-market leases(2)
Amortization of loan and closing costs(3)
Change in deferred rent receivables(4)
Gain in fair value of derivative financial instruments(5)
Foreign currency loss(6)
Fair value adjustment to investments in unconsolidated entities(7)
Adjustments for unconsolidated properties(8)
Adjustments for redeemable noncontrolling interests and noncontrolling interests(8)
MFFO attributable to controlling interest
Weighted average common shares outstanding — basic and diluted
Net loss per common share — basic and diluted
FFO attributable to controlling interest per common share — basic and diluted
MFFO attributable to controlling interest per common share — basic and diluted
In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition related expenses, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or its affiliates and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.
Under GAAP, above- and below-market leases are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, we believe that by excluding charges relating to the amortization of above- and below-market leases, MFFO may provide useful supplemental information on the performance of the real estate.
Under GAAP, direct loan and closing costs are amortized over the term of our notes receivable and debt security investment as an adjustment to the yield on our notes receivable or debt security investment. This may result in income recognition that is different than the contractual cash flows under our notes receivable and debt security investment. By adjusting for the amortization of the loan and closing costs related to our real estate notes receivable and debt security investment, MFFO may provide useful supplemental information on the realized economic impact of our notes receivable and debt security investment terms, providing insight on the expected contractual cash flows of such notes receivable and debt security investment, and aligns results with our analysis of operating performance.
Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns results with our analysis of operating performance.
Under GAAP, we are required to record our derivative financial instruments at fair value at each reporting period. We believe that adjusting for the change in fair value of our derivative financial instruments is appropriate because such adjustments may not be reflective of on-going operations and reflect unrealized impacts on value based only on then current market conditions, although they may be based upon general market conditions. The need to reflect the change in fair value of our derivative financial instruments is a continuous process and is analyzed on a quarterly basis in accordance with GAAP.
We believe that adjusting for the change in foreign currency exchange rates provides useful information because such adjustments may not be reflective of on-going operations.
Includes impairment of one of our investments in unconsolidated entities, which resulted from a measurable decrease in the fair value of the real estate operations of such entity.
Includes all adjustments to eliminate the unconsolidated properties' share or redeemable noncontrolling interests and noncontrolling interests' share, as applicable, of the adjustments described in Notes (1) – (7) to convert our FFO to MFFO.
*Includes the property information related to interests held in certain joint ventures.
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