e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number:
333-133652
NNN Healthcare/Office REIT,
Inc.
(Exact name of registrant as
specified in its charter)
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Maryland
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20-4738467
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1551 N. Tustin Avenue, Suite 200
Santa Ana, California
(Address of principal executive
offices)
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92705
(Zip Code)
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(714) 667-8252
(Registrants telephone
number, including area code)
N/A
(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 Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
o Accelerated
filer
o Non-accelerated
filer
þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of October 31, 2007, there were 18,272,625 shares
of common stock of NNN Healthcare/Office REIT, Inc. outstanding.
NNN
Healthcare/Office REIT, Inc.
(A Maryland Corporation)
TABLE OF
CONTENTS
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Financial Statements
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2
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Condensed Consolidated Balance Sheets as of
September 30, 2007 (Unaudited) and December 31, 2006
(Unaudited)
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2
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Condensed Consolidated Statements of Operations
for the Three Months Ended September 30, 2007 and 2006
(Unaudited), for the Nine Months Ended September 30, 2007
(Unaudited) and for the Period from April 28, 2006 (Date of
Inception) through September 30, 2006 (Unaudited)
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3
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Condensed Consolidated Statement of
Stockholders Equity (Deficit) for the Nine Months Ended
September 30, 2007 (Unaudited)
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4
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Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2007 (Unaudited)
and for the Period from April 28, 2006 (Date of Inception)
through September 30, 2006 (Unaudited)
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5
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Notes to Condensed Consolidated Financial
Statements (Unaudited)
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6
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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31
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Quantitative and Qualitative Disclosures About
Market Risk
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47
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Controls and Procedures
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47
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Controls and Procedures
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47
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Legal Proceedings
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49
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Risk Factors
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49
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Unregistered Sales of Equity Securities and Use
of Proceeds
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49
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Defaults Upon Senior Securities
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49
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Submission of Matters to a Vote of Security
Holders
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49
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Other Information
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49
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Exhibits
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49
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50
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EXHIBIT 31.1 |
EXHIBIT 31.2 |
EXHIBIT 32.1 |
EXHIBIT 32.2 |
1
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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NNN
Healthcare/Office REIT, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2007 and December 31, 2006
(Unaudited)
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September 30, 2007
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December 31, 2006
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ASSETS
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Real estate investments:
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Operating properties, net
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$
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248,066,000
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$
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Cash and cash equivalents
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4,512,000
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202,000
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Accounts and other receivable, net
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1,419,000
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Restricted cash
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4,875,000
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Identified intangible assets, net
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41,232,000
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Other assets, net
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2,981,000
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183,000
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Total assets
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$
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303,085,000
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$
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385,000
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LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY
(DEFICIT)
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Liabilities:
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Mortgage loan payables, net
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$
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123,331,000
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$
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Line of credit
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35,700,000
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Accounts payable and accrued liabilities
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5,720,000
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62,000
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Accounts payable due to affiliates, net
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1,890,000
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312,000
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Security deposits and prepaid rent
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617,000
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Identified intangible liabilities, net
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1,315,000
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Total liabilities
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168,573,000
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374,000
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Commitments and contingencies (Note 9)
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Minority interest of limited partner in Operating Partnership
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200,000
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200,000
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Stockholders equity (deficit):
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Preferred stock, $0.01 par value; 200,000,000 shares
authorized; none issued and outstanding
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Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 15,984,067 and 20,200 shares issued and
outstanding as of September 30, 2007 and December 31,
2006, respectively
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160,000
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Additional paid-in capital
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141,868,000
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53,000
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Accumulated deficit
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(7,716,000
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)
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(242,000
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)
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Total stockholders equity (deficit)
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134,312,000
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(189,000
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)
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Total liabilities, minority interest and stockholders
equity (deficit)
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$
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303,085,000
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$
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385,000
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
NNN
Healthcare/Office REIT, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2007 and 2006, for
the
Nine Months Ended September 30, 2007 and for the
Period from April 28, 2006 (Date of Inception) through
September 30, 2006
(Unaudited)
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Period from
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April 28, 2006
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(Date of
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Nine Months
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Inception)
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Three Months Ended
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Ended
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through
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September 30,
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Revenues:
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Rental income
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$
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4,787,000
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$
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$
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8,711,000
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$
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Expenses:
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Rental expenses
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1,562,000
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3,065,000
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General and administrative
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935,000
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50,000
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1,957,000
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50,000
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Depreciation and amortization
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3,048,000
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5,252,000
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Total expenses
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5,545,000
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50,000
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10,274,000
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50,000
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Loss before other income (expense)
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(758,000
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)
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(50,000
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)
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(1,563,000
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)
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(50,000
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)
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Other income (expense):
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Interest expense (including amortization of deferred financing
costs and debt discount):
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Interest expense related to note payables to affiliate
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(7,000
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)
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(84,000
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)
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Interest expense related to mortgage loan payables and line of
credit
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(1,279,000
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)
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(2,218,000
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)
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Interest and dividend income
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111,000
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196,000
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Net loss
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$
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(1,933,000
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)
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$
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(50,000
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)
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$
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(3,669,000
|
)
|
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$
|
(50,000
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)
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Net loss per share basic and diluted
|
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$
|
(0.15
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)
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$
|
(88.84
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)
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$
|
(0.53
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)
|
|
$
|
(141.88
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)
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|
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Weighted-average number of shares
outstanding basic and diluted
|
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13,223,746
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|
|
559
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|
|
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6,939,820
|
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|
350
|
|
|
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|
|
|
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|
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|
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Distributions declared per common share
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0.18
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0.52
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|
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
NNN
Healthcare/Office REIT, Inc.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2007
(Unaudited)
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Common Stock
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Total
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Number of
|
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Additional
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Preferred
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Accumulated
|
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Stockholders
|
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Shares
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Amount
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Paid-In Capital
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Stock
|
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Deficit
|
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Equity (Deficit)
|
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BALANCE December 31, 2006
|
|
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20,200
|
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$
|
|
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$
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53,000
|
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$
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$
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(242,000
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)
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$
|
(189,000
|
)
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Issuance of common stock
|
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15,813,538
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159,000
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157,796,000
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157,955,000
|
|
Issuance of vested and nonvested
restricted common stock
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|
17,500
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35,000
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35,000
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Offering costs
|
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(17,319,000
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)
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|
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(17,319,000
|
)
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Amortization of nonvested common stock compensation
|
|
|
|
|
|
|
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42,000
|
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
Issuance of common stock under the
DRIP
|
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|
132,829
|
|
|
|
1,000
|
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|
1,261,000
|
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|
|
|
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|
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|
1,262,000
|
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Distributions
|
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|
|
|
|
|
|
|
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|
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|
|
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(3,805,000
|
)
|
|
|
(3,805,000
|
)
|
Net loss
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(3,669,000
|
)
|
|
|
(3,669,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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BALANCE September 30, 2007
|
|
|
15,984,067
|
|
|
$
|
160,000
|
|
|
$
|
141,868,000
|
|
|
$
|
|
|
|
$
|
(7,716,000
|
)
|
|
$
|
134,312,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
NNN
Healthcare/Office REIT, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and for the
Period
from April 28, 2006 (Date of Inception) through
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from April 28, 2006
|
|
|
|
Nine Months Ended
|
|
|
(Date of Inception) through
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,669,000
|
)
|
|
$
|
(50,000
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization (including deferred financing
costs, above/below market leases and debt discount)
|
|
|
5,534,000
|
|
|
|
|
|
Stock based compensation, net of forfeitures
|
|
|
77,000
|
|
|
|
31,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other receivable, net
|
|
|
(723,000
|
)
|
|
|
|
|
Other assets
|
|
|
(768,000
|
)
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
2,804,000
|
|
|
|
19,000
|
|
Accounts payable due to affiliates, net
|
|
|
379,000
|
|
|
|
|
|
Prepaid rent
|
|
|
(671,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,963,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisition of real estate operating properties
|
|
|
(253,574,000
|
)
|
|
|
|
|
Capital expenditures
|
|
|
(61,000
|
)
|
|
|
|
|
Restricted cash
|
|
|
(4,875,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(258,510,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings on mortgage loan payables
|
|
|
86,310,000
|
|
|
|
|
|
Borrowings on unsecured note payables to affiliate
|
|
|
19,900,000
|
|
|
|
|
|
Borrowings under the line of credit, net
|
|
|
35,700,000
|
|
|
|
|
|
Payments on mortgage loan payables
|
|
|
(19,921,000
|
)
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
157,281,000
|
|
|
|
2,000
|
|
Minority interest contributions to our Operating Partnership
|
|
|
|
|
|
|
200,000
|
|
Security deposits
|
|
|
23,000
|
|
|
|
|
|
Deferred financing costs
|
|
|
(1,668,000
|
)
|
|
|
|
|
Payment of offering costs
|
|
|
(16,130,000
|
)
|
|
|
|
|
Distributions
|
|
|
(1,638,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
259,857,000
|
|
|
|
202,000
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
4,310,000
|
|
|
|
202,000
|
|
CASH AND CASH EQUIVALENTS - Beginning of period
|
|
|
202,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - End of period
|
|
$
|
4,512,000
|
|
|
$
|
202,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,927,000
|
|
|
$
|
|
|
Income taxes
|
|
$
|
2,000
|
|
|
$
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
260,000
|
|
|
$
|
|
|
The following represents the increase in certain assets and
liabilities in connection with our acquisitions of operating
properties:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
610,000
|
|
|
$
|
|
|
Mortgage loan payables
|
|
$
|
37,039,000
|
|
|
$
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,771,000
|
|
|
$
|
|
|
Accounts payable due to affiliates, net
|
|
$
|
9,000
|
|
|
$
|
|
|
Security deposits and prepaid rent
|
|
$
|
1,182,000
|
|
|
$
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock under the DRIP
|
|
$
|
1,262,000
|
|
|
$
|
|
|
Distributions declared but not paid
|
|
$
|
905,000
|
|
|
$
|
|
|
Accrued offering costs
|
|
$
|
1,189,000
|
|
|
$
|
|
|
Receivable from transfer agent for issuance of common stock
|
|
$
|
674,000
|
|
|
$
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NNN
Healthcare/Office REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The use of the words we, us or
our refers to NNN Healthcare/Office REIT, Inc. and
our subsidiaries, including NNN Healthcare/Office REIT Holdings,
L.P., except where the context otherwise requires.
|
|
1.
|
Organization
and Description of Business
|
NNN Healthcare/Office REIT, Inc., a Maryland corporation, was
incorporated on April 20, 2006. We were initially
capitalized on April 28, 2006, and therefore we consider
that our date of inception. We intend to provide investors the
potential for income and growth through investment in a
diversified portfolio of real estate properties, focusing
primarily on medical office buildings, healthcare-related
facilities and quality commercial office properties that produce
current income. We may also invest in real estate related
securities. We intend to qualify as a real estate investment
trust, or REIT, for federal income tax purposes for our taxable
year ending December 31, 2007.
We are conducting a best efforts initial public offering, or our
Offering, in which we are offering a minimum of
200,000 shares of our common stock aggregating at least
$2,000,000, or the minimum offering, and a maximum of
200,000,000 shares of our common stock for $10.00 per share
and 21,052,632 shares of our common stock pursuant to our
distribution reinvestment plan, or the DRIP, at $9.50 per share,
aggregating up to $2,200,000,000, or the maximum offering.
Shares purchased by our executive officers and directors, by NNN
Capital Corp., or our Dealer Manager, by NNN Healthcare/Office
REIT Advisor, LLC, or our Advisor, or by its affiliates did not
count towards the minimum offering. As of October 31, 2007,
we had received and accepted subscriptions in our Offering for
18,059,074 shares of our common stock, or $180,368,000,
excluding shares issued under the DRIP.
We conduct substantially all of our operations through NNN
Healthcare/Office REIT Holdings, L.P., or our Operating
Partnership. We are externally advised by our Advisor, pursuant
to an advisory agreement, or the Advisory Agreement, between us,
our Advisor and Triple Net Properties, LLC, or Triple Net
Properties, who is the managing member of our Advisor. The
Advisory Agreement had a one-year term that expired on
September 19, 2007 and was subject to successive one-year
renewals upon the mutual consent of the parties. On
September 18, 2007, our board of directors extended the
Advisory Agreement on a month-to-month basis. On
October 24, 2007, our board of directors authorized the
renewal, for a term of one year ending on October 24, 2008,
of our Advisory Agreement. Our Advisor supervises and manages
our day-to-day operations and selects the properties and
securities we acquire, subject to oversight by our board of
directors. Our Advisor also provides marketing, sales and client
services on our behalf. Our Advisor is affiliated with us in
that we and our Advisor have common officers, some of whom also
own an indirect equity interest in our Advisor. Our Advisor
engages affiliated entities, including Triple Net Properties
Realty, Inc., or Realty, to provide various services to us.
In the fourth quarter of 2006, NNN Realty Advisors, Inc., or NNN
Realty Advisors, or our Sponsor, acquired all of the outstanding
ownership interests of Triple Net Properties, NNN Capital Corp.
and Realty. As a result, we consider NNN Realty Advisors to be
our Sponsor. On May 22, 2007, NNN Realty Advisors entered
into a definitive merger agreement with Grubb & Ellis
Company, or Grubb & Ellis. The merger has been
approved by the boards of directors of both NNN Realty Advisors
and Grubb & Ellis. The combined company will retain
the Grubb & Ellis name and will continue to be listed
on the New York Stock Exchange under the ticker symbol
GBE. The transaction is expected to close in the
fourth quarter of 2007, subject to approval by stockholders of
both companies and other customary closing conditions of
transactions of this type.
As of September 30, 2007, we had purchased 14 properties
comprising 1,547,000 square feet of gross leasable area, or
GLA.
6
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
Our interim unaudited condensed consolidated financial
statements and accompanying notes are the representations of our
management, who are responsible for their integrity and
objectivity. The following accounting policies conform to
accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been
consistently applied in preparing our accompanying interim
unaudited condensed consolidated financial statements.
Basis
of Presentation
Our accompanying interim unaudited condensed consolidated
financial statements include our accounts and those of our
Operating Partnership. We operate and intend to continue to
operate in an umbrella partnership REIT structure in which our
Operating Partnership, or wholly-owned subsidiaries of our
Operating Partnership, will own substantially all of the
properties acquired on our behalf. We are the sole general
partner of our Operating Partnership and as of
September 30, 2007 and December 31, 2006, we owned a
99.99% and 1.0%, respectively, general partnership interest
therein. Our Advisor is the sole limited partner and as of
September 30, 2007 and December 31, 2006, owned a
0.01% and 99.0%, respectively, limited partnership interest
therein. Our Advisor is also entitled to certain subordinated
distribution rights under the partnership agreement for our
Operating Partnership. Because we are the sole general partner
of our Operating Partnership and have unilateral control over
its management and major operating decisions (even if additional
limited partners are admitted to our Operating Partnership), the
accounts of our Operating Partnership are consolidated in our
consolidated financial statements. All significant intercompany
accounts and transactions are eliminated in consolidation.
Interim
Financial Data
Our accompanying interim unaudited condensed consolidated
financial statements have been prepared by us in accordance with
GAAP in conjunction with the rules and regulations of the
Securities and Exchange Commission, or the SEC. Certain
information and footnote disclosures required for annual
financial statements have been condensed or excluded pursuant to
SEC rules and regulations. Accordingly, our accompanying interim
unaudited condensed consolidated financial statements do not
include all of the information and footnotes required by GAAP
for complete financial statements. Our accompanying interim
unaudited condensed consolidated financial statements reflect
all adjustments, which are, in our opinion, of a normal
recurring nature and necessary for a fair presentation of our
financial position, results of operations and cash flows for the
interim period. Interim results of operations are not
necessarily indicative of the results to be expected for the
full year; such results may be less favorable. Our accompanying
interim unaudited condensed consolidated financial statements
should be read in conjunction with our audited consolidated
financial statements and the notes thereto included in our 2006
Annual Report on
Form 10-K,
as filed with the SEC.
Use of
Estimates
The preparation of our consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We believe that our critical
accounting policies are those that require significant judgments
and estimates. These estimates are made and evaluated on an
on-going basis using information that is currently available as
well as various other assumptions believed to be reasonable
under the circumstances. Actual results could differ from those
estimates, perhaps in material adverse ways, and those estimates
could be different under different assumptions or conditions.
7
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Restricted
Cash
Restricted cash is comprised of impound reserve accounts for
property taxes, insurance, capital improvements and tenant
improvements.
Allowance
for Uncollectible Accounts
Tenant receivables and unbilled deferred rent receivables are
carried net of the allowances for uncollectible current tenant
receivables and unbilled deferred rent. An allowance is
maintained for estimated losses resulting from the inability of
certain tenants to meet the contractual obligations under their
lease agreements. Our determination of the adequacy of these
allowances is based primarily upon evaluations of historical
loss experience, individual tenant receivables considering the
tenants financial condition, security deposits, letters of
credit, lease guarantees and current economic conditions and
other relevant factors. As of September 30, 2007 and
December 31, 2006, we had $2,000 and $0, respectively, in
allowances for uncollectible accounts as determined to be
necessary to reduce receivables to our estimate of the amount
recoverable.
Purchase
Price Allocation
In accordance with Statements of Financial Accounting Standards,
or SFAS, No. 141, Business Combinations, we, with
the assistance of independent valuation specialists, allocate
the purchase price of acquired properties to tangible and
identified intangible assets based on their respective fair
values. The allocation to tangible assets (building and land) is
based upon our determination of the value of the property as if
it were vacant using discounted cash flow models similar to
those used by independent appraisers. Factors considered by us
include an estimate of carrying costs during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the
applicable property is allocated to the above or below market
value of in-place leases, the value of in-place leases, tenant
relationships and above or below market debt assumed.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between:
(i) the contractual amounts to be paid pursuant to the
lease over its remaining term, and (ii) our estimate of the
amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above
market leases are included in identified intangible assets, net
and below market lease values are included in identified
intangible liabilities, net in the accompanying condensed
consolidated balance sheets and are amortized to rental income
over the weighted-average remaining term of the acquired leases
with each property.
The total amount of other intangible assets acquired is further
allocated to in-place lease costs and the value of tenant
relationships based on managements evaluation of the
specific characteristics of each tenants lease and our
overall relationship with that respective tenant.
Characteristics considered by us in allocating these values
include the nature and extent of the credit quality and
expectations of lease renewals, among other factors.
The value allocable to above or below market debt is determined
based upon the present value of the difference between the cash
flow stream of the assumed fixed rate mortgage and the cash flow
stream of a market fixed rate mortgage. The amounts allocated to
above or below market debt are included in mortgage loan
payables, net in the accompanying condensed consolidated balance
sheets and are amortized to interest expense over the remaining
term of the assumed mortgage.
These allocations are subject to change based on information
received within one year of the purchase related to one or more
events identified at the time of purchase which confirm the
value of an asset or liability received in an acquisition of
property.
8
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Operating
Properties
Operating properties are carried at the lower of fair market
value or historical cost less accumulated depreciation. The cost
of the operating properties includes the cost of land and
completed buildings and related improvements. Expenditures that
increase the service life of the properties are capitalized and
the cost of maintenance and repairs is charged to expense as
incurred. The cost of buildings is depreciated on a
straight-line basis over the estimated useful lives of the
buildings up to 39 years and for tenant improvements, the
shorter of the lease term or useful life, ranging from two
months to 120 months. When depreciable property is retired
or disposed of, the related costs and accumulated depreciation
are removed from the accounts and any gain or loss is reflected
in operations.
An operating property is evaluated for potential impairment
whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Impairment losses are
recorded on long-lived assets and tenant improvements used in
operations. Impairment losses are recorded on an operating
property when indicators of impairment are present and the
carrying amount of the asset is greater than the sum of the
future undiscounted cash flows expected to be generated by that
asset. We would recognize an impairment loss to the extent the
carrying amount exceeded the fair value of the property. As of
September 30, 2007, there were no impairment losses
recorded.
Other
Assets
Other assets consist primarily of deferred rent receivables,
leasing commissions, prepaid expenses, deposits and deferred
financing costs. Costs incurred for property leasing have been
capitalized as deferred assets. Deferred financing costs include
amounts paid to lenders and others to obtain financing. Such
costs are amortized using the straight-line method over the term
of the related loan, which approximates the effective interest
rate method. Amortization of deferred financing costs is
included in interest expense in our accompanying condensed
consolidated statements of operations. Deferred leasing costs
include leasing commissions that are amortized using the
straight-line method over the term of the related lease.
Revenue
Recognition
In accordance with SFAS No. 13, Accounting for
Leases, as amended and interpreted, minimum annual rental
revenue is recognized on a straight-line basis over the term of
the related lease (including rent holidays). Tenant
reimbursement revenue, which is comprised of additional amounts
recoverable from tenants for common area maintenance expenses
and certain other recoverable expenses, is recognized as revenue
in the period in which the related expenses are incurred.
Concentration
of Credit Risk
Financial instruments that potentially subject us to a
concentration of credit risk are primarily cash and accounts
receivable from tenants. We have cash in financial institutions
that is insured by the Federal Deposit Insurance Corporation, or
FDIC, up to $100,000 per institution. As of September 30,
2007 and December 31, 2006, we had cash accounts in excess
of FDIC insured limits. We believe this risk is not significant.
Concentration of credit risk with respect to accounts receivable
from tenants is limited. We perform credit evaluations of
prospective tenants, and security deposits are obtained upon
lease execution.
9
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
As of September 30, 2007, we owned consolidated properties
located in various states as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
State
|
|
|
2007 Annual
|
|
|
2007 Annual
|
|
Property
|
|
(Property Location)
|
|
|
Base Rent (*)
|
|
|
Base Rent
|
|
|
Commons V Medical Office Building
|
|
|
FL
|
|
|
$
|
762,000
|
|
|
|
3.1%
|
|
East Florida Senior Care Portfolio
|
|
|
FL
|
|
|
|
4,095,000
|
|
|
|
16.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
FL
|
|
|
|
4,857,000
|
|
|
|
20.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yorktown Medical Center and Shakerag Medical Center
|
|
|
GA
|
|
|
|
2,389,000
|
|
|
|
9.8%
|
|
Gwinnett Professional Center
|
|
|
GA
|
|
|
|
1,132,000
|
|
|
|
4.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
GA
|
|
|
|
3,521,000
|
|
|
|
14.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southpointe Office Parke and Epler Parke I
|
|
|
IN
|
|
|
|
1,391,000
|
|
|
|
5.7%
|
|
Crawfordsville Medical Office Park and Athens Surgery Center
|
|
|
IN
|
|
|
|
578,000
|
|
|
|
2.4%
|
|
Kokomo Medical Office Park
|
|
|
IN
|
|
|
|
1,319,000
|
|
|
|
5.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
IN
|
|
|
|
3,288,000
|
|
|
|
13.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2750 Monroe Boulevard
|
|
|
PA
|
|
|
|
2,623,000
|
|
|
|
10.8%
|
|
Triumph Hospital Northwest and Triumph Hospital Southwest
|
|
|
TX
|
|
|
|
2,584,000
|
|
|
|
10.7%
|
|
Lenox Office Park, Building G
|
|
|
TN
|
|
|
|
2,134,000
|
|
|
|
8.8%
|
|
Thunderbird Medical Plaza
|
|
|
AZ
|
|
|
|
1,856,000
|
|
|
|
7.7%
|
|
1 and 4 Market Exchange
|
|
|
OH
|
|
|
|
1,689,000
|
|
|
|
7.0%
|
|
The Gallery Professional Building
|
|
|
MN
|
|
|
|
1,057,000
|
|
|
|
4.4%
|
|
St. Mary Physicians Center
|
|
|
CA
|
|
|
|
647,000
|
|
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
24,256,000
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Annualized rental revenue is based on contractual base rent from
leases in effect as of September 30, 2007. |
As of September 30, 2007, three of our tenants at our
consolidated properties accounted for 10.0% or more of our
aggregate annual rental revenue, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
Square
|
|
|
Lease
|
|
|
|
2007 Annual
|
|
|
2007 Annual
|
|
|
|
|
Footage
|
|
|
Expiration
|
|
Tenant
|
|
Base Rent(*)
|
|
|
Base Rent
|
|
|
Property
|
|
(Approximately)
|
|
|
Date
|
|
|
Institute for Senior Living of Florida
|
|
$
|
4,095,000
|
|
|
|
16.9
|
%
|
|
East Florida
|
|
|
355,000
|
|
|
|
05/31/14
|
|
|
|
|
|
|
|
|
|
|
|
Senior Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
|
|
|
|
|
|
|
Triumph Hospital
|
|
$
|
2,584,000
|
|
|
|
10.7
|
%
|
|
Triumph Hospital
|
|
|
151,000
|
|
|
|
02/28/13
|
|
|
|
|
|
|
|
|
|
|
|
Northwest and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triumph Hospital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest
|
|
|
|
|
|
|
|
|
Quest Diagnostics, Inc.
|
|
$
|
2,623,000
|
|
|
|
10.8
|
%
|
|
2750 Monroe
|
|
|
109,000
|
|
|
|
04/30/11
|
|
|
|
|
|
|
|
|
|
|
|
Boulevard
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Annualized rental revenue is based on contractual base rent from
leases in effect as of September 30, 2007. |
Organizational,
Offering and Related Expenses
Our organizational, offering and related expenses are being paid
by our Advisor and its affiliates on our behalf. These
organizational, offering and related expenses include all
expenses (other than selling commissions and the marketing
support fee which generally represent 7.0% and 2.5% of our gross
offering proceeds, respectively) to be paid by us in connection
with our Offering. These expenses will only become our liability
to the extent selling commissions, the marketing support fee and
due diligence expense
10
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
reimbursements and other organizational and offering expenses do
not exceed 11.5% of the gross proceeds of our Offering. As of
September 30, 2007 and December 31, 2006, expenses of
$990,000 and $1,728,000, respectively, in excess of 11.5% of the
gross proceeds of our Offering, has been incurred by our Advisor
or Triple Net Properties and therefore these expenses are not
recorded in our accompanying condensed consolidated financial
statements as of September 30, 2007 and December 31,
2006. To the extent we raise additional proceeds from our
Offering, these amounts may become our liability. See
Note 10, Related Party Transactions Offering
Stage, for a further discussion of these amounts during our
offering stage.
Stock
Compensation
We follow SFAS, No. 123(R), Share-Based Payment, to
account for our stock compensation pursuant to our 2006
Incentive Plan and the 2006 Independent Directors Compensation
Plan, a sub-plan of our 2006 Incentive Plan. See Note 12,
Stockholders Equity (Deficit) 2006 Incentive
Plan and Independent Directors Compensation Plan, for a further
discussion of grants under our 2006 Incentive Plan.
Income
Taxes
We intend to make an election to be taxed as a REIT, under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended, or the Code, and we intend to be taxed as such
beginning with our taxable year ending December 31, 2007.
We intend to qualify as a REIT. To qualify as a REIT, we must
meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90.0%
of our ordinary taxable income to stockholders. As a REIT, we
generally will not be subject to federal income tax on taxable
income that we distribute to our stockholders. If we fail to
qualify as a REIT in any taxable year, we will then be subject
to federal income taxes on our taxable income at regular
corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost
unless the Internal Revenue Service grants us relief under
certain statutory provisions. Such an event could have a
material adverse effect on our net income and net cash available
for distribution to stockholders. Because of our intention to
elect REIT status in 2007, we will not benefit from the loss
incurred for the year ended December 31, 2006.
Per
Share Data
We report earnings (loss) per share pursuant to
SFAS No. 128, Earnings Per Share. Basic
earnings (loss) per share attributable for all periods presented
are computed by dividing net income (loss) by the weighted
average number of shares of our common stock outstanding during
the period. Diluted earnings (loss) per share is computed based
on the weighted average number of shares of our common stock and
all potentially dilutive securities, if any. Shares of
restricted common stock give rise to potentially dilutive shares
of common stock.
For the three months ended September 30, 2007 and 2006, we
recorded a net loss of approximately $1,933,000 and $50,000,
respectively. For the nine months ended September 30, 2007
and for the period from April 28, 2006 (Date of Inception)
through September 30, 2006, we recorded a net loss of
approximately $3,669,000 and $50,000, respectively. As of
September 30, 2007 and 2006, 27,000 and 12,000 shares,
respectively, of restricted common stock were outstanding, but
were excluded from the computation of diluted earnings per share
because such shares of restricted common stock were
anti-dilutive during this period.
Segment
Disclosure
The Financial Accounting Standards Board, or the FASB, issued
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes
standards for reporting financial and descriptive information
about an enterprises reportable segments. We have
determined that we have one reportable segment, with activities
related to investing in medical office buildings,
healthcare-related facilities and quality
11
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
commercial office properties. Our investments in real estate are
geographically diversified and management evaluates operating
performance on an individual property level. However, as each of
our properties has similar economic characteristics, tenants,
and products and services, our properties have been aggregated
into one reportable segment for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006.
Recently
Issued Accounting Pronouncements
In July 2006 the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN No. 48. This interpretation, among other things,
creates a two-step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise
concludes that a tax position, based solely on its technical
merits, is more-likely-than-not to be sustained upon
examination. Measurement (step two) determines the amount of
benefit that more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN No. 48 specifically
prohibits the use of a valuation allowance as a substitute for
derecognition of tax positions, and it has expanded disclosure
requirements. FIN No. 48 was effective for fiscal
years beginning after December 15, 2006, in which the
impact of adoption should be accounted for as a
cumulative-effect adjustment to the beginning balance of
retained earnings in the year of adoption. Our adoption of
FIN No. 48 as of the beginning of the first quarter of
2007 did not have any impact on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement, or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and
expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007. We will adopt
SFAS No. 157 on January 1, 2008. We are
evaluating SFAS No. 157 and have not yet determined
the impact the adoption, if any, will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is
effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted
as of the beginning of the fiscal year beginning on or before
November 15, 2007, provided the provisions of
SFAS No. 157 are applied. We will adopt
SFAS No. 159 on January 1, 2008. We are
evaluating SFAS No. 159 and have not yet determined
the impact the adoption, if any, will have on our consolidated
financial statements.
12
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
3.
|
Real
Estate Investments
|
Our investments in our consolidated properties consisted of the
following as of September 30, 2007 and December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
Land
|
|
$
|
40,260,000
|
|
|
$
|
|
|
Building and improvements
|
|
|
210,096,000
|
|
|
|
|
|
Furniture and equipment
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(2,294,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
248,066,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended
September 30, 2007 and 2006 was $1,411,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006 was $2,312,000 and
$0, respectively.
Acquisitions
in 2007
Affiliate
Acquisitions
As a result of acquiring the NNN Southpointe, LLC, NNN
Crawfordsville, LLC, NNN Gallery Medical, LLC, NNN Lenox
Medical, LLC and NNN Lenox Medical Land, LLC membership
interests from affiliates, as described below, an independent
appraiser was engaged to value the properties and the
transactions were approved and determined by a majority of our
board of directors, including a majority of our independent
directors, as fair and reasonable to us, and at prices no
greater than the cost of the investments to our affiliate or the
properties appraised values.
Southpointe Office Parke and Epler Parke I
Indianapolis, Indiana
On January 22, 2007, we acquired all of the membership
interests of NNN Southpointe, LLC from an affiliate, for a total
purchase price of $14,800,000, plus closing costs. NNN
Southpointe, LLC has fee simple ownership of Southpointe Office
Parke and Epler Parke I, located in Indianapolis, Indiana,
or the Southpointe property. We primarily financed the purchase
price through the assumption of an existing mortgage loan of
$9,146,000 on the property with LaSalle Bank National
Association, or LaSalle, and approximately $5,115,000 of the
proceeds from a $7,500,000 unsecured loan from our Sponsor. See
Note 6, Mortgage Loan Payables and Unsecured Note Payables to
Affiliate, for a further discussion. The balance was provided by
funds raised through our Offering. An acquisition fee of
$444,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
Crawfordsville Medical Office Park and Athens Surgery
Center Crawfordsville, Indiana
On January 22, 2007, we acquired all of the membership
interests of NNN Crawfordsville, LLC from an affiliate, for a
total purchase price of $6,900,000, plus closing costs. NNN
Crawfordsville, LLC has fee simple ownership of Crawfordsville
Medical Office Park and Athens Surgery Center, located in
Crawfordsville, Indiana, or the Crawfordsville property. We
primarily financed the purchase price through the assumption of
an existing mortgage loan of $4,264,000 on the property with
LaSalle and approximately $2,385,000 of the proceeds from a
$7,500,000 unsecured loan from our Sponsor. See Note 6, Mortgage
Loan Payables and Unsecured Note Payables to Affiliate, for a
further discussion. The balance was provided by funds raised
through our Offering. An acquisition fee of $207,000, or 3.0% of
the purchase price, was paid to our Advisor and its affiliate.
13
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Gallery Professional Building St. Paul, Minnesota
On March 9, 2007, we acquired all of the membership
interests of NNN Gallery Medical, LLC from an affiliate, for a
purchase price of $8,800,000, plus closing costs. NNN Gallery
Medical, LLC has fee simple ownership of The Gallery
Professional Building, located in St. Paul, Minnesota, or the
Gallery property. We primarily financed the purchase price
through the assumption of an existing mortgage loan of
$6,000,000 on the property with LaSalle and a $1,000,000
unsecured loan from our Sponsor. See Note 6, Mortgage Loan
Payables and Unsecured Note Payables to Affiliate, for a further
discussion. The balance of the purchase price was provided by
funds raised through our Offering. An acquisition fee of
$264,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
Lenox Office Park, Building G Memphis, Tennessee
On March 23, 2007, we acquired all of the membership
interests of NNN Lenox Medical, LLC and NNN Lenox Medical Land,
LLC from an affiliate, for a purchase price of $18,500,000, plus
closing costs. NNN Lenox Medical, LLC holds a leasehold interest
in Lenox Office Park, Building G, and NNN Lenox Medical Land,
LLC holds a fee simple interest in two vacant parcels of land
within Lenox Office Park, located in Memphis, Tennessee, which
we collectively refer to as the Lenox property. We primarily
financed the purchase price of the property and land parcels
through the assumption of an existing mortgage loan of
$12,000,000 on the property with LaSalle. See Note 6, Mortgage
Loan Payables and Unsecured Note Payables to
Affiliate Mortgage Loan Payables, for a further
discussion. The balance of the purchase price was provided by
funds raised through our Offering. An acquisition fee of
$555,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
Unaffiliated
Third Party Acquisitions
Commons V Medical Office Building Naples, Florida
On April 24, 2007, we acquired Commons V Medical Office
Building, located in Naples, Florida, or the Commons V property,
from an unaffiliated third party, for a purchase price of
$14,100,000, plus closing costs. We financed the purchase price
using funds raised through our Offering. An acquisition fee of
$423,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate. In addition, a real estate commission of
$300,000, or approximately 2.0% of the purchase price, was paid
to Grubb & Ellis. On May 14, 2007, we entered
into a loan, secured by the Commons V property, with Wachovia
Bank, National Association, or Wachovia, evidenced by a
promissory note in the principal amount of $10,000,000. The
proceeds from this loan were used to purchase the Thunderbird
Medical Plaza as described below. See Note 6, Mortgage Loan
Payables and Unsecured Note Payables to Affiliate
Mortgage Loan Payables, for a further discussion.
Yorktown Medical Center and Shakerag Medical Center
Fayetteville and Peachtree City, Georgia
On May 2, 2007, we acquired Yorktown Medical Center and
Shakerag Medical Center, located in Fayetteville, Georgia and
Peachtree City, Georgia, respectively, which we collectively
refer to as the Peachtree property, for a total purchase price
of $21,500,000, plus closing costs. We acquired the property
from an unaffiliated third party. We financed the purchase price
through a secured loan with Wachovia as evidenced by a
promissory note in the principal amount of $13,530,000 and by
funds raised through our Offering. See Note 6, Mortgage
Loan Payables and Unsecured Note Payables to
Affiliate Mortgage Loan Payables, for a further
discussion. An acquisition fee of $645,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate.
Thunderbird Medical Plaza Glendale, Arizona
On May 15, 2007, we acquired Thunderbird Medical Plaza,
located in Glendale, Arizona, from an unaffiliated third party
for a total purchase price of $25,000,000, plus closing costs.
We financed the purchase price using a combination of $9,651,000
in net proceeds from the $10,000,000 loan from Wachovia secured
by
14
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
the Commons V property (described above) and funds raised
through our Offering. An acquisition fee of $750,000, or 3.0% of
the purchase price, was paid to our Advisor and its affiliate.
On June 8, 2007, we entered into a loan, secured by the
Thunderbird property, with Wachovia, evidenced by a promissory
note in the principal amount of $14,000,000. The proceeds from
this loan were used to purchase Triumph Hospital Northwest and
Triumph Hospital Southwest as described below. See Note 6,
Mortgage Loan Payables and Unsecured Note Payables to
Affiliate Mortgage Loan Payables, for a further
discussion.
Triumph Hospital Northwest and Triumph Hospital
Southwest Houston and Sugar Land, Texas
On June 8, 2007, we acquired Triumph Hospital Northwest,
located in Houston, Texas, and Triumph Hospital Southwest,
located in Sugar Land, Texas, which we collectively refer to as
the Triumph Hospital Portfolio, for a total purchase price of
$36,500,000, plus closing costs. We acquired the property from
an unaffiliated third party. We financed the purchase price
using a combination of $12,605,000 in net proceeds from the loan
from Wachovia secured by the Thunderbird property (described
above), $20,975,000 from funds raised through our Offering and
the balance of $4,000,000 from an unsecured loan from our
Sponsor. See Note 6, Mortgage Loan Payables and Unsecured
Note Payables to Affiliate Unsecured Note Payables
to Affiliate, for a further discussion. An acquisition fee of
$1,095,000, or 3.0% of the purchase price, was paid to our
Advisor and its affiliate.
Gwinnett Professional Center Lawrenceville, Georgia
On July 27, 2007, we acquired the Gwinnett Professional
Center, or the Gwinnett property, located in Lawrenceville,
Georgia, for a purchase price of $9,300,000, plus closing costs.
We acquired the property from an unaffiliated third party. We
financed the purchase price using a combination of debt
financing consisting of a $6,000,000 loan assumed with a current
principal balance of $5,734,000 secured by the Gwinnett property
from LaSalle and funds raised through our Offering. See
Note 6, Mortgage Loan Payables and Unsecured Note Payables
to Affiliate Mortgage Loan Payables, for a further
discussion. An acquisition fee of $279,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate.
1 and 4 Market Exchange Columbus, Ohio
On August 15, 2007, we acquired 1 Market Exchange, 4 Market
Exchange and a vacant parcel of land, located in Columbus, Ohio,
which we collectively refer to as the 1 and 4 Market property,
for a total purchase price of $21,900,000, plus closing costs.
We acquired the property from unaffiliated third parties. We
financed the purchase price using funds raised through our
Offering. An acquisition fee of $657,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate. On
September 28, 2007, we entered into a loan, secured by the
1 and 4 Market property, with Wachovia, evidenced by a
promissory note in the principal amount of $14,500,000. See
Note 6, Mortgage Loan Payables and Unsecured Note Payables
to Affiliate Mortgage Loan Payables, for a further
discussion.
Kokomo Medical Office Park Kokomo, Indiana
On August 30, 2007, we acquired the Kokomo Medical Office
Park, located in Kokomo, Indiana, or the Kokomo property, for a
total purchase price of $13,350,000, plus closing costs. We
acquired the property from an unaffiliated third party. We
financed the purchase price using a combination of funds raised
through our Offering and the balance of $1,300,000 from an
unsecured loan from our Sponsor. See Note 6, Mortgage Loan
Payables and Unsecured Note Payables to Affiliate
Unsecured Note Payables to Affiliate, for a further discussion.
An acquisition fee of $401,000, or 3.0% of the purchase price,
was paid to our Advisor and its affiliate.
St. Mary Physicians Center Long Beach, California
On September 5, 2007, we acquired St. Mary Physicians
Center, located in Long Beach, California, or the St. Mary
property, for a purchase price of $13,800,000, plus closing
costs. We acquired the property from an
15
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
unaffiliated third party. We financed the purchase price using a
combination of $8,280,000 from a loan secured by the
St. Mary property and the balance of $6,100,000 from an
unsecured loan from our Sponsor. See Note 6, Mortgage Loan
Payables and Unsecured Note Payables to Affiliate
Unsecured Note Payables to Affiliate, for a further discussion.
An acquisition fee of $414,000, or 3.0% of the purchase price,
was paid to our Advisor and its affiliate.
2750 Monroe Boulevard Valley Forge, Pennsylvania
On September 10, 2007, we acquired 2750 Monroe Boulevard,
located in Valley Forge, Pennsylvania, or the 2750 Monroe
property, for a total purchase price of $26,700,000, plus
closing costs. We acquired the property from an unaffiliated
third party. We financed the purchase price of the property with
approximately $27,870,000 in borrowings under a secured
revolving line of credit with LaSalle. See Note 7, Line of
Credit, for a further discussion. An acquisition fee of
$801,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
East Florida Senior Care Portfolio Jacksonville,
Winter Park and Sunrise, Florida
On September 28, 2007, we acquired the East Florida Senior
Care Portfolio, located in Jacksonville, Winter Park and
Sunrise, Florida, or the EFSC property, for a total purchase
price of $52,000,000, plus closing costs. We acquired the
property from an unaffiliated third party. We financed the
purchase price using a combination of $24,918,000 in net
proceeds from a $26,000,000 loan (net of a $4,500,000 loan
holdback) from KeyBank National Association, or KeyBank, secured
by the EFSC property, $11,000,000 in borrowings under a secured
revolving line of credit with LaSalle and the balance with funds
raised through our Offering. See Note 6, Mortgage Loan
Payables and Unsecured Note Payables to Affiliate
Mortgage Loan Payables and Note 7, Line of Credit, for a
further discussion. An acquisition fee of $1,560,000, or 3.0% of
the purchase price, was paid to our Advisor and its affiliate.
Leverage
In accordance with our charter, a majority of our directors,
including a majority of our independent directors, approved our
leverage exceeding 300.0% in connection with our first four
acquisitions. The board of directors determined that the excess
leverage was justified because it enabled us to purchase the
properties during the initial stages of our Offering, thereby
improving our ability to meet our goal of acquiring a
diversified portfolio of properties to generate current income
for investors and preserve investor capital. As of
November 13, 2007, our leverage does not exceed 300.0%. We
may, with a majority of our independent directors
authority, exceed our charters leverage guidelines again
during the early stages of our operations. Net assets for
purposes of this calculation are defined as our total assets
(other than intangibles), valued at cost prior to deducting
depreciation, reserves for bad debts and other non-cash
reserves, less total liabilities.
Proposed
Unaffiliated Third Party Acquisition
St.
Ritas Medical Center Portfolio Lima,
Ohio
On July 31, 2007, our board of directors approved the
acquisition of the St. Ritas Medical Center Portfolio,
located in Lima, Ohio. We anticipate purchasing the St.
Ritas Medical Center Portfolio for a purchase price of
$25,750,000, plus closing costs, from an unaffiliated third
party. We intend to finance the purchase using our secured
revolving line of credit with LaSalle. We expect to pay our
Advisor and its affiliate an acquisition fee of $773,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the fourth quarter
of 2007; however, closing is subject to certain agreed upon
conditions and there can be no assurance that we will be able to
complete the acquisition of the St. Ritas Medical Center
Portfolio.
16
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
4.
|
Identified
Intangible Assets
|
Identified intangible assets consisted of the following as of
September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
In place leases, net of accumulated amortization of $1,828,000
and
$0 as of September 30, 2007 and December 31, 2006,
respectively,
(with a weighted-average life of 55 months as of
September 30, 2007).
|
|
$
|
17,391,000
|
|
|
$
|
|
|
Above market leases, net of accumulated amortization of $167,000
and $0 as of September 30, 2007 and December 31, 2006,
respectively, (with a weighted-average life of 55 months as
of September 30, 2007).
|
|
|
1,162,000
|
|
|
|
|
|
Tenant relationships, net of accumulated amortization of
$837,000 and $0 as of September 30, 2007 and
December 31, 2006, respectively, (with a weighted-average
life of 99 months as of September 30, 2007).
|
|
|
22,679,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,232,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the identified intangible
assets for the three months ended September 30, 2007 and
2006 was $1,713,000 and $0, respectively, which included $78,000
and $0, respectively, of amortization recorded against rental
income for above market leases. Amortization expense recorded on
the identified intangible assets for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006 was
$3,104,000 and $0, respectively, which included $167,000 and $0,
respectively, of amortization recorded against rental income for
above market leases.
Amortization expense on the identified intangible assets as of
September 30, 2007 for the three months ended
December 31, 2007, each of the next four years ended
December 31 and thereafter, is as follows:
|
|
|
|
|
Year
|
|
Amount
|
2007
|
|
|
$2,083,000
|
|
2008
|
|
|
$7,406,000
|
|
2009
|
|
|
$6,766,000
|
|
2010
|
|
|
$5,264,000
|
|
2011
|
|
|
$3,978,000
|
|
Thereafter
|
|
|
$15,735,000
|
|
Other assets consisted of the following as of September 30,
2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
Deferred financing costs, net of accumulated amortization of
$54,000 and $0 as of September 30, 2007 and
December 31, 2006, respectively
|
|
$
|
1,615,000
|
|
|
$
|
3,000
|
|
Lease commissions, net of accumulated amortization of $3,000 and
$0 as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
123,000
|
|
|
|
|
|
Deferred rent receivable
|
|
|
191,000
|
|
|
|
|
|
Prepaid expenses and deposits
|
|
|
1,052,000
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,981,000
|
|
|
$
|
183,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on deferred financing costs and
lease commissions for the three months ended September 30,
2007 and 2006 was $39,000 and $0, respectively, and for the nine
months ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006 was $57,000 and $0, respectively.
17
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
6.
|
Mortgage
Loan Payables and Unsecured Note Payables to Affiliate
|
Mortgage
Loan Payables
Mortgage loan payables were $123,433,000 ($123,331,000, net of
discount) and $0 as of September 30, 2007 and
December 31, 2006, respectively. As of September 30,
2007, we had fixed and variable rate mortgage loans with the
effective interest rates ranging from 5.52% to 6.52% per annum
and the weighted-average effective interest rate of 6.01% per
annum. We are required by the terms of the applicable loan
documents to meet certain financial covenants, such as debt
service coverage ratios and rent coverage ratios, and reporting
requirements. As of September 30, 2007, we were in
compliance with all such covenants and requirements.
Mortgage loan payables consisted of the following as of
September 30, 2007 and December 31, 2006:
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Mortgage
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Mortgage
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Loan Payables
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Loan Payables
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Interest
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Maturity
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as of
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as of
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Property
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Rate
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Date
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September 30, 2007
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December 31, 2006
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Fixed Debt:
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Southpointe Office Parke and Epler Parke I
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6.11 %
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9/1/2016
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$
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9,146,000
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$
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Crawfordsville Medical Office Park
and Athens Surgery Center
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6.12 %
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10/1/2016
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4,264,000
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The Gallery Professional Building
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5.76 %
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3/1/2017
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6,000,000
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Lenox Office Park, Building G
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5.88 %
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2/1/2017
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12,000,000
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Commons V Medical Office Building
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5.54 %
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6/11/2017
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10,000,000
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Yorktown Medical Center and Shakerag
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Medical Center
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5.52 %
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5/11/2017
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13,530,000
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Thunderbird Medical Plaza
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5.67 %
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6/11/2017
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14,000,000
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Gwinnett Professional Center
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5.88 %
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1/1/2014
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5,713,000
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St. Mary Physicians Center
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5.80 %
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9/4/2009
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8,280,000
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82,933,000
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Variable Debt:
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1 and 4 Market Exchange
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Variable *
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9/30/2010
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14,500,000
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East Florida Senior Care Portfolio
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Variable **
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10/1/2010
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26,000,000
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40,500,000
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Total fixed and variable debt
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123,433,000
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Less: discount
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(102,000)
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Mortgage loan payables
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$
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123,331,000
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$
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* At our option, the loan bears interest at per annum
rates equal to:
(a) 30-day
LIBOR plus 1.35%; or (b) the Prime Rate, as announced by
Wachovia Financial from time to time. As of September 30,
2007, the rate was 6.47%.
** At our option, the loan bears interest at per annum rates
equal to: (a) a rate equal to the greater of: (i) the
prime rate, as established from time to time by KeyBank, or
(ii) 1.0% in excess of the federal funds effective rate, as
defined in the loan agreement; or (b) the Adjusted LIBOR
Rate, as defined in the loan agreement. As of September 30,
2007, the rate was 6.52%.
18
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The principal payments due on our mortgage loan payables as of
September 30, 2007, for the three months ended
December 31, 2007, each of the next four years ended
December 31 and thereafter, is as follows:
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Year
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Amount
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2007
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$
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14,000
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2008
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$
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150,000
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2009
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$
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8,588,000
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2010
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$
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41,045,000
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2011
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$
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961,000
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Thereafter
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$
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72,675,000
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Unsecured
Note Payables to Affiliate
On January 22, 2007 and March 9, 2007, we entered into
unsecured loans with NNN Realty Advisors, evidenced by unsecured
promissory notes in the principal amounts of $7,500,000 and
$1,000,000, respectively. The unsecured notes provided for
maturity dates of July 22, 2007 and September 9, 2007,
respectively. The $7,500,000 and $1,000,000 unsecured notes bore
interest at a fixed rate of 6.86% and 6.84% per annum,
respectively, and required monthly interest-only payments for
the terms of the unsecured notes. The unsecured notes provided
for default interest rates in an event of default equal to 8.86%
and 8.84% per annum, respectively. On March 28, 2007, we
repaid all outstanding principal and accrued interest on both
unsecured notes using proceeds from our Offering.
On June 8, 2007, we entered into an unsecured loan with NNN
Realty Advisors, evidenced by an unsecured promissory note in
the principal amount of $4,000,000. The unsecured note provided
for a maturity date of December 8, 2007. The $4,000,000
unsecured note bore interest at a fixed rate of 6.82% per annum
and required monthly interest-only payments for the term of the
unsecured note. The unsecured note provided for a default
interest rate in an event of default equal to 8.82% per annum.
On June 18, 2007, we repaid all outstanding principal and
accrued interest on the unsecured note using proceeds from our
Offering.
On August 30, 2007 and September 5, 2007, we entered
into unsecured loans with NNN Realty Advisors, evidenced by
unsecured promissory notes in the principal amounts of
$1,300,000 and $6,100,000, respectively. The unsecured notes
provided for maturity dates of March 1, 2008 and
March 5, 2008, respectively. The $1,300,000 and $6,100,000
unsecured notes bore interest at a fixed rate of 6.85% and 6.86%
per annum, respectively, and required monthly interest-only
payments for the terms of the unsecured notes. The unsecured
notes provided for default interest rates in an event of default
equal to 8.85% and 8.86% per annum, respectively. On
September 4, 2007 and September 11, 2007, we repaid
all outstanding principal and accrued interest on the $1,300,000
and $6,100,000 unsecured notes, respectively.
Because these loans were related party loans, the terms of the
loans and the unsecured notes were approved by our board of
directors, including a majority of our independent directors,
and deemed fair, competitive and commercially reasonable by our
board of directors.
On September 10, 2007, we entered into a loan agreement, or
the Loan Agreement, with LaSalle to obtain a secured revolving
credit facility in an aggregate maximum principal amount of
$50,000,000, or the LaSalle Line of Credit. The proceeds of
loans made under the Loan Agreement may be used to finance the
purchase of properties or, provided no event of default has
occurred and is continuing, may be used for any other lawful
purpose. In addition to loans, our Operating Partnership may
obtain up to $10,000,000 of the credit available under the Loan
Agreement in the form of letters of credit. The initial term of
the Loan Agreement is three
19
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
years, which may be extended by one 12-month period subject to
satisfaction of certain conditions, including payment of an
extension fee equal to 0.20% of the principal balance of loans
then outstanding.
The actual amount of credit available under the Loan Agreement
is a function of certain loan to cost, loan to value and debt
service coverage ratios contained in the Loan Agreement. The
maximum principal amount of the Loan Agreement may be increased
to $120,000,000 subject to the terms of the Loan Agreement.
Also, additional financial institutions may become lenders under
the Loan Agreement.
At our option, loans under the Loan Agreement bear interest at
per annum rates equal to (a) LIBOR plus a margin ranging
from 1.45% to 1.60%, depending on the ratio of outstanding
amounts under the Loan Agreement to the value of the collateral
securing the Loan Agreement, (b) the greater of
LaSalles prime rate or the Federal Funds Rate plus 0.50%,
or (c) a combination of these rates. Accrued interest under
the Loan Agreement is payable monthly and at maturity. In
addition to interest, we are required to pay a fee on the unused
portion of the lenders commitments under the Loan
Agreement at a per annum rate equal to 0.20%, payable quarterly
in arrears, beginning with the quarter ending December 31,
2007.
Our obligations with respect to the Loan Agreement are
guaranteed by us and by our subsidiaries that own properties
that serve as collateral for the Loan Agreement.
The Loan Agreement contains various affirmative and negative
covenants that are customary for facilities and transactions of
this type, including limitations on the incurrence of debt by us
and our subsidiaries that own properties that serve as
collateral for the Loan Agreement, limitations on the nature of
our business, and limitations on distributions by us and our
subsidiaries that own properties that serve as collateral for
the Loan Agreement. The Loan Agreement also imposes the
following financial covenants on us and our Operating
Partnership, as applicable: (a) a minimum ratio of
operating cash flow to interest expense, (b) a minimum
ratio of operating cash flow to fixed charges, (c) a
maximum ratio of liabilities to asset value, (d) a maximum
distribution covenant and (e) a minimum net worth covenant,
all of which are defined in the Loan Agreement. In addition, the
Loan Agreement includes events of default that are customary for
facilities and transactions of this type.
As of September 30, 2007 and December 31, 2006,
borrowings under the LaSalle Line of Credit totaled $35,700,000
and $0, respectively. Borrowings as of September 30, 2007
bore interest at a weighted-average interest rate of 7.08% per
annum.
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8.
|
Identified
Intangible Liabilities
|
Identified intangible liabilities consisted of the following as
of September 30, 2007 and December 31, 2006:
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September 30, 2007
|
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December 31, 2006
|
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|
Below market leases, net of accumulated amortization of $130,000
and $0 as of September 30, 2007 and December 31, 2006,
respectively, (with a weighted-average life of 59 months as
of September 30, 2007)
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$
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1,315,000
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$
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$
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1,315,000
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|
$
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|
Amortization expense recorded on the identified intangible
liabilities for the three months ended September 30, 2007
and 2006 was $93,000 and $0, respectively, and for the nine
months ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006 was $132,000 and $0, respectively, which
is recorded to rental income on the condensed consolidated
statements of operations.
20
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Amortization expense on the identified intangible liabilities as
of September 30, 2007 for the three months ended
December 31, 2007, each of the next four years ended
December 31 and thereafter, is as follows:
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Year
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|
Amount
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2007
|
|
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$106,000
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|
2008
|
|
|
$335,000
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2009
|
|
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$259,000
|
|
2010
|
|
|
$192,000
|
|
2011
|
|
|
$154,000
|
|
Thereafter
|
|
|
$269,000
|
|
|
|
9.
|
Commitments
and Contingencies
|
Litigation
We are not presently subject to any material litigation nor, to
our knowledge, is any material litigation threatened against us,
which if determined unfavorably to us, would have a material
adverse effect on our consolidated financial position, results
of operations or cash flows.
Environmental
Matters
We follow the policy of monitoring our properties for the
presence of hazardous or toxic substances. While there can be no
assurance that a material environmental liability does not exist
at our properties, we are not currently aware of any
environmental liability with respect to our properties that
would have a material effect on our consolidated financial
position, results of operations or 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.
Organizational,
Offering and Related Expenses
As of September 30, 2007 and December 31, 2006,
expenses of $990,000 and $1,728,000, respectively, in excess of
11.5% of the gross proceeds of our Offering, has been incurred
by our Advisor or Triple Net Properties and therefore these
expenses are not recorded in our accompanying condensed
consolidated financial statements as of September 30, 2007
and December 31, 2006. To the extent we raise additional
proceeds from our Offering, these amounts may become our
liability. See Note 2, Summary of Significant Accounting
Policies Organizational, Offering and Related
Expenses for a further discussion.
Other
Our other commitments and contingencies include the usual
obligations of real estate owners and operators in the normal
course of business. In our opinion, these matters are not
expected to have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
|
|
10.
|
Related
Party Transactions
|
Fees
and Expenses Paid to Affiliates
Some of our executive officers and our non-independent directors
are also executive officers
and/or
holders of a direct or indirect interest in our Advisor, Triple
Net Properties, our Dealer Manager, or other affiliated
entities. Upon the effectiveness of our Offering, we entered
into the Advisory Agreement and a dealer manager agreement, or
the Dealer Manager Agreement. These agreements entitle our
Advisor, our Dealer Manager and their affiliates to specified
compensation for certain services with regards to our Offering
and the
21
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
investment of funds in real estate assets, among other services,
as well as reimbursement of organizational and offering expenses
incurred.
Offering
Stage
Selling
Commissions
Our Dealer Manager receives selling commissions up to 7.0% of
the gross offering proceeds from the sale of shares of our
common stock in our Offering other than shares sold pursuant to
the DRIP. Our Dealer Manager may re-allow all or a portion of
these fees to participating broker-dealers. For the three months
ended September 30, 2007 and 2006, we incurred $3,673,000
and $0, respectively, and for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, we
incurred $10,915,000 and $0, respectively, in selling
commissions to our Dealer Manager. Such commissions are charged
to stockholders equity (deficit) as such amounts are
reimbursed to our Dealer Manager from the gross proceeds of our
Offering.
Marketing
Support Fee and Due Diligence Expense Reimbursements
Our Dealer Manager may receive non-accountable marketing support
fees and due diligence expense reimbursements up to 2.5% of the
gross offering proceeds from the sale of shares of our common
stock in our Offering other than shares sold pursuant to the
DRIP, and may re-allow up to 1.5% of gross offering proceeds to
participating broker-dealers. In addition, we may reimburse our
Dealer Manager or its affiliates an additional accountable 0.5%
of gross offering proceeds for bona fide due diligence expenses
and may re-allow up to 0.5% of gross offering proceeds to
participating broker-dealers. For the three months ended
September 30, 2007 and 2006, we incurred $1,328,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, we incurred
$4,032,000 and $0, respectively, in marketing support fees and
due diligence expense reimbursements to our Dealer Manager. Such
fees and reimbursements are charged to stockholders equity
(deficit) as such amounts are reimbursed to our Dealer Manager
or its affiliates from the gross proceeds of our Offering.
Other
Organizational and Offering Expenses
Our organizational and offering expenses are paid by our Advisor
or Triple Net Properties on our behalf. Our Advisor or Triple
Net Properties may be reimbursed for actual expenses incurred
for up to 1.5% of the gross offering proceeds from the sale of
shares of our common stock in our Offering other than shares
sold pursuant to the DRIP. For the three months ended
September 30, 2007 and 2006, we incurred $797,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, we incurred
$2,372,000 and $0, respectively, in other organizational and
offering expenses to our Advisor or Triple Net Properties. Other
organizational expenses are expensed as incurred, and offering
expenses are charged to stockholders equity (deficit) as
such amounts are reimbursed to our Advisor or Triple Net
Properties from the gross proceeds of our Offering.
Acquisition
and Development Stage
Acquisition
Fees
Our Advisor or its affiliates receive, as compensation for
services rendered in connection with the investigation,
selection and acquisition of properties, an acquisition fee up
to 3.0% of the contract purchase price for each property
acquired or up to 4.0% of the total development cost of any
development property acquired, as applicable. For the three
months ended September 30, 2007 and 2006, we incurred
$4,112,000 and $0, respectively, and for the nine months ended
September 30, 2007 and for the period from April 28,
22
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
2006 (Date of Inception) through September 30, 2006, we
incurred $8,495,000 and $0, respectively, in acquisition fees to
our Advisor or its affiliates. Acquisition fees are capitalized
as part of the purchase price allocations.
Reimbursement
of Acquisition Expenses
Our Advisor or its affiliates will be reimbursed for acquisition
expenses related to selecting, evaluating, acquiring and
investing in properties. Acquisition expenses, including amounts
paid to third parties, will not exceed 0.5% of the purchase
price of the properties. The reimbursement of acquisition fees
and expenses, including real estate commissions paid to
unaffiliated parties, will not exceed, in the aggregate, 6.0% of
the purchase price or total development costs, unless fees in
excess of such limits are approved by a majority of our
disinterested independent directors. For the three months ended
September 30, 2007 and 2006, we incurred $4,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, we incurred $7,000
and $0, respectively, for such expenses to our Advisor or its
affiliates, excluding amounts our Advisor or its affiliates paid
directly to third parties. Acquisition expenses are capitalized
as part of the purchase price allocations.
Operational
Stage
Asset
Management Fee
Our Advisor or its affiliates are paid a monthly fee for
services rendered in connection with the management of our
assets equal to one-twelfth of 1.0% of the average invested
assets calculated as of the close of business on the last day of
each month, subject to our stockholders receiving annualized
distributions in an amount equal to 5.0% per annum on average
invested capital. For the three months ended September 30,
2007 and 2006, we incurred $483,000 and $0, respectively, and
for the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, we incurred $775,000 and $0,
respectively, in asset management fees to our Advisor or its
affiliates, which is included in general and administrative in
the accompanying condensed consolidated statements of operations.
Property
Management Fees
Our Advisor or its affiliates are paid a monthly property
management fee equal to 4.0% of the gross cash receipts from
each property managed. For properties managed by other third
parties besides our Advisor or its affiliates, our Advisor or
its affiliates will be paid up to 1.0% of the gross cash
receipts from the property for a monthly oversight fee. For the
three months ended September 30, 2007 and 2006, we incurred
$173,000 and $0, respectively, and for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, we
incurred $291,000 and $0, respectively, in property management
fees and oversight fees to our Advisor or its affiliates, which
is included in rental expenses in the accompanying condensed
consolidated statements of operations.
Lease
Fees
Our Advisor, its affiliates or unaffiliated third parties, as
the property manager, may receive a separate fee for leasing
activities in an amount not to exceed the fee customarily
charged in arms length transactions by others rendering
similar services in the same geographic area for similar
properties, as determined by a survey of brokers and agents in
such area ranging between 3.0% and 8.0% of gross revenues
generated from the initial term of the lease. For the three
months ended September 30, 2007 and 2006, and for the nine
months ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006, we incurred $93,000, $0, $127,000, and
$0, respectively, to Triple Net Properties in lease fees.
23
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
On-site
Personnel and Engineering Payroll
For the three months ended September 30, 2007 and 2006,
Triple Net Properties incurred payroll for
on-site
personnel and engineering on our behalf of $43,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, Triple Net
Properties incurred payroll for
on-site
personnel and engineering on our behalf of $71,000 and $0,
respectively, which is included in rental expense on the
condensed consolidated statements of operations.
Operating
Expenses
We reimburse our Advisor or its affiliates for expenses incurred
in rendering its services to us, subject to certain limitations
on our operating expenses. However, we cannot reimburse our
Advisor and affiliates for fees and costs that exceed the
greater of: (1) 2.0% of our average invested assets, as
defined in the Advisory Agreement, or (2) 25.0% of our net
income, as defined in the Advisory Agreement, unless the board
of directors determines that such excess expenses were justified
based on unusual and non-recurring factors. For the twelve
months ended September 30, 2007, our operating expenses
exceeded this limitation by $334,000. We raised the minimum
offering and had funds held in escrow released to us to commence
real estate operations in January 2007. At this early stage of
our operations, our general and administrative expenses are
relatively high compared with our funds from operations and our
average invested assets. Our board of directors determined that
the relationship of our general and administrative expenses to
our funds from operations and our average invested assets was
justified for the twelve months ended September 30, 2007
given the costs of operating a public company and the early
stage of our operations.
For the three months ended September 30, 2007 and 2006,
Triple Net Properties incurred on our behalf $68,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, Triple Net
Properties incurred on our behalf $494,000 and $0, respectively,
which is included in general and administrative in the
accompanying condensed consolidated statements of operations or
prepaid expenses on the accompanying condensed consolidated
balance sheets, as applicable.
Liquidity
Stage
Disposition
Fees
Our Advisor or its affiliates will be paid, for services
relating to a sale of one or more properties, a disposition fee
up to the lesser of 1.75% of the contract sales price or 50.0%
of a customary competitive real estate commission given the
circumstances surrounding the sale, in each case as determined
by our board of directors and will not exceed market norms. The
amount of disposition fees paid, including real estate
commissions paid to unaffiliated parties, will not exceed the
lesser of the customary competitive disposition fee or an amount
equal to 6.0% of the contract sales price. For the three months
ended September 30, 2007 and 2006, and for the nine months
ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006, we did not incur such fees.
Subordinated
Participation Interest
Subordinated Distribution of Net Sales Proceeds
Upon liquidation of our portfolio, our Advisor will be paid a
subordinated distribution of net sales proceeds. The
distribution will be equal to 15.0% of the net proceeds from the
sales of properties, after subtracting distributions to our
stockholders of (1) their initial contributed capital (less
amounts paid to repurchase shares pursuant to our share
repurchase program) plus (2) an annual cumulative,
non-compounded return of 8.0% on average invested capital.
Actual amounts depend upon the sales prices of properties upon
liquidation. For the three months ended September 30, 2007
and 2006, and for the nine months ended September 30, 2007
and for
24
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
the period from April 28, 2006 (Date of Inception) through
September 30, 2006, we did not incur such distributions.
Subordinated Distribution Upon Listing
Upon the listing of our shares of common stock on a national
securities exchange, our Advisor will be paid a distribution
equal to 15.0% of the amount by which (1) the market value
of our outstanding common stock at listing plus distributions
paid prior to listing exceeds (2) the sum of total amount
of capital raised from stockholders (less amounts paid to
repurchase shares pursuant to our share repurchase plan) and the
amount of cash that, if distributed to stockholders as of the
date of listing, would have provided them an annual 8.0%
cumulative, non-compounded return on average invested capital
through the date of listing. Actual amounts depend upon the
market value of shares of our common stock at the time of
listing, among other factors. For the three months ended
September 30, 2007 and 2006, and for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, we did
not incur such distributions.
Subordinated Distribution Upon Termination
Upon termination of the Advisory Agreement, other than a
termination by us for cause, our Advisor will be entitled to
receive a distribution from our Operating Partnership in an
amount equal to 15.0% of the amount, if any, by which
(1) the fair market value of all of the assets of our
Operating Partnership as of the date of the termination
(determined by appraisal), less any indebtedness secured by such
assets, plus the cumulative distributions made to us by our
Operating Partnership from our inception through the termination
date, exceeds (2) the sum of the total amount of capital
raised from stockholders (less amounts paid to redeem shares
pursuant to our share repurchase plan) plus an annual 8.0%
cumulative, non-compounded return on average invested capital
through the termination date. However, our Advisor will not be
entitled to this distribution if our shares have been listed on
a national securities exchange prior to the termination of the
Advisory Agreement.
Accounts
Payable Due to Affiliates, Net
The following amounts were outstanding to affiliates as of
September 30, 2007 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Entity
|
|
Fee
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Triple Net Properties
|
|
Operating Expenses
|
|
$
|
75,000
|
|
|
$
|
312,000
|
|
Triple Net Properties
|
|
Offering Costs
|
|
|
797,000
|
|
|
|
|
|
Triple Net Properties
|
|
On-site Payroll and Engineering
|
|
|
17,000
|
|
|
|
|
|
Triple Net Properties
|
|
Acquisition Related Expenses
|
|
|
128,000
|
|
|
|
|
|
Triple Net Properties
|
|
Receivable for Property Acquisition Refund
|
|
|
(119,000
|
)
|
|
|
|
|
NNN Capital Corp.
|
|
Selling Commissions, Marketing Support Fees
|
|
|
|
|
|
|
|
|
|
|
and Due Diligence Expense Reimbursements
|
|
|
392,000
|
|
|
|
|
|
Realty
|
|
Asset and Property Management Fees
|
|
|
540,000
|
|
|
|
|
|
Realty
|
|
Lease Commissions
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,890,000
|
|
|
$
|
312,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Note Payables to Affiliate
For the three months ended September 30, 2007 and 2006, we
paid interest expense to our Sponsor of $7,000 and $0,
respectively, and for the nine months ended September 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through September 30, 2006, we paid interest
expense to our Sponsor of $84,000 and $0, respectively.
25
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
See Note 6, Mortgage Loan Payables and Unsecured Note
Payables to Affiliate Unsecured Note Payables to
Affiliate for a further discussion.
As of September 30, 2007 and December 31, 2006, we
owned a 99.99% and a 1.0%, respectively, general partnership
interest in our Operating Partnership and our Advisor owned a
0.01% and a 99.0%, respectively, limited partnership interest.
As such, 0.01% of the losses at our Operating Partnership are
allocated to minority interest.
|
|
12.
|
Stockholders
Equity (Deficit)
|
Common
Stock
In April 2006, our Advisor purchased 200 shares of our
common stock for total cash consideration of $2,000 and was
admitted as our initial stockholder. On September 20, 2006
and October 4, 2006, we granted an aggregate of
15,000 shares and 5,000 shares, respectively, of
restricted common stock to our independent directors. On
April 12, 2007, we granted 5,000 shares of restricted
common stock to our newly appointed independent director. On
June 12, 2007, in connection with their re-election, we
granted an aggregate of 12,500 shares of restricted stock
to our independent directors. Through September 30, 2007,
we issued 15,813,538 shares in connection with our Offering
and 132,829 shares under the DRIP. As of September 30,
2007 and December 31, 2006, we had 15,984,067 and
20,200 shares of common stock outstanding, respectively.
We are offering and selling to the public up to
200,000,000 shares of our $0.01 par value common stock
for $10.00 per share and up to 21,052,632 shares of our
$0.01 par value common stock to be issued pursuant to the
DRIP at $9.50 per share. Our charter authorizes us to issue
1,000,000,000 shares of our common stock.
Preferred
Stock
Our charter authorizes us to issue 200,000,000 shares of
our $0.01 par value preferred stock. No shares of preferred
stock were issued and outstanding as of September 30, 2007
and December 31, 2006.
Distribution
Reinvestment Plan
We adopted the DRIP that allows stockholders to purchase
additional shares of common stock through reinvestment of
distributions, subject to certain conditions. We registered and
reserved 21,052,632 shares of common stock for sale
pursuant to the DRIP in our Offering. For the three and nine
months ended September 30, 2007, $927,000 and $1,262,000,
respectively, in distributions were reinvested and 97,543 and
132,829 shares, respectively, were issued under the DRIP.
As of September 30, 2007 and December 31, 2006, a
total of $1,262,000 and $0, respectively, in distributions were
reinvested and 132,829 and 0 shares, respectively, were
issued under the DRIP.
Share
Repurchase Plan
Our board of directors has approved a share repurchase plan. On
August 24, 2006, we received SEC exemptive relief from
rules restricting issuer purchases during distributions. The
share repurchase plan allows for share repurchases by us when
certain criteria are met. Share repurchases will be made at the
sole discretion of our board of directors. Funds for the
repurchase of shares will come exclusively from the proceeds we
receive from the sale of shares under the DRIP. As of
September 30, 2007, no share repurchases had been made.
26
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
2006
Incentive Plan and Independent Directors Compensation
Plan
Under the terms of our 2006 Incentive Plan, the aggregate number
of shares of our common stock subject to options, shares of
restricted common stock, stock purchase rights, stock
appreciation rights or other awards, including those issuable
under its sub-plan, the 2006 Independent Directors Compensation
Plan, will be no more than 2,000,000 shares.
On September 20, 2006 and October 4, 2006, we granted
an aggregate of 15,000 shares and 5,000 shares,
respectively, of restricted common stock, as defined in the 2006
Incentive Plan, to our independent directors under the 2006
Independent Director Compensation Plan. On April 12, 2007,
we granted 5,000 shares of restricted common stock to our
newly appointed independent director. On June 12, 2007, in
connection with their re-election, we granted 12,500 shares
of restricted stock to our independent directors. Each of these
restricted stock awards vested 20.0% on the grant date and 20.0%
will vest on each of the first four anniversaries of the date of
grant. The fair value of each share of restricted common stock
was estimated at the date of grant at $10.00 per share, the per
share price of shares in our Offering, and is amortized on a
straight-line basis over the vesting period. Shares of
restricted common stock may not be sold, transferred, exchanged,
assigned, pledged, hypothecated or otherwise encumbered. Such
restrictions expire upon vesting. For the three months ended
September 30, 2007 and 2006, we recognized compensation
expense of $19,000 and $31,000, respectively, related to the
restricted common stock grants, and for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, we
recognized compensation expense of $77,000 and $31,000,
respectively, related to the restricted common stock grants.
Such compensation expense is included in general and
administrative on our accompanying condensed consolidated
statements of operations. Shares of restricted common stock have
full voting rights and rights to dividends.
As of September 30, 2007 and December 31, 2006, there
was approximately $247,000 and $149,000, respectively, of total
unrecognized compensation expense, net of estimated forfeitures,
related to nonvested shares of restricted common stock. This
expense is expected to be realized over a remaining weighted
average period of 3.3 years.
As of September 30, 2007 and December 31, 2006, the
fair value of the nonvested shares of restricted common stock
was $270,000 and $160,000, respectively. A summary of the status
of our shares of restricted common stock as of
September 30, 2007 and December 31, 2006, and changes
for the nine months ended September 30, 2007 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Weighted Average
|
|
|
|
Common
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Balance December 31, 2006
|
|
|
16,000
|
|
|
$
|
10.00
|
|
Granted
|
|
|
17,500
|
|
|
|
10.00
|
|
Vested
|
|
|
(6,500
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2007
|
|
|
27,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Expected to vest September 30, 2007
|
|
|
27,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Subordinated
Participation Interest
|
Pursuant to our Agreement of Limited Partnership approved by our
board of directors, upon termination of the Advisory Agreement,
other than a termination by us for cause, our Advisor will be
entitled to receive a distribution from our Operating
Partnership in an amount equal to 15.0% of the amount, if any,
by which (1) the fair market value of all of the assets of
our Operating Partnership as of the date of the termination
27
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
(determined by appraisal), less any indebtedness secured by such
assets, plus the cumulative distributions made to us by our
Operating Partnership from our inception through the termination
date, exceeds (2) the sum of the total amount of capital
raised from stockholders (less amounts paid to redeem shares
pursuant to our share repurchase plan) plus an annual 8.0%
cumulative, non-compounded return on average invested capital
through the termination date. However, our Advisor will not be
entitled to this distribution if our shares have been listed on
a national securities exchange prior to the termination of the
Advisory Agreement.
|
|
14.
|
Business
Combinations
|
As of September 30, 2007, we completed the acquisition of
14 consolidated properties, adding a total of approximately
1,547,000 square feet of GLA to our property portfolio. We
purchased our 14 properties on the following dates:
|
|
|
Property
|
|
Date
|
|
|
|
Southpointe Office Parke and Epler Parke I
|
|
January 22, 2007
|
Crawfordsville Medical Office Park
and Athens Surgery Center
|
|
January 22, 2007
|
The Gallery Professional Building
|
|
March 9, 2007
|
Lenox Office Park, Building G
|
|
March 23, 2007
|
Commons V Medical Office Building
|
|
April 24, 2007
|
Yorktown Medical Center and Shakerag Medical Center
|
|
May 2, 2007
|
Thunderbird Medical Plaza
|
|
May 15, 2007
|
Triumph Hospital Northwest and
Triumph Hospital Southwest
|
|
June 8, 2007
|
Gwinnett Professional Center
|
|
July 27, 2007
|
1 and 4 Market Exchange
|
|
August 15, 2007
|
Kokomo Medical Office Park
|
|
August 30, 2007
|
St. Mary Physicians Center
|
|
September 5, 2007
|
2750 Monroe Boulevard
|
|
September 10, 2007
|
East Florida Senior Care Portfolio
|
|
September 28, 2007
|
Results of operations for the properties are reflected in our
consolidated statements of operations for the three and nine
months ended September 30, 2007 for the periods subsequent
to the acquisition dates. The aggregate purchase price of the 14
consolidated properties was $283,150,000 plus closing costs of
$9,795,000, of which $144,368,000 was initially financed with
mortgage loans, unsecured note payables to an affiliate or
borrowings under the LaSalle Line of Credit.
In accordance with SFAS No. 141, we allocated the
purchase price to the fair value of the assets acquired and the
liabilities assumed, including the allocation of the intangibles
associated with the in-place leases considering the following
factors: lease origination costs and tenant relationships.
Certain allocations as of September 30, 2007 are subject to
change based on information received within one year of the
purchase date related to one or more events at the time of
purchase which confirm the value of an asset acquired or a
liability assumed in an acquisition of a property.
Assuming all of the acquisitions discussed above had occurred on
April 28, 2006 (Date of Inception), for the nine months
ended September 30, 2007, pro forma revenues, net income
(loss) and net income (loss) per diluted share would have been
$23,672,000, $(5,126,000) and $(0.49), respectively. For the
three months ended September 30, 2007, pro forma revenues,
net income (loss) and net income (loss) per diluted share would
have been $7,648,000, $(2,088,000) and $(0.16), respectively.
For the period from April 28, 2006 (Date of Inception)
through September 30, 2006, pro forma revenues, net income
(loss) and net income (loss) per diluted share would have been
$13,527,000, $(1,914,000) and $(0.21), respectively. For the
three months ended September 30, 2006, pro forma revenues,
net income (loss) and net income (loss) per diluted share
28
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
would have been $7,977,000, $(1,129,000) and $(0.13). The pro
forma results are not necessarily indicative of the operating
results that would have been obtained had the acquisitions
occurred at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
Status
of our Offering
As of October 31, 2007, we had received and accepted
subscriptions in our Offering for 18,059,074 shares of our
common stock, or $180,368,000, excluding shares issued under the
DRIP.
Proposed
Unaffiliated Third Party Acquisitions
Tucson
Medical Center Tucson, Arizona
On October 24, 2007, our board of directors approved the
acquisition of Tucson Medical Center, located in Tucson,
Arizona. We anticipate purchasing Tucson Medical Center for a
purchase price of $21,125,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
using the LaSalle Line of Credit. We expect to pay our Advisor
and its affiliate an acquisition fee of $634,000, or 3.0% of the
purchase price, in connection with the acquisition. We
anticipate that the closing will occur in the fourth quarter of
2007; however, closing is subject to certain agreed upon
conditions and there can be no assurance that we will be able to
complete the acquisition of Tucson Medical Center.
Northmeadow
Medical Center Roswell, Georgia
On October 24, 2007, our board of directors approved the
acquisition of Northmeadow Medical Center, located in Roswell,
Georgia. We anticipate purchasing Northmeadow Medical Center for
a purchase price of $11,850,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
using the LaSalle Line of Credit. We expect to pay our Advisor
and its affiliate an acquisition fee of $356,000, or
approximately 3.0% of the purchase price, in connection with the
acquisition. We anticipate that the closing will occur in the
fourth quarter of 2007; however, closing is subject to certain
agreed upon conditions and there can be no assurance that we
will be able to complete the acquisition of Northmeadow Medical
Center.
Interest
Rate Swaps
On October 12, 2007, we executed an interest rate swap
agreement with Wachovia in connection with the $14,500,000
secured loan on the 1 and 4 Market Exchange property, or the
Market Exchange loan. Pursuant to the terms of the original
promissory note, the Market Exchange loan bears interest, at our
option, at a per annum rate equal to either:
(a) 30-day
LIBOR plus 1.35%; or (b) the Prime Rate, as announced by
Wachovia Financial from time to time. As a result of the
interest rate swap agreement, the Market Exchange loan bears
interest at an effective fixed rate of 5.97% per annum from
September 28, 2007 through September 28, 2010; and
provides for monthly interest-only payments due on the first day
of each calendar month commencing on November 1, 2007.
On October 19, 2007, we executed an interest rate swap
agreement with KeyBank in connection with the $30,500,000
secured loan on the EFSC property, or the EFSC loan. Pursuant to
the terms of the original promissory note, the EFSC loan bears
interest, at our option, at a per annum rate equal to either:
(a) a rate equal to the greater of: (i) the prime
rate, as established from time to time by KeyBank, or
(ii) 1.0% in excess of the federal funds effective rate, as
defined in the loan agreement; or (b) the Adjusted LIBOR
Rate, as defined in the loan agreement. As a result of the
interest rate swap agreement, the EFSC loan bears interest at an
effective fixed rate of 6.02% per annum from November 1,
2007 through October 1, 2010; and provides for monthly
principal and interest payments due on the tenth day of each
calendar month commencing on November 10, 2007.
29
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Line
of Credit
As of November 13, 2007, we have repaid $29,300,000 on the
LaSalle Line of Credit and $6,400,000 remains outstanding.
EFSC
Loan
On October 22, 2007, we met the requirements of the EFSC
loan and received the $4,500,000 loan holdback held in escrow
from KeyBank pursuant to the loan agreement.
30
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The use of the words we, us or
our refers to NNN Healthcare/Office REIT, Inc. and
our subsidiaries, including NNN Healthcare/Office REIT Holdings,
L.P., except where the context otherwise requires.
The following discussion should be read in conjunction with our
interim unaudited condensed consolidated financial statements
and notes appearing elsewhere in this Quarterly Report on
Form 10-Q.
Such consolidated financial statements and information have been
prepared to reflect our financial position as of
September 30, 2007, together with our results of operations
for the three months ended September 30, 2007 and 2006, for
the nine months ended September 30, 2007 and for the period
from April 28, 2006 (Date of Inception) through
September 30, 2006 and cash flows for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006.
Forward-Looking
Statements
Historical results and trends should not be taken as indicative
of future operations. Our statements contained in this report
that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Actual
results may differ materially from those included in the
forward-looking statements. We intend those forward-looking
statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and are including this statement
for purposes of complying with those safe-harbor provisions.
Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and
expectations of us, are generally identifiable by use of the
words believe, expect,
intend, anticipate,
estimate, project,
prospects, or similar expressions. Our ability to
predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations and future prospects
on a consolidated basis include, but are not limited to: changes
in economic conditions generally and the real estate market
specifically; legislative/regulatory changes, including changes
to laws governing the taxation of real estate investment trusts,
or REITs; the availability of 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, policies and guidelines
applicable to REITs; the availability of properties to acquire;
the availability of financing; our ongoing relationship with NNN
Realty Advisors, Inc., or NNN Realty Advisors, or our Sponsor;
and litigation, including without limitation, the investigation
of Triple Net Properties, LLC, or Triple Net Properties, by the
Securities and Exchange Commission, or the SEC. These risks and
uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements. Additional information concerning us and our
business, including additional factors that could materially
affect our financial results, is included herein and in our
other filings with the SEC.
Overview
and Background
NNN Healthcare/Office REIT, Inc., a Maryland corporation, was
incorporated on April 20, 2006. We were initially
capitalized on April 28, 2006, and therefore we consider
that our date of inception. We intend to provide investors the
potential for income and growth through investment in a
diversified portfolio of real estate properties, focusing
primarily on medical office buildings, healthcare-related
facilities and quality commercial office properties that produce
current income. We may also invest in real estate related
securities. We intend to qualify as a real estate investment
trust, or REIT, for federal income tax purposes for our taxable
year ending December 31, 2007.
We are conducting a best efforts initial public offering, or our
Offering, in which we are offering a minimum of
200,000 shares of our common stock aggregating at least
$2,000,000, or the minimum offering, and a maximum of
200,000,000 shares of our common stock for $10.00 per share
and 21,052,632 shares of our common stock pursuant to our
distribution reinvestment plan, or the DRIP, at $9.50 per share,
aggregating up to $2,200,000,000, or the maximum offering.
Shares purchased by our executive officers and directors, by NNN
Capital Corp., or our Dealer Manager, by NNN Healthcare/Office
REIT Advisor, LLC, or our Advisor,
31
or its affiliates did not count toward the minimum offering. As
of October 31, 2007, we had received and accepted
subscriptions in our Offering for 18,059,074 shares of our
common stock, or $180,368,000, excluding shares issued under the
DRIP.
We conduct substantially all of our operations through NNN
Healthcare/Office REIT Holdings, L.P., or our Operating
Partnership. We are externally advised by our Advisor, pursuant
to an advisory agreement, or the Advisory Agreement, between us,
our Advisor and Triple Net Properties, LLC, the managing member
of our Advisor. The Advisory Agreement had a one-year term that
expired on September 19, 2007, and was subject to
successive one-year renewals. On September 18, 2007, our
board of directors extended the Advisory Agreement on a
month-to-month basis. On October 24, 2007, our board of
directors authorized the renewal, for one year ending on
October 24, 2008, of our Advisory Agreement. Our Advisor
supervises and manages our day-to-day operations and selects the
properties and securities we acquire, subject to oversight by
our board of directors. Our Advisor will also provide marketing,
sales and client services on our behalf. Our Advisor is
affiliated with us in that we and our Advisor have common
officers, some of whom also own an indirect equity interest in
our Advisor. Our Advisor engages affiliated entities, including
Triple Net Properties Realty, Inc., or Realty, an affiliate of
our Advisor, to provide various services to us.
In the fourth quarter of 2006, NNN Realty Advisors, Inc., or NNN
Realty Advisors, or our Sponsor, acquired all of the outstanding
ownership interests of Triple Net Properties, NNN Capital Corp.
and Realty. As a result, we consider NNN Realty Advisors to be
our Sponsor. On May 22, 2007, NNN Realty Advisors entered
into a definitive merger agreement with Grubb & Ellis
Company, or Grubb & Ellis. The merger has been
approved by the Boards of Directors of both NNN Realty Advisors
and Grubb & Ellis. The combined company will retain
the Grubb & Ellis name and will continue to be listed
on the New York Stock Exchange under the ticker symbol
GBE. The transaction is expected to close in the
fourth quarter of 2007, subject to approval by stockholders of
both companies and other customary closing conditions of
transactions of this type.
As of September 30, 2007, we had purchased 14 properties
comprising 1,547,000 square feet of gross leasable area, or
GLA.
Critical
Accounting Policies
The complete listing of our Critical Accounting Policies was
previously disclosed in our 2006 Annual Report on
Form 10-K,
as filed with the SEC.
Interim
Financial Data
Our accompanying interim unaudited condensed consolidated
financial statements have been prepared by us in accordance with
GAAP in conjunction with the rules and regulations of the SEC.
Certain information and footnote disclosures required for annual
financial statements have been condensed or excluded pursuant to
SEC rules and regulations. Accordingly, our accompanying interim
unaudited condensed consolidated financial statements do not
include all of the information and footnotes required by GAAP
for complete financial statements. Our accompanying interim
unaudited condensed consolidated financial statements reflect
all adjustments, which are, in our opinion, of a normal
recurring nature and necessary for a fair presentation of our
financial position, results of operations and cash flows for the
interim period. Interim results of operations are not
necessarily indicative of the results to be expected for the
full year; such results may be less favorable. Our accompanying
interim unaudited condensed consolidated financial statements
should be read in conjunction with our audited consolidated
financial statements and the notes thereto included in our 2006
Annual Report on
Form 10-K,
as filed with the SEC.
Recently
Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or the
FASB, issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN No. 48. This
interpretation, among other things, creates a two-step approach
for evaluating uncertain tax positions. Recognition (step one)
occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be
sustained upon
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examination. Measurement (step two) determines the amount of
benefit that more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN No. 48 specifically
prohibits the use of a valuation allowance as a substitute for
derecognition of tax positions, and it has expanded disclosure
requirements. FIN No. 48 was effective for fiscal
years beginning after December 15, 2006, in which the
impact of adoption should be accounted for as a
cumulative-effect adjustment to the beginning balance of
retained earnings in the year of adoption. Our adoption of
FIN No. 48 as of the beginning of the first quarter of
2007 did not have any impact on our consolidated financial
statements.
In September 2006, the FASB issued Statements of Financial
Accounting Standards, or SFAS, No. 157, Fair Value
Measurement, or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and
expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007. We will adopt
SFAS No. 157 on January 1, 2008. We are
evaluating SFAS No. 157 and have not yet determined
the impact the adoption, if any, will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is
effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted
as of the beginning of the fiscal year beginning on or before
November 15, 2007, provided the provisions of
SFAS No. 157 are applied. We will adopt
SFAS No. 159 on January 1, 2008. We are
evaluating SFAS No. 159 and have not yet determined
the impact the adoption, if any, will have on our consolidated
financial statements.
Acquisitions
in 2007
Affiliate
Acquisitions
As a result of acquiring the NNN Southpointe, LLC, NNN
Crawfordsville, LLC, NNN Gallery Medical, LLC, NNN Lenox
Medical, LLC and NNN Lenox Medical Land, LLC membership
interests from affiliates, as described below, an independent
appraiser was engaged to value the properties and the
transactions were approved and determined by a majority of our
board of directors, including a majority of our independent
directors, as fair and reasonable to us, and at prices no
greater than the cost of the investments to our affiliate or the
properties appraised values.
Southpointe Office Parke and Epler Parke I
Indianapolis, Indiana
On January 22, 2007, we acquired all of the membership
interests of NNN Southpointe, LLC from an affiliate, for a total
purchase price of $14,800,000, plus closing costs. NNN
Southpointe, LLC has fee simple ownership of Southpointe Office
Parke and Epler Parke I, located in Indianapolis, Indiana,
or the Southpointe property. We primarily financed the purchase
price through the assumption of an existing mortgage loan of
$9,146,000 on the property with LaSalle Bank National
Association, or LaSalle, and approximately $5,115,000 of the
proceeds from a $7,500,000 unsecured loan from our Sponsor. See
Capital Resources Financing, for a further
discussion. The balance was provided by funds raised through our
Offering. An acquisition fee of $444,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate.
Crawfordsville Medical Office Park and Athens Surgery
Center Crawfordsville, Indiana
On January 22, 2007, we acquired all of the membership
interests of NNN Crawfordsville, LLC from an affiliate, for a
total purchase price of $6,900,000, plus closing costs. NNN
Crawfordsville, LLC has fee simple ownership of Crawfordsville
Medical Office Park and Athens Surgery Center, located in
Crawfordsville, Indiana, or the Crawfordsville property. We
primarily financed the purchase price through the assumption of
an existing mortgage loan of $4,264,000 on the property with
LaSalle and approximately $2,385,000 of the
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proceeds from a $7,500,000 unsecured loan from our Sponsor. See
Capital Resources Financing, for a further
discussion. The balance was provided by funds raised through our
Offering. An acquisition fee of $207,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate.
The Gallery Professional Building St. Paul, Minnesota
On March 9, 2007, we acquired all of the membership
interests of NNN Gallery Medical, LLC from an affiliate, for a
purchase price of $8,800,000, plus closing costs. NNN Gallery
Medical, LLC has fee simple ownership of The Gallery
Professional Building, located in St. Paul, Minnesota, or the
Gallery property. We primarily financed the purchase price
through the assumption of an existing mortgage loan of
$6,000,000 on the property with LaSalle and a $1,000,000
unsecured loan from our Sponsor. See Capital
Resources Financing, for a further discussion. The
balance of the purchase price was provided by funds raised
through our Offering. An acquisition fee of $264,000, or 3.0% of
the purchase price, was paid to our Advisor and its affiliate.
Lenox Office Park, Building G Memphis, Tennessee
On March 23, 2007, we acquired all of the membership
interests of NNN Lenox Medical, LLC and NNN Lenox Medical Land,
LLC from an affiliate, for a purchase price of $18,500,000, plus
closing costs. NNN Lenox Medical, LLC holds a leasehold interest
in Lenox Office Park, Building G, and NNN Lenox Medical Land,
LLC holds a fee simple interest in two vacant parcels of land
within Lenox Office Park, located in Memphis, Tennessee, which
we collectively refer to as the Lenox property. We primarily
financed the purchase price of the property and land parcels
through the assumption of an existing mortgage loan of
$12,000,000 on the property with LaSalle. See Capital
Resources Financing Mortgage Loan
Payables, for a further discussion. The balance of the purchase
price was provided by funds raised through our Offering. An
acquisition fee of $555,000, or 3.0% of the purchase price, was
paid to our Advisor and its affiliate.
Unaffiliated
Third Party Acquisitions
Commons V Medical Office Building Naples, Florida
On April 24, 2007, we acquired Commons V Medical Office
Building, located in Naples, Florida, or the Commons V property,
from an unaffiliated third party, for a purchase price of
$14,100,000, plus closing costs. We financed the purchase price
using funds raised through our Offering. An acquisition fee of
$423,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate. In addition, a real estate commission of
$300,000, or approximately 2.0% of the purchase price, was paid
to Grubb & Ellis. On May 14, 2007, we entered
into a loan, secured by the Commons V property, with Wachovia,
evidenced by a promissory note in the principal amount of
$10,000,000. The proceeds from this loan were used to purchase
the Thunderbird Medical Plaza as described below. See Capital
Resources Financing Mortgage Loan
Payables, for a further discussion.
Yorktown Medical Center and Shakerag Medical Center
Fayetteville and Peachtree City, Georgia
On May 2, 2007, we acquired Yorktown Medical Center and
Shakerag Medical Center, located in Fayetteville, Georgia and
Peachtree City, Georgia, respectively, which we collectively
refer to as the Peachtree property, for a total purchase price
of $21,500,000, plus closing costs. We acquired the property
from an unaffiliated third party. We financed the purchase price
through a secured loan with Wachovia as evidenced by a
promissory note in the principal amount of $13,530,000 and by
funds raised through our Offering. See Capital
Resources Financing Mortgage Loan
Payables, for a further discussion. An acquisition fee of
$645,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
Thunderbird Medical Plaza Glendale, Arizona
On May 15, 2007, we acquired Thunderbird Medical Plaza,
located in Glendale, Arizona, from an unaffiliated third party
for a total purchase price of $25,000,000, plus closing costs.
We acquired the property from an unaffiliated third party. We
financed the purchase price using a combination of $9,651,000 in
net proceeds from the $10,000,000 loan from Wachovia secured by
the Commons V property (described above) and funds raised
through our Offering. An acquisition fee of $750,000, or 3.0% of
the purchase price, was
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paid to our Advisor and its affiliate. On June 8, 2007, we
entered into a loan, secured by the Thunderbird property, with
Wachovia, evidenced by a promissory note in the principal amount
of $14,000,000. The proceeds from this loan were used to
purchase Triumph Hospital Northwest and Triumph Hospital
Southwest as described below. See Capital Resources
Financing Mortgage Loan Payables, for a further
discussion.
Triumph Hospital Northwest and Triumph Hospital
Southwest Houston and Sugar Land, Texas
On June 8, 2007, we acquired Triumph Hospital Northwest,
located in Houston, Texas, and Triumph Hospital Southwest,
located in Sugar Land, Texas, which we collectively refer to as
the Triumph Hospital Portfolio, for a total purchase price of
$36,500,000, plus closing costs. We acquired the property from
an unaffiliated third party. We financed the purchase price
using a combination of $12,605,000 in net proceeds from the loan
from Wachovia secured by the Thunderbird property (described
above), $20,975,000 from funds raised through our Offering and
the balance of $4,000,000 from an unsecured loan from our
Sponsor. See Capital Resources Unsecured Note
Payables to Affiliate, for a further discussion. An acquisition
fee of $1,095,000, or 3.0% of the purchase price, was paid to
our Advisor and its affiliate.
Gwinnett Professional Center Lawrenceville, Georgia
On July 27, 2007, we acquired the Gwinnett Professional
Center, located in Lawrenceville, Georgia, or the Gwinnett
property, for a purchase price of $9,300,000, plus closing
costs. We acquired the property from an unaffiliated third
party. We financed the purchase price using a combination of
debt financing consisting of a $6,000,000 loan assumed with a
current principal balance of $5,734,000 secured by the Gwinnett
property from LaSalle and funds raised through our Offering. See
Capital Resources Financing Mortgage
Loan Payables, for a further discussion. An acquisition fee of
$279,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate.
1 and 4 Market Exchange Columbus, Ohio
On August 15, 2007, we acquired 1 Market Exchange, 4 Market
Exchange and a vacant parcel of land, located in Columbus, Ohio,
which we collectively refer to as the 1 and 4 Market property,
for a total purchase price of $21,900,000, plus closing costs.
We acquired the property from unaffiliated third parties. We
financed the purchase price using funds raised through our
Offering. An acquisition fee of $657,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate. On
September 28, 2007, we entered into a loan, secured by the
1 and 4 Market property, with Wachovia, evidenced by a
promissory note in the principal amount of $14,500,000. See
Capital Resources Financing Mortgage
Loan Payables, for a further discussion.
Kokomo Medical Office Park Kokomo, Indiana
On August 30, 2007, we acquired the Kokomo Medical Office
Park, located in Kokomo, Indiana, or the Kokomo property, for a
total purchase price of $13,350,000, plus closing costs. We
acquired the property from an unaffiliated third party. We
financed the purchase price using a combination of funds raised
through our Offering and the balance of $1,300,000 from an
unsecured loan from our Sponsor. See Capital
Resources Financing Unsecured Note
Payables to Affiliate, for a further discussion. An acquisition
fee of $401,000, or 3.0% of the purchase price, was paid to our
Advisor and its affiliate.
St. Mary Physicians Center Long Beach, California
On September 5, 2007, we acquired St. Mary Physicians
Center, located in Long Beach, California, or the St. Mary
property, for a purchase price of $13,800,000, plus closing
costs. We acquired the property from an unaffiliated third
party. We financed the purchase price using a combination of
$8,280,000 from a loan secured by the St. Mary property and
the balance of $6,100,000 from an unsecured loan from our
Sponsor. See Capital Resources Financing, for a
further discussion. An acquisition fee of $414,000, or 3.0% of
the purchase price, was paid to our Advisor and its affiliate.
2750 Monroe Boulevard Valley Forge, Pennsylvania
On September 10, 2007, we acquired 2750 Monroe Boulevard,
located in Valley Forge, Pennsylvania, or the 2750 Monroe
property, for a total purchase price of $26,700,000, plus
closing costs. We acquired the property from an unaffiliated
third party. We financed the purchase price of the property with
approximately
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$27,870,000 in borrowings under a secured revolving line of
credit with LaSalle. See Capital Resources
Financing Line of Credit, for a further discussion.
An acquisition fee of $801,000, or 3.0% of the purchase price,
was paid to our Advisor and its affiliate.
East Florida Senior Care Portfolio Jacksonville,
Winter Park and Sunrise, Florida
On September 28, 2007, we acquired the East Florida Senior
Care Portfolio, located in Jacksonville, Winter Park and
Sunrise, Florida, or the EFSC property, for a total purchase
price of $52,000,000, plus closing costs. We acquired the
property from an unaffiliated third party. We financed the
purchase price using a combination of $24,918,000 in net
proceeds from a $26,000,000 loan (net of a $4,500,000 loan
holdback) from KeyBank National Association, or KeyBank, secured
by the EFSC property, $11,000,000 in borrowings under a secured
revolving line of credit with LaSalle and the balance with funds
raised through our Offering. See Capital Resources
Financing Mortgage Loan Payables, for a further
discussion. An acquisition fee of $1,560,000, or 3.0% of the
purchase price, was paid to our Advisor and its affiliate.
Leverage
In accordance with our charter, a majority of our directors,
including a majority of our independent directors, approved our
leverage exceeding 300.0% in connection with our first four
acquisitions. The board of directors determined that the excess
leverage was justified because it enabled us to purchase the
properties during the initial stages of our Offering, thereby
improving our ability to meet our goal of acquiring a
diversified portfolio of properties to generate current income
for investors and preserve investor capital. As of
November 13, 2007, our leverage does not exceed 300.0%. We
may, with a majority of our independent directors
authority, exceed our charters leverage guidelines again
during the early stages of our operations. We will take action
to reduce any such excess as soon as practicable. Net assets for
purposes of this calculation are defined as our total assets
(other than intangibles), valued at cost prior to deducting
depreciation, reserves for bad debts and other non-cash
reserves, less total liabilities. The preceding calculation is
generally expected to approximate 75.0% of the sum of
(1) the aggregate cost of our properties before non-cash
reserves and depreciation and (2) the aggregate cost of our
securities assets.
Proposed
Unaffiliated Third Party Acquisition
St.
Ritas Medical Center Portfolio Lima,
Ohio
On July 31, 2007, our board of directors approved the
acquisition of the St. Ritas Medical Center Portfolio,
located in Lima, Ohio. We anticipate purchasing the St.
Ritas Medical Center Portfolio for a purchase price of
$25,750,000, plus closing costs, from an unaffiliated third
party. We intend to finance the purchase using our secured
revolving line of credit with LaSalle. We expect to pay our
Advisor and its affiliate an acquisition fee of $773,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the fourth quarter
of 2007; however, closing is subject to certain agreed upon
conditions and there can be no assurance that we will be able to
complete the acquisition of St. Ritas Medical Center.
Factors
Which May Influence Results of Operations
Rental
Income
The amount of rental income generated by our properties depends
principally on our ability to maintain the occupancy rates of
currently leased space, to lease currently available space and
space available from unscheduled lease terminations at the
existing rental rates and the timing of the disposition of the
properties. Negative trends in one or more of these factors
could adversely affect our rental income in future periods.
Scheduled
Lease Expirations
As of September 30, 2007, our consolidated properties were
91.5% leased. 1.8% of the leased GLA expires during the
remainder of 2007. Our leasing strategy for 2007 focuses on
negotiating renewals for leases scheduled to expire during the
remainder of the year. If we are unable to negotiate such
renewals, we will try
36
to identify new tenants or collaborate with existing tenants who
are seeking additional space to occupy. Of the leases expiring
in 2007, we anticipate, but cannot assure, that all of the
tenants will renew for another term.
Sarbanes-Oxley
Act
The Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act, and related laws, regulations and standards
relating to corporate governance and disclosure requirements
applicable to public companies, have increased the costs of
compliance with corporate governance, reporting and disclosure
practices which are now required of us. These costs may have a
material adverse effect on our results of operations and could
impact our ability to continue to pay distributions at current
rates to our stockholders. Furthermore, we expect that these
costs will increase in the future due to our continuing
implementation of compliance programs mandated by these
requirements. Any increased costs may affect our ability to
distribute funds to our stockholders. As part of our compliance
with the Sarbanes-Oxley Act, we will have to provide
managements assessment of our internal control over
financial reporting as of December 31, 2007.
In addition, these laws, rules and regulations create new legal
bases for potential administrative enforcement, civil and
criminal proceedings against us in the event of non-compliance,
thereby increasing the risks of liability and potential
sanctions against us. We expect that our efforts to comply with
these laws and regulations will continue to involve significant,
and potentially increasing costs and, our failure to comply
could result in fees, fines, penalties or administrative
remedies against us.
Results
of Operations
Our operating results are primarily comprised of income derived
from our portfolio of properties.
We are not aware of any material trends or uncertainties, other
than national economic conditions affecting real estate
generally, that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the
acquisition, management and operation of properties other than
those listed in Part II, Item 1A. Risk Factors.
If we fail to raise significant proceeds above our minimum
offering, we will not have enough proceeds to invest in a
diversified real estate portfolio. Our real estate portfolio
would be concentrated in a small number of properties, resulting
in increased exposure to local and regional economic downturns
and the poor performance of one or more of our properties and,
therefore, expose our stockholders to increased risk. In
addition, many of our expenses are fixed regardless of the size
of our real estate portfolio. Therefore, depending on the amount
of offering proceeds we raise, we would expend a larger portion
of our income on operating expenses. This would reduce our
profitability and, in turn, the amount of net income available
for distribution to our stockholders.
We had limited results of operations for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006.
Net
Loss
For the three months ended September 30, 2007 and 2006, we
had a net loss of $1,933,000 and $50,000, respectively, or
$(0.15) and $(88.84) per share, respectively, due to revenue of
$4,787,000 and $0, respectively, offset by rental expenses of
$1,562,000 and $0, respectively, general and administrative
expenses of $935,000 and $50,000, respectively, depreciation and
amortization of $3,048,000 and $0, respectively, interest
expense of $1,286,000 and $0, respectively, and interest income
of $111,000 and $0, respectively.
For the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, we had a net loss of $3,669,000 and
$50,000, respectively, or $(0.53) and $(141.88) per share,
respectively, due to revenue of $8,711,000 and $0, respectively,
offset by rental expenses of $3,065,000 and $0, respectively,
general and administrative expenses of $1,957,000 and $50,000,
respectively, depreciation and amortization of $5,252,000 and
$0, respectively, interest expense of $2,302,000 and $0,
respectively, and interest income of $196,000 and $0,
respectively.
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Revenue
For the three months ended September 30, 2007 and 2006,
revenue was comprised of $4,787,000 and $0 in rental income,
respectively. The increases were primarily related to a full
quarter of rental income at the Southpointe property, the
Crawfordsville property, the Gallery property, the Lenox
property, the Commons V property, the Peachtree property, the
Thunderbird property and the Triumph Hospital Portfolio. In
addition to the increase, we received rental income from the
Gwinnett property for 66 days, the 1 and 4 Market property
for 47 days, the Kokomo property for 32 days, the
St. Mary property for 26 days, the 2750 Monroe
property for 21 days and the EFSC property for three days.
For the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, revenue was comprised of $8,711,000 and
$0 in rental income, respectively. The increases were primarily
related to two full quarters of rental income at the Southpointe
property, the Crawfordsville property, the Gallery property and
the Lenox property. Also, the increase was related to a full
quarter of rental income at the Commons V property, the
Peachtree property, the Thunderbird property and the Triumph
Hospital Portfolio. In addition to the increase, we received
rental income from the Gwinnett property for 66 days, the 1
and 4 Market property for 47 days, the Kokomo property for
32 days, the St. Mary property for 26 days, the
2750 Monroe property for 21 days and the EFSC property for
three days.
Rental
Expense
For the three months ended September 30, 2007 and 2006,
rental expense was $1,562,000 and $0, respectively. Rental
expense represents expense for a full quarter at the Southpointe
property, the Crawfordsville property, the Gallery property, the
Lenox property, the Commons V property, the Peachtree property,
the Thunderbird property and the Triumph Hospital Portfolio. In
addition to the increase, rental expense was comprised of the
Gwinnett property for 66 days, the 1 and 4 Market property
for 47 days, the Kokomo property for 32 days, the
St. Mary property for 26 days, the 2750 Monroe
property for 21 days and the EFSC property for three days.
For the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, rental expense was $3,065,000 and $0,
respectively. Rental expense represents expense for two full
quarters at the Southpointe property, the Crawfordsville
property, the Gallery property and the Lenox property. Also, the
increase was related to a full quarter of rental expense at the
Commons V property, the Peachtree property, the Thunderbird
property and the Triumph Hospital Portfolio. In addition to the
increase, rental expense was comprised of the Gwinnett property
for 66 days, the 1 and 4 Market property for 47 days,
the Kokomo property for 32 days, the St. Mary property
for 26 days, the 2750 Monroe property for 21 days and
the EFSC property for three days.
General
and Administrative
For the three months ended September 30, 2007 and 2006,
general and administrative expense was $935,000 and $50,000,
respectively. General and administrative expenses consisted
primarily of third-party professional legal, accounting fees
related to our SEC filing requirements, asset management fees,
board of directors fees and retainer and director and
officers insurance.
For the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, general and administrative expense was
$1,957,000 and $50,000, respectively. General and administrative
expenses consisted primarily of third-party professional legal,
accounting fees related to our SEC filing requirements, asset
management fees, board of directors fees and retainer and
director and officers insurance.
Depreciation
and Amortization
For the three months ended September 30, 2007 and 2006,
depreciation and amortization expense was comprised primarily of
depreciation on the properties of $1,411,000 and $0,
respectively, and amortization of
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identified intangible assets of $1,635,000 and $0, respectively.
The increase from prior quarter is due to the increase in the
number of properties.
For the nine months ended September 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
September 30, 2006, depreciation and amortization expense
was comprised primarily of depreciation on the properties of
$2,312,000 and $0, respectively, and amortization of identified
intangible assets of $2,937,000 and $0, respectively. The
increase from prior quarter is due to the increase in the number
of properties.
Depreciation and amortization is calculated based on our
depreciation and amortization policies as set forth in our 2006
Annual Report on
Form 10-K,
as filed with the SEC.
Interest
Expense
For the three months ended September 30, 2007 and 2006,
interest expense was related to interest expense primarily on
our mortgage loan payables and line of credit of $1,242,000 and
$0, respectively, interest expense on the unsecured note
payables to NNN Realty Advisors of $7,000 and $0, respectively,
and amortization of loan fees associated with acquiring the
mortgage loan payables of $37,000 and $0, respectively, that are
being amortized to interest expense over the terms of the
related mortgage note payables.
For the nine months ended September 30, 2007 and for the
period from April 28 (Date of Inception) through
September 30, 2006, interest expense was related to
interest expense primarily on our mortgage loan payables and
line of credit of $2,164,000 and $0, respectively, interest
expense on the unsecured note payables to NNN Realty Advisors of
$84,000, and $0, respectively, and amortization of loan fees
associated with acquiring the mortgage loan payables of $54,000
and $0, respectively, that are being amortized to interest
expense over the terms of the related mortgage note payables.
Liquidity
and Capital Resources
We are dependent upon the net proceeds to be received from our
Offering to conduct our proposed activities. The capital
required to purchase real estate and real estate related
securities will be obtained from our Offering and from any
indebtedness that we may incur.
Our principal demands for funds will be for acquisitions of real
estate and real estate related securities, to pay operating
expenses and interest on our outstanding indebtedness and to
make distributions to our stockholders. In addition, we will
require resources to make certain payments to our Advisor and
our Dealer Manager, which during our Offering include payments
to our Advisor and its affiliates for reimbursement of certain
organizational and offering expenses and to our Dealer Manager
and its affiliates for selling commissions, non-accountable
marketing support fees and due diligence expense reimbursements.
Generally, cash needs for items other than acquisitions of real
estate and real estate related securities will be met from
operations, future borrowings, and the net proceeds of our
Offering. However, there may be a delay between the sale of
shares of our common stock and our investments in properties and
real estate related securities, which could result in a delay in
the benefits to our stockholders, if any, of returns generated
from our investment operations. We believe that these cash
resources will be sufficient to satisfy our cash requirements
for the foreseeable future, and we do not anticipate a need to
raise funds from other than these sources within the next
12 months.
We currently anticipate that we will require up to $5,331,000
for the next 12 months for capital expenditures. We have
reserves with lenders for such capital expenditures of
$2,839,000 as of September 30, 2007. To the extent we
purchase additional properties in the future, we may require
funds for capital expenditures. To the extent funds from
operations are not sufficient to fund these expenditures, we
would be required to borrow amounts.
Our Advisor evaluates potential additional investments and
engages in negotiations with real estate sellers, developers,
brokers, investment managers, lenders and others on our behalf.
Until we invest the proceeds of our Offering in properties and
real estate related securities, we may invest in short-term,
highly liquid or other
39
authorized investments. Such short-term investments will not
earn significant returns, and we cannot predict how long it will
take to fully invest the proceeds in properties and real estate
related securities. The number of properties we may acquire and
other investments we will make will depend upon the number of
shares sold in our Offering and the resulting amount of net
proceeds available for investment.
When we acquire a property, our Advisor prepares a capital plan
that contemplates the estimated capital needs of that
investment. In addition to operating expenses, capital needs may
also include costs of refurbishment, tenant improvements or
other major capital expenditures. The capital plan also sets
forth the anticipated sources of the necessary capital, which
may include a line of credit or other loans established with
respect to the investment, operating cash generated by the
investment, additional equity investments from us or joint
venture partners or, when necessary, capital reserves. Any
capital reserve would be established from the gross proceeds of
our Offering, proceeds from sales of other investments,
operating cash generated by other investments or other cash on
hand. In some cases, a lender may require us to establish
capital reserves for a particular investment. The capital plan
for each investment will be adjusted through ongoing, regular
reviews of our portfolio or as necessary to respond to
unanticipated additional capital needs.
Cash
Flows
Cash flows from operating activities for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, were
$2,963,000 and $0, respectively. Such cash flows related
primarily to operations from the properties. We anticipate cash
flows from operating activities to continue to increase as we
purchase more properties and have a full year of operations.
Cash flows used in investing activities for the nine months
ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006 were $258,510,000 and $0, respectively.
In 2007, such cash flows related primarily to the acquisition of
our 14 properties in the amount of $253,574,000. We anticipate
cash flows used in investing activities to continue to increase
as we purchase more properties.
Cash flows from financing activities for the nine months ended
September 30, 2007 and for the period from April 28,
2006 (Date of Inception) through September 30, 2006, were
$259,857,000 and $202,000, respectively. In 2007, such cash
flows related primarily to funds raised from investors in the
amount of $157,281,000, borrowings on mortgage loan payables and
unsecured note payables to affiliate of $106,210,000 and net
borrowings under the line of credit of $35,700,000 partially
offset by principal repayments of $19,921,000 on unsecured
loans, offering costs of $16,130,000 and distributions of
$1,638,000. Additional cash outflows related to debt financing
costs of $1,668,000 in relation to the acquisitions. In 2006,
such cash flows related to $2,000 from the sale of
200 shares of our common stock to our Advisor and $200,000
invested in our Operating Partnership from our Advisor. We
anticipate cash flows from financing activities to increase in
the future as we raise additional funds from investors and incur
additional debt to purchase properties.
Distributions
The amount of the distributions to our stockholders will be
determined by our board of directors and are dependent on a
number of factors, including funds available for payment of
distributions, our financial condition, capital expenditure
requirements and annual distribution requirements needed to
maintain our status as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, or the
Code.
We paid our first monthly distribution on February 15, 2007
for the period ended January 31, 2007.
On February 14, 2007, our board of directors approved a
7.25% per annum distribution to be paid to stockholders
beginning with our February 2007 monthly distribution,
which was paid in March 2007. Distributions are paid monthly.
If distributions are in excess of our taxable income, such
distributions will result in a return of capital to our
stockholders.
40
For the nine months ended September 30, 2007, we paid
distributions of $1,638,000 from cash flow from operations of
$2,963,000 for the period. However, as of September 30,
2007, we owed $632,000 to our Advisor and its affiliates for
operating expenses,
on-site
personnel and engineering payroll and asset and property
management fees, which will be paid from cash flow from
operations in the future.
Our Advisor and its affiliates have no obligations to defer or
forgive amounts due to them. As of September 30, 2007, no
amounts due to our Advisor or its affiliates have been forgiven.
In the future, if our Advisor or its affiliates do not defer or
forgive amounts due to them and as a result if our cash flow
from operations is less than the distributions to be paid, we
would be required to pay our distributions, or a portion
thereof, with proceeds from our Offering or borrowed funds. As a
result, the amount of proceeds available for investment and
operations would be reduced, or we may incur additional interest
expense as a result of borrowed funds.
For the nine months ended September 30, 2007, our funds
from operations, or FFO, was $1,583,000. We paid distributions
of $1,638,000, of which $1,583,000 was paid from FFO and the
remainder from proceeds from our Offering. See our disclosure
regarding FFO below.
Capital
Resources
Financing
We anticipate that aggregate borrowings, both secured and
unsecured, will not exceed 60.0% of all of our properties
combined fair market values, as determined at the end of each
calendar year beginning with our first full year of operations.
For these purposes, the fair market value of each asset will be
equal to the purchase price paid for the asset or, if the asset
was appraised subsequent to the date of purchase, then the fair
market value will be equal to the value reported in the most
recent independent appraisal of the asset. Our policies do not
limit the amount we may borrow with respect to any individual
investment.
Our charter precludes us from borrowing in excess of 300.0% of
the value of our net assets, unless approved by our independent
directors and the justification for such excess borrowing is
disclosed to our stockholders in our next quarterly report. In
accordance with our charter, a majority of our directors,
including a majority of our independent directors, approved our
leverage exceeding 300.0% in connection with our first four
acquisitions. The board of directors determined that the excess
leverage was justified because it enabled us to purchase the
properties during the initial stages of our Offering, thereby
improving our ability to meet our goal of acquiring a
diversified portfolio of properties to generate current income
for investors and preserve investor capital. As of
November 13, 2007, our leverage does not exceed 300.0%. We
may, with a majority of our independent directors
authority, exceed our charters leverage guidelines during
the early stages of our operations. We will take action to
reduce any such excess as soon as practicable. Net assets for
purposes of this calculation are defined as our total assets
(other than intangibles), valued at cost prior to deducting
depreciation, reserves for bad debts and other non-cash
reserves, less total liabilities.
Mortgage
Loan Payables
Mortgage loan payables were $123,433,000 ($123,331,000, net of
discount) and $0 as of September 30, 2007 and
December 31, 2006, respectively. As of September 30,
2007, we had fixed and variable rate mortgage loans with the
effective interest rates ranging from 5.52% to 6.52% per annum
and the weighted-average effective interest rate of 6.01% per
annum. We are required by the terms of the applicable loan
documents to meet certain financial covenants, such as debt
service coverage ratios and rent coverage ratios, and reporting
requirements. As of September 30, 2007, we were in
compliance with all such covenants and requirements.
41
Mortgage loan payables consisted of the following as of
September 30, 2007 and December 31, 2006:
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Mortgage
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Mortgage
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Loan Payables
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Loan Payables
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Interest
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Maturity
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as of
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as of
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Property
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Rate
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Date
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September 30, 2007
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December 31, 2006
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Fixed Debt:
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Southpointe Office Parke and Epler Parke I
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6.11
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%
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9/1/2016
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$
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9,146,000
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$
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Crawfordsville Medical Office Park
and Athens Surgery Center
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6.12
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%
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10/1/2016
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4,264,000
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The Gallery Professional Building
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5.76
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%
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3/1/2017
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6,000,000
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Lenox Office Park, Building G
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5.88
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%
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2/1/2017
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12,000,000
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Commons V Medical Office Building
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5.54
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%
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6/11/2017
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10,000,000
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Yorktown Medical Center and Shakerag
Medical Center
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5.52
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%
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5/11/2017
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13,530,000
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Thunderbird Medical Plaza
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5.67
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%
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6/11/2017
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14,000,000
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Gwinnett Professional Center
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5.88
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%
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1/1/2014
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5,713,000
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St. Mary Physicians Center
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5.80
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%
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9/4/2009
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8,280,000
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82,933,000
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Variable Debt:
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1 and 4 Market Exchange
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Variable
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*
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9/30/2010
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14,500,000
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East Florida Senior Care Portfolio
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Variable
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**
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10/1/2010
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26,000,000
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40,500,000
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Total fixed and variable debt
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123,433,000
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Less: discount
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(102,000
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)
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Mortgage loan payables
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$
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123,331,000
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$
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* At our option, the loan bears interest at per annum rates
equal to:
(a) 30-day
LIBOR plus 1.35%; or (b) the Prime Rate, as announced by
Wachovia Financial from time to time. As of September 30,
2007, the rate was 6.47%.
** At our option, the loan bears interest at per annum
rates equal to: (a) a rate equal to the greater of:
(i) the prime rate, as established from time to time by
KeyBank, or (ii) 1.0% in excess of the federal funds
effective rate, as defined in the loan agreement; or
(b) the Adjusted LIBOR Rate, as defined in the loan
agreement. As of September 30, 2007, the rate was 6.52%.
Unsecured
Note Payables to Affiliate
On January 22, 2007 and March 9, 2007, we entered into
unsecured loans with NNN Realty Advisors, evidenced by unsecured
promissory notes in the principal amounts of $7,500,000 and
$1,000,000, respectively. The unsecured notes provided for
maturity dates of July 22, 2007 and September 9, 2007,
respectively. The $7,500,000 and $1,000,000 unsecured notes bore
interest at a fixed rate of 6.86% and 6.84% per annum,
respectively, and required monthly interest-only payments for
the terms of the unsecured notes. The unsecured notes provided
for default interest rates in an event of default equal to 8.86%
and 8.84% per annum, respectively. On March 28, 2007, we
repaid all outstanding principal and accrued interest on both
unsecured notes.
On June 8, 2007, we entered into an unsecured loan with NNN
Realty Advisors, evidenced by an unsecured promissory note in
the principal amount of $4,000,000. The unsecured note provided
for a maturity date of December 8, 2007. The $4,000,000
unsecured note bore interest at a fixed rate of 6.82% per annum
and required monthly interest-only payments for the term of the
unsecured note. The unsecured note provided for a default
interest rate in an event of default equal to 8.82% per annum.
On June 28, 2007, we repaid all outstanding principal and
accrued interest on the unsecured note.
On August 30, 2007 and September 5, 2007, we entered
into unsecured loans with NNN Realty Advisors, evidenced by
unsecured promissory notes in the principal amounts of
$1,300,000 and $6,100,000, respectively. The unsecured notes
provided for maturity dates of March 1, 2008 and
March 5, 2008, respectively. The $1,300,000 and $6,100,000
unsecured notes bore interest at a fixed rate of 6.85% and 6.86%
per annum, respectively, and required monthly interest-only
payments for the terms of the unsecured notes. The unsecured
notes provided for
42
default interest rates in an event of default equal to 8.85% and
8.86% per annum, respectively. On September 4, 2007 and
September 11, 2007, we repaid all outstanding principal and
accrued interest on both the $1,300,000 and $6,100,000 unsecured
notes, respectively.
Because these loans were related party loans, the terms of the
loans and the unsecured notes, were approved by our board of
directors, including a majority of our independent directors,
and deemed fair, competitive and commercially reasonable by our
board of directors.
Line of
Credit
On September 10, 2007, we entered into a loan agreement, or
the Loan Agreement, with LaSalle to obtain a secured revolving
credit facility in an aggregate maximum principal amount of
$50,000,000, or the LaSalle Line of Credit. The proceeds of
loans made under the Loan Agreement may be used to finance the
purchase of properties or, provided no event of default has
occurred and is continuing, may be used for any other lawful
purpose. In addition to loans, our Operating Partnership may
obtain up to $10,000,000 of the credit available under the Loan
Agreement in the form of letters of credit. The initial term of
the Loan Agreement is three years, which may be extended by one
12-month period subject to satisfaction of certain conditions,
including payment of an extension fee equal to 0.20% of the
principal balance of loans then outstanding.
The actual amount of credit available under the Loan Agreement
is a function of certain loan to cost, loan to value and debt
service coverage ratios contained in the Loan Agreement. The
maximum principal amount of the Loan Agreement may be increased
to $120,000,000 subject to the terms of the Loan Agreement.
Also, additional financial institutions may become lenders under
the Loan Agreement.
At our option, loans under the Loan Agreement bear interest at
per annum rates equal to (a) LIBOR plus a margin ranging
from 1.45% to 1.60%, depending on the ratio of outstanding
amounts under the Loan Agreement to the value of the collateral
securing the Loan Agreement, (b) the greater of
LaSalles prime rate or the Federal Funds Rate plus 0.50%,
or (c) a combination of these rates. Accrued interest under
the Loan Agreement is payable monthly and at maturity. In
addition to interest, we are required to pay a fee on the unused
portion of the lenders commitments under the Loan
Agreement at a per annum rate equal to 0.20%, payable quarterly
in arrears, beginning with the quarter ending December 31,
2007.
Our obligations with respect to the Loan Agreement are
guaranteed by us and by our subsidiaries that own properties
that serve as collateral for the Loan Agreement.
The Loan Agreement contains various affirmative and negative
covenants that are customary for facilities and transactions of
this type, including limitations on the incurrence of debt by us
and our subsidiaries that own properties that serve as
collateral for the Loan Agreement, limitations on the nature of
our business, and limitations on distributions by us and our
subsidiaries that own properties that serve as collateral for
the Loan Agreement. The Loan Agreement also imposes the
following financial covenants on us and our Operating
Partnership, as applicable: (a) a minimum ratio of
operating cash flow to interest expense, (b) a minimum
ratio of operating cash flow to fixed charges, (c) a
maximum ratio of liabilities to asset value, (d) a maximum
distribution covenant and (e) a minimum net worth covenant,
all of which are defined in the Loan Agreement. In addition, the
Loan Agreement includes events of default that are customary for
facilities and transactions of this type.
As of September 30, 2007 and December 31, 2006,
borrowings under the LaSalle Line of Credit totaled $35,700,000
and $0, respectively. Borrowings as of September 30, 2007
bore interest at a weighted-average interest rate of 7.08% per
annum.
REIT
Requirements
In order to qualify as a REIT for federal income tax purposes,
we are required to make distributions to our stockholders of at
least 90.0% of REIT taxable income. In the event that there is a
shortfall in net cash available due to factors including,
without limitation, the timing of such distributions or the
timing of the collections of receivables, we may seek to obtain
capital to pay distributions by means of debt financing
43
through one or more third parties. We may also pay distributions
from cash from capital transactions including, without
limitation, the sale of one or more of our properties.
Commitments
and Contingencies
Our organizational, offering and related expenses are being paid
by our Advisor and their affiliates on our behalf. These
organizational, offering and related expenses include all
expenses (other than selling commissions and the marketing
support fee which generally represent 7.0% and 2.5% of our gross
offering proceeds, respectively) to be paid by us in connection
with our Offering. These expenses will only become our liability
to the extent selling commissions, the marketing support fee and
due diligence expense reimbursement and other organizational and
offering expenses do not exceed 11.5% of the gross proceeds of
our Offering. As of September 30, 2007 and
December 31, 2006, our Advisor or its affiliates have
incurred expenses of $990,000 and $1,728,000, respectively, in
excess of 11.5% of the gross proceeds of our Offering, and
therefore these expenses are not recorded in our accompanying
condensed consolidated financial statements as of
September 30, 2007 and December 31, 2006. To the
extent we raise additional proceeds from our Offering, these
amounts may become our liability. See Note 10, Related
Party Transactions Offering Stage for a further
discussion of these amounts during our offering stage.
Debt
Service Requirements
One of our principal liquidity needs is the payment of interest
on outstanding indebtedness. As of September 30, 2007, we
had fixed and variable mortgage loan payables and the LaSalle
Line of Credit outstanding secured by our properties, in the
principal amount of $159,133,000 ($159,031,000, net of
discount). As of September 30, 2007, the weighted-average
interest rate on our outstanding debt was 6.77% per annum.
Contractual
Obligations
The following table provides information with respect to the
maturities and scheduled principal repayments of our secured
mortgage loan payables and the LaSalle Line of Credit as of
September 30, 2007. The table does not reflect any
available extension options.
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Payments Due by Period
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Less Than
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More Than
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(2007)
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(2008-2009)
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(2010-2012)
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(After 2012)
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Total
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Principal payments variable rate debt
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$
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$
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$
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40,500,000
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$
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|
$
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40,500,000
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|
Principal payments fixed rate debt
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|
|
14,000
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|
|
|
8,738,000
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|
2,561,000
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|
|
|
71,620,000
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|
|
|
82,933,000
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|
Line of credit
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|
|
|
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|
|
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|
35,700,000
|
|
|
|
|
|
|
|
35,700,000
|
|
Interest payments variable rate debt (based on rate
in effect as of September 30, 2007)
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|
|
446,000
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|
|
|
5,194,000
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|
|
|
1,458,000
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|
|
|
|
|
|
|
7,098,000
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|
Interest payments fixed rate debt
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|
|
1,202,000
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|
|
|
9,538,000
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|
|
|
12,748,000
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|
|
|
16,157,000
|
|
|
|
39,645,000
|
|
Interest payments line of credit
|
|
|
632,000
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|
|
|
5,057,000
|
|
|
|
1,897,000
|
|
|
|
|
|
|
|
7,586,000
|
|
|
|
|
|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
Total
|
|
$
|
2,294,000
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|
|
$
|
28,527,000
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|
|
$
|
94,864,000
|
|
|
$
|
87,777,000
|
|
|
$
|
213,462,000
|
|
|
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|
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|
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|
|
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Off-Balance
Sheet Arrangements
As of September 30, 2007, we had no off-balance sheet
transactions, nor do we currently have any such arrangements or
obligations.
Inflation
We will be exposed to inflation risk as income from future
long-term leases is expected to be the primary source of our
cash flows from operations. We expect that there will be
provisions in the majority of our tenant leases that would
protect us from the impact of inflation. These provisions
include rent steps, reimbursement billings for operating expense
pass-through charges, real estate tax and insurance
reimbursements on a per
44
square foot allowance. However, due to the anticipated long-term
nature of the leases, among other factors, the leases may not
re-set frequently enough to cover inflation.
Funds
from Operations
One of our objectives is to provide cash distributions to our
stockholders from cash generated by our operations. FFO is not
equivalent to our net income or loss as determined under GAAP.
Due to certain unique operating characteristics of real estate
companies, the National Association of Real Estate Investment
Trusts, or NAREIT, an industry trade group, has promulgated a
measure known as FFO which it believes more accurately reflects
the operating performance of a REIT such as us.
We define FFO, a non-GAAP measure, consistent with the standards
established by the White Paper on FFO approved by the Board of
Governors of NAREIT, as revised in February 2004. The White
Paper defines FFO as net income or loss computed in accordance
with GAAP, excluding gains or losses from sales of property but
including asset impairment writedowns, plus depreciation and
amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect FFO.
We are disclosing FFO and intend to disclose FFO in future
filings because we consider FFO to be an appropriate
supplemental measure of a REITs operating performance as
it is based on a net income analysis of property portfolio
performance that excludes non-cash items such as depreciation.
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. Since real estate values
historically rise and fall with market conditions, presentations
of operating results for a REIT, using historical accounting for
depreciation, could be less informative. The use of FFO is
recommended by the REIT industry as a supplemental performance
measure.
Presentation of this information is intended to assist the
reader in comparing the operating performance of different
REITs, although it should be noted that not all REITs calculate
FFO the same way, so comparisons with other REITs may not be
meaningful. Furthermore, FFO is not necessarily indicative of
cash flow available to fund cash needs and should not be
considered as an alternative to net income as an indication of
our performance. Our FFO reporting complies with NAREITs
policy described above.
The following is the calculation of FFO for the three months
ended September 30, 2007 and 2006, for the nine months
ended September 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
April 28, 2006
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
|
|
|
|
|
|
|
Inception)
|
|
|
|
Three Months Ended
|
|
|
Nine Months
|
|
|
through
|
|
|
|
September 30,
|
|
|
Ended September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net loss
|
|
$
|
(1,933,000
|
)
|
|
$
|
(50,000
|
)
|
|
$
|
(3,669,000
|
)
|
|
$
|
(50,000
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
consolidated properties
|
|
|
3,048,000
|
|
|
|
|
|
|
|
5,252,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
1,115,000
|
|
|
$
|
(50,000
|
)
|
|
$
|
1,583,000
|
|
|
$
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding basic and diluted
|
|
|
13,223,746
|
|
|
|
559
|
|
|
|
6,939,820
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
Events
Status
of our Offering
As of October 31, 2007, we had received and accepted
subscriptions in our Offering for 18,059,074 shares of our
common stock, or $180,368,000, excluding shares issued under the
DRIP.
45
Proposed
Unaffiliated Third Party Acquisitions
Tucson
Medical Center Tucson, Arizona
On October 24, 2007, our board of directors approved the
acquisition of Tucson Medical Center, located in Tucson,
Arizona. We anticipate purchasing the Tucson Medical Center for
a purchase price of $21,125,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
using the LaSalle Line of Credit. We expect to pay our Advisor
and its affiliate an acquisition fee of $634,000, or 3.0% of the
purchase price, in connection with the acquisition. We
anticipate that the closing will occur in the fourth quarter of
2007; however, closing is subject to certain agreed upon
conditions and there can be no assurance that we will be able to
complete the acquisition Tucson Medical Center.
Northmeadow
Medical Center Roswell, Georgia
On October 24, 2007, our board of directors approved the
acquisition of Northmeadow Medical Center, located in Roswell,
Georgia. We anticipate purchasing the Northmeadow Medical Center
for a purchase price of $11,850,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
using the LaSalle Line of Credit. We expect to pay our Advisor
and its affiliate an acquisition fee of $356,000, or
approximately 3.0% of the purchase price, in connection with the
acquisition. We anticipate that the closing will occur in the
fourth quarter of 2007; however, closing is subject to certain
agreed upon conditions and there can be no assurance that we
will be able to complete the acquisition of Northmeadow Medical
Center.
Interest
Rate Swaps
On October 12, 2007, we executed an interest rate swap
agreement with Wachovia in connection with the $14,500,000
secured loan on the 1 and 4 Market Exchange property, or the
Market Exchange loan. Pursuant to the terms of the original
promissory note, the Market Exchange loan bears interest, at our
option, at a per annum rate equal to either:
(a) 30-day
LIBOR plus 1.35%; or (b) the Prime Rate, as announced by
Wachovia Financial from time to time. As a result of the
interest rate swap agreement, the Market Exchange loan bears
interest at an effective fixed rate of 5.97% per annum from
September 28, 2007 through September 28, 2010; and
provides for monthly interest-only payments due on the first day
of each calendar month commencing on November 1, 2007.
On October 19, 2007, we executed an interest rate swap
agreement with KeyBank in connection with the $30,500,000
secured loan on the EFSC property, or the EFSC loan. Pursuant to
the terms of the original promissory note, the EFSC loan bears
interest, at our option, at a per annum rate equal to either:
(a) a rate equal to the greater of: (i) the prime
rate, as established from time to time by KeyBank, or
(ii) 1.0% in excess of the federal funds effective rate, as
defined in the loan agreement; or (b) the Adjusted LIBOR
Rate, as defined in the loan agreement. As a result of the
interest rate swap agreement, the EFSC loan bears interest at an
effective fixed rate of 6.01% per annum from November 1,
2007 through October 1, 2010; and provides for monthly
principal and interest payments due on the tenth day of each
calendar month commencing on November 10, 2007.
Line
of Credit
As of November 13, 2007, we have repaid $29,300,000 on the
LaSalle Line of Credit and $6,400,000 remains outstanding.
EFSC
Loan
On October 22, 2007, we met the requirements of the EFSC
loan and received the $4,500,000 loan holdback held in escrow
from KeyBank pursuant to the loan agreement.
46
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
As of December 31, 2006, we had not commenced real estate
operations and therefore had limited exposure to financial
market risks. During the nine months ended September 30,
2007, we assumed or entered into fixed and variable rate
mortgage loan payables and a secured line of credit secured by
our 14 properties.
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. In pursuing our business plan, we expect that the
primary market risk to which we will be exposed is interest rate
risk.
We may be exposed to the effects of interest rate changes
primarily as a result of borrowings used to maintain liquidity
and fund expansion and refinancing of our real estate investment
portfolio and operations. Our interest rate risk management
objectives are to limit the impact of interest rate changes on
earnings, prepayment penalties and cash flows and to lower
overall borrowing costs while taking into account variable
interest rate risk. To achieve our objectives, we may borrow at
fixed rates or variable rates. We may also enter into derivative
financial instruments such as interest rate swaps and caps in
order to mitigate our interest rate risk on a related financial
instrument. We will not enter into derivative or interest rate
transactions for speculative purposes.
In addition to changes in interest rates, the value of our
properties is subject to fluctuations based on changes in local
and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to
refinance our debt if necessary.
Our interest rate risk is monitored using a variety of
techniques. The table below presents, as of September 30,
2007, the principal amounts and weighted-average interest rates
by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair Value
|
|
|
Fixed rate debt - principal payments
|
|
$
|
14,000
|
|
|
$
|
150,000
|
|
|
$
|
8,588,000
|
|
|
$
|
545,000
|
|
|
$
|
73,636,000
|
|
|
$
|
82,933,000
|
|
|
$
|
81,728,000
|
|
Weighted-average interest rate
on maturing debt
|
|
|
5.88%
|
|
|
|
5.74%
|
|
|
|
5.80%
|
|
|
|
5.68%
|
|
|
|
5.76%
|
|
|
|
5.77%
|
|
|
|
|
|
Variable rate debt - principal payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,200,000
|
|
|
|
|
|
|
$
|
76,200,000
|
|
|
$
|
76,200,000
|
|
Weighted-average interest rate on maturing debt (based on rates
in effect as of September 30, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.77%
|
|
|
|
|
|
|
|
6.77%
|
|
|
|
|
|
As of September 30, 2007, our debt consisted of fixed and
variable mortgage loan payables in the principal amount of
$123,433,000 ($123,331,000, net of discount), at a
weighted-average interest rate of 6.01% per annum. As of
September 30, 2007, we had $35,700,000 outstanding on our
line of credit at a weighted-average interest rate of 7.08%.
An increase in the variable interest rate on the line of credit
and our variable rate mortgage loan payables constitutes a
market risk. As of September 30, 2007, for example a 0.5%
increase in LIBOR would have increased our overall annual
interest expense by $381,000, or 7.38%.
|
|
Item 4.
|
Controls
and Procedures.
|
Not applicable.
|
|
Item 4T.
|
Controls
and Procedures.
|
(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our reports under the Exchange Act, is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to us, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, we recognize that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
47
objectives, as ours are designed to do, and we necessarily were
required to apply our judgment in evaluating whether the
benefits of the controls and procedures that we adopt outweigh
their costs.
Attached as Exhibits 31.1 and 31.2 to this Quarterly Report
on
Form 10-Q
are certifications of our chief executive officer and chief
financial officer required in accordance with Section 302
of the Sarbanes-Oxley Act of 2002 and
Rules 13a-14(a)
and
15d-14(a)
under the Exchange Act, or the Section 302 Certification.
This portion of our Quarterly Report on
Form 10-Q
is our disclosure of the results of our disclosure controls
evaluation referred to in paragraphs (4) and (5) of
the Section 302 Certification and should be read in
conjunction with the Section 302 Certification for a more
complete understanding of the topics presented.
As of September 30, 2007, an evaluation was conducted under
the supervision and with the participation of our management,
including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on this evaluation, the chief
executive officer and the chief financial officer concluded that
the design and operation of these disclosure controls and
procedures were effective.
(b) Changes in internal control over financial
reporting. There were no changes in our internal control
over financial reporting that occurred during the quarter ended
September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
48
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
None.
There were no material changes from the risk factors previously
disclosed in our 2006 Annual Report on
Form 10-K,
as filed with the SEC.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
Use of
Public Offering Proceeds
On September 20, 2006, we commenced our initial public
offering in which we are offering a minimum of
200,000 shares of our common stock aggregating at least
$2,000,000, and a maximum of 200,000,000 shares of our
common stock for $10.00 per share and 21,052,632 shares of
our common stock pursuant to our DRIP for $9.50 per share
aggregating up to $2,200,000,000. The shares offered have been
registered with the SEC on a Registration Statement on
Form S-11
(File
No. 333-133652)
under the Securities Act of 1933, which was declared effective
by the SEC on September 20, 2006. The offering will
terminate no later than September 20, 2009.
As of September 30, 2007, we had received and accepted
subscriptions for 15,813,538 shares of our common stock, or
$157,955,000. As of September 30, 2007, a total of
$1,262,000 in distributions were reinvested and
132,829 shares were issued under the DRIP.
As of September 30, 2007, we have incurred marketing
support fees of $3,941,000, selling commissions of $10,915,000
and due diligence expense reimbursements of $91,000. We have
also incurred organizational and offering expenses of
$2,372,000. Such fees and reimbursements are charged to
stockholders equity (deficit) as such amounts are
reimbursed from the gross proceeds of our Offering.
As of September 30, 2007, we have used $131,585,000 in
offering proceeds to purchase our 14 properties and repay debt
incurred in connection with such acquisitions.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
|
|
Item 5.
|
Other
Information.
|
None.
The exhibits listed on the Exhibit Index (following the
signatures section of this report) are included, or incorporated
by reference, in this quarterly report.
49
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
|
|
|
|
|
NNN Healthcare/Office REIT, Inc.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
November 13, 2007
|
|
By:
|
|
/s/
SCOTT D. PETERS
|
|
|
|
|
|
Date
|
|
|
|
Scott D. Peters
|
|
|
|
|
Chief Executive Officer and President
(principal executive officer)
|
|
|
|
|
|
November 13, 2007
|
|
By:
|
|
/s/
SHANNON K S JOHNSON
|
|
|
|
|
|
Date
|
|
|
|
Shannon K S Johnson
|
|
|
|
|
Chief Financial Officer
(principal financial officer)
|
50
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of
Regulation S-K,
this Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by
reference, in this Quarterly Report on
Form 10-Q
for the period ended June 30, 2007 (and are numbered in
accordance with Item 601 of
Regulation S-K).
|
|
|
|
|
|
3.1
|
|
|
Third Articles of Amendment and Restatement of NNN
Healthcare/Office REIT, Inc. (included as Exhibit 3.1 to our
Annual Report on Form 10-K for the year ended December 31, 2006
and incorporated herein by reference).
|
|
3.2
|
|
|
Bylaws of Healthcare/Office REIT, Inc. (included as Exhibit 3.2
to our Registration Statement on Form S-11, filed on April 28,
2006 (File No. 333-133652) and incorporated herein by reference).
|
|
10.1
|
|
|
Real Estate Purchase Agreement between Triple Net Properties,
LLC and Gwinnett Professional Center, Ltd., dated May 23, 2007
(included as Exhibit 10.1 to our Form 8-K filed August 2, 2007
and incorporated herein by reference)
|
|
10.2
|
|
|
Assignment and Assumption of Real Estate Purchase Agreement by
Triple Net Properties, LLC to NNN Healthcare/Office REIT
Gwinnett, LLC, dated July 27, 2007 (included as Exhibit 10.2 to
our Form 8-K filed August 2, 2007 and incorporated herein by
reference)
|
|
10.3
|
|
|
Loan Assumption and Substitution Agreement among NNN
Healthcare/Office REIT Gwinnett, LLC; NNN Healthcare/Office
REIT, Inc.; Gwinnett Professional Center, Ltd.; Harvey B. Tauber
and Miles H. Mason, dated July 27, 2007 (included as Exhibit
10.3 to our Form 8-K filed August 2, 2007 and incorporated
herein by reference)
|
|
10.4
|
|
|
Allonge to Note, by NNN Healthcare/Office REIT Gwinnett, LLC, in
favor of LaSalle Bank National Association, date July 27, 2007
(included as Exhibit 10.4 to our Form 8-K filed August 2, 2007
and incorporated herein by reference)
|
|
10.5
|
|
|
Debt to Secure Debt Note by Gwinnett Professional Center, Ltd.,
in favor of Archon Financial, L.P., dated December 30, 2003
(included as Exhibit 10.5 to our Form 8-K filed August 2, 2007
and incorporated herein by reference)
|
|
10.6
|
|
|
Deed to Secure Debt, Assignment of Rents and Security Agreement
by Gwinnett Professional Center, Ltd., to Archon Financial,
L.P., dated December 30, 2003 (included as Exhibit 10.6 to our
Form 8-K filed August 2, 2007 and incorporated herein by
reference)
|
|
10.7
|
|
|
Agreement for Purchase and Sale of Real Property and Escrow
Instructions by and among 4MX Partners, LLC, 515 Partners, LLC,
Triple Net Properties, LLC and First American Title Insurance
Company as escrow holder, dated July 30, 2007 (included as
Exhibit 10.1 to our Form 8-K filed August 17, 2007 and
incorporated herein by reference)
|
|
10.8
|
|
|
Assignment and Assumption of Agreement for Purchase and Sale of
Real Property and Escrow Instructions by and between Triple Net
Properties, LLC and NNN Healthcare/Office REIT Market Exchange,
dated August 15, 2007 (included as Exhibit 10.2 to our Form 8-K
filed August 17, 2007 and incorporated herein by reference)
|
|
10.9
|
|
|
Agreement for Purchase and Sale of Real Property and Escrow
Instructions by and between Kokomo Medical Office Park, L.P. and
Triple Net Properties, LLC, dated June 12, 2007 (included as
Exhibit 10.1 to our Form 8-K filed September 6, 2007 and
incorporated herein by reference)
|
|
10.10
|
|
|
First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions by and between Kokomo Medical
Office Park, L.P. and Triple Net Properties, LLC, dated June 25,
2007 (included as Exhibit 10.2 to our Form 8-K filed September
6, 2007 and incorporated herein by reference)
|
|
10.11
|
|
|
Second Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions by and between Kokomo Medical
Office Park, L.P. and Triple Net Properties, LLC, dated July 10,
2007 (included as Exhibit 10.3 to our Form 8-K filed September
6, 2007 and incorporated herein by reference)
|
|
10.12
|
|
|
Third Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions by and between Kokomo Medical
Office Park, L.P. and Triple Net Properties, LLC, dated July 26,
2007 (included as Exhibit 10.4 to our Form 8-K filed September
6, 2007 and incorporated herein by reference)
|
|
|
|
|
|
|
10.13
|
|
|
Fourth Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions by and between Kokomo Medical
Office Park, L.P. and Triple Net Properties, LLC, dated August
7, 2007 (included as Exhibit 10.5 to our Form 8-K filed
September 6, 2007 and incorporated herein by reference)
|
|
10.14
|
|
|
Assignment and Assumption of Agreement for Purchase and Sale of
Real Property and Escrow Instructions by and between Triple Net
Properties, LLC and NNN Healthcare/Office REIT Kokomo Medical
Office Park, LLC, dated August 30, 2007 (included as Exhibit
10.6 to our Form 8-K filed September 6, 2007 and incorporated
herein by reference)
|
|
10.15
|
|
|
Unsecured Promissory Note by NNN Healthcare/Office REIT
Holdings, L.P. in favor of NNN Realty Advisors, Inc., dated
August 30, 2007 (included as Exhibit 10.7 to our Form 8-K filed
September 6, 2007 and incorporated herein by reference)
|
|
10.16
|
|
|
Purchase Agreement by and between St. Mary Physicians Center,
LLC and Triple Net Properties, LLC, dated June 26, 2007
(included as Exhibit 10.1 to our Form 8-K filed September 11,
2007 and incorporated herein by reference)
|
|
10.17
|
|
|
Assignment and Assumption of Purchase Agreement by and between
Triple Net Properties, LLC and NNN Healthcare/Office REIT St.
Mary Physician Center, LLC, dated September 5, 2007 (included as
Exhibit 10.2 to our Form 8-K filed September 11, 2007 and
incorporated herein by reference)
|
|
10.18
|
|
|
Note Secured by Deed of Trust by NNN Healthcare/Office REIT St.
Mary Physician Center, LLC in favor of St. Mary Physicians
Center, LLC, dated September 5, 2007 (included as Exhibit 10.3
to our Form 8-K filed September 11, 2007 and incorporated herein
by reference)
|
|
10.19
|
|
|
Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, by NNN Healthcare/Office REIT St. Mary Physician
Center, LLC in favor of St. Mary Physicians Center, LLC, dated
September 5, 2007 (included as Exhibit 10.4 to our Form 8-K
filed September 11, 2007 and incorporated herein by reference)
|
|
10.20
|
|
|
Unsecured Promissory Note by NNN Healthcare/Office REIT
Holdings, L.P. in favor of NNN Realty Advisors, Inc., dated
September 5, 2007 (included as Exhibit 10.5 to our Form 8-K
filed September 11, 2007 and incorporated herein by reference)
|
|
10.21
|
|
|
Purchase Agreement by and between Lexington Valley Forge L.P.
and Triple Net Properties, LLC, dated August 1, 2007 (included
as Exhibit 10.1 to our Form 8-K filed September 14, 2007 and
incorporated herein by reference)
|
|
10.22
|
|
|
Assignment and Assumption of Purchase Agreement by and between
Triple Net Properties, LLC and NNN Healthcare/Office Quest
Diagnostics, LLC, dated September 10, 2007 (included as Exhibit
10.2 to our Form 8-K filed September 14, 2007 and incorporated
herein by reference)
|
|
10.23
|
|
|
Loan Agreement by and between NNN Healthcare/Office REIT
Holdings, L.P. and LaSalle Bank National Association, dated
September 10, 2007 (included as Exhibit 10.3 to our Form 8-K
filed September 14, 2007 and incorporated herein by reference)
|
|
10.24
|
|
|
Promissory Note by NNN Healthcare/Office REIT Holdings, L.P. in
favor of LaSalle Bank National Association, dated September 10,
2007 (included as Exhibit 10.4 to our Form 8-K filed September
14, 2007 and incorporated herein by reference)
|
|
10.25
|
|
|
Contribution Agreement by NNN Healthcare/Office REIT Holdings,
L.P. and NNN Healthcare/Office REIT Quest Diagnostics, LLC and
NNN Healthcare/Office REIT Triumph, LLC, et al., dated September
10, 2007 (included as Exhibit 10.5 to our Form 8-K filed
September 14, 2007 and incorporated herein by reference)
|
|
10.26
|
|
|
Guaranty of Payment by NNN Healthcare/Office REIT, Inc. for the
benefit of LaSalle Bank National Association, dated September
10, 2007 (included as Exhibit 10.6 to our Form 8-K filed
September 14, 2007 and incorporated herein by reference)
|
|
10.27
|
|
|
Open End Real Property Mortgage, Security Agreement, Assignment
of Rents and Leases and Fixture Filing by NNN Healthcare/Office
REIT Quest Diagnostics, LLC for the benefit of LaSalle Bank
National Association, dated September 10, 2007 (included as
Exhibit 10.7 to our Form 8-K filed September 14, 2007 and
incorporated herein by reference)
|
|
10.28
|
|
|
Commercial Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing (on the Triumph Hospital
Northwest property) by NNN Healthcare/Office REIT Triumph, LLC
for the benefit of LaSalle Bank National Association, dated
September 10, 2007 (included as Exhibit 10.8 to our Form 8-K
filed September 14, 2007 and incorporated herein by reference)
|
|
|
|
|
|
|
10.29
|
|
|
Commercial Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing (on the Triumph Hospital
Southwest property) by NNN Healthcare/Office REIT Triumph, LLC
for the benefit of LaSalle Bank National Association, dated
September 10, 2007 (included as Exhibit 10.9 to our Form 8-K
filed September 14, 2007 and incorporated herein by reference)
|
|
10.30
|
|
|
Environmental Indemnity Agreement by NNN Healthcare/Office REIT
Holdings, L.P., NNN Healthcare/Office REIT Quest Diagnostics,
LLC, and NNN Healthcare/Office REIT, Inc. for the benefit of
LaSalle Bank National Association, dated September 10, 2007
(included as Exhibit 10.10 to our Form 8-K filed September 14,
2007 and incorporated herein by reference)
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10.31
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Environmental Indemnity Agreement by NNN Healthcare/Office REIT
Holdings, L.P., NNN Healthcare/Office REIT Triumph, LLC, and NNN
Healthcare/Office REIT, Inc. for the benefit of LaSalle Bank
National Association, dated September 10, 2007 (included as
Exhibit 10.11 to our Form 8-K filed September 14, 2007 and
incorporated herein by reference)
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10.32
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Joinder Agreement by NNN Healthcare/Office REIT Quest
Diagnostics, LLC in favor of LaSalle Bank National Association,
dated September 10, 2007 (included as Exhibit 10.12 to our Form
8-K filed September 14, 2007 and incorporated herein by
reference)
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10.33
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Joinder Agreement by NNN Healthcare/Office REIT Triumph, LLC in
favor of LaSalle Bank National Association, dated September 10,
2007 (included as Exhibit 10.13 to our Form 8-K filed September
14, 2007 and incorporated herein by reference)
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10.34
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Loan Agreement by and between NNN Healthcare/Office REIT Market
Exchange, LLC and Wachovia Financial Services, Inc., dated
September 27, 2007 (included as Exhibit 10.1 to our Form 8-K
filed October 3, 2007 and incorporated herein by reference)
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10.35
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Promissory Note by NNN Healthcare/Office REIT Market Exchange,
LLC in favor of Wachovia Financial Services, Inc., dated
September 27, 2007 (included as Exhibit 10.2 to our Form 8-K
filed October 3, 2007 and incorporated herein by reference)
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10.36
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Repayment Guaranty by NNN Healthcare/Office REIT, Inc. in favor
of Wachovia Financial Services, Inc., dated September 27, 2007
(included as Exhibit 10.3 to our Form 8-K filed October 3, 2007
and incorporated herein by reference)
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10.37
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Open-End Mortgage, Assignment, Security Agreement and Fixture
Filing by NNN Healthcare/Office REIT Market Exchange, LLC in
favor of Wachovia Financial Services, Inc., dated September 27,
2007 (included as Exhibit 10.4 to our Form 8-K filed October 3,
2007 and incorporated herein by reference)
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10.38
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Environmental Indemnity Agreement by NNN Healthcare/Office REIT
Market Exchange, LLC and NNN Healthcare/Office REIT, Inc. for
the benefit of Wachovia Financial Services, Inc., dated
September 27, 2007 (included as Exhibit 10.5 to our Form 8-K
filed October 3, 2007 and incorporated herein by reference)
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10.39
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Agreement for Purchase and Sale of Real Property and Escrow
Instructions by and among Health Quest Realty XVII, Health Quest
Realty XXII, Health Quest Realty XXXV and Triple Net Properties,
LLC, dated August 6, 2007 (included as Exhibit 10.1 to our Form
8-K filed October 4, 2007 and incorporated herein by reference)
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10.40
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Assignment and Assumption of Purchase Agreement by and between
Triple Net Properties, LLC and NNN Healthcare/Office E Florida
LTC, LLC, dated September 28, 2007 (included as Exhibit 10.2 to
our Form 8-K filed October 4, 2007 and incorporated herein by
reference)
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10.41
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Loan Agreement by and between NNN Healthcare/Office REIT E
Florida LTC, LLC and KeyBank National Association, dated
September 28, 2007 (included as Exhibit 10.3 to our Form 8-K
filed October 4, 2007 and incorporated herein by reference)
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10.42
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Promissory Note by NNN Healthcare/Office REIT E Florida LTC, LLC
in favor of KeyBank National Association, dated September 28,
2007 (included as Exhibit 10.4 to our Form 8-K filed October 4,
2007 and incorporated herein by reference)
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10.43
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Unconditional Payment Guaranty by NNN Healthcare/Office REIT,
Inc. for the benefit of KeyBank National Association, dated
September 28, 2007 (included as Exhibit 10.5 to our Form 8-K
filed October 4, 2007 and incorporated herein by reference)
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10.44
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Mortgage, Assignment of Rents, Security Agreement and Fixture
Filing (Jacksonville) by NNN Healthcare/Office REIT E Florida
LTC, LLC in favor of KeyBank National Association, dated
September 28, 2007 (included as Exhibit 10.6 to our Form 8-K
filed October 4, 2007 and incorporated herein by reference)
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10.45
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Mortgage, Assignment of Rents, Security Agreement and Fixture
Filing (Winter Park) by NNN Healthcare/Office REIT E Florida
LTC, LLC in favor of KeyBank National Association, dated
September 28, 2007 (included as Exhibit 10.7 to our Form 8-K
filed October 4, 2007 and incorporated herein by reference)
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10.46
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Mortgage, Assignment of Rents, Security Agreement and Fixture
Filing (Sunrise) by NNN Healthcare/Office REIT E Florida LTC,
LLC in favor of KeyBank National Association, dated September
28, 2007 (included as Exhibit 10.8 to our Form 8-K filed October
4, 2007 and incorporated herein by reference)
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10.47
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Environmental and Hazardous Substances Indemnity Agreement by
NNN Healthcare/Office REIT E Florida LTC, LLC for the benefit of
KeyBank National Association, dated September 28, 2007 (included
as Exhibit 10.9 to our Form 8-K filed October 4, 2007 and
incorporated herein by reference)
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31.1*
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Certification of Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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31.2*
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Certification of Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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32.1*
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Certification of Chief Executive 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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32.2*
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Certification of Chief 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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