Grubb & Ellis Healthcare REIT II Reports Third Quarter 2011 Results

Nov 14, 2011, 16:30 ET from Grubb & Ellis Healthcare REIT II, Inc.

SANTA ANA, Calif., Nov. 14, 2011 /PRNewswire/ -- Grubb & Ellis Healthcare REIT II, Inc. today announced operating results for the company's third quarter ended September 30, 2011.  

"Grubb & Ellis Healthcare REIT II continued to perform exceptionally well during the third quarter of 2011," said Danny Prosky, president and chief operating officer. "Our net operating income totaled nearly $10 million and achieved quarterly growth of more than 40 percent for the sixth straight quarter.  Since we began acquiring assets in March 2010 the growth and financial performance of the REIT has been phenomenal; we couldn't be more pleased."

Third Quarter 2011 Highlights and Recent Accomplishments

  • Completed third quarter acquisitions totaling $19.3 million, based on purchase price.  Declared and paid quarterly distributions to stockholders of record equal to an annualized rate of 6.5 percent, or a quarterly distribution of $0.16 per share, based upon a $10.00 per share offering price. The company's board of directors intends to continue to declare distributions on a quarterly basis.
  • Third quarter modified funds from operations, or MFFO, as defined by the Investment Program Association, or IPA, was $5.4 million, approximately 51 percent more than the $3.5 million in the second quarter of 2011. Funds from operations, or FFO, equaled approximately $5.0 million, compared with $(3.6) million in the second quarter of 2011. (Quarter-over-quarter growth in MFFO is primarily due to the acquisition of additional properties. Quarter-over-quarter growth in FFO is primarily due to lower acquisition related expenses in the third quarter compared to the second quarter as well as the acquisition of additional properties. Please see financial reconciliation tables and notes at the end of this release for more information regarding modified funds from operations and funds from operations.)
  • Net operating income, or NOI, totaled approximately $9.8 million in the third quarter of 2011, an increase of approximately 43 percent compared to the $6.9 million achieved in the second quarter of 2011. The company reported net income of $413,000, compared to a loss equal to $6.9 million in the second quarter, which was largely due to the significant costs associated with the company's acquisitions during the second quarter. (Quarter-over-quarter growth in NOI is primarily due to the acquisition of additional properties. Please see financial reconciliation tables and notes at the end of this release for more information regarding NOI and net income/loss.)
  • The company's property portfolio achieved an aggregate average occupancy of 97 percent as of Sept. 30, 2011 and had leverage of 25.6 percent. The portfolio's average remaining lease term was 10.0 years at the close of the third quarter, based on leases in effect as of Sept. 30, 2011.

Third Quarter 2011 and Recent Acquisition Highlights

  • In July, the company acquired Maxfield Medical Office Building in Sarasota, Fla., for $7.2 million.
  • In September, the company completed the $12.1 million acquisition of Lafayette Physical Rehabilitation Hospital in Lafayette, La.
  • Total portfolio value grew to approximately $430.8 million, based on purchase price, at the close of the third quarter 2011 from $411.5 million at the close of the second quarter 2011.
  • Subsequent to the close of the third quarter, the company announced that it has entered into an agreement to acquire the $166.5 million Southeastern Skilled Nursing Facility Portfolio, comprised of 10 skilled nursing facilities in Alabama, Georgia, Louisiana and Tennessee. The acquisition is subject to customary closing conditions and the satisfaction of other requirements as detailed in the agreement.

Subsequent Events

  • On Wednesday, Nov. 9, the board of directors of Grubb & Ellis Healthcare REIT II filed an 8-K with the U.S. Securities and Exchange Commission announcing the transition of its advisory and dealer manager relationship with Grubb & Ellis Company.  The termination of the underlying agreements is effective immediately with a 60-day transition period, during which Grubb & Ellis will continue to provide advisory and dealer manager services to the company.
  • Following the transition, the company will be renamed Griffin-American Healthcare Trust, Inc., and will be co-sponsored by American Healthcare Investors, LLC and Griffin Capital Corporation.  Griffin Capital Securities, an affiliate of Griffin Capital, will serve as dealer manager.
  • Jeff Hanson, chairman and chief executive officer, and Danny Prosky, president and chief operating officer, will lead the transition and continue to manage the company thereafter.  Hanson and Prosky founded and are principals of American Healthcare Investors.

According to Hanson, "When we launched Grubb & Ellis Healthcare REIT II in late 2009, we set a lofty goal to become the finest performing non-traded REIT in the industry.  As our quarterly results consistently demonstrate, we continue to meet this challenge and set a high bar for the rest of the sector."  

As of Sept. 30, 2011, Grubb & Ellis Healthcare REIT II had sold approximately 39,168,803 shares of its common stock, excluding the shares issued under its distribution reinvestment plan, for approximately $390,864,000 through its initial public offering.

To date, the REIT has made 24 geographically diverse acquisitions comprised of 55 buildings valued at approximately $430.8 million, based on purchase price in the aggregate.

FINANCIAL TABLES AND NOTES FOLLOW

GRUBB & ELLIS HEALTHCARE REIT II, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2011 and December 31, 2010
(Unaudited)





September 30, 2011


December 31, 2010










ASSETS

Real estate investments:







Operating properties, net

$

366,402,000


$

163,335,000

Cash and cash equivalents


8,812,000



6,018,000

Accounts and other receivables, net


1,314,000



241,000

Restricted cash



2,389,000



2,816,000

Real estate and escrow deposits


3,650,000



649,000

Identified intangible assets, net


65,778,000



28,568,000

Other assets, net



6,194,000



2,369,000


Total assets


$

454,539,000


$

203,996,000










LIABILITIES AND EQUITY










Liabilities:









Mortgage loans payable, net

$

64,853,000


$

58,331,000


Lines of credit


44,947,000



11,800,000


Accounts payable and accrued liabilities


7,649,000



3,356,000


Accounts payable due to affiliates


1,523,000



840,000


Derivative financial instruments


880,000



453,000


Identified intangible liabilities, net


652,000



502,000


Security deposits, prepaid rent and other liabilities


10,683,000



3,352,000



Total liabilities


131,187,000



78,634,000










Commitments and contingencies 















Equity:









Stockholders' equity:








Preferred stock, $0.01 par value; 200,000,000 shares authorized;









none issued and outstanding






Common stock, $0.01 par value; 1,000,000,000 shares authorized;









39,919,575 and 15,452,668 shares issued and outstanding









as of September 30, 2011 and December 31, 2010, respectively

399,000



154,000



Additional paid-in capital


355,487,000



137,657,000



Accumulated deficit


(32,656,000)



(12,571,000)




Total stockholders’ equity


323,230,000



125,240,000


Noncontrolling interests


122,000



122,000



Total equity


323,352,000



125,362,000




Total liabilities and equity

$

454,539,000


$

203,996,000












GRUBB & ELLIS HEALTHCARE REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2011 and 2010
(Unaudited)





Three Months Ended


Nine Months Ended





September 30,


September 30,





2011


2010


2011


2010












Revenue:















Rental income

$

12,504,000


$

2,807,000


$

27,186,000


$

4,010,000
















Expenses:















Rental expenses


2,664,000



834,000



5,684,000



1,241,000


General and administrative


1,563,000



503,000



3,942,000



1,048,000


Acquisition related expenses


913,000



2,847,000



9,698,000



5,179,000


Depreciation and amortization


4,553,000



1,157,000



10,029,000



1,722,000



Total expenses


9,693,000



5,341,000



29,353,000



9,190,000

Income (loss) from operations


2,811,000



(2,534,000)



(2,167,000)



(5,180,000)

Other income (expense):













Interest expense (including amortization of














deferred financing costs and














debt discount and premium):














Interest expense


(2,199,000)



(323,000)



(4,767,000)



(432,000)



Loss in fair value of derivative















financial instruments


(202,000)



(74,000)



(427,000)



(194,000)


Interest income


3,000



1,000



9,000



14,000

Net income (loss)



413,000



(2,930,000)



(7,352,000)



(5,792,000)


Less: net income attributable to














noncontrolling interests




(1,000)



(1,000)



(1,000)

Net income (loss) attributable to controlling interest

$

413,000


$

(2,931,000)


$

(7,353,000)


$

(5,793,000)

Net income (loss) per common share attributable to













controlling interest — basic and diluted

$

0.01


$

(0.34)


$

(0.28)


$

(1.02)

Weighted average number of common shares













outstanding — basic and diluted


34,644,097



8,745,255



26,171,404



5,687,117
















Distributions declared per common share

$

0.16


$

0.16


$

0.33


$

0.49


















GRUBB & ELLIS HEALTHCARE REIT II, INC.
NET OPERATING INCOME RECONCILIATION
For the Three and Nine Months Ended September 30, 2011 and 2010
(Unaudited)

Net operating income is a financial measure that does not conform to accounting principles generally accepted in the United States of America, or GAAP, or a non-GAAP measure. It is defined as net income (loss), computed in accordance with GAAP, generated from properties before general and administrative expenses, acquisition related expenses, depreciation and amortization, interest expense and interest income. The company believes that net operating income is useful for investors as it provides an accurate measure of the operating performance of its operating assets because net operating income excludes certain items that are not associated with the management of the properties. Additionally, the company believes that net operating income is a widely accepted measure of comparative operating performance in the real estate community. However, the company's use of the term net operating income may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

The following is a reconciliation of net income (loss), which is the most directly comparable GAAP financial measure, to net operating income for the three and nine months ended September 30, 2011 and 2010:




Three Months Ended


Nine Months Ended




September 30,


September 30,




2011


2010


2011


2010















Net income (loss)


$

413,000


$

(2,930,000)


$

(7,352,000)


$

(5,792,000)

Add:















General and administrative



1,563,000



503,000



3,942,000



1,048,000


Acquisition related expenses



913,000



2,847,000



9,698,000



5,179,000


Depreciation and amortization



4,553,000



1,157,000



10,029,000



1,722,000


Interest expense



2,401,000



397,000



5,194,000



626,000

Less:















Interest income



(3,000)



(1,000)



(9,000)



(14,000)

Net operating income


$

9,840,000


$

1,973,000


$

21,502,000


$

2,769,000

















GRUBB & ELLIS HEALTHCARE REIT II, INC.
FFO AND MFFO RECONCILIATION
For the Three and Nine Months Ended September 30, 2011 and 2010
(Unaudited)

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 funds from operations, or FFO, which the company believes to be an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under GAAP.

The company defines 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, or the White Paper. 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. The company's FFO calculation complies with NAREIT's policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, the company believes, may be less informative. As a result, the company believes that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of the company's performance to investors and to management, and when compared year over year, reflects the impact on the company's operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which is not immediately apparent from net income or loss.

However, changes in the accounting and reporting rules under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. In addition, the company views fair value adjustments of derivatives, and impairment charges and gains and losses from dispositions of assets as items which are typically adjusted for when assessing operating performance. Lastly, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation and therefore require additional adjustments to FFO in evaluating performance. Due to these and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which the company believes to be another appropriate supplemental measure to reflect the operating performance of a REIT. The use of MFFO is recommended by the IPA as a supplemental performance measure for publicly registered, non-listed REITs. MFFO is a metric used by management to evaluate sustainable performance and distribution policy. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments' revenues and expenses. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after the time we cease to acquire properties on a frequent and regular basis. MFFO may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy upon completion of our acquisition stage. However, because MFFO excludes acquisition expenses, which are an important component in an analysis of historical performance, MFFO should not be construed as a historical performance measure. MFFO is not equivalent to the company's net income or loss as determined under GAAP.

The company defines MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities; accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The company's MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, the company excludes acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, gains or losses from the extinguishment of debt, change in deferred rent receivables and the adjustments of such items related to noncontrolling interests. The other adjustments included in the IPA's Practice Guideline are not applicable to the company for the three and nine months ended September 30, 2011 and 2010.

Presentation of this information is intended to assist in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of the company's performance, as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of the company's performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.

The following is a reconciliation of net income (loss), which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three and nine months ended September 30, 2011 and 2010 (unaudited):




Three Months Ended


Nine Months Ended




September 30,


September 30,




2011


2010


2011


2010















Net income (loss)

$

413,000


$

(2,930,000)


$

(7,352,000)


$

(5,792,000)

Add:















Depreciation and amortization














— consolidated properties


4,553,000



1,157,000



10,029,000



1,722,000

Less:















Net income attributable to














noncontrolling interests




(1,000)



(1,000)



(1,000)


Depreciation and amortization related to














noncontrolling interests


(2,000)



(2,000)



(7,000)



(2,000)

FFO



$

4,964,000


$

(1,776,000)


$

2,669,000


$

(4,073,000)















Add:















Acquisition related expenses

$

913,000


$

2,847,000


$

9,698,000


$

5,179,000


Amortization of above and below market leases


81,000



28,000



206,000



49,000


Loss in fair value of derivative financial instruments


202,000



74,000



427,000



194,000


Loss on extinguishment of debt


2,000





44,000




Change in deferred rent receivables related to














noncontrolling interests






1,000



Less:















Change in deferred rent receivables


(806,000)



(157,000)



(1,719,000)



(241,000)

MFFO


$

5,356,000


$

1,016,000


$

11,326,000


$

1,108,000

Weighted average common shares













outstanding — basic and diluted


34,644,097



8,745,255



26,171,404



5,687,117















Net income (loss) per common share — basic and diluted

$

0.01


$

(0.34)


$

(0.28)


$

(1.02)















FFO per common share — basic and diluted

$

0.14


$

(0.20)


$

0.10


$

(0.72)















MFFO per common share — basic and diluted

$

0.15


$

0.12


$

0.43


$

0.19

















About Grubb & Ellis Healthcare REIT II

Grubb & Ellis Healthcare REIT II, Inc. is a real estate investment trust that seeks to preserve, protect and return investors' capital contributions, pay regular cash distributions, and realize growth in the value of its investments upon the ultimate sale of such investments. Grubb & Ellis Healthcare REIT II is seeking to raise up to approximately $3 billion in equity and to acquire a diversified portfolio of real estate assets, focusing primarily on medical office buildings and other healthcare-related facilities.  

This release contains certain forward-looking statements with respect to the success of our company, our ability to provide our investors distribution sustainability and superior long-term financial performance, whether we will be able to maintain our current distribution rate, whether we can continue to improve our net operating income, funds from operations and modified funds from operations, whether we can maintain the financial results experienced in the quarter ended September 30, 2011, whether we can continue to achieve impressive quarter-over-quarter growth, whether we can become the finest performing non-traded REIT in the industry and whether we can transition our advisory and dealer manager relationship with Grubb & Ellis Company. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to, the following: our strength and financial condition and uncertainties relating to the financial strength of our current and future real estate investments; uncertainties relating to our ability to continue to maintain the current coverage of our investor distributions; uncertainties relating to the local economies where our real estate investments are located; uncertainties relating to changes in general economic and real estate conditions; uncertainties regarding changes in the healthcare industry; uncertainties relating to the implementation of recent healthcare legislation; the uncertainties relating to the implementation of our real estate investment strategy; uncertainties related to the transition of our advisory and dealer manager relationship from Grubb & Ellis Company to American Healthcare Investors and Griffin Capital and the success of such transition; and other risk factors as outlined in the company's prospectus, as amended from time to time, and as detailed from time to time in our periodic reports, as filed with the U.S. Securities and Exchange Commission. Forward-looking statements in this document speak only as of the date on which such statements were made, and we undertake no obligation to update any such statements that may become untrue because of subsequent events.

THIS IS NEITHER AN OFFER TO SELL NOR AN OFFER TO BUY ANY SECURITIES DESCRIBED HEREIN.  OFFERINGS ARE MADE ONLY BY MEANS OF A PROSPECTUS.

SOURCE Grubb & Ellis Healthcare REIT II, Inc.



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