e424b3
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-133652
NNN HEALTHCARE/OFFICE REIT, INC.
SUPPLEMENT NO. 12 DATED AUGUST 17, 2007
TO THE PROSPECTUS DATED APRIL 23, 2007
This document supplements, and should be read in conjunction
with, our prospectus dated April 23, 2007, as supplemented
by Supplement No. 7 dated May 9, 2007, Supplement
No. 8 dated May 25, 2007, Supplement No. 9 dated
June 20, 2007, Supplement No. 10 dated July 17,
2007 and Supplement No. 11 dated August 8, 2007
relating to our offering of 221,052,632 shares of common
stock. The purpose of this Supplement No. 12 is to disclose:
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the status of our initial public offering;
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our acquisition of 1 and 4 Market Exchange located in Columbus,
Ohio;
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an update to our Risk Factors disclosure;
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Managements Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 2007 and for the
three months ended June 30, 2007, for the period from
April 28, 2006 (Date of Inception) through June 30,
2006 and for the six months ended June 30, 2007; and
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our unaudited financial statements as of June 30, 2007 and
for the three months ended June 30, 2007, for the period
from April 28, 2006 (Date of Inception) through
June 30, 2006 and for the six months ended June 30,
2007.
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Status of
Our Initial Public Offering
As of August 10, 2007, we had received and accepted
subscriptions in our offering for 12,922,662 shares of
common stock, or approximately $129,067,000, excluding shares
issued under our distribution reinvestment plan.
Acquisition
of 1 and 4 Market Exchange
On August 15, 2007, we, through our wholly-owned
subsidiary, NNN Healthcare/Office REIT Market Exchange, LLC,
acquired a fee simple interest in 1 Market Exchange, 4 Market
Exchange and a vacant parcel of land, each located in Columbus,
Ohio, or collectively, 1 and 4 Market Exchange, from
unaffiliated third parties for a total purchase price of
$21,900,000, plus closing costs.
Financing
and Fees
We financed the purchase price of 1 and 4 Market Exchange with
funds raised through this offering. An acquisition fee of
$657,000, or 3.0% of the aggregate purchase price, was paid to
our advisor and its affiliate.
Description
of the Property
1 and 4 Market Exchange consists of two multi-tenant
Class A medical office buildings and a vacant parcel of
land to be developed as a parking lot. 1 Market Exchange is a
five-story building constructed in 2001 located at 515 East Main
Street. 1 Market Exchange was awarded the 2002 Columbus
Chapter American Institute of Architecture Sustainability
Award due to its Green design which maximizes
natural day-lighting while screening out unwanted solar gain
during the summer months. 4 Market Exchange is a three-story
building constructed in 2003 located at 500 Main Street.
Combined, they comprise approximately 116,000 square feet
and are 92.6% leased. Both buildings are located less than one
mile from Columbus Childrens Hospital, just east of the
Columbus Central Business District and are an integral part of
the Market Exchange redevelopment taking place along East Main
Street. Additionally, the property is located at the I-70 and
I-71 interchange and just south of I-670, allowing easy access
to all parts of Columbus and its surrounding communities. The
principal businesses and professions of the tenants occupying
the buildings are healthcare providers. The vacant parcel of
land is a 28,000 square foot unimproved parcel of land
that, once developed, shall serve as a parking lot for 1 and 4
Market Exchange which will provide 85 additional parking spaces.
The most significant tenants of 1 and 4 Market Exchange are
Columbus Childrens Hospital, OhioHealth and
Design Group. Columbus Childrens Hospital leases
approximately 27,000 square feet pursuant to leases
that expire in
2009-2011,
approximately 2,400 square feet of which have one five-year
renewal options. Columbus Childrens Hospital, the
nations 5th largest childrens hospital, is the
primary pediatric health care provider for 37 counties, with
more than 800 medical staff members and 4,500 employees.
The rental rate per annum for Columbus Childrens Hospital
is approximately $378,000 or $13.77 per square foot. OhioHealth
leases approximately 22,000 square feet pursuant to leases
that expire between 2007 and 2012, some of which have five-year
renewal options. OhioHealth is a nationally recognized,
not-for-profit, charitable healthcare organization consisting of
15 hospitals, 20 health and surgery centers, home-health
providers, and medical equipment and health service suppliers
throughout a 46-coutny area. The rental rate per annum for
OhioHealth is approximately $358,000 or $16.25 per square foot.
Design Group leases approximately 28,000 square feet
pursuant to a lease that expires in October 2010 with one
ten-year renewal option. Design Group, a firm that provides
expertise in planning, architecture, interior design, graphics
and sustainable design, was responsible for designing 1 and 4
Market Exchange. The rental rate per annum for Design Group is
approximately $473,000 or $16.71 per square foot.
Triple Net Properties Realty, Inc. will serve as the property
manager and will provide services and receive certain fees and
expense reimbursements in connection with the operation and
management of 1 and 4 Market Exchange as provided in our
advisory agreement.
1 and 4 Market Exchange faces competition from other nearby
medical office buildings that provide comparable services. Most
of the medical office buildings with which 1 and 4 Market
Exchange competes are located on either the campuses of nearby
hospitals or in surrounding suburban areas.
Management currently has no renovation plans for the property
other than the development of the vacant parcel of land into a
parking lot, and believes that the property is suitable for its
intended purpose and adequately covered by insurance. For
federal income tax purposes, the depreciable basis in 1 and 4
Market Exchange will be approximately $20.3 million. We
calculate depreciation for income tax purposes using the
straight line method. We depreciate buildings based upon
estimated useful lives of 39 years. For 2006, 1 and 4
Market Exchange paid real estate taxes of approximately $121,000
at a rate of 6.65%.
The following table sets forth the lease expirations of 1 and 4
Market Exchange for the next ten years, including the number of
tenants whose leases will expire in the applicable year, the
total area in square feet covered by such leases and the
percentage of gross annual rent represented by such leases.
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% of Gross Annual
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No. of Leases
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Total Square Feet
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Gross Annual Rent
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Rent Represented
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Year
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Expiring
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of Expiring Leases
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of Expiring Leases
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by Expiring Leases
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2007
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2
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7,488
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$
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123,987
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7.09
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%
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2008
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2
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4,251
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$
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73,194
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4.18
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%
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2009
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4
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10,627
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$
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176,439
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10.08
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%
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2010
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5
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65,382
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$
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1,042,361
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59.57
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%
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2011
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2
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5,873
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$
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91,993
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5.26
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%
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2012
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2
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13,510
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$
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241,800
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13.82
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%
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2013
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2014
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2015
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2016
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The following table shows the average occupancy rate for 1 and 4
Market Exchange for the last five years.
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Year
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Average Occupancy Rate
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2002
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90%
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2003
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90%
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2004
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90%
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2005
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91%
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2006
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93%
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2
Update to
Risk Factors
The Risk Factors section of the prospectus is hereby
supplemented by the following additional risk factor:
We may
not have sufficient cash available from operations to pay
distributions, and, therefore, distributions may be paid with
offering proceeds or borrowed funds.
The amount of the distributions to our stockholders will be
determined by our board of directors and is 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. 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. For
the six months ended June 30, 2007, we paid distributions
of $470,000 from cash flow from operations of $388,000 for the
period. The distributions paid in excess of our cash flow from
operations was paid using proceeds from this offering. However,
as of June 30, 2007, we owed $95,000 to our advisor and its
affiliates for operating expenses. Our advisor and its
affiliates have no obligations to defer or forgive amounts due
to them, and if our advisor or its affiliates had required such
amounts to be paid, our cash flow from operations would have
been less. In the future, if our advisor or its affiliates do
not defer or forgive amounts due to them and if such amounts
exceed our cash flow from operations plus the distributions to
be paid, we would be required to pay our distributions, or a
portion thereof, with proceeds from this 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. In
addition, for the six months ended June 30, 2007, our funds
from operations, or FFO, was $466,000. We paid the $4,000 of
distributions in excess of FFO with proceeds from this offering.
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 supplement. Such
consolidated financial statements and information have been
prepared to reflect our financial position as of June 30,
2007, together with our results of operations for the three
months ended June 30, 2007, for the period from
April 28, 2006 (Date of Inception) through June 30,
2006 and for the six months ended June 30, 2007 and cash
flows for the six months ended June 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
June 30, 2006.
Forward-Looking
Statements
Historical results and trends should not be taken as indicative
of future operations. Our statements contained in this
supplement 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
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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, or its affiliates did not
count toward the minimum offering. As of August 10, 2007,
we had received and accepted subscriptions in our Offering for
12,922,662 shares of our common stock, or $129,067,000,
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 has a one year term that
expires on September 19, 2007, and is subject to successive
one-year renewals. Our Advisor supervises and manages our
day-to-day operations and will select 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
third or fourth quarter of 2007, subject to approval by
stockholders of both companies and other customary closing
conditions of transactions of this type.
As of June 30, 2007, we had purchased eight properties
comprising 753,000 square feet of gross leasable area, or
GLA.
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Critical
Accounting Policies
The complete listing of our Critical Accounting Policies was
previously disclosed in our prospectus dated April 23, 2007.
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
prospectus dated April 23, 2007.
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 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.
In June 2007, the American Institute of Certified Public
Accountants, or the AICPA, issued Statement of Position, or SOP,
07-01,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies
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and Accounting for Parent Companies and Equity Method Investors
for Investments in Investment Companies, or
SOP 07-01.
SOP 07-01
provides guidance for determining whether an entity is within
the scope of the AICPA Audit and Accounting Guide Investment
Companies, or the Guide. Entities that are within the scope of
the Guide are required, among other things, to carry their
investments at fair value, with changes in fair value included
in earnings. The provisions of
SOP 07-01
are effective for the first fiscal year beginning on
January 1, 2008. We are currently evaluating
SOP 07-01
and have not determined whether we will be required to apply the
provisions of the Guide in presenting our consolidated financial
statements.
Acquisitions
in 2007
Affiliate
Transactions
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 a fee simple ownership interest in
Southpointe Office Parke and Epler Parke I, or the
Southpointe property, located in Indianapolis, Indiana. 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. 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 a fee simple ownership interest in
Crawfordsville Medical Office Park and Athens Surgery Center, or
the Crawfordsville property, located in Crawfordsville, Indiana.
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. 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, or the Gallery property, located in
downtown St. Paul, Minnesota. 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. 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 total 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
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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. 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.
Commons V
Medical Office Building Naples, Florida
On April 24, 2007, we acquired Commons V Medical Office
Building, or Commons V, located in Naples, Florida, 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 refer to
collectively 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. An acquisition fee of
$645,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate. See Capital Resources
Financing Mortgage Loan Payables for a further
discussion.
Thunderbird
Medical Plaza Glendale, Arizona
On May 15, 2007, we acquired Thunderbird Medical Plaza in
Glendale, Arizona from an unaffiliated third party for a total
purchase price of $25,000,000, plus closing costs. Thunderbird
Medical Plaza consists of real property located at 5422 and
5410 West Thunderbird Road, or T-Bird 5422/5410, and real
property located at 5310 West Thunderbird Road, or T-Bird
5310, which we refer to collectively as the Thunderbird
property. Of the total purchase price of $25,000,000,
$11,500,000 was allocated to T-Bird 5422/5410 and $13,500,000
was allocated to T-Bird 5310. 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 our 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 Capital Resources
Financing Mortgage Loan Payables for a further
discussion.
Triumph
Hospital Northwest and Triumph Hospital Southwest
Houston and Sugarland, Texas
On June 8, 2007, we acquired Triumph Hospital Northwest and
Triumph Hospital Southwest, which we collectively refer to as
the Triumph Hospital Portfolio, located in suburban Houston,
Texas, 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.
7
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
August 10, 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
Acquisitions
Gwinnett
Professional Center Lawrenceville, Georgia
On June 8, 2007, our board of directors approved the
acquisition of the Gwinnett Professional Center located in
Lawrenceville, Georgia. On July 27, 2007, we purchased the
Gwinnett Professional Center. See Subsequent Events
Property Acquisitions.
Kokomo
Medical Office Park Kokomo, Indiana
On June 8, 2007, our board of directors approved the
acquisition of Kokomo Medical Office Park, located in Kokomo,
Indiana. We anticipate purchasing the Kokomo Medical Office Park
for a purchase price of $13,350,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
through a combination of debt financing and funds raised through
our Offering. We expect to pay our Advisor and its affiliate an
acquisition fee of $400,500, or 3.0% of the purchase price, in
connection with the acquisition. We anticipate that the closing
will occur in the third quarter of 2007.
St.
Marys Physician Center Long Beach,
California
On June 8, 2007, our board of directors approved the
acquisition of St. Marys Physicians Center, located
in Long Beach, California. We anticipate purchasing the
St. Marys Physicians Center for a purchase price of
$13,800,000, plus closing costs, from an unaffiliated third
party. We intend to finance the purchase through a combination
of seller financed debt and funds raised through our Offering.
We expect to pay our Advisor and its affiliate an acquisition
fee of $414,000, or 3.0% of the purchase price, in connection
with the acquisition. We anticipate that the closing will occur
in the third quarter of 2007.
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 June 30, 2007, our consolidated properties were 89.0%
leased. 4.9% 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 year. If we
are unable to negotiate such renewals, we will try 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. At the time the
8
leases expire and the tenants do not renew the lease, we
write-off all tenant relationship intangible assets associated
with such tenants.
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.
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 did not have any results from operations for the period from
April 28, 2006 (Date of inception) through June 30,
2006.
For the three and six months ended June 30, 2007, we had a
net loss of $1,203,000 and $1,736,000, respectively, or $0.18
and $0.46 per share, respectively, due to revenue of $3,183,000
and $3,924,000, respectively, offset by rental expenses of
$1,205,000 and $1,503,000, respectively, general and
administrative expenses of $659,000 and $1,022,000,
respectively, depreciation and amortization of $1,862,000 and
$2,204,000, respectively, and interest expense of $744,000 and
$1,016,000, respectively. We expect all amounts to increase in
the future based on a full year of operations as well as
increased activity as we make additional real estate
investments. Our results of operations are not indicative of
those expected in future periods.
For the three and six months ended June 30, 2007, revenue
was comprised of $3,183,000 and $3,924,000 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 and the Lenox
property. In addition to the increase, we received rental income
from the Commons V property for 66 days, the Peachtree
property for 59 days, the Thunderbird property for
45 days and the Triumph Hospital Portfolio for 22 days.
For the three and six months ended June 30, 2007, rental
expense was $1,205,000 and $1,503,000, respectively. Rental
expense represents expense for a full quarter at the Southpointe
property, the
9
Crawfordsville property, the Gallery property and the Lenox
property. In addition to the increase, rental expense was
comprised from the Commons V property for 66 days, the
Peachtree property of 59 days, the Thunderbird property for
45 days and the Triumph Hospital Portfolio for 22 days.
For the three and six months ended June 30, 2007,
depreciation and amortization expense was comprised primarily of
depreciation on the properties of $780,000 and $900,000,
respectively, and amortization of identified intangible assets
of $1,081,000 and $1,302,000, 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
prospectus dated April 23, 2007.
For the three and six months ended June 30, 2007, interest
expense was related to interest expense primarily on our seven
mortgage loan payables of $725,000 and $922,000, respectively,
interest expense on the unsecured note payables to NNN Realty
Advisors of $6,000 and $77,000, respectively, and amortization
of loan fees associated with acquiring the mortgage loan
payables of $13,000 and $17,000, 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 $3,062,000
for the next 12 months for capital expenditures. We have
reserves with lenders for such capital expenditures of
$1,975,000 as of June 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 will evaluate potential additional investments and
will engage 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 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 will prepare 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 will also set
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
10
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 six months ended
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, were $388,000
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 six months ended
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, were
$121,505,000 and $0, respectively. Such cash flows related
primarily to the acquisition, including closing costs, of the
Crawfordsville property and the Southpointe property on
January 22, 2007 in the amount of $8,761,000, the Gallery
property on March 9, 2007 in the amount of $3,028,000, the
Lenox property on March 23, 2007 in the amount of
$6,511,000, the Commons V property on April 24, 2007 in the
amount of $14,993,000, the Peachtree property on May 2,
2007 in the amount of $22,276,000, the Thunderbird property on
May 15, 2007 in the amount of $25,683,000 and the Triumph
Hospital Portfolio on June 8, 2007 in the amount of
$37,459,000. We anticipate cash flows used in investing
activities to continue to increase as we purchase more
properties.
Cash flows from financing activities for the six months ended
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, were
$131,669,000 and $202,000, respectively. Such cash flows related
primarily to funds raised from investors in the amount of
$104,953,000 and borrowings of mortgage payables of $50,030,000
related to the Commons V property, the Thunderbird property and
the Triumph property partially offset by principal repayments of
$12,500,000 on unsecured loans, offering costs of $9,771,000 and
distributions of $470,000. Additional cash outflows related to
debt financing costs of $585,000 in relation to the
acquisitions. 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.
For the six months ended June 30, 2007, we paid
distributions of $470,000 from cash flow from operations of
$388,000 for the period. However, as of June 30, 2007, we
owed $95,000 to our Advisor and its affiliates for operating
expenses. Our Advisor and its affiliates have no obligations to
defer or forgive amounts due to them, and if our Advisor or its
affiliates had required such amounts to be paid, our cash flow
from operations would have been negative. In the future, if our
Advisor or its affiliates do not defer or forgive amounts due to
them and if such amounts exceed our cash flow from operations
plus 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.
11
For the six months ended June 30, 2007, our funds from
operations, or FFO, was $466,000. We paid the $4,000 of
distributions in excess of FFO with 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
August 10, 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 $68,940,000 and $0 as of
June 30, 2007 and December 31, 2006, respectively. As
of June 30, 2007, we had seven fixed rate mortgage loans
with a weighted-average effective interest rate of 5.75% per
annum. As of June 30, 2007, our mortgage loans have
interest-only monthly payments. We are required by the terms of
the applicable loan documents to meet certain reporting
requirements. As of June 30, 2007, we were in compliance
with all such requirements.
Mortgage loan payables consisted of the following as of
June 30, 2007 and December 31, 2006:
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Mortgage
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Mortgage
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Loan Payables
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Loan Payables
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as of
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as of
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Interest
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Maturity
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June 30,
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December 31,
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Property
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Rate
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Date
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2007
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2006
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Southpointe Office Parke and Epler
Parke I
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6.11
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%
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9/1/2016
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$
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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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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 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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$
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68,940,000
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$
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12
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 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.
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.
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 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, our Dealer Manager 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 June 30, 2007 and
December 31, 2006, our Advisor or its affiliates have
incurred $1,181,000 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 June 30, 2007 and
December 31, 2006. To the extent we raise additional
proceeds from our Offering, these amounts may become our
liability. See Note 9, 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 June 30, 2007, we had
seven mortgage loan payables outstanding secured by our
properties, in the principal amount of $68,940,000. As of
June 30, 2007, the weighted-average interest rate on our
outstanding debt was 5.75% per annum. Our mortgage loans have
interest-only monthly payments.
13
Contractual
Obligations
The following table provides information with respect to the
maturities and scheduled principal repayments of our secured
mortgage loan payables as of June 30, 2007. The table does
not reflect any available extension options.
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Payments Due by Period
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Less Than
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More Than
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(2007)
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(2008-2009)
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(2010-2011)
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(After 2011)
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Total
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Principal payments
fixed rate debt
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$
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$
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$
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$
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68,940,000
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$
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68,940,000
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Interest payments
fixed rate debt
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3,086,000
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7,988,000
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7,904,000
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19,715,000
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38,693,000
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Total
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$
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3,086,000
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$
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7,988,000
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$
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7,904,000
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$
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88,655,000
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$
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107,633,000
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Off-Balance
Sheet Arrangements
As of June 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 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.
14
The following is the calculation of FFO for the three months
ended June 30, 2007 and for the period from April 28,
2006 (Date of Inception) through June 30, 2006 and six
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from April 28,
|
|
|
|
|
|
|
Three Months
|
|
|
2006 (Date of Inception)
|
|
|
Six Months Ended
|
|
|
|
Ended June 30,
|
|
|
through June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Net loss
|
|
$
|
(1,203,000
|
)
|
|
$
|
|
|
|
$
|
(1,736,000
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization consolidated properties
|
|
|
1,861,000
|
|
|
|
|
|
|
|
2,202,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
658,000
|
|
|
$
|
|
|
|
$
|
466,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares
outstanding basic and diluted
|
|
|
6,727,995
|
|
|
|
200
|
|
|
|
3,745,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
Events
Status
of our Offering
As of August 10, 2007, we had received and accepted
subscriptions in our Offering for 12,922,662 shares of our
common stock, or $129,067,000 excluding shares issued under the
DRIP.
Property
Acquisition
Gwinnett
Professional Center Lawrenceville, Georgia
On July 27, 2007, we purchased the Gwinnett Professional
Center for a purchase price of $9,300,000, plus closing costs,
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 property from La Salle National Bank and
funds raised through our Offering. We paid our Advisor and its
affiliate an acquisition fee of $279,000, or 3.0% of the
purchase price, in connection with the acquisition.
1 and 4
Market Exchange Columbus, Ohio
On August 15, 2007, we purchased 1 Market Exchange, 4
Market Exchange and a vacant parcel of land, each located in
Columbus, Ohio, or collectively, 1 and 4 Market Exchange, for a
total purchase price of $21,900,000, plus closing costs, from
unaffiliated third parties. We financed the purchase price using
funds raised through our Offering. We paid our Advisor and its
affiliate an acquisition fee of $657,000, or 3.0% of the
purchase price, in connection with the acquisition.
Proposed
Acquisitions
Institute
for Senior Living of Florida Jacksonville, Winter
Park and Sunrise, Florida
On July 31, 2007, our board of directors approved the
acquisition of the Institute for Senior Living of Florida
consisting of six centers on three campuses located in
Jacksonville, Winter Park and Sunrise, Florida. We anticipate
purchasing the Institute for Senior Living of Florida for a
purchase price of $52,000,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
through a combination of debt financing and funds raised through
our Offering. We expect to pay our Advisor and its affiliate an
acquisition fee of $1,560,000, or 3.0% of the purchase price, in
connection with the acquisition. We anticipate that the closing
will occur in the third quarter of 2007.
15
St.
Ritas Medical Center Portfolio Lima,
Ohio
On July 31, 2007, our board of directors approved the
acquisition of St. Ritas Medical Center Portfolio, located
in Lima, Ohio. We anticipate purchasing the St. Ritas
Medical Center Portfolio for a purchase price of $25,050,000,
plus closing costs, from an unaffiliated third party. We intend
to finance the purchase through a combination of debt financing
and funds raised through our Offering. We expect to pay our
Advisor and its affiliate an acquisition fee of $772,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the third quarter
of 2007.
Quest
Diagnostics Office Building Valley Forge,
Pennsylvania
On July 31, 2007, our board of directors approved the
acquisition of Quest Diagnostics Office Building, located in
Valley Forge, Pennsylvania. We anticipate purchasing the Quest
Diagnostics Office Building for a purchase price of $26,700,000,
plus closing costs, from an unaffiliated third party. We intend
to finance the purchase through a combination of debt financing
and funds raised through our Offering. We expect to pay our
Advisor and its affiliate an acquisition fee of $801,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the third quarter
of 2007.
16
INDEX OF
FINANCIAL STATEMENTS
NNN
Healthcare/Office REIT, Inc. June 30,
2007
F-1
NNN
Healthcare/Office REIT, Inc.
As of June 30, 2007 and December 31, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Real estate investments:
|
|
|
|
|
|
|
|
|
Operating properties, net
|
|
$
|
127,273,000
|
|
|
$
|
|
|
Cash and cash equivalents
|
|
|
10,754,000
|
|
|
|
202,000
|
|
Accounts and other receivable, net
|
|
|
682,000
|
|
|
|
|
|
Restricted cash
|
|
|
3,352,000
|
|
|
|
|
|
Identified intangible assets, net
|
|
|
22,719,000
|
|
|
|
|
|
Other assets, net
|
|
|
938,000
|
|
|
|
183,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
165,718,000
|
|
|
$
|
385,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS EQUITY (DEFICIT)
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage loan payables
|
|
$
|
68,940,000
|
|
|
$
|
|
|
Accounts payable and accrued
liabilities
|
|
|
2,322,000
|
|
|
|
62,000
|
|
Accounts payable due to affiliates
|
|
|
2,119,000
|
|
|
|
312,000
|
|
Security deposits and prepaid rent
|
|
|
567,000
|
|
|
|
|
|
Identified intangible liabilities,
net
|
|
|
1,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
75,108,000
|
|
|
|
374,000
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Minority interest of limited
partner in Operating Partnership
|
|
|
200,000
|
|
|
|
200,000
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
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; 10,569,401 and
20,200 shares issued and outstanding as of June 30,
2007 and December 31, 2006, respectively
|
|
|
105,000
|
|
|
|
|
|
Additional paid-in capital
|
|
|
93,656,000
|
|
|
|
53,000
|
|
Accumulated deficit
|
|
|
(3,351,000
|
)
|
|
|
(242,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
90,410,000
|
|
|
|
(189,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority
interest and stockholders equity (deficit)
|
|
$
|
165,718,000
|
|
|
$
|
385,000
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-2
NNN
Healthcare/Office REIT, Inc.
For the Three Months Ended June 30, 2007, for the
Period from April 28, 2006 (Date of Inception) through
June 30, 2006 and for the
Six Months Ended June 30, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from April 28,
|
|
|
|
|
|
|
Three Months
|
|
|
2006 (Date of
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Inception) through
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
3,183,000
|
|
|
$
|
|
|
|
$
|
3,924,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses
|
|
|
1,205,000
|
|
|
|
|
|
|
|
1,503,000
|
|
General and administrative
|
|
|
659,000
|
|
|
|
|
|
|
|
1,022,000
|
|
Depreciation and amortization
|
|
|
1,862,000
|
|
|
|
|
|
|
|
2,204,000
|
|
Total expenses
|
|
|
3,726,000
|
|
|
|
|
|
|
|
4,729,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income
(expense)
|
|
|
(543,000
|
)
|
|
|
|
|
|
|
(805,000
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (including
amortization of deferred financing costs):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to note
payables to affiliate
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
(77,000
|
)
|
Interest expense related to
mortgage loan payables
|
|
|
(738,000
|
)
|
|
|
|
|
|
|
(939,000
|
)
|
Interest and dividend income
|
|
|
84,000
|
|
|
|
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,203,000
|
)
|
|
$
|
|
|
|
$
|
(1,736,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
|
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
shares outstanding basic and diluted
|
|
|
6,727,995
|
|
|
|
200
|
|
|
|
3,745,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per
common share
|
|
|
0.18
|
|
|
|
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
NNN
Healthcare/Office REIT, Inc.
For the Six Months Ended June 30, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Number of
|
|
|
|
|
|
Paid-In
|
|
|
Preferred
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
BALANCE
December 31, 2006
|
|
|
20,200
|
|
|
$
|
|
|
|
$
|
53,000
|
|
|
$
|
|
|
|
$
|
(242,000
|
)
|
|
$
|
(189,000
|
)
|
Issuance of common stock
|
|
|
10,496,415
|
|
|
|
105,000
|
|
|
|
104,730,000
|
|
|
|
|
|
|
|
|
|
|
|
104,835,000
|
|
Issuance of vested and nonvested
restricted common stock
|
|
|
17,500
|
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(11,520,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,520,000
|
)
|
Amortization of nonvested common
stock compensation
|
|
|
|
|
|
|
|
|
|
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
23,000
|
|
Issuance of common stock under the
DRIP
|
|
|
35,286
|
|
|
|
|
|
|
|
335,000
|
|
|
|
|
|
|
|
|
|
|
|
335,000
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,373,000
|
)
|
|
|
(1,373,000
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,736,000
|
)
|
|
|
(1,736,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30,
2007
|
|
|
10,569,401
|
|
|
$
|
105,000
|
|
|
$
|
93,656,000
|
|
|
$
|
|
|
|
$
|
(3,351,000
|
)
|
|
$
|
90,410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-4
NNN
Healthcare/Office REIT, Inc.
For the Six Months Ended June 30, 2007 and for the
Period
from April 28, 2006 (Date of Inception) through
June 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
April 28, 2006
|
|
|
|
For the Six Months
|
|
|
(Date of Inception)
|
|
|
|
Ended
|
|
|
through
|
|
|
|
June 30, 2007
|
|
|
June 30, 2006
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,736,000
|
)
|
|
$
|
|
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(including deferred financing costs and above/below market
leases)
|
|
|
2,320,000
|
|
|
|
|
|
Stock based compensation, net of
forfeitures
|
|
|
58,000
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other receivable, net
|
|
|
(682,000
|
)
|
|
|
|
|
Accounts receivable due from
affiliates
|
|
|
45,000
|
|
|
|
|
|
Other assets
|
|
|
164,000
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
|
602,000
|
|
|
|
|
|
Accounts payable due to affiliates
|
|
|
(379,000
|
)
|
|
|
|
|
Prepaid rent
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
388,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisition of real estate
operating properties
|
|
|
(118,128,000
|
)
|
|
|
|
|
Capital expenditures
|
|
|
(25,000
|
)
|
|
|
|
|
Restricted cash
|
|
|
(3,352,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(121,505,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings on mortgage loan payables
|
|
|
37,530,000
|
|
|
|
|
|
Borrowings on unsecured note
payables to affiliate
|
|
|
12,500,000
|
|
|
|
|
|
Payments on unsecured note payables
to affiliate
|
|
|
(12,500,000
|
)
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
104,953,000
|
|
|
|
2,000
|
|
Minority interest contributions to
our Operating Partnership
|
|
|
|
|
|
|
200,000
|
|
Security deposits and prepaid rent
|
|
|
12,000
|
|
|
|
|
|
Deferred financing costs
|
|
|
(585,000
|
)
|
|
|
|
|
Payment of offering costs
|
|
|
(9,771,000
|
)
|
|
|
|
|
Distributions
|
|
|
(470,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
131,669,000
|
|
|
|
202,000
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
10,552,000
|
|
|
|
202,000
|
|
CASH AND CASH
EQUIVALENTS Beginning of period
|
|
|
202,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of period
|
|
$
|
10,754,000
|
|
|
$
|
202,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
37,000
|
|
|
$
|
|
|
The following represents the
increase in certain assets and liabilities in connection with
our acquisitions of operating properties:
|
|
|
|
|
|
|
|
|
Accounts receivable due from
affiliates
|
|
$
|
45,000
|
|
|
$
|
|
|
Other assets
|
|
$
|
397,000
|
|
|
$
|
|
|
Mortgage loan payables
|
|
$
|
31,410,000
|
|
|
$
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
936,000
|
|
|
$
|
|
|
Accrued closing costs due to
affiliates
|
|
$
|
430,000
|
|
|
$
|
|
|
Security deposits and prepaid rent
|
|
$
|
559,000
|
|
|
$
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock under the
DRIP
|
|
$
|
335,000
|
|
|
$
|
|
|
Distributions declared but not paid
|
|
$
|
568,000
|
|
|
$
|
|
|
Accrued offering costs
|
|
$
|
1,749,000
|
|
|
$
|
|
|
Payable to transfer agent for
issuance of common stock
|
|
$
|
118,400
|
|
|
$
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-5
NNN
Healthcare/Office REIT, Inc.
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 July 31, 2007, we
had received and accepted subscriptions in our Offering for
12,162,354 shares of our common stock, or $121,466,000,
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 has a one-year term that expires on
September 19, 2007 and is subject to successive one-year
renewals upon the mutual consent of the parties. Our Advisor
supervises and manages our day-to-day operations and will select
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
third or fourth quarter of 2007, subject to approval by
stockholders of both companies and other customary closing
conditions of transactions of this type.
As of June 30, 2007, we had purchased eight properties
comprising 753,000 square feet of gross leasable area, or
GLA.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The summary of significant accounting policies presented below
is designed to assist in understanding our interim unaudited
condensed consolidated financial statements. Such consolidated
financial statements and accompanying notes are the
representations of our management, who are responsible for their
integrity and
F-6
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
objectivity. These 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 June 30,
2007 and December 31, 2006, we owned a 99.99% and 1.0%,
respectively, general partnership interest therein. Our Advisor
is a limited partner and as of June 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
prospectus dated April 23, 2007.
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.
Restricted
Cash
Restricted cash is comprised of impound reserve accounts for
property taxes, insurance, capital improvements and tenant
improvements.
F-7
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 June 30, 2007 and
December 31, 2006, no allowance for uncollectible accounts
was 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 and the value of in-place leases and
related tenant relationships.
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.
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.
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 three
months to 114 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.
F-8
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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. There
were no impairment losses recorded during the three and six
months ended June 30, 2007.
Other
Assets
Other assets consist primarily of deferred rent receivables,
leasing commissions 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 June 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.
F-9
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
As of June 30, 2007, we owned consolidated properties
located in various states as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
State
|
|
2007 Annual
|
|
|
2007 Annual
|
|
|
|
(Property
|
|
Base
|
|
|
Base
|
|
Property
|
|
Location)
|
|
Rent (*)
|
|
|
Rent
|
|
|
Southpointe Office Parke and Epler
Parke I
|
|
IN
|
|
$
|
1,385,000
|
|
|
|
10.7
|
%
|
Crawfordsville Medical Office Park
and Athens Surgery Center
|
|
IN
|
|
|
578,000
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
IN
|
|
|
1,963,000
|
|
|
|
15.1
|
%
|
The Gallery Professional Building
|
|
MN
|
|
|
1,063,000
|
|
|
|
8.2
|
%
|
Lenox Office Park, Building G
|
|
TN
|
|
|
2,134,000
|
|
|
|
16.4
|
%
|
Commons V Medical Office Building
|
|
FL
|
|
|
1,051,000
|
|
|
|
8.1
|
%
|
Yorktown Medical Center and
Shakerag Medical Center
|
|
GA
|
|
|
2,387,000
|
|
|
|
18.4
|
%
|
Thunderbird Medical Plaza
|
|
AZ
|
|
|
1,814,000
|
|
|
|
13.9
|
%
|
Triumph Hospital Northwest and
Triumph Hospital Southwest
|
|
TX
|
|
|
2,584,000
|
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
12,996,000
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Annualized rental revenue is based on contractual base rent from
leases in effect as of June 30, 2007. |
For the three and six months ended June 30, 2007, two 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
|
|
|
Triumph Hospital
|
|
$
|
2,584,000
|
|
|
|
19.9
|
%
|
|
Triumph
Hospital
|
|
|
151,000
|
|
|
|
02/28/13
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
and
Triumph
Hospital
Southwest
|
|
|
|
|
|
|
|
|
Pfizer, Inc.
|
|
$
|
2,134,000
|
|
|
|
16.4
|
%
|
|
Lenox Office
Park,
Building G
|
|
|
98,000
|
|
|
|
01/31/10
|
|
|
|
|
* |
|
Annualized rental revenue is based on contractual base rent
from leases in effect as of June 30, 2007. |
Organizational,
Offering and Related Expenses
Our organizational, offering and related expenses are being paid
by our Advisor, our Dealer Manager 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 reimbursements and other
organizational and offering expenses do not exceed 11.5% of the
gross proceeds of our Offering. As of June 30, 2007 and
December 31, 2006, our Advisor or Triple Net Properties
have incurred $1,181,000 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
F-10
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
of June 30, 2007 and December 31, 2006. To the extent
we raise additional proceeds from our Offering, these amounts
may become our liability. See Note 9, Related Party
Transactions 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 11,
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 in 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 June 30, 2007 and for the period
from April 28, 2006 (Date of Inception) through
June 30, 2006, we recorded a net loss of approximately
$1,203,000 and $0, respectively. For the six months ended
June 30, 2007, we recorded a net loss of approximately
$1,736.000. As of June 30, 2007 and 2006, 30,000 and
0 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
We internally evaluate operations as one segment and therefore
do not report segment information.
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
F-11
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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.
In June 2007, the American Institute of Certified Public
Accountants, or the AICPA, issued Statement of Position, or SOP,
07-01,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting for Parent Companies and
Equity Method Investors for Investments in Investment
Companies, or
SOP 07-01.
SOP 07-01
provides guidance for determining whether an entity is within
the scope of the AICPA Audit and Accounting Guide Investment
Companies, or the Guide. Entities that are within the scope of
the Guide are required, among other things, to carry their
investments at fair value, with changes in fair value included
in earnings. The provisions of
SOP 07-01
are effective for the first fiscal year beginning on
January 1, 2008. We are currently evaluating
SOP 07-01
and have not determined whether we will be required to apply the
provisions of the Guide in presenting our consolidated financial
statements.
F-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 June 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
21,023,000
|
|
|
$
|
|
|
Building and improvements
|
|
|
107,145,000
|
|
|
|
|
|
Furniture and equipment
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,172,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(899,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127,273,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended June 30,
2007 and for the period from April 28, 2006 (Date of
Inception) through June 30, 2006 was $780,000 and $0,
respectively, and for the six months ended June 30, 2007
was $900,000.
Acquisitions
in 2007
Affiliate
Transactions
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 a fee simple ownership interest in
Southpointe Office Parke and Epler Parke I, or the
Southpointe property, located in Indianapolis, Indiana. 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. 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 a fee simple ownership interest in
Crawfordsville Medical Office Park and Athens Surgery Center, or
the Crawfordsville property, located in Crawfordsville, Indiana.
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. 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.
F-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, or the Gallery property, located in
downtown St. Paul, Minnesota. 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. 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 total 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. 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.
Commons V
Medical Office Building Naples, Florida
On April 24, 2007, we acquired Commons V Medical Office
Building, or Commons V, located in Naples, Florida, 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 refer to
collectively 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. An acquisition fee of
$645,000, or 3.0% of the purchase price, was paid to our Advisor
and its affiliate. See Note 6, Mortgage Loan Payables and
Unsecured Note Payables to Affiliate Mortgage Loan
Payables for a further discussion.
Thunderbird
Medical Plaza Glendale, Arizona
On May 15, 2007, we acquired Thunderbird Medical Plaza in
Glendale, Arizona from an unaffiliated third party for a total
purchase price of $25,000,000, plus closing costs. Thunderbird
Medical Plaza consists of real property located at 5422 and
5410 West Thunderbird Road, or T-Bird 5422/5410, and real
property located at 5310 West Thunderbird Road, or T-Bird
5310, which we refer to collectively as the Thunderbird
property. Of the total purchase price of $25,000,000,
$11,500,000 was allocated to T-Bird 5422/5410 and $13,500,000
was allocated
F-14
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
to T-Bird 5310. 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 our 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 Sugarland, Texas
On June 8, 2007, we acquired Triumph Hospital Northwest and
Triumph Hospital Southwest, which we collectively refer to as
the Triumph Hospital Portfolio, located in suburban Houston,
Texas, 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.
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
August 10, 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
Acquisitions
Gwinnett
Professional Center Lawrenceville, Georgia
On June 8, 2007, our board of directors approved the
acquisition of the Gwinnett Professional Center, located in
Lawrenceville, Georgia. On July 27, 2007, we purchased the
Gwinnett Professional Center. See Note 14, Subsequent
Events Property Acquisitions.
Kokomo
Medical Office Park Kokomo, Indiana
On June 8, 2007, our board of directors approved the
acquisition of Kokomo Medical Office Park, located in Kokomo,
Indiana. We anticipate purchasing the Kokomo Medical Office Park
for a purchase price of $13,350,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
through a combination of debt financing and funds raised through
our Offering. We expect to pay our Advisor and its affiliate an
acquisition fee of $400,500, or 3.0% of the purchase price, in
connection with the acquisition. We anticipate that the closing
will occur in the third quarter of 2007.
F-15
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
St.
Marys Physician Center Long Beach,
California
On June 8, 2007, our board of directors approved the
acquisition of St. Marys Physicians Center, located
in Long Beach, California. We anticipate purchasing the
St. Marys Physicians Center for a purchase price of
$13,800,000, plus closing costs, from an unaffiliated third
party. We intend to finance the purchase through a combination
of seller financed debt and funds raised through our Offering.
We expect to pay our Advisor and its affiliate an acquisition
fee of $414,000, or 3.0% of the purchase price, in connection
with the acquisition. We anticipate that the closing will occur
in the third quarter of 2007.
|
|
4.
|
Identified
Intangible Assets
|
Identified intangible assets consisted of the following as of
June 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
In place leases, net of
accumulated amortization of $822,000 and $0 as of June 30,
2007 and December 31, 2006, respectively, (with a
weighted-average life of 54 months as of June 30, 2007)
|
|
$
|
10,704,000
|
|
|
$
|
|
|
Above market leases, net of
accumulated amortization of $89,000 and $0 as of June 30,
2007 and December 31, 2006, respectively, (with a
weighted-average life of 13 months as of June 30, 2007)
|
|
|
680,000
|
|
|
|
|
|
Tenant relationships, net of
accumulated amortization of $368,000 and $0 as of June 30,
2007 and December 31, 2006, respectively, (with a
weighted-average life of 106 months as of June 30,
2007)
|
|
|
11,335,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,719,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the identified intangible
assets for the three months ended June 30, 2007 and for the
period from April 28, 2006 (Date of Inception) through
June 30, 2006 was $1,163,000 and $0, respectively, which
included $82,000 and $0, respectively, of amortization recorded
against revenue for above market leases. Amortization expense
recorded on the identified intangible assets for the six months
ended June 30, 2007 was $1,391,000, which included $89,000
of amortization recorded against revenue for above market
leases. Amortization expense on the identified intangible assets
as of June 30, 2007 for the six months ended
December 31, 2007, each of the next four years ended
December 31 and thereafter, is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
2,246,000
|
|
2008
|
|
$
|
4,570,000
|
|
2009
|
|
$
|
4,140,000
|
|
2010
|
|
$
|
2,939,000
|
|
2011
|
|
$
|
2,301,000
|
|
Thereafter
|
|
$
|
6,523,000
|
|
F-16
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Other assets consisted of the following as of June 30, 2007
and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred financing costs, net of
accumulated amortization of $17,000 and $0 as of June 30,
2007 and December 31, 2006, respectively
|
|
$
|
572,000
|
|
|
$
|
3,000
|
|
Lease commissions, net of
accumulated amortization of $1,000 and $0 as of June 30,
2007 and December 31, 2006, respectively
|
|
|
32,000
|
|
|
|
|
|
Deferred rent receivables
|
|
|
51,000
|
|
|
|
|
|
Prepaid expenses and deposits
|
|
|
283,000
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
938,000
|
|
|
$
|
183,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on deferred financing costs and
lease commissions for the three months ended June 30, 2007
and for the period from April 28, 2006 (Date of Inception)
through June 30, 2006 was $14,000 and $0, respectively, and
for the six months ended June 30, 2007 was $18,000.
|
|
6.
|
Mortgage
Loan Payables and Unsecured Note Payables to Affiliate
|
Mortgage
Loan Payables
Mortgage loan payables were $68,940,000 and $0 as of
June 30, 2007 and December 31, 2006, respectively. As
of June 30, 2007, we had seven fixed rate mortgage loans
with a weighted-average effective interest rate of 5.75% per
annum. As of June 30, 2007, our mortgage loans have
interest-only monthly payments. We are required by the terms of
the applicable loan documents to meet certain reporting
requirements. As of June 30, 2007, we were in compliance
with all such requirements.
Mortgage loan payables consisted of the following as of
June 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
Loan Payables
|
|
|
Loan Payables
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
Interest
|
|
|
Maturity
|
|
|
June 30,
|
|
|
December 31,
|
|
Property
|
|
Rate
|
|
|
Date
|
|
|
2007
|
|
|
2006
|
|
|
Southpointe Office Parke and Epler
Parke I
|
|
|
6.11
|
%
|
|
|
9/1/2016
|
|
|
$
|
9,146,000
|
|
|
$
|
|
|
Crawfordsville Medical Office Park
and Athens Surgery Center
|
|
|
6.12
|
|
|
|
10/1/2016
|
|
|
|
4,264,000
|
|
|
|
|
|
The Gallery Professional Building
|
|
|
5.76
|
|
|
|
3/1/2017
|
|
|
|
6,000,000
|
|
|
|
|
|
Lenox Office Park, Building G
|
|
|
5.88
|
|
|
|
2/1/2017
|
|
|
|
12,000,000
|
|
|
|
|
|
Commons V Medical Office Building
|
|
|
5.54
|
|
|
|
6/11/2017
|
|
|
|
10,000,000
|
|
|
|
|
|
Yorktown Medical Center and
Shakerag Medical Center
|
|
|
5.52
|
|
|
|
5/11/2017
|
|
|
|
13,530,000
|
|
|
|
|
|
Thunderbird Medical Plaza
|
|
|
5.67
|
|
|
|
6/11/2017
|
|
|
|
14,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,940,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
F-17
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 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.
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.
|
|
7.
|
Identified
Intangible Liabilities
|
Identified intangible liabilities consisted of the following as
of June 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Below market leases, net of
accumulated amortization of $40,000 and $0 as of June 30,
2007 and December 31, 2006, respectively, (with a
weighted-average life of 68 months as of June 30, 2007)
|
|
$
|
1,160,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,160,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the identified intangible
liabilities for the three months ended June 30, 2007 and
for the period from April 28, 2006 (Date of Inception)
through June 30, 2006 was $36,000 and $0, respectively, and
for the six months ended June 30, 2007 was $40,000, which
is recorded to rental income on the consolidated statements of
operations. Amortization expense on the identified intangible
liabilities as of June 30, 2007 for the six months ended
December 31, 2007, each of the next four years ended
December 31 and thereafter, is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
127,000
|
|
2008
|
|
$
|
230,000
|
|
2009
|
|
$
|
201,000
|
|
2010
|
|
$
|
180,000
|
|
2011
|
|
$
|
153,000
|
|
Thereafter
|
|
$
|
269,000
|
|
|
|
8.
|
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.
F-18
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 June 30, 2007 and December 31, 2006, our Advisor
or Triple Net Properties have incurred $1,181,000 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 June 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.
|
|
9.
|
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 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. Our Dealer Manager may re-allow
all or a portion of these fees to participating broker-dealers.
For the three months ended June 30, 2007 and for the period
from April 28, 2006 (Date of Inception) through
June 30, 2006, we incurred $5,416,000 and $0, respectively,
and for the six months ended June 30, 2007, we incurred
$7,242,000 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 and may re-allow up to 1.5% of gross
offering proceeds to participating broker-dealers. In addition,
F-19
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 June 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through June 30,
2006, we incurred $1,950,000 and $0, respectively, and for the
six months ended June 30, 2007, we incurred $2,704,000, 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 for the shares
sold under our Offering. For the three months ended
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, we incurred
$1,176,000 and $0, respectively, and for the six months ended
June 30, 2007, we incurred $1,574,000 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 June 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through June 30,
2006, we incurred $2,913,000 and $0, respectively, and for the
six months ended June 30, 2007, we incurred $4,383,000, in
acquisition fees to our Advisor or its affiliates. Acquisition
fees are capitalized as part of any 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, which 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
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, and for the six
months ended June 30, 2007, we did not incur such expenses
to our Advisor or its affiliates.
Operational
Stage
Asset
Management Fee
Our Advisor is 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 June 30, 2007 and for the period
from April 28, 2006 (Date of Inception) through
June 30, 2006, we incurred $233,000 and $0, respectively,
and for the six months ended June 30, 2007, we incurred
$292,000 in asset management fees to our Advisor or its
F-20
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 June 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through June 30,
2006, we incurred $89,000 and $0, respectively, and for the six
months ended June 30, 2007, we incurred $118,000, 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 June 30, 2007 and for the period from
April 28, 2006 (Date of Inception) through June 30,
2006, and for the six months ended June 30, 2007, we did
not incur such expenses.
Operating
Expenses
Our Advisor or its affiliates are reimbursed for expenses
incurred in rendering its services, subject to certain
limitations. Fees and costs reimbursed to our Advisor or its
affiliates cannot 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. For the three months ended June 30, 2007 and for
the period from April 28, 2006 (Date of Inception) through
June 30, 2006, Triple Net Properties incurred on our behalf
$95,000 and $0, respectively, and for the six months ended
June 30, 2007, Triple Net Properties incurred on our behalf
$426,000, which is included in general and administrative in the
accompanying condensed consolidated statements of operations.
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 June 30, 2007 and for the period from April 28,
2006 (Date of Inception) through June 30, 2006, and for the
six months ended June 30, 2007, we did not incur such fees.
F-21
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 June 30, 2007 and
for the period from April 28, 2006 (Date of Inception)
through June 30, 2006, and for the six months ended
June 30, 2007, 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
June 30, 2007 and for the period from April 28, 2006
(Date of Inception) through June 30, 2006, and for the six
months ended June 30, 2007, 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
As of June 30, 2007, $101,000, $1,176,000 and $153,000 was
payable to Triple Net Properties for operating expenses,
offering costs and due diligence, respectively. As of
December 31, 2006, $312,000 was payable to Triple Net
Properties for operating expenses.
As of June 30, 2007 and December 31, 2006, $420,000
and $0, respectively, was payable to NNN Capital Corp. for the
payment of selling commissions, marketing support fees and due
diligence expense reimbursements.
As of June 30, 2007 and December 31, 2006, $269,000
and $0, respectively, was payable to Realty for asset and
property management fees.
F-22
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Unsecured
Note Payables to Affiliate
See Note 6, Mortgage Loan Payables and Unsecured Note
Payables to Affiliate Unsecured Note Payables to
Affiliate.
As of June 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.
|
|
11.
|
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 June 30, 2007, we
issued 10,496,415 shares in connection with our Offering
and 35,286 shares under the DRIP. As of June 30, 2007
and December 31, 2006, we had 10,569,401 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 June 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 six
months ended June 30, 2007, $318,000 and $335,000,
respectively, in distributions were reinvested and 33,493 and
35,286 shares, respectively, were issued under the DRIP. As
of June 30, 2007 and December 31, 2006, a total of
$335,000 and $0, respectively, in distributions were reinvested
and 35,286 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
June 30, 2007, no share repurchases had been made.
F-23
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. We recognized compensation
expense of approximately $48,000 and $58,000 related to the
restricted common stock grants for the three and six months
ended June 30, 2007, which 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 June 30, 2007 and December 31, 2006, there was
approximately $266,000 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 weighted average
period of
31/2
years.
As of June 30, 2007 and December 31, 2006, the fair
value of the nonvested shares of restricted common stock was
$300,000 and $160,000, respectively. A summary of the status of
our shares of restricted common stock as of June 30, 2007
and December 31, 2006, and changes for the six months ended
June 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
|
|
|
(3,500
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30,
2007
|
|
|
30,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to
vest June 30, 2007
|
|
|
30,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
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
(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
F-24
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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.
|
|
13.
|
Business
Combinations
|
As of June 30, 2007, we completed the acquisition of eight
wholly-owned properties, adding a total of approximately
753,000 square feet of GLA to our property portfolio. We
purchased the Southpointe property and the Crawfordsville
property on January, 22, 2007, the Gallery property on
March 9, 2007, the Lenox property on March 23, 2007,
the Commons V property on April 24, 2007, the Peachtree
property on May 2, 2007, the Thunderbird property on
May 15, 2007 and the Triumph Hospital Portfolio on
June 8, 2007. Results of operations for the properties are
reflected in our consolidated statements of operations for the
three and six months ended June 30, 2007 for the periods
subsequent to the acquisition dates. The aggregate purchase
price of the eight consolidated properties was $146,100,000,
plus closing costs of $4,922,000, of which $81,440,000 was
initially financed with mortgage loans and unsecured note
payables to an affiliate.
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 June 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
April 28, 2006 (Date of Inception), for the three months
ended June 30, 2007, pro forma revenues, net income (loss)
and net income (loss) per diluted share would have been
$4,344,000, $(1,350,000) and $(0.20). For the period from
April 28, 2006 (Date of Inception) through June 30,
2006, pro forma revenues, net income (loss) and net income
(loss) per diluted share would have been $3,068,000, $(521,000)
and $(0.44). For the six months ended June 30, 2007, pro
forma revenues, net income (loss) and net income (loss) per
diluted share would have been $8,678,000, $(2,420,000) and
$(0.65). 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 July 31, 2007, we had received and accepted
subscriptions in our Offering for 12,162,354 shares of our
common stock, or $121,466,000, excluding shares issued under the
DRIP.
Property
Acquisition
Gwinnett
Professional Center Lawrenceville, Georgia
On July 27, 2007, we purchased the Gwinnett Professional
Center for a purchase price of $9,300,000, plus closing costs,
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 property from La Salle National Bank and
funds raised through our Offering. We paid our Advisor and its
affiliate an acquisition fee of $279,000, or 3.0% of the
purchase price, in connection with the acquisition.
F-25
NNN
Healthcare/Office REIT, Inc.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
1 and 4
Market Exchange Columbus, Ohio
On August 15, 2007, we purchased 1 Market Exchange, 4
Market Exchange and a vacant parcel of land, each located in
Columbus, Ohio, or collectively, 1 and 4 Market Exchange, for a
total purchase price of $21,900,000, plus closing costs, from
unaffiliated third parties. We financed the purchase price using
funds raised through our Offering. We paid our Advisor and its
affiliate an acquisition fee of $657,000, or 3.0% of the
purchase price, in connection with the acquisition.
Proposed
Acquisitions
Institute
for Senior Living of Florida Jacksonville, Winter
Park and Sunrise, Florida
On July 31, 2007, our board of directors approved the
acquisition of the Institute for Senior Living of Florida
consisting of six centers on three campuses located in
Jacksonville, Winter Park and Sunrise, Florida. We anticipate
purchasing the Institute for Senior Living of Florida for a
purchase price of $52,000,000, plus closing costs, from an
unaffiliated third party. We intend to finance the purchase
through a combination of debt financing and funds raised through
our Offering. We expect to pay our Advisor and its affiliate an
acquisition fee of $1,560,000, or 3.0% of the purchase price, in
connection with the acquisition. We anticipate that the closing
will occur in the third quarter of 2007.
St.
Ritas Medical Center Portfolio Lima,
Ohio
On July 31, 2007, our board of directors approved the
acquisition of St. Ritas Medical Center Portfolio, located
in Lima, Ohio. We anticipate purchasing the St. Ritas
Medical Center Portfolio for a purchase price of $25,050,000,
plus closing costs, from an unaffiliated third party. We intend
to finance the purchase through a combination of debt financing
and funds raised through our Offering. We expect to pay our
Advisor and its affiliate an acquisition fee of $772,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the third quarter
of 2007.
Quest
Diagnostics Office Building Valley Forge,
Pennsylvania
On July 31, 2007, our board of directors approved the
acquisition of Quest Diagnostics Office Building, located in
Valley Forge, Pennsylvania. We anticipate purchasing the Quest
Diagnostics Office Building for a purchase price of $26,700,000,
plus closing costs, from an unaffiliated third party. We intend
to finance the purchase through a combination of debt financing
and funds raised through our Offering. We expect to pay our
Advisor and its affiliate an acquisition fee of $801,000, or
3.0% of the purchase price, in connection with the acquisition.
We anticipate that the closing will occur in the third quarter
of 2007.
F-26