News Column

AMERICAN REALTY CAPITAL HEALTHCARE TRUST INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 26, 2014

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties. Overview We were incorporated on August 23, 2010, as a Maryland corporation and qualified as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2011. On February 18, 2011, we commenced our initial public offering ("IPO" or "our offering") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-169075), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covers up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stock holders may elect to have their distributions reinvested in additional shares of our common stock at a price initially equal to $9.50 per share, which is 95% of the offering price in our IPO. On April 12, 2013, we registered an additional 25.0 million shares to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3 (File No. 333-187900). In April 2013, we completed the issuance of the 150.0 million shares of common stock registered in connection with our IPO, plus 1.2 million DRIP shares, and as permitted, reallocated the remaining 23.8 million DRIP shares available under the Registration Statement to the primary offering. On April 26, 2013, we closed the IPO following the successful achievement of our target equity raise, including the shares reallocated from the DRIP. As of December 31, 2013, we had 180.5 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP and had received total gross proceeds of $1.8 billion, including proceeds from shares issued under the DRIP. As of December 31, 2013, the aggregate value of all the common stock outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 per share for shares issued under the DRIP). We were formed to primarily acquire a diversified portfolio of income producing real estate properties, focusing predominantly on medical office buildings and healthcare-related facilities. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced real estate operations in June 2011. As of December 31, 2013, we owned 114 properties with an aggregate purchase price of $1.6 billion, comprised of 5.8 million rentable square feet. Substantially all of our business is conducted through American Realty Capital Healthcare Trust Operating Partnership, L.P., a Delaware limited partnership, (the "OP"). We have no direct employees. American Realty Capital Healthcare Advisors, LLC, (the "Advisor") manages our affairs on a day-to-day basis. American Realty Capital Healthcare Properties, LLC (the "Property Manager") serves as our property manager. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO. The Advisor and Property Manager are wholly owned entities of, and the Dealer Manager is under common ownership with, our sponsor, American Realty Capital V, LLC (the "Sponsor") and, as a result of which, they are related parties and each has received or may receive compensation and fees for services related to the IPO and for the investment and management of our assets. Such entities have received or may receive fees during the offering, acquisition, operational and liquidation stages. Significant Accounting Estimates and Critical Accounting Policies Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include: 44



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Offering and Related Costs Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, Realty Capital Securities, LLC, the dealer manager of the offering (the "Dealer Manager") or their affiliates on our behalf. These costs include but are not limited to: (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the bona fide diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We were obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor was obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our offering exceed 1.5% of gross offering proceeds in the IPO. As a result, these costs were only our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs did not exceed 11.5% of the gross proceeds determined at the end of our IPO. As of the end of the IPO in April 2013, offering costs were less than 11.5% of the gross proceeds received in the IPO. Revenue Recognition Our rental income is primarily related to rent received from tenants in medical office buildings and other healthcare-related facilities and residents in seniors housing communities. Rent from tenants in our three operating segments, excluding seniors housing communities under the RIDEA structure, are recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation. Rental income from residents in our seniors housing communities are recognized as earned. Residents pay a monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. We defer the revenue related to lease payments received from tenants and residents in advance of their due dates. Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable. Resident services and fee income relates to ancillary services performed for residents in our seniors housing communities. Fees for ancillary services are recorded in the period in which the services are performed. We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations. Investments in Real Estate Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis. We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations at fair value for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet. Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a "critical accounting estimate" because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment. 45



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Events or changes in circumstances that could cause an evaluation for impairment include the following: a significant decrease in the market price of a long-lived asset;



a significant adverse change in the extent or manner in which a long-lived

asset is being used or in its physical condition;

a significant adverse change in legal factors or in the business climate

that could affect the value of a long-lived asset, including an adverse

action or assessment by a regulator;

an accumulation of costs significantly in excess of the amount originally

expected for the acquisition or construction of a long-lived asset; and



a current-period operating or cash flow loss combined with a history of

operating or cash flow losses or a projection or forecast that

demonstrates continuing losses associated with the use of a long-lived

asset.

We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. Purchase Price Allocation We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable. The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 12 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The aggregate value of intangible assets related to customer relationship is measured based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors. 46



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The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 25 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed. Derivative Instruments We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or we elect not to apply hedge accounting. Recently Issued Accounting Pronouncements In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance was effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows. In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments allow an entity to initially assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity is no longer required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments were effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows. In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance was effective for annual and interim periods beginning after December 15, 2012. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows. In February 2013, the FASB issued new accounting guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position, results of operations or cash flows. Results of Operations We purchased our first property and commenced our real estate operations in June 2011. As of December 31, 2013, we owned 114 properties with an aggregate purchase price of $1.6 billion, comprised of 5.8 million rentable square feet. As of December 31, 2012, we owned 50 properties with an aggregate purchase price of $672.6 million, comprised of 2.2 million rentable square feet. 47



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Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012 We have acquired 100 properties since January 1, 2012. On January 1, 2012, we owned 14 properties (our "Same Store") with an aggregate purchase price of $164.5 million, consisting of 0.5 million rentable square feet. Accordingly, our results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012 reflect significant increases in most categories. Rental Income Rental income increased $77.4 million to $107.8 million for the year ended December 31, 2013 from $30.4 million for the year ended December 31, 2012. This increase in rental income was due to our acquisitions in 2013, as well as a full year of operations for properties acquired in 2012, which resulted in an increase in rental income of $77.6 million for the year ended December 31, 2013. In addition, Same Store rental income decreased by $0.2 million, primarily due to a tenant lease termination in April 2013 in the Spring Creek Medical Plaza. This space was leased to another tenant in June 2013 at a lower rent per square foot. Operating Expense Reimbursements Operating expense reimbursements increased $5.9 million to $11.1 million for the year ended of December 31, 2013 from $5.2 million for the year ended December 31, 2012. Operating expense reimbursements increase in relation to the increase in property operating expenses. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Our acquisitions resulted in a increase to operating expense reimbursements of $5.7 million. Same Store operating expense reimbursements increased $0.2 million due to higher property operating expenses at the Carson Tahoe Specialty Medical Center. Resident Services and Fee Income Resident services and fee income increased $6.3 million to $6.5 million for the year ended of December 31, 2013 from $0.2 million for the year ended December 31, 2012. This income relates to services offered to residents in our seniors housing communities depending on the level of care required as well as fees associated with other ancillary services. The increase in resident services and fee income is due to our acquisition of 21 seniors housing communities that operate under the RIDEA structure during the year ended December 31, 2013. Property Operating and Maintenance Expenses Property operating and maintenance expenses increased $40.1 million to $46.7 million for the year ended December 31, 2013 from $6.6 million for the year ended December 31, 2012. The increase was primarily due to our property acquisitions, which resulted in an increase in property operating and maintenance expense of $39.6 million for the year ended December 31, 2013. These costs primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, repairs, maintenance and unaffiliated third party property management fees, as well as costs relating to caring for the residents in our seniors housing communities. Same Store property operating and maintenance expense increased by $0.5 million, primarily due to the write-off of rent of $0.3 million as a result of the lease termination of a tenant in the Spring Creek Medical Plaza, as well as $0.2 million of higher repairs and maintenance costs at the Carson Tahoe Specialty Medical Center during the year ended December 31, 2013. Operating Fees to Affiliates Until September 30, 2012, our Advisor was entitled to asset management fees in connection with providing asset management services. During the year ended December 31, 2012, we incurred $1.0 million in asset management fees from our Advisor. The Advisor elected to waive $0.6 million of asset management fees for the year ended December 31, 2012. For the year ended December 31, 2012, we would have incurred asset management fees of $1.6 million, had these fees not been waived. Effective October 1, 2012, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead, we issue (if approved by the board of directors) Class B OP units to the Advisor, which will be forfeited unless certain conditions are met. During the year ended December 31, 2013, we issued 709,180 Class B Units to the Advisor in connection with this arrangement. Our Property Manager is entitled to property management fees for managing our properties on a day-to day basis. Property management fees increase in direct correlation with gross revenues. The Property Manager elected to waive all property management fees for the years ended December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, we would have incurred property management fees of $1.4 million and $0.4 million, respectively, had these fees not been waived. 48



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Acquisition and Transaction Related Costs Acquisition and transaction related costs for the year ended of December 31, 2013 of $13.6 million, primarily pertained to $15.2 million of acquisition and transaction related costs associated with the the purchase of 64 properties with an aggregate purchase price of $970.0 million, partially offset by the reimbursement from the Advisor of $4.7 million of acquisition expenses and legal reimbursements that had been incurred on previous acquisitions. Acquisition and transaction related costs for the year ended December 31, 2013 also included $3.0 million incurred from the Dealer Manager for fees related to strategic advisory services rendered during the IPO and services rendered in connection with transaction management, information agent and advisory services agreements related to a potential liquidity event. Acquisition and transaction related costs for the year ended December 31, 2012 of $9.4 million, related to our acquisition of 36 properties with an aggregate purchase price of $508.1 million. General and Administrative Expenses General and administrative expenses were $4.6 million and $0.9 million for the years ended December 31, 2013 and 2012, respectively, which reflects an increase of $3.7 million, primarily due to higher professional fees, directors' and officers' insurance and federal and state income taxes to support our larger real estate portfolio and number of stockholders. When the IPO ended in April 2013, professional fees relating to stockholder services were expensed as incurred, because these costs no longer related to fulfilling subscriptions and offering costs. This increase was offset by the Advisor's absorption of $0.3 million in general and administrative expenses during the year ended December 31, 2013, compared to $0.2 million during the year ended December 31, 2012. Depreciation and Amortization Expense Depreciation and amortization expense increased $48.2 million to $67.5 million for the year ended December 31, 2013 from $19.3 million for the year ended December 31, 2012. This increase relates to our acquisitions, which resulted in an increase in depreciation and amortization of $46.5 million for the year ended December 31, 2013. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives. In addition, Same Store depreciation and amortization expense increased by $1.7 million, primarily due to the write-off of tangible and intangible assets related to the lease termination of a tenant in the Spring Creek Medical Plaza. Interest Expense Interest expense increased $6.6 million to $15.8 million for the year ended December 31, 2013 from $9.2 million for the year ended December 31, 2012. Interest expense related to mortgage notes payable increased by $3.6 million as a result of a higher average balance outstanding of $229.2 million during the year ended December 31, 2013, compared to the $158.8 million during the year ended December 31, 2012, as well as the associated increased amortization of deferred financing costs. We entered into a $50.0 million senior revolving credit facility in May 2012. In October 2012 and July 2013, we entered into amendments which increased the maximum commitments under the credit facility to $200.0 million and $755.0 million, respectively. Interest expense related to the credit facility increased $3.2 million during the year ended December 31, 2013, compared to the year ended December 31, 2012, due to higher non-usage fees and the increased amortization of deferred financing costs associated with the amendments, partially offset by the decrease in interest expense related to lower average outstanding advances. We did not carry a balance on the senior revolving credit facility throughout the year ended December 31, 2013. The average outstanding advances was $8.7 million during the year ended December 31, 2012. These increases were partially offset by a $0.2 million decrease in interest expense related to an unsecured note payable which was repaid in January 2013. We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings, and the opportunity to acquire real estate assets which meet our investment objectives. Income from Investment Securities Income from investments for the year ended December 31, 2013 of $0.9 million related to income earned on our investments in common stock, redeemable preferred stock and senior notes. We did not own any investment securities, and therefore, had no income from investment securities for the year ended December 31, 2012. Loss on sale of investments Loss on sale of investment securities of $0.3 million for the year ended December 31, 2013 resulted from selling our investments in redeemable common stock and senior notes. 49



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Net Loss (Income) Attributable to Non-Controlling Interests

Net loss (income) attributable to non-controlling interests was approximately $(0.1) million and $2,000 for the year ended December 31, 2013 and 2012, respectively, which represents the net loss (income) that is related to non-controlling interest holders. We had a net loss attributable to non-controlling interests for the year ended December 31, 2012, due to acquisition and transaction costs, which were not incurred during the year ended December 31, 2013. Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011 We purchased our first property and commenced our real estate operations in June 2011. As of December 31, 2012, we owned 50 properties with an aggregate purchase price of $672.6 million, comprised of 2.2 million square feet. As of December 31, 2011, we owned 14 properties with an aggregate purchase price of $164.5 million, comprised of 0.5 million square feet. Accordingly, our results of operations for the year ended December 31, 2012 as compared to the year ended December 31, 2011 reflect significant increases in most categories. Rental Income Rental income increased $27.8 million to $30.4 million for the year ended December 31, 2012 from $2.6 million for the year ended December 31, 2011. Rental income was driven by our acquisition of 50 properties, since we commenced operations in June 2011, for a base purchase price of $672.6 million of properties. Operating Expense Reimbursements Operating expense reimbursements increased $4.4 million to $5.2 million for the year ended of December 31, 2012 from $0.8 million for the year ended December 31, 2011. Operating expense reimbursements increased in relation to the increase in property operating expenses due to property acquisitions. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Resident services and fee income Resident services and fee income of $0.2 million for the year ended of December 31, 2012 relates to services offered to residents in our seniors housing communities depending on the level of care required as well as fees associated with other ancillary services. We did not own any seniors housing communities and therefore did not have any resident services and fee income for the year ended December 31, 2011. Property Operating and Maintenance Expenses Property operating and maintenance expenses increased $5.7 million to $6.6 million for the year ended December 31, 2012 from $0.9 million for the year ended December 31, 2011. The increase was primarily due to our property acquisitions since we commenced operations in June 2011. These costs primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, repairs, maintenance and unaffiliated third party property management fees as well as costs relating to caring for the residents in our seniors housing communities. Fees to Affiliates Our Property Manager is entitled to property management fees for managing our properties on a day-to-day basis. Property management fees increase in direct correlation with gross revenues. Until September 30, 2012, our Advisor was entitled to asset management fees in connection with providing asset management services. Effective October 1, 2012, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead we will issue (if approved by the board of directors) to the Advisor Class B OP Units, which will be forfeited unless certain conditions are met. In January 2013, we issued 133,954 Class B OP Units to to the Advisor in connection with this arrangement based on our cost of assets as of December 31, 2012. We incurred $1.0 million in asset management fees from our Advisor during the year ended December 31, 2012. The Advisor and Property Manager elected to waive a portion of asset management fees and all property management fees for the year ended December 31, 2012 and 2011. For the year ended December 31, 2012 and 2011, we would have incurred additional asset management fees and property management fees of $1.0 million and $0.2 million, respectively, had these fees not been waived. Acquisition and Transaction Related Costs Acquisition and transaction related costs for the year ended of December 31, 2012 were $9.4 million. These costs related to our acquisition of 36 properties with an aggregate purchase price of $508.1 million. For the year ended December 31, 2011, acquisition and transaction related costs were $3.4 million, which related to the acquisition of 14 properties with an aggregate purchase price of $164.5 million. 50



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General and Administrative Expenses General and administrative expenses increased $0.5 million to $0.9 million for the year ended December 31, 2012 from $0.4 million for the year ended December 31, 2011. General and administrative expenses increased $0.7 million due to higher professional fees, bank fees, board member compensation, state income taxes and insurance expense to support our larger real estate portfolio. This increase was partially offset by $0.2 million of general and administrative expense absorbed by the Advisor during the year ended December 31, 2012. No general and administrative expense was absorbed by the Advisor during the year ended December 31, 2011. Depreciation and Amortization Expense Depreciation and amortization expense increased $17.8 million to $19.3 million for the year ended December 31, 2012 from $1.5 million for the year ended December 31, 2011. This increase relates to the purchase of 50 properties since we commenced operations in June 2011 with an aggregate purchase price of $672.6 million. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives. Interest Expense Interest expense increased $8.0 million to $9.2 million for the year ended December 31, 2012 from $1.2 million for the year ended December 31, 2011. As of December 31, 2012, we had mortgage notes payable of $200.1 million with a weighted average effective interest rate of 5.00%. We entered into our first mortgage payable in June 2011, when we commenced operations. In addition, the first advance under our revolving credit facility occurred in May 2012. Since the first advance, the average balance outstanding under the facility was $9.4 million, which bore interest at an average rate of 3.7%. Interest expense also related to our unsecured note payable of $2.5 million issued in September 2011 and repaid in January 2013, which bore interest a fixed interest rate of 8.0%. Net Loss Attributable to Non-Controlling Interests Net loss attributable to non-controlling interests of $2,000 and $32,000 during the years ended December 31, 2012 and 2011, respectively, represents the net loss that is related to non-controlling interest holders. Cash Flows for the Year Ended December 31, 2013 During the year ended December 31, 2013, net cash provided by operating activities was $53.0 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2013 includes $13.6 million of acquisition and transaction costs. Cash inflows included a net loss adjusted for non-cash items of $50.0 million (net loss of $22.2 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, net income attributable to minority interest holders, share based compensation, bad debt expense and loss on sale of investment securities, offset by amortization of mortgage premium of $72.3 million); an increase of $10.0 million in accounts payable and accrued expenses due to fees owned to our Dealer Manager of $2.1 million for services rendered related to a potential liquidity event, as well as accrued real estate, income taxes and other accrued expenses related to our seniors housing communities; an increase in deferred rent of $2.0 million; and $0.2 million from our Advisor related to reimbursement for absorbed costs. These cash inflows were partially offset by an increase in prepaid and other assets of $9.2 million due to rent and other receivables, unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid insurance and real estate taxes. The net cash used in investing activities during the year ended December 31, 2013 was $942.7 million. The cash used in investing activities included $920.5 million to acquire 64 properties with an aggregate base purchase price of $970.0 million, as well as $12.9 million for the land and related construction in progress of a medical office building in Kenosha, Wisconsin, partially offset by the assumption of mortgage notes payable of $59.7 million and other liabilities of $2.6 million related to tenant deposits and improvements. The cash used in investing activities also included $3.6 million of deposits on pending real estate acquisitions, $0.7 million of capital expenditures and $19.6 million for the purchase of investment securities. These cash outflows were partially offset by proceeds from the sale of investment securities of $1.7 million Net cash provided by financing activities of $1.0 billion during the year ended December 31, 2013 related to proceeds, net of receivables and common stock repurchases, from the issuance of common stock of $1.2 billion. This cash inflow was partially offset by payments related to offering costs of $122.3 million, payments on mortgage notes payable, the credit facility and note payable of $29.0 million, cash distributions to stockholders of $45.0 million, payments related to financing costs of $17.2 million, increases in restricted cash of $1.3 million, distributions to non-controlling interest holders of $0.4 million and payments to non-controlling interest holders of $0.1 million. 51



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Cash Flows for the Year Ended December 31, 2012 During the year ended December 31, 2012, net cash provided by operating activities was $7.8 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2012 included $9.4 million of acquisition and transaction costs. Cash inflows included a net loss adjusted for non-cash items of $10.1 million (net loss of $10.6 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share based compensation, offset by amortization of mortgage premium of $20.7 million), an increase of $2.0 million in accounts payable and accrued expenses and an increase of $0.8 million in deferred rent. These cash inflows were partially offset by an increase in prepaid and other assets of $5.1 million, due to rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid insurance and accrued income for real estate tax reimbursements. The increases in accounts payable, accrued expenses, deferred rent and prepaid and other assets were primarily due to our larger real estate portfolio. The net cash used in investing activities during the year ended December 31, 2012 of $452.5 million related to our acquisition of 36 properties with an aggregate gross purchase price of $508.1 million. Four properties were financed at acquisition with mortgage notes payable of $54.6 million during the year ended December 31, 2012. We assumed $1.0 million of other liabilities in connection with acquisitions related to tenant deposits and improvements. Net cash provided by financing activities of $453.6 million during the year ended December 31, 2012 related to proceeds, net of receivables and common stock repurchases, from the issuance of common stock of $470.8 million, proceeds from mortgage notes payable and the revolving credit facility of $99.8 million. These cash inflows were partially offset by payments related to offering costs of $63.4 million, payments on mortgage notes payable and the revolving credit facility of $39.0 million, distributions to stockholders of $7.9 million, payments related to financing costs of $6.0 million, distributions to non-controlling interest holders of $0.4 million and an increase in receivables from affiliates of $0.2 million related to general and administrative expenses absorbed by our Advisor. Cash Flows for the Year Ended December 31, 2011 During the year ended December 31, 2011, net cash used in operating activities was $2.2 million. The level of cash flows used in or provided by operating activities is affected by the timing of interest payments and the amounts of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2011 included $3.4 million of acquisition and transaction costs. Cash flows used in operating activities during the year ended December 31, 2011 was mainly due to a net loss adjusted for non-cash items of $2.4 million (net loss of $4.1 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share based compensation of $1.7 million) and an increase in prepaid and other assets of $0.8 million. This cash outflow was partially offset by an increase of $0.8 million in accounts payable and accrued expenses mainly due to interest payable related to mortgages and deferred rent of $0.2 million. The net cash used in investing activities during the year ended December 31, 2011 of $53.3 million related to the acquisition of 14 properties as of December 2011 with an aggregate gross purchase price of $164.5 million. Many of the properties were financed at acquisition date with $110.7 million of mortgage note payables. We assumed $0.4 million of other liabilities in connection with the acquisitions related to tenant deposits and improvements. Net cash provided by financing activities of $60.5 million during the year ended December 31, 2011 related to proceeds, net of receivables and common stock redemptions, from the issuance of common stock of $68.4 million and $4.5 million of proceeds from notes payable and $4.4 million of contributions from non-controlling interest holders. These inflows were partially offset by payments related to offering costs of $11.5 million, payments related to financing costs of $2.8 million, payments related to notes and mortgage note payables of $2.0 million, distributions to stockholders of $0.4 million and $0.1 million of net payments to affiliated entities and an increase in restricted cash. 52



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Liquidity and Capital Resources In May 2011, we had raised proceeds sufficient to break escrow in connection with our IPO. We received and accepted aggregate subscriptions in excess of the $2.0 million minimum and issued shares of common stock to our initial investors who were simultaneously admitted as stockholders. As of December 31, 2013, we had 180.5 million shares of common stock outstanding, including unvested restricted stock and shares issues under the DRIP, from proceeds of $1.8 billion, including proceeds from shares issued under the DRIP. We purchased our first property and commenced our real estate operations in June 2011. As of April 2013, we had issued the entire 150.0 million shares of common stock registered in connection with our IPO, plus 1.2 million DRIP shares, and as permitted, reallocated the remaining 23.8 million DRIP shares available under the Registration Statement to the primary offering. Concurrent with such reallocation, on April 12, 2013, we registered an additional 25.0 million shares to be used under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-187900). On April 26, 2013, we closed the IPO following the successful achievement of our target equity raise, including the shares reallocated from the DRIP. During the year ended December 31, 2013, we acquired 64 properties with an aggregate base purchase price of $970.0 million. As of December 31, 2013, we owned 114 properties with an aggregate base purchase price of $1.6 billion. As of December 31, 2013, we had cash and cash equivalents of $103.4 million. Our principal demands for funds will continue to be for property acquisitions, either directly or through investment interests, for the payment of operating expenses, distributions to our stockholders and non-controlling interest holders, and for the payment of principal and interest on our outstanding indebtedness. Generally, capital needs for property acquisitions will be met through the remaining proceeds from our IPO, as well as proceeds from secured financings and our credit facility. We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire. Expenditures other than property acquisitions are expected to be met from cash flows from operations. We expect to meet our future short-term operating liquidity requirements through a combination of net cash provided by our current property operations and the operations of properties to be acquired in the future. Management expects that in the future, as our portfolio matures and we invest the remaining proceeds received from our IPO, our properties will generate sufficient cash flow to cover operating expenses and the payment of our monthly distribution. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from public and private offerings and undistributed funds from operations. We expect to utilize the remaining proceeds from our IPO and proceeds from secured financings and our credit facility to complete future property acquisitions. Specifically, we may incur mortgage debt and pledge all or some of our properties as security for that debt to obtain funds to acquire additional properties. We may borrow if we need funds to satisfy the REIT tax qualifications requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principals in the United States of America ("GAAP"), determined without regard to the deduction for dividends paid and excluding net capital gain). We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT. On May 25, 2012, we entered into a senior revolving credit facility in the amount of $50.0 million. On October 25, 2012, our credit facility agreement was amended to increase the commitment up to a maximum of $200.0 million with an "accordion" feature to allow us, subject to certain conditions, to increase the aggregate commitments under the credit facility to a maximum of $400.0 million. On July 24, 2013, we entered into an unsecured amended and restated credit agreement (the "Amended Facility"). The Amended Facility allows for total borrowings of up to $755.0 million with a $500.0 million term loan component and a $255.0 million revolving loan component, and with a subfacility for letters of credit of up to $25.0 million. The Amended Facility contains an "accordion feature" to allow us, under certain circumstances, to increase the aggregate term loan borrowings under the Amended Facility to up to $750.0 million and the aggregate revolving loan borrowings to up to $450.0 million, or up to $1.2 billion of total borrowings. The term loan component and the revolving loan component of the Amended Facility matures in July 2018 and July 2016, respectively. The Amended Facility also requires us to make draws on the term loan component of the facility on the following schedule: $100.0 million on or before January 24, 2014, $200.0 million during the period from January 25, 2014 to April 24, 2014 and $200.0 million during the period from April 25, 2014 to the termination date. The revolving loan component of the Amended Facility also contains two one-year extension options. As of December 31, 2013, there was no outstanding balance under the Amended Facility. Our unused borrowing capacity was $315.3 million, based on the assets assigned to the Amended Facility as of December 31, 2013. Availability of borrowings is based on a pool of eligible unencumbered real estate assets. There is no limit on the amount we may borrow against any single improved property. Under our charter, we may borrow up to 300% of our total "net assets" (as defined in our charter) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments and may exceed that limit if, among other things, a majority of our independent directors approve the higher amount. The cost of each investment will be substantially similar to its fair market value at the time of acquisition. Subsequent events, including changes in the fair market value of our assets, could, however, result in our exceeding these limits. 53



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Incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default and cause us to recognize taxable income on foreclosure for federal income tax purposes even though we do not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. The domestic and international commercial real estate debt markets continue to be volatile, pushing up the cost for debt financing. Increases in interest rates impact us in a number of ways. For example, it may result in future acquisitions generating lower overall economic returns. Also, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.We have and expect to continue incurring indebtedness in connection with property acquisitions or financing our operations. To the extent that we incur variable rate debt or on maturity of fixed rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on these investments. Our board of directors has adopted a share repurchase plan that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such purchase. The following table reflects information related to the shares repurchased for the three years ended December 31, 2013: Number Number of of Shares Average Price Requests Repurchased per Share Year ended December 31, 2011 3 6,241 $ 10.00 Year ended December 31, 2012 27 108,361 9.83 Year ended December 31, 2013 92 272,366 9.75 Cumulative repurchase requests as of December 31, 2013 (1) 122 386,968 $ 9.77 _________________



(1) Includes 25 unfulfilled repurchase requests consisting of 66,553 shares at an

average price per share of $9.62, which were approved for repurchase as of

December 31, 2013 and completed in February 2014.

Acquisitions

Our Advisor evaluates potential acquisitions of real estate and real estate related assets and engages in negotiations with sellers and borrowers on our behalf. Investors should be aware that after a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and fully negotiated binding agreements. We currently have $344.9 million of assets under contract and submitted letters of intent. Pursuant to the terms of the purchase and sale agreements and letters of intent, our obligation to close upon these acquisitions is subject to certain conditions customary to closing. We may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions. Funds from Operations and Adjusted Funds from Operations Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under U.S. GAAP. 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"). The White Paper defines FFO as net income or loss computed in accordance with U.S. GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization, after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT's policy described above. 54



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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, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of U.S. GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in U.S. GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and adjusted funds from operations ("AFFO"), as described below, should not be construed to be more relevant or accurate than the current U.S. GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under U.S. GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and AFFO measures and the adjustments to U.S. GAAP in calculating FFO and AFFO. We consider FFO and AFFO useful indicators of the performance of a REIT. Because FFO calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs in our peer group. Accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. While certain companies may experience significant acquisition activity, other companies may not have significant acquisition activity and management believes that excluding costs such as merger and transaction costs and acquisition related costs from property operating results provides useful information to investors and provides information that improves the comparability of operating results with other companies who do not have significant merger or acquisition activities. AFFO is not equivalent to our net income or loss as determined under GAAP, and AFFO may not be a useful measure of the impact of long-term operating performance if we continue to have such activities in the future. We exclude certain income or expense items from AFFO that we consider more reflective of investing activities, other non-cash income and expense items and the income and expense effects of other activities that are not a fundamental attribute of our business plan. These items include unrealized gains and losses, which may not ultimately be realized, such as gains or losses on derivative instruments, gains or losses on contingent valuation rights, gains and losses on investments and early extinguishment of debt. We exclude distributions related to Class B units and certain interest expenses related to securities that are convertible to common stock as the shares are assumed to have converted to common stock in our calculation of weighted average common shares-fully diluted. In addition, by excluding non-cash income and expense items such as amortization of above and below market leases, amortization of deferred financing costs, straight-line rent and non-cash equity compensation from AFFO we believe we provide useful information regarding income and expense items which have no cash impact and do not provide liquidity to the company or require capital resources of the company. By providing AFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our ongoing operating performance without the impacts of transactions that are not related to the ongoing profitability of our portfolio of properties. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that are not as involved activities which are excluded from our calculation. Investors are cautioned that AFFO should only be used to assess the sustainability of our operating performance excluding these activities, as it excludes certain costs that have a negative effect on our operating performance during the periods in which these costs are incurred. 55



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In calculating AFFO, we exclude expenses, which under GAAP are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued merger and acquisition fees and certain other expenses negatively impact our operating performance during the period in which expenses are incurred or properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property and certain other expenses. Therefore, AFFO may not be an accurate indicator of our operating performance, especially during periods in which mergers are being consummated or properties are being acquired or certain other expense are being incurred. AFFO that excludes such costs and expenses would only be comparable to companies that did not have such activities. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments as items which are unrealized and may not ultimately be realized. We view both gains and losses from fair value adjustments as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Excluding income and expense items detailed above from our calculation of AFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe AFFO provides useful supplemental information. As a result, we believe that the use of FFO and AFFO, together with the required U.S. GAAP presentations, provide a more complete understanding of our performance relative to our peers and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. FFO and AFFO are non-GAAP financial measures and do not represent net income as defined by U.S. GAAP. FFO and AFFO do not represent cash flows from operations as defined by U.S. GAAP, are not indicative of cash available to fund all cash flow needs and liquidity, including our ability to pay distributions and should not be considered as alternatives to net income, as determined in accordance with U.S. GAAP, for purposes of evaluating our operating performance. Other REITs may not define FFO in accordance with the current NAREIT definition (as we do) or may interpret the current NAREIT definition differently than we do and/or calculate AFFO differently than we do. Consequently, our presentation of FFO and AFFO may not be comparable to other similarly titled measures presented by other REITs. The below table reflects the items deducted or added to net loss in our calculation of FFO and AFFO for the periods presented. Items are presented net of non-controlling interest portions where applicable. Quarter Ended Year Ended (In thousands) March 31, June 30, September 30, December 31, December 31, 2013 2013 2013 2013 2013 Net loss attributable to stockholders (in accordance with GAAP) $ (3,606 )$ (3,258 )$ (5,475 )$ (9,891 )$ (22,230 ) Depreciation and amortization attributable to stockholders 11,579 12,592 17,018 25,786 66,975 FFO 7,973 9,334 11,543 15,895 44,745 Acquisition fees and expenses 2,038 2,713 3,107 5,748 13,606

Amortization of above or below market leases and liabilities, net 67 119 160 98 444 Straight-line rent (990 ) (1,138 ) (1,322 ) (1,820 ) (5,270 ) Amortization of mortgage premiums (179 ) (188 ) (226 ) (233 ) (826 ) Amortization of deferred financing costs 617 636 1,209 1,520 3,982 Non-cash equity compensation expense 9 10 13 68 100 Loss on sale of investments - - - 300 300 Distributions on Class B units 17 37 63 103 220 AFFO $ 9,552$ 11,523$ 14,547

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Distributions

On December 10, 2011, our board of directors authorized, and we declared, our current distribution rate, which is calculated based on stockholders of record each day during the applicable period at a rate of $0.0018630137 per day, or $0.68 annually per share of common stock, beginning January 1, 2012. Our distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. During the year ended December 31, 2013, distributions paid to common stockholders totaled $95.8 million, inclusive of $50.9 million of distributions for which common stock was issued under the DRIP. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured. During the year ended December 31, 2013, cash used to pay our distributions was primarily generated from cash flows from operations and shares issued under the DRIP. We have continued to pay distributions to our stockholders each month since our initial distribution payment in August 2011. There is no assurance that we will continue to declare distributions at this rate. The following table shows the sources for the payment of distributions to common stockholders: Quarter Ended Year Ended March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013 December 31, 2013 Percentage of Percentage of Percentage of Percentage of Percentage of (In thousands) Distributions Distributions Distributions Distributions Distributions Distributions(1): Distributions paid in cash $ 5,494$ 11,663$ 13,960$ 13,865$ 44,982 Distributions reinvested 4,847 12,954 16,519 16,537 50,857 Total distributions $ 10,341$ 24,617$ 30,479 30,402 $ 95,839 Source of distribution coverage: Cash flows provided by operations (1) $ 5,494 53.1 % $ 11,663 47.4 % $ 12,086 39.7 % $ 15,739 51.8 % $ 44,982 46.9 % Proceeds from issuance of common stock - - % - - % 1,874 6.1 % (1,874 ) (6.2 )% - - % Common stock issued under the DRIP / offering proceeds 4,847 46.9 % 12,954 52.6 % 16,519 54.2 % 16,537

54.4 % 50,857 53.1 % Proceeds from financings - - % - - % - - % - - % - - % Total source of $ 30,402 100.0 % $ 95,839 100.0 % distribution coverage $ 10,341 100.0 % $ 24,617 100.0 % $ 30,479 100.0 % Cash flows provided by operations (GAAP basis) $ 10,055$ 8,930$ 10,258$ 23,768$ 53,011 Net loss attributable to stockholders (in accordance with GAAP) $ (3,606 )$ (3,258 )$ (5,475 )$ (9,891 )$ (22,230 ) _________________



(1) Excludes distributions on unvested restricted stock and Class B units, which

are included in general and administrative expenses on the accompanying

consolidated statements of operations and comprehensive loss.

(2) Cash flows provided by operations for the year ended December 31, 2013 include acquisition and transaction related expenses of $13.6 million.

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The following table compares cumulative distributions paid to cumulative net loss (in accordance with GAAP) for the period from August 23, 2010 (date of inception) through December 31, 2013:

For the Period from August 23, 2010 (date of inception) to (In thousands) December 31, 2013 Distributions paid: Common stockholders in cash $ 53,268 Common stockholders pursuant to DRIP/offering proceeds 57,720 Total distributions paid $ 110,988 Reconciliation of net loss: Revenues $ 164,405 Acquisition and transaction related (26,454 ) Depreciation and amortization (88,311 ) Other operating expenses (61,027 ) Other non-operating expenses (25,540 ) Net income attributable to non-controlling interests (24 )



Net loss attributable to stockholders (in accordance with GAAP) (1) $

(36,951 )

_________________

(1) Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions. Dilution Our net tangible book value per share is a mechanical calculation using amounts from our balance sheet, and is calculated as (1) total book value of our assets less the net value of intangible assets, (2) minus total liabilities less the net value of intangible liabilities, (3) divided by the total number of shares of common and preferred stock outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common and preferred stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flow from operations, and (iii) fees paid in connection with this offering, including commissions, dealer manager fees and other offering costs. As of December 31, 2013, our net tangible book value per share was $7.15. The offering price of shares under the primary portion of our IPO (excluding the effect of purchase price discounts for certain categories of purchasers) at December 31, 2013 was $10.00. Loan Obligations The payment terms of our loan obligations require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of December 31, 2013, we were in compliance with the debt covenants under our loan agreements. Our Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings, including advances under our credit facility, as an efficient and accretive means of acquiring real estate. Our secured debt leverage ratio approximated 15.8% (total secured debt divided by the base purchase price of acquired real estate investments) as of December 31, 2013. 58



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Contractual Obligations The following table reflects contractual debt obligations and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of December 31, 2013. These minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items. Years Ended December 31, (In thousands) Total 2014 2015 - 2016 2017 - 2018 Thereafter Principal on mortgage notes payable $ 259,348$ 1,038$ 134,520$ 102,387$ 21,403 Interest on mortgage notes payable 40,952 13,178 19,218 5,188 3,368 Lease rental payments due 26,257 613 1,246 1,289 23,109 $ 326,557$ 14,829$ 154,984$ 108,864$ 47,880 We entered into a construction advance agreement and purchase and sale agreement to initially fund the construction of, and subsequently purchase upon construction completion and rent commencement, a medical office building in Kenosha, Wisconsin for $24.5 million. As of December 31, 2013, we have funded $1.7 million and $11.1 million for the land and construction in progress, respectively. Election as a REIT We elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2011. We believe that, commencing with such taxable year, we are organized and operate in such a manner as to qualify, and continue to qualify, for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. If we continue to qualify for taxation as a REIT, we generally, with the exception of our taxable REIT subsidiaries, will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders, and so long as we distribute at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income and taxable REIT subsidiaries. Inflation Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation. Related Party Transactions and Agreements We have entered into agreements with affiliates of our Sponsor, whereby we have paid or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common ownership with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock under our offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 12 - Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees. In addition, the limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP. In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain officers and directors. Off-Balance Sheet Arrangements On May 25, 2012, we entered into a senior revolving credit facility in the amount of $50.0 million, which was amended on October 25, 2012 to increase the maximum commitments to $200.0 million with an "accordion" feature to allow us, subject to certain conditions, to increase aggregate commitments up to a maximum of $400.0 million. 59



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On July 24, 2013, we entered into the Amended Facility that allows for total borrowings of up to $755.0 million with a $500.0 million term loan component and a $255.0 million revolving loan component, and with a subfacility for letters of credit of up to $25.0 million. The Amended Facility contains an "accordion feature" to allow us, under certain circumstances, to increase the aggregate term loan borrowings under the Amended Facility to up to $750.0 million and the aggregate revolving loan borrowings to up to $450.0 million, or up to $1.2 billion of total borrowings. The term loan component and the revolving loan component of the Amended Facility matures in July 2018 and July 2016, respectively. The revolving loan component of the Amended Facility also contains two one-year extension options. As of December 31, 2013, there was no balance under the Amended Facility, resulting in an unused borrowing capacity available of $315.3 million based on the assets assigned to the Amended Facility as of December 31, 2013. We entered into a construction advance agreement and purchase and sale agreement to initially fund the construction of, and subsequently purchase upon construction completion and rent commencement, a medical office building in Kenosha, Wisconsin. As of December 31, 2013, we funded $1.7 million and $11.1 million for the land and construction in progress, respectively. We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations. As of December 31, 2013, our debt included fixed-rate secured mortgage financings with a carrying value of $262.1 million and a fair value of $266.2 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the notes, but it has no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2013 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $15.7 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $17.1 million. These amounts were determined by considering the impact of hypothetical interest rates changes on our borrowing costs, and, assuming no other changes in our capital structure. As the information presented above includes only those exposures that existed as of December 31, 2013, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations. Item 8. Financial Statements and Supplementary Data. The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report of Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Disclosure Controls and Procedures In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act. 60



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Internal Control Over Financial Reporting Management's Annual Reporting on Internal Controls over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on its assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was effective. The rules of the SEC do not require, and this Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Changes in Internal Control Over Financial Reporting During the fourth quarter of fiscal year ended December 31, 2013, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None.


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