News Column

GRIFFIN-AMERICAN HEALTHCARE REIT II, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 13, 2014

The use of the words "we," "us" or "our" refers to Griffin-American Healthcare REIT II, Inc. and its subsidiaries, including Griffin-American Healthcare REIT II Holdings, LP, except where the context otherwise requires. The following discussion should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of June 30, 2014 and December 31, 2013, together with our results of operations for the three months and six ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013. Forward-Looking Statements Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words "expect," "project," "may," "will," "should," "could," "would," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology. 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: our ability to consummate the mergers with NorthStar Realty Finance Corp. and its subsidiaries; changes in economic conditions generally and the real estate market specifically; legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs; changes in interest and foreign currency exchange 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; our ability to acquire properties pursuant to our investment strategy; the availability of capital and debt financing; and our ongoing relationship with American Healthcare Investors LLC, or American Healthcare Investors, and Griffin Capital Corporation, or Griffin Capital, or our co-sponsors, and their affiliates. 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 United States Securities and Exchange Commission, or the SEC. Overview and Background Griffin-American Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7, 2009 and therefore we consider that our date of inception. We were initially capitalized on February 4, 2009. We invest in a diversified portfolio of real estate properties, focusing primarily on medical office buildings and healthcare-related facilities. We may also originate and acquire secured loans and real estate-related investments. We also operate healthcare-related facilities utilizing the structure permitted by the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a "RIDEA" structure (the provisions of the Internal Revenue Code of 1986, as amended, or the Code, authorizing the RIDEA structure were enacted as part of the Housing and Economic Recovery Act of 2008). We generally seek investments that produce current income. We qualified to be taxed as a REIT under the Code for federal income tax purposes beginning with our taxable year ended December 31, 2010 and we intend to continue to be taxed as a REIT. As of February 14, 2013, the termination date of our initial public offering, or our initial offering, we had received and accepted subscriptions in our initial offering for 123,179,064 shares of our common stock, or $1,233,333,000, and a total of $40,167,000 in distributions were reinvested and 4,205,920 shares of our common stock were issued pursuant to the distribution reinvestment plan, or the DRIP. As of October 30, 2013, the termination date of our follow-on public offering, or our follow-on offering, we had received and accepted subscriptions in our follow-on offering for 157,622,743 shares of our common stock, or $1,604,996,000, and a total of $42,713,000 in distributions were reinvested and 4,398,862 shares of our common stock were issued pursuant to the DRIP. We conduct substantially all of our operations through Griffin-American Healthcare REIT II Holdings, LP, or our operating partnership. Until January 6, 2012, we were externally advised by Grubb & Ellis Healthcare REIT II Advisor, LLC, or our former advisor, pursuant to an advisory agreement, as amended and restated, between us and our former advisor. Effective January 7, 2012, we are externally advised by Griffin-American Healthcare REIT Advisor, LLC, or Griffin-American Advisor, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our advisor. The Advisory Agreement had an initial one-year term, but was subject to successive one year renewals upon mutual consent of the parties. The Advisory Agreement was most recently renewed pursuant to the mutual consent of the parties for a period 42



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beginning on June 6, 2014 and ending on January 7, 2015; provided, however, that in the event a definitive agreement relating to a Merger or Terminating Sale Transaction (as such terms are defined in the Amended and Restated Agreement of Limited Partnership, dated April 26, 2014, of our operating partnership) is entered into but not consummated prior to January 7, 2015, the Advisory Agreement will be automatically extended until the consummation or earlier termination of such Merger or Terminating Sale Transaction. Our advisor delegates advisory duties to Griffin-American Healthcare REIT Sub-Advisor, LLC, or Griffin-American Sub-Advisor, or our sub-advisor. Griffin-American Sub-Advisor is jointly owned by our co-sponsors. Our advisor, through our sub-advisor, uses its best efforts, subject to the oversight, review and approval of our board of directors, to, among other things, research, identify, review and make investments in and dispositions of properties, real estate-related investments and securities on our behalf consistent with our investment policies and objectives. Our advisor also provides marketing, sales and client services on our behalf. Our advisor performs its duties and responsibilities under the Advisory Agreement as our fiduciary. Our sub-advisor performs its duties and responsibilities pursuant to a sub-advisory agreement with our advisor and also acts as our fiduciary. Collectively, we refer to our advisor and our sub-advisor as our advisor entities. Griffin Capital Securities, Inc., or Griffin Securities, or our dealer manager, an affiliate of Griffin Capital, served as our dealer manager in our initial offering effective as of January 7, 2012 and in our follow-on offering. We are not affiliated with Griffin Capital, Griffin-American Advisor or Griffin Securities; however, we are affiliated with Griffin-American Sub-Advisor and American Healthcare Investors. We currently operate through five reportable business segments - medical office buildings, hospitals, skilled nursing facilities, senior housing and senior housing-RIDEA. As of June 30, 2014, we had completed 75 acquisitions comprising 289 buildings and approximately 11,277,000 square feet of gross leasable area, or GLA, for an aggregate contract purchase price of $2,929,461,000. Critical Accounting Policies The complete listing of our Critical Accounting Policies was previously disclosed in our 2013 Annual Report on Form 10-K/A, as filed with the SEC on March 21, 2014, and there have been no material changes to our Critical Accounting Policies as disclosed therein. Interim Unaudited Financial Data Our accompanying 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 condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, 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 full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2013 Annual Report on Form 10-K/A, as filed with the SEC on March 21, 2014. Recently Issued Accounting Pronouncements For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements, to our accompanying condensed consolidated financial statements. Acquisitions in 2014 For a discussion of property acquisitions in 2014, see Note 3, Real Estate Investments, Net to our accompanying condensed consolidated financial statements. Factors Which May Influence Results of Operations We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of properties other than those listed in Part II, Item 1A. Risk Factors, of this Quarterly Report on Form 10-Q and those Risk Factors previously disclosed in our 2013 Annual Report on Form 10-K/A, as filed with the SEC on March 21, 2014. 43



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Revenue

The amount of revenue generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from lease terminations at the then existing rental rates. Negative trends in one or more of these factors could adversely affect our revenue in future periods. Scheduled Lease Expirations Excluding our properties operated utilizing a RIDEA structure, as of June 30, 2014, our consolidated properties were 95.1% leased and during the remainder of 2014, 2.9% of the leased GLA is scheduled to expire. Midwest CCRC Portfolio was 96.3% and 95.9%, respectively, leased for the three and six months ended June 30, 2014 and substantially all of our leases with residents at Midwest CCRC Portfolio are for a term of one year or less. Our leasing strategy focuses on negotiating renewals for leases scheduled to expire during the remainder of the year. In the future, if we are unable to negotiate renewals, we will try to identify new tenants or collaborate with existing tenants who are seeking additional space to occupy. As of June 30, 2014, our remaining weighted average lease term was 9.3 years, excluding our properties operated utilizing a RIDEA structure. 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. These costs may have a material adverse effect on our results of operations and could impact our ability 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 have provided management's assessment of our internal control over financial reporting as of December 31, 2013 and will continue to comply with such regulations. 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 that our failure to comply with these laws could result in fees, fines, penalties or administrative remedies against us. Results of Operations Comparison of the Three and Six Months Ended June 30, 2014 and 2013 Our operating results for the three and six months ended June 30, 2014 and 2013 are primarily comprised of income derived from our portfolio of properties and acquisition related expenses in connection with the acquisitions of such properties. In general, we expect all amounts, with the exception of acquisition related expenses, to increase in the future based on a full year of operations as well as increased activity as we acquire additional real estate investments. Our results of operations are not indicative of those expected in future periods. As of June 30, 2014, we operated through five reportable business segments - medical office buildings, hospitals, skilled nursing facilities, senior housing and senior housing-RIDEA. Prior to December 2013, we operated through four reportable segments; however, with the acquisition of our first senior housing facilities owned and operated utilizing a RIDEA structure in December 2013, we felt it useful to segregate our operations into five reporting segments to assess the performance of our business in the same way that management intends to review our performance and make operating decisions. Prior to June 2013, our senior housing segment was referred to as our assisted living facilities segment. Except where otherwise noted, the change in our results of operations is primarily due to owning 289 buildings as of June 30, 2014, as compared to 174 buildings as of June 30, 2013. As of June 30, 2014 and 2013, we owned the following types of properties: 44



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Table of Contents June 30, 2014 2013 Number of Aggregate Contract Leased Number of Aggregate Leased Buildings Purchase Price % Buildings Purchase Price % Medical office buildings 144 $ 1,384,044,000 91.9 % 105 $ 869,370,000 93.4 % Senior housing 60 599,104,000 100 % 15 105,936,000 100 % Skilled nursing facilities 45 436,468,000 100 % 41 397,468,000 100 % Senior housing-RIDEA 26 310,000,000 (1 ) - - - Hospitals 14 199,845,000 100 % 13 186,145,000 100 % Total/weighted average(2) 289 $ 2,929,461,000 95.1 %



174 $ 1,558,919,000 96.0 %

_________

(1) The leased percentage for these 1,079 resident units was 96.3% and 95.9%,

respectively, for the three and six months ended June 30, 2014.

(2) Leased percentage excludes properties operated utilizing a RIDEA structure.

Real Estate Revenue For the three months ended June 30, 2014 and 2013, real estate revenue was $72,935,000 and $45,394,000, respectively, and was primarily comprised of base rent of $56,329,000 and $35,295,000, respectively, and expense recoveries of $10,268,000 and $7,145,000, respectively. For the six months ended June 30, 2014 and 2013, real estate revenue was $145,203,000 and $85,612,000, respectively, and was primarily comprised of base rent of $111,715,000 and $66,228,000, respectively, and expense recoveries of $20,836,000 and $13,100,000, respectively. Real estate revenue by operating segment consisted of the following for the periods then ended: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Medical office buildings $ 39,459,000$ 25,023,000$ 78,726,000$ 46,477,000 Senior housing 13,828,000 2,357,000 27,374,000 4,720,000 Skilled nursing facilities 13,298,000 12,177,000 26,503,000 22,927,000 Hospitals 6,350,000 5,837,000 12,600,000 11,488,000 Total $ 72,935,000$ 45,394,000$ 145,203,000$ 85,612,000 Resident Fees and Services For the three and six months ended June 30, 2014, resident fees and services was $20,987,000 and $40,175,000, respectively, and related to revenue earned from our operations of senior housing facilities operated utilizing a RIDEA structure. We did not own or operate any real estate investments utilizing a RIDEA structure prior to December 2013. 45



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Rental Expenses For the three months ended June 30, 2014 and 2013, rental expenses were $34,992,000 and $10,217,000, respectively. For the six months ended June 30, 2014 and 2013, rental expenses were $66,303,000 and $18,457,000, respectively. Rental expenses consisted of the following for the periods then ended: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Building maintenance $ 10,776,000$ 2,011,000$ 19,723,000$ 3,545,000 Administration 10,341,000 380,000 18,966,000 673,000 Real estate taxes 6,185,000 4,299,000 12,292,000 7,825,000 Utilities 3,954,000 1,786,000 7,753,000 3,179,000 Property management fees - affiliates 1,638,000 1,033,000 3,248,000 1,858,000 RIDEA operating management fees 1,333,000 - 2,412,000 - Insurance 594,000 223,000 1,015,000 425,000 Amortization of leasehold interests 44,000 54,000 88,000 112,000 Other 127,000 431,000 806,000 840,000 Total $ 34,992,000$ 10,217,000$ 66,303,000$ 18,457,000 The increase in building maintenance and administration for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 was primarily due to the acquisition of senior housing facilities operated utilizing a RIDEA structure in December 2013, the transition of additional skilled nursing and senior housing facilities into a RIDEA structure during 2014 and having additional buildings in the portfolio in 2014 as compared to 2013. Rental expenses and rental expenses as a percentage of total revenue by operating segment consisted of the following for the periods then ended: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013



Senior housing-RIDEA $ 14,185,000 73.2 % $ - - % $ 28,370,000 73.5 % $ - - % Medical office buildings 12,592,000 31.9 % 8,385,000 33.5 % 25,180,000 32.0 % 15,018,000 32.3 % Skilled nursing facilities 6,073,000 42.5 % 823,000 6.8 % 9,207,000 33.5 % 1,619,000 7.1 % Senior housing

1,246,000 8.6 % 159,000 6.7 % 1,800,000 6.4 % 315,000 6.7 % Hospitals 896,000 14.1 % 850,000 14.6



% 1,746,000 13.9 % 1,505,000 13.1 % Total/weighted average $ 34,992,000 37.3 % $ 10,217,000 22.5 % $ 66,303,000 35.8 % $ 18,457,000 21.6 %

Overall, the percentage of rental expenses as a percentage of revenue in 2014 was higher than in 2013 due to the acquisition of senior housing facilities operated utilizing a RIDEA structure in December 2013, which accounted for 20.8% of total revenues in 2014. In addition, rental expenses as a percentage of revenue on our skilled nursing facilities increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 primarily due to additional rental expenses incurred in connection with transitioning certain properties into a RIDEA structure in 2014. We anticipate that the percentage of rental expenses to revenue will remain close to the percentage in the current year. 46



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General and Administrative For the three months ended June 30, 2014 and 2013, general and administrative was $11,704,000 and $4,369,000, respectively. For the six months ended June 30, 2014 and 2013, general and administrative was $19,890,000 and $8,439,000, respectively. General and administrative consisted of the following for the periods then ended: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013



Asset management fees - affiliates $ 5,783,000$ 3,011,000

$ 11,373,000$ 5,729,000 Professional and legal fees 3,989,000 231,000 4,914,000 645,000 Transfer agent services 732,000 530,000 1,466,000 941,000 Franchise taxes 344,000 216,000 706,000 356,000 Board of directors fees 325,000 89,000 535,000 165,000 Bad debt expense, net 210,000 13,000 98,000 118,000 Bank charges 141,000 131,000 274,000 218,000 Directors' and officers' liability insurance 96,000 68,000 192,000 137,000 Restricted stock compensation 67,000 27,000 293,000 53,000 Postage & delivery 2,000 39,000 4,000 40,000 Other 15,000 14,000 35,000 37,000 Total $ 11,704,000$ 4,369,000$ 19,890,000$ 8,439,000 The increase in general and administrative for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 was primarily the result of purchasing additional properties in 2014 and 2013 and thus incurring higher asset management fees to our sub-advisor. In addition, our board of directors, along with its advisors, evaluated our strategic alternatives to maximize stockholder value. As such, professional and legal fees and board of directors fees increased for the three and six months ended June 30, 2014 by $3,266,000 and $3,635,000, respectively, as compared to the three and six months ended June 30, 2013. Lastly, we incurred higher fees for transfer agent services for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 due to an increase in the number of our investors in connection with the increased equity raise pursuant to our public offerings. We expect general and administrative to continue to increase in 2014 as our board of directors, along with its advisors, evaluate strategic alternatives and as we purchase additional properties in 2014 and have a full year of operations. Acquisition Related Expenses For the three months ended June 30, 2014 and 2013, we incurred acquisition related expenses of $1,101,000 and $3,674,000, respectively. For the three months ended June 30, 2014, acquisition related expenses related primarily to expenses associated with our acquisitions completed during the period, including acquisition fees of $660,000 incurred to our sub-advisor and its affiliates. For the three months ended June 30, 2013, acquisition related expenses related primarily to expenses associated with our acquisitions completed during the period, including acquisition fees of $2,756,000 incurred to our sub-advisor and its affiliates. The decrease in acquisition related expenses for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 was primarily due to fewer business combinations in 2014 as compared to 2013. For the six months ended June 30, 2014 and 2013, we incurred acquisition related expenses of $2,743,000 and $7,279,000, respectively. For the six months ended June 30, 2014, acquisition related expenses related primarily to expenses associated with our acquisitions completed during the period, including acquisition fees of $1,821,000 incurred to our sub-advisor and its affiliates. For the six months ended June 30, 2013, acquisition related expenses related primarily to expenses associated with our acquisitions completed during the period, including acquisition fees of $5,173,000 incurred to our sub-advisor and its affiliates. The decrease in acquisition related expenses for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was primarily due to fewer business combinations in 2014 as compared to 2013. Depreciation and Amortization For the three months ended June 30, 2014 and 2013, depreciation and amortization was $34,326,000 and $16,420,000, respectively, and consisted primarily of depreciation on our operating properties of $21,295,000 and $10,920,000, respectively, and amortization on our identified intangible assets of $12,888,000 and $5,429,000, respectively. 47



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For the six months ended June 30, 2014 and 2013, depreciation and amortization was $67,927,000 and $31,238,000, respectively, and consisted primarily of depreciation on our operating properties of $41,942,000 and $20,821,000, respectively, and amortization on our identified intangible assets of $25,709,000 and $10,301,000, respectively. Interest Expense For the three months ended June 30, 2014 and 2013, interest expense including gain in fair value of derivative financial instruments was $5,420,000 and $4,365,000, respectively. For the six months ended June 30, 2014 and 2013, interest expense including gain in fair value of derivative financial instruments was $10,463,000 and $8,353,000, respectively. Interest expense consisted of the following for the periods then ended: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Interest expense - mortgage loans payable and derivative financial instruments $ 3,906,000$ 4,265,000$ 7,920,000$ 7,774,000 Interest expense - line of credit 1,338,000 307,000 2,260,000 801,000 Amortization of debt discount and (premium), net (575,000 ) (545,000 ) (1,170,000 ) (930,000 ) Amortization of deferred financing costs - line of credit 559,000 359,000 1,117,000 621,000 Amortization of deferred financing costs - mortgage loans payable 191,000 207,000 385,000 404,000 Loss (gain) on extinguishment of debt - write-off of deferred financing costs and debt premium 26,000 (105,000 ) 26,000 (105,000 ) Gain in fair value of derivative financial instruments (25,000 ) (123,000 ) (75,000 ) (212,000 ) Total $ 5,420,000$ 4,365,000$ 10,463,000$ 8,353,000 The increase in interest expense on our unsecured line of credit with Bank of America, N.A., or Bank of America, or our unsecured line of credit, for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 was primarily the result of the increase in the borrowings on our unsecured line of credit to purchase properties after the termination of our follow-on offering in October 2013. We expect interest expense on our unsecured line of credit to continue to increase in 2014 as we purchase additional properties in 2014. Foreign Currency and Derivative Loss For the three and six months ended June 30, 2014, we had $7,682,000 and $9,904,000, respectively, in net losses resulting from foreign currency transactions as compared to $330,000 for the three and six months ended June 30, 2013. The net losses on foreign currency transactions for the three and six months ended June 30, 2014 were primarily due to an unrealized loss of $8,185,000 and $10,384,000, respectively, on our foreign currency forward contract. For a further discussion of our foreign currency forward contract, including a discussion regarding the fair value measurements, see Note 9, Derivative Financial Instruments, and Note 14, Fair Value Measurements - Assets and Liabilities Reported at Fair Value, to our accompanying condensed consolidated financial statements. For the three and six months ended June 30, 2013, the $330,000 loss on foreign currency transactions was primarily due to fluctuations in foreign currency exchange rates between the United Kingdom Pound Sterling, or GBP, and the U.S. Dollar, or USD, on a real estate deposit in the amount of 15,000,000 we made on May 16, 2013 pursuant to a letter of intent to acquire UK Senior Housing Portfolio. Significant fluctuations in foreign currency exchange rates between GBP and USD have material effects on our results of operations and financial position. Interest Income For the three months ended June 30, 2014 and 2013, we had interest income of $1,000 and $34,000, respectively, related to interest earned on funds held in cash accounts. For the six months ended June 30, 2014 and 2013, we had interest income of $4,000 and $37,000, respectively, related to interest earned on funds held in cash accounts. Income Tax Benefit For the three and six months ended June 30, 2014, we had an income tax benefit of $805,000 and $1,437,000, respectively, as compared to $0 for the three and six months ended June 30, 2013. The income tax benefit for the three and six months ended June 30, 2014 was primarily due to a $925,000 and $1,670,000, respectively, decrease in our foreign deferred tax liabilities on our real estate investments located in the United Kingdom, offset by $120,000 and $281,000, respectively, of 48



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foreign income taxes incurred on the 2014 operations of our real estate investments located in the United Kingdom. For a further discussion of our income taxes, see Note 15, Income Taxes, to our accompanying condensed consolidated financial statements. Liquidity and Capital Resources Our sources of funds primarily consist of operating cash flows and borrowings. We terminated our follow-on offering on October 30, 2013. Our principal demands for funds are for acquisitions of real estate and real estate-related investments, payment of operating expenses and interest on our current and future indebtedness and payment of distributions to our stockholders. Our total capacity to purchase real estate and real estate-related investments is a function of our current cash position, our borrowing capacity on our unsecured revolving line of credit, as well as any future indebtedness that we may incur and any possible future equity offerings. As of June 30, 2014, our cash on hand was $30,878,000 and we had $232,700,000 available on our unsecured line of credit. We believe that these 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 sources within the next 12 months. We estimate that we will require approximately $10,434,000 to pay interest on our outstanding indebtedness in the remainder of 2014, based on interest rates in effect as of June 30, 2014. In addition, we estimate that we will require $5,154,000 to pay principal on our outstanding indebtedness in the remainder of 2014. We also require resources to make certain payments to our advisor entities and their affiliates. See Note 13, Related Party Transactions, to our accompanying condensed consolidated financial statements, for a further discussion of our payments to our advisor entities and their affiliates. Our advisor entities evaluate potential additional investments and engage in negotiations with real estate sellers, developers, brokers, investment managers, lenders and others on our behalf. When we acquire a property, our advisor entities 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 also sets forth the anticipated sources of the necessary capital, which may include a line of credit or other loans established with respect to the investment, operating cash generated by the investment, additional equity investments from us or joint venture partners or, when necessary, capital reserves. Any capital reserve would be established from proceeds from sales of other investments, borrowings, 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. Based on the properties we owned as of June 30, 2014, we estimate that our expenditures for capital improvements and tenant improvements will require up to $13,264,000 for the remaining six months of 2014. As of June 30, 2014, we had $10,655,000 of restricted cash in loan impounds and reserve accounts for capital expenditures, some of which may be used to fund our estimated expenditures for capital improvements and tenant improvements. We cannot provide assurance, however, that we will not exceed these estimated expenditure and distribution levels or be able to obtain additional sources of financing on commercially favorable terms or at all. Other Liquidity Needs In the event that there is a shortfall in net cash available due to various factors, including, without limitation, the timing of distributions or the timing of the collection of receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured debt financing through one or more third parties, or our advisor entities or their affiliates. There are currently no limits or restrictions on the use of proceeds from our advisor entities or their affiliates which would prohibit us from making the proceeds available for distribution. We may also pay distributions from cash from capital transactions, including, without limitation, the sale of one or more of our properties. If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewed leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of leasing activity and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs. 49



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Cash Flows Operating Cash flows provided by (used in) operating activities for the six months ended June 30, 2014 and 2013 were $78,590,000 and $(11,550,000), respectively. For the six months ended June 30, 2014 and 2013, cash flows provided by operating activities primarily related to the cash flows provided by our property operations, offset by the payment of acquisition related expenses and general and administrative expenses. In addition, for the six months ended June 30, 2013, we paid $51,198,000 to settle contingent consideration obligations that was paid from cash flows from operating activities. We anticipate cash flows from operating activities to increase as we purchase additional properties. Investing Cash flows used in investing activities for the six months ended June 30, 2014 and 2013 were $149,873,000 and $205,598,000, respectively. For the six months ended June 30, 2014, cash flows used in investing activities related primarily to the acquisition of our properties in the amount of $138,524,000, advances of $10,767,000 on our real estate notes receivable, capital expenditures of $3,225,000 and an increase in restricted cash in the amount of $1,873,000, partially offset by a decrease in real estate and escrow deposits of $3,201,000. For the six months ended June 30, 2013, cash flows used in investing activities related primarily to the acquisition of our properties in the amount of $173,016,000, $21,242,000 in real estate and escrow deposits, advances of $5,200,000 on our real estate notes receivable, restricted cash in the amount of $4,769,000 and capital expenditures of $1,255,000. We intend to continue to acquire additional real estate and real estate-related investments, but generally anticipate that cash flows used in investing activities will decrease in 2014 as compared to 2013 due to fewer anticipated acquisitions as a result of the termination of our follow-on offering in October 2013. Financing Cash flows provided by financing activities for the six months ended June 30, 2014 and 2013 were $64,380,000 and $378,072,000, respectively. For the six months ended June 30, 2014, such cash flows related primarily to net borrowings on our unsecured line of credit in the amount of $149,300,000, partially offset by distributions to our common stockholders of $62,091,000. Additional cash outflows primarily related to principal payments on our mortgage loans payable in the amount of $16,958,000, share repurchases of $4,860,000 and payments on contingent consideration obligations of $1,028,000. Of the $16,958,000 in payments on our mortgage loans payable, $14,143,000 reflects the early extinguishment of the mortgage loan payables secured by a property in the FLAGS MOB Portfolio and Muskogee Long-Term Acute Care Hospital. For the six months ended June 30, 2013, cash flows provided by financing activities related primarily to funds raised from investors in our initial offering and our follow-on offering, or our offerings, in the aggregate amount of $688,902,000, offset by net payments on our unsecured line of credit in the amount of $200,000,000, the payment of offering costs of $69,204,000 in connection with our offerings and distributions to our common stockholders of $21,108,000. Additional cash outflows primarily related to share repurchases of $5,254,000, principal payments on our mortgage loans payable in the amount of $7,446,000 and payments on contingent consideration obligations of $3,077,000. Of the $7,446,000 in payments on our mortgage loans payable, $5,036,000 reflects the early extinguishment of a mortgage loan payable on Hardy Oak Medical Office Building. For a further discussion of our unsecured line of credit, see Note 8, Line of Credit, to our accompanying condensed consolidated financial statements. Overall, we anticipate cash flows from financing activities to decrease in the future since we terminated our initial offering on February 14, 2013 and our follow-on offering on October 30, 2013. However, we anticipate borrowings under our unsecured line of credit and other indebtedness to increase as we acquire additional real estate and real estate-related investments in 2014. Distributions Our board of directors authorized, on a quarterly basis, a daily distribution to our stockholders of record as of the close of business on each day of the quarterly periods from January 1, 2013 and ending on September 30, 2014. For distributions declared for each record date in the January 2013 through September 2014 periods, the distributions are calculated based on 365 days in the calendar year and are equal to $0.001863014 per day per share of common stock, which is equal to an annualized distribution rate of 6.65%, assuming a purchase price of $10.22 per share. These distributions are aggregated and paid monthly in arrears in cash or shares of our common stock pursuant to the DRIP and the $100,000,000 additional shares of our common stock that we registered on September 9, 2013 pursuant to our distribution reinvestment plan, or the Secondary 50



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DRIP. The distributions declared for each record date are paid only from legally available funds. On March 28, 2014, our board of directors suspended the Secondary DRIP effective beginning with the distributions declared for the month of April 2014, which were payable in May 2014, and all future distributions declared will be paid in cash to our stockholders. The amount of the distributions to our stockholders is determined quarterly 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 qualification as a REIT under the Code. We did not establish any limit on the amount of offering proceeds, and we have not established any limit on the amount of proceeds from any future offerings, that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business; (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability to maintain our qualification as a REIT. The distributions paid for the six months ended June 30, 2014 and 2013, along with the amount of distributions reinvested pursuant to the Secondary DRIP and DRIP, respectively, and the sources of our distributions as compared to cash flows from operations were as follows: Six Months Ended June 30, 2014 2013 Distributions paid in cash $ 62,091,000$ 21,108,000 Distributions reinvested 36,909,000 22,830,000 $ 99,000,000$ 43,938,000 Sources of distributions: Cash flows from operations $ 78,590,000 79.4 % $ - - % Proceeds from borrowings 20,410,000 20.6 - - Offering proceeds - - 43,938,000 100 $ 99,000,000 100 % $ 43,938,000 100 % Under GAAP, acquisition related expenses are expensed, and therefore, subtracted from cash flows from operations. However, these expenses are paid from offering proceeds or debt. Our distributions of amounts in excess of our current and accumulated earnings and profits have resulted in a return of capital to our stockholders, and all or any portion of a distribution to our stockholders may be paid from offering proceeds. The payment of distributions from our offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively impact the amount of income available for future distributions. As of June 30, 2014, we had an amount payable of $2,979,000 to our sub-advisor or its affiliates comprised of asset and property management fees and lease commissions, which will be paid from cash flows from operations in the future as they become due and payable by us in the ordinary course of business consistent with our past practice. As of June 30, 2014, no amounts due to our advisor entities or its affiliates had been deferred, waived or forgiven. Our advisor entities or their affiliates have no obligations to defer, waive or forgive amounts due to them. In the future, if our advisor entities or their affiliates do not defer, waive or forgive amounts due to them, this would negatively affect our cash flows from operations, which could result in us paying distributions, or a portion thereof, using 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. 51



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The distributions paid for the six months ended June 30, 2014 and 2013, along with the amount of distributions reinvested pursuant to the Secondary DRIP and DRIP, respectively, and the sources of our distributions as compared to funds from operations, or FFO, were as follows: Six Months Ended June 30, 2014 2013 Distributions paid in cash $ 62,091,000$ 21,108,000 Distributions reinvested 36,909,000 22,830,000 $ 99,000,000$ 43,938,000 Sources of distributions: FFO $ 77,441,000 78.2 % $ 42,749,000 97.3 % Proceeds from borrowings 21,559,000 21.8 - - Offering proceeds - - 1,189,000 2.7 % $ 99,000,000 100 % $ 43,938,000 100 % The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. For a further discussion of FFO, a non-GAAP financial measure, including a reconciliation of our GAAP net income (loss) to FFO, see Funds from Operations and Modified Funds from Operations below. Financing We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed 45.0% of all of our properties' and other real estate-related assets' 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 contract 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. As of June 30, 2014, our borrowings were 17.1% of the combined fair market value of all of our real estate and real estate-related investments. Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300% of our net assets without the approval of a majority of our independent directors. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real estate or for working capital. We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual taxable income, excluding net capital gains, to our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of August 13, 2014 and June 30, 2014, our leverage did not exceed 300% of the value of our net assets. Mortgage Loans Payable, Net For a discussion of our mortgage loans payable, net, see Note 7, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial statements. Unsecured Line of Credit For a discussion of our unsecured line of credit, see Note 8, Line of Credit, to our accompanying condensed consolidated financial statements. REIT Requirements In order to maintain our qualification as a REIT for federal income tax purposes, we are required to make distributions to our stockholders of at least 90.0% of our annual taxable income, excluding net capital gains. 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 collection of receivables, we may seek to obtain capital to pay distributions by means of secured debt financing through one or more unaffiliated parties. We may also pay distributions from cash from capital transactions including, without limitation, the sale of one or more of our properties or from the proceeds of our offerings. 52



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Commitments and Contingencies For a discussion of our commitments and contingencies, see Note 11, Commitments and Contingencies, to our accompanying condensed consolidated financial statements. Debt Service Requirements Our principal liquidity need is the payment of principal and interest on our outstanding indebtedness. As of June 30, 2014, we had $298,880,000 ($311,775,000, net of discount and premium) of fixed rate debt and $9,066,000 ($8,868,000, net of discount) of variable rate debt outstanding secured by our properties. As of June 30, 2014, we also had $217,300,000 outstanding under our unsecured line of credit. We are required by the terms of certain loan documents to meet certain covenants, such as occupancy ratios, leverage ratios, net worth ratios, debt service coverage ratios, liquidity ratios, operating cash flow to fixed charges ratios, distribution ratios and reporting requirements. As of June 30, 2014, we were in compliance with all such covenants and requirements on our mortgage loans payable and our unsecured line of credit and we expect to remain in compliance with all such requirements for the next 12 months. As of June 30, 2014, the weighted average effective interest rate on our outstanding debt, factoring in our fixed rate interest rate swaps, was 3.82% per annum. Contractual Obligations The following table provides information with respect to (i) the maturity and scheduled principal repayment of our secured mortgage loans payable and our unsecured line of credit, (ii) interest payments on our mortgage loans payable, unsecured line of credit and fixed rate interest rate swaps, and (iii) obligations under our ground and other leases as of June 30, 2014: Payments Due by Period Less than 1 Year 1-3 Years 4-5 Years More than 5 Years (2014) (2015-2016) (2017-2018) (after 2018) Total Principal payments - fixed rate debt $ 2,714,000$ 94,305,000$ 58,643,000$ 143,218,000$ 298,880,000 Interest payments - fixed rate debt 7,508,000 25,268,000 15,944,000 56,790,000 105,510,000 Principal payments - variable rate debt 2,440,000 (1) 223,926,000 - - 226,366,000 Interest payments - variable rate debt (based on rates in effect as of June 30, 2014) 2,890,000 5,449,000 - - 8,339,000 Interest payments - fixed rate interest rate swaps (based on rates in effect as of June 30, 2014) 36,000 60,000 - - 96,000 Ground and other lease obligations 635,000 2,209,000 2,241,000 55,732,000 60,817,000 Total $ 16,223,000$ 351,217,000$ 76,828,000$ 255,740,000$ 700,008,000



________

(1) Our variable rate mortgage loan payable in the outstanding principal amount

of $2,354,000 ($2,156,000, net of discount) secured by Center for

Neurosurgery and Spine as of June 30, 2014, had a fixed rate interest rate

swap, thereby effectively fixing our interest rate on this mortgage loan

payable to an effective interest rate of 6.00% per annum. This mortgage loan

payable is due August 15, 2021; however, the principal balance is

immediately due upon written request from the seller and seller's

confirmation that it shall pay any interest rate swap termination amount

that is applicable. Assuming the seller does not exercise such right,

interest payments, using the 6.00% per annum effective interest rate, would

be $68,000, $225,000, $148,000 and $75,000 in 2014, 2015-2016, 2017-2018 and

thereafter, respectively.

The table above does not reflect any payments expected under our contingent consideration obligations in the estimated amount of $3,669,000, the majority of which we expect to pay in the next twelve months. For a further discussion of our contingent consideration obligations, see Note 14, Fair Value Measurements - Assets and Liabilities Reported at Fair Value - Contingent Consideration, to our accompanying condensed consolidated financial statements. In addition, based on the currency exchange rate as of June 30, 2014, approximately $107,312,000 remained available for future funding under our real estate notes receivable, subject to certain conditions set forth in the applicable loan agreements. These amounts do not have fixed funding dates, but may be funded in any future year, subject to certain conditions set forth in the applicable loan agreements. We anticipate funding the majority of these commitments in the next three years. There are various maturity dates depending upon the timing of advances, however, the maturity dates of the real estate notes 53



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receivable will be no later than March 10, 2022. For a further discussion of the real estate notes receivable, see Note 4, Real Estate Notes Receivable, Net, to our accompanying condensed consolidated financial statements. Off-Balance Sheet Arrangements As of June 30, 2014, we had no off-balance sheet transactions. Funds from Operations and Modified Funds from Operations 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 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 (loss) as determined under 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, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and 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. Our FFO calculation complies with NAREIT's policy described above. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which is the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. In addition, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist, and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset an impairment charge would be recognized. Testing for impairment charges is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income (loss). However, FFO and modified funds from operations, or MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting rules under GAAP that were put into effect and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed as operating expenses under GAAP. We believe these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial 54



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years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We have used the proceeds raised in our offerings to acquire properties, and have begun the process of evaluating our strategic alternatives to maximize stockholder value (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction), which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs and which we believe MFFO to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired. We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting; and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income (loss) in calculating cash flows from operations and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. We are responsible for managing interest rate, hedge and foreign exchange risk, and we do not rely on another party to manage such risk. Inasmuch as interest rate and foreign currency rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are based on market fluctuations and may not be directly related or attributable to our operations. Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses (which includes gains and losses on contingent consideration), amortization of above and below market leases, amortization of closing costs and origination fees, fair value adjustments of derivative financial instruments, gains or losses on foreign currency transactions, gain or loss from the extinguishment of debt, change in deferred rent receivables and the adjustments of such items related to noncontrolling interests. The other adjustments included in the IPA's Practice Guideline are not applicable to us for the three and six months ended June 30, 2014 and 2013. Acquisition fees and expenses are paid in cash and stock by us, and we have not set aside or put into escrow any specific amount of proceeds from our offerings to be used to fund acquisition fees and expenses. The purchase of real estate and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate operating revenues and cash flows to make distributions to our stockholders. However, we do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent re-deployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our advisor entities and their affiliates and third parties. Such fees and expenses will not be reimbursed by our advisor entities and their affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of 55



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our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the contract purchase price of the property, these fees and expenses and other costs related to such property. In the future, we may pay acquisition fees or reimburse acquisition expenses due to our advisor entities and their affiliates, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties, or ancillary cash flows. 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. Nevertheless, our advisor entities and their affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offerings and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information. Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO has limitations as a performance measure for companies such as ours, where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO. Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO. 56



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The following is a reconciliation of net (loss) income, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three and six months ended June 30, 2014 and 2013:


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