HR

Business Context and Reporting Period

Company: Grubb & Ellis Healthcare REIT, Inc. (formerly NNN Healthcare/Office REIT, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: The Company is an externally advised Real Estate Investment Trust (REIT) focused on acquiring medical office buildings, healthcare-related facilities, and quality commercial office properties. It operates through an umbrella partnership structure and is currently conducting a best-efforts initial public offering (IPO). The Company intends to elect REIT status for the 2007 tax year but was not yet qualified as of the filing date.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Expansion: The Company acquired 20 properties in 2007, compared to zero properties in the prior period (inception April 2006). Aggregate purchase price was approximately $408.4 million.
• Revenue Growth: Rental income increased from $0 in 2006 to $17.6 million in 2007 due to the acquisition of income-producing assets.
• Net Loss Increase: Net loss increased from $(242,000) in 2006 to $(7.7 million) in 2007. This was driven by significant depreciation and amortization ($9.8 million) and interest expense ($6.4 million) associated with the new portfolio, offsetting operating income.
• Debt Incurrence: The Company incurred $185.9 million in mortgage debt and $51.8 million under a secured revolving line of credit in 2007, compared to no debt in 2006.
• Equity Raise: Raised approximately $211 million in gross proceeds from the sale of common stock in 2007.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Offering Status: The Company is in the midst of a best-efforts offering targeting up to $2.2 billion. As of March 14, 2008, it had raised approximately $259 million (excluding DRIP shares).
• Liquidity Event: Management intends to effect a liquidity event (e.g., listing on a national exchange) by September 2013. Currently, there is no established public market for the stock.
• Distribution Policy: The Board approved a 7.25% annual distribution rate. For 2007, distributions of $6.0 million were paid, exceeding FFO by $3.9 million, which was funded by offering proceeds.

• SEC Investigation: The Company's sponsor/advisor (formerly Triple Net Properties) is subject to an ongoing SEC investigation regarding disclosures in prior offerings. A resolution could adversely affect the advisor's ability to perform duties or the Company's reputation.
• REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income taxes, materially reducing cash available for distribution.
• Concentration Risk: One tenant (Institute for Senior Living of Florida) accounted for 11.2% of annual rental revenue. The portfolio is concentrated in healthcare facilities, making it sensitive to healthcare reimbursement changes.
• Illiquidity: Shares are not publicly traded, and the share repurchase plan is limited, making it difficult for stockholders to sell shares.

Important Facts for Investor Verification

• FFO vs. Distributions: Verify the sustainability of the 7.25% distribution rate, as 2007 distributions exceeded FFO by $3.9 million, requiring funding from equity proceeds.
• Advisor Fees: Confirm the impact of related-party fees (acquisition, asset management, property management) which totaled approximately $38.6 million in 2007.
• Debt Maturity: Review the maturity schedule of the $237.7 million debt, noting that a significant portion of variable-rate debt (effectively fixed via swaps) matures in 2010.
• SEC Investigation Status: Monitor the outcome of the SEC investigation into the sponsor/advisor, as this poses a reputational and operational risk.
• REIT Election: Confirm the successful filing and qualification for REIT status for the 2007 tax year to avoid corporate taxation.