Business Context and Reporting Period
Company: NNN Healthcare/Office REIT, Inc. (a Maryland corporation)
Reporting Period: Fiscal year ended December 31, 2006 (Inception: April 28, 2006)
Business Overview: The Company is an externally advised Real Estate Investment Trust (REIT) in its initial offering stage. It intends to invest in a diversified portfolio of medical office buildings, healthcare-related facilities, and quality commercial office properties. As of December 31, 2006, the Company had not yet acquired any real estate properties or real estate-related securities. It is conducting a best-efforts initial public offering (IPO) with a minimum offering of $2,000,000 and a maximum of $2,200,000,000.
Key Financial Metrics
| Metric | Value (Period ended Dec 31, 2006) |
|---|---|
| Total Assets | $385,324 |
| Cash and Cash Equivalents | $202,000 |
| Total Liabilities | $374,370 |
| Stockholders' Deficit | $(189,046) |
| Net Loss | $(241,771) |
| Loss Per Share (Basic & Diluted) | $(149.03) |
| Funds From Operations (FFO) | $(241,771) |
| Debt Outstanding | $0 |
| Offering Proceeds Raised (as of Dec 31, 2006) | $0 (Funds held in escrow) |
Note: The Company had no revenue, operating cash flow, or investing cash flow during the reporting period. Expenses were primarily general and administrative costs related to the IPO process.
Material Changes and Subsequent Events
Significant developments occurred after the reporting period (December 31, 2006) that materially changed the Company's status:
- Minimum Offering Achieved: On January 8, 2007, the Company exceeded its minimum offering requirement, raising $2,004,000 from 200,846 shares. Escrow funds were released to the Company.
- Property Acquisitions: On January 22, 2007, the Company acquired two healthcare-related facilities:
- Southpointe Property (Indianapolis, IN): Purchase price of $14,800,000.
- Crawfordsville Property (Crawfordsville, IN): Purchase price of $6,900,000.
- Debt Financing: To fund acquisitions, the Company assumed existing mortgages totaling $13,410,000 and entered into a $7,500,000 unsecured related-party loan with its Sponsor, NNN Realty Advisors.
- Leverage: As of January 22, 2007, leverage exceeded the Company's charter limit of 300% of net assets. The Board approved this excess to facilitate early-stage acquisitions.
- Distributions: The Board approved a 6.5% annual distribution rate effective January 8, 2007, and increased it to 7.25% effective February 2007.
Guidance, Outlook, and Risks
Outlook and Strategy:
- The Company intends to qualify as a REIT for the taxable year ending December 31, 2007, requiring the distribution of at least 90% of taxable income.
- Investment strategy focuses on medical office buildings and healthcare facilities to generate current income.
- Future acquisitions are contingent on raising sufficient financing; two additional properties (St. Paul, MN and Memphis, TN) were approved for acquisition in January 2007 pending financing.
Key Risks and Contingencies:
- SEC Investigation: The Company's Sponsor and Advisor (Triple Net Properties) are subject to an ongoing SEC investigation regarding disclosures in prior offerings (1998–2004). A negative resolution could materially affect the Advisor's ability to perform duties and investor willingness to participate.
- Liquidity: There is no established public market for the Company's common stock. Liquidity is limited to a share repurchase plan funded by DRIP proceeds.
- Conflicts of Interest: The Company is externally advised by an affiliate of the Sponsor. Conflicts exist regarding the allocation of investment opportunities and fee structures.
- Healthcare Industry Risks: Tenants are subject to regulatory changes, reimbursement reductions (Medicare/Medicaid), and malpractice liabilities, which could impact their ability to pay rent.
Investor Verification Checklist
- Offering Status: Verify the total capital raised as of the current date to assess diversification capabilities beyond the initial two properties.
- SEC Investigation Outcome: Monitor the status of the SEC investigation into Triple Net Properties and NNN Capital Corp. for potential fines or operational restrictions.
- Leverage Ratios: Confirm if the Company has reduced its leverage below the 300% charter limit following the initial acquisitions.
- Related Party Transactions: Review the terms of the $7.5 million unsecured loan from the Sponsor and the 3% acquisition fees paid to the Advisor.
- REIT Qualification: Verify the Company's ability to meet the 90% distribution requirement for the 2007 tax year to maintain tax-exempt status.