10-Q 1 nshi-0930201710xq.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017

Commission File Number: 000-55190
NORTHSTAR HEALTHCARE INCOME, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
27-3663988
(State or Other Jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)
399 Park Avenue, 18th Floor, New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)
(212) 547-2600
(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer ý
(Do not check if a
smaller reporting company)
 
Smaller reporting company o

Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
The Company has one class of common stock, $0.01 par value per share, 186,111,082 shares outstanding as of November 13, 2017.
 




NORTHSTAR HEALTHCARE INCOME, INC.
FORM 10-Q
TABLE OF CONTENTS


Index
 
Page
 
 
 
 
 
 
 
 
 
 











 


2





FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to make distributions to our stockholders, our reliance on our advisor and our sponsor, the operating performance of our investments, our financing needs, the effects of our current strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, particularly given the economic environment. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:
adverse economic conditions and the impact on the real estate industry, including healthcare real estate;
our dependence on the resources and personnel of our advisor, our sponsor and their affiliates, including our advisor’s ability to manage our portfolio on our behalf;
the performance of our advisor, our sponsor and their affiliates;
our liquidity and access to capital;
our use of leverage;
our ability to make distributions to our stockholders;
the lack of a public trading market for our shares;
the effect of economic conditions on the valuation of our investments;
the effect of paying distributions to our stockholders from sources other than cash flow provided by operations;
the impact of our sponsor’s recently completed merger with NorthStar Realty Finance Corp. and Colony Capital, Inc., and whether any of the anticipated benefits to our advisor’s and its affiliates’ platform will be realized in full or at all;
our advisor’s and its affiliates’ ability to attract and retain qualified personnel to support our growth and operations and potential changes to key personnel providing management services to us;
our reliance on our advisor and its affiliates and sub-advisors/co-venturers in providing management services to us, the payment of substantial fees to our advisor, the allocation of investments by our advisor and its affiliates among us and the other sponsored or managed companies and strategic vehicles of our sponsor and its affiliates, and various potential conflicts of interest in our relationship with our sponsor;
the impact of market and other conditions influencing the performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments;
changes in our business or investment strategy;
the impact of economic conditions on the operators/tenants of the real property that we own as well as on borrowers of the debt we originate and acquire;
the nature and extent of future competition, including new construction in the markets in which our assets are located;
the ability of our tenants, operators and managers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent payments to us and, in turn, our ability to satisfy our obligations under our borrowings;
the ability of our tenants, operators and managers, as applicable, to comply with laws, rules and regulations in the operation of our properties, to deliver high-quality services, to attract and retain qualified personnel and to attract residents and patients;

3





the ability and willingness of our tenants, operators, managers and other third parties to satisfy their respective obligations to us, including in some cases their obligation to indemnify us from and against various claims and liabilities;
the financial weakness of our tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans and/or expose us to additional liabilities and expenses;
the impact of increased operating costs on our liquidity, financial condition and results of operations or that of our tenants, operators, managers and borrowers and our ability and the ability of our tenants, operators, managers and borrowers to accurately estimate the magnitude of those costs;
changes in the value of our portfolio;
the impact of fluctuations in interest rates;
our ability to realize current and expected returns over the life of our investments;
any failure in our advisor’s and its affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;
investments in asset classes and structures with which we have less familiarity;
illiquidity of properties or debt investments in our portfolio;
our ability to finance our assets on terms that are acceptable to us, if at all;
environmental compliance costs and liabilities;
risks associated with our joint ventures and unconsolidated entities, including our reliance on joint venture partners, lack of decision making authority and the financial condition of our joint venture partners;
increased rates of loss or default and decreased recovery on our investments;
the degree and nature of our competition;
the effectiveness of our risk and portfolio management systems;
the potential failure to maintain effective internal controls and disclosure controls and procedures;
regulatory requirements with respect to our business and the healthcare industry generally, as well as the related cost of compliance;
the extent and timing of future healthcare reform and regulation, including changes in reimbursement policies, procedures and rates;
legislative and regulatory changes, including changes to laws governing the taxation of real estate investment trusts, or REITs, and changes to laws affecting non-traded REITs and alternative investments generally;
our ability to maintain our qualification as a REIT for federal income tax purposes and limitations imposed on our business by our status as a REIT;
the loss of our exemption from registration under the Investment Company Act of 1940, as amended;
availability of opportunities to acquire equity, debt and securities investments in the healthcare real estate sector;
general volatility in capital markets;
the adequacy of our cash reserves and working capital; and
other risks associated with investing in our targeted investments, including changes in our industry, interest rates, the securities markets, the general economy or the capital markets and real estate markets specifically.
The foregoing list of factors is not exhaustive. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

4





Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the U.S. Securities and Exchange Commission, or the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.




5





Part I. Financial Information
Item 1.    Financial Statements
NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Assets
 
 
 

Cash and cash equivalents
$
27,395


$
223,102

Restricted cash
28,620


28,790

Operating real estate, net
1,870,095


1,571,980

Investments in unconsolidated ventures (refer to Note 4)
328,951

 
360,534

Real estate debt investments, net
74,626


74,558

Senior housing mortgage loans held in a securitization trust, at fair value
552,087

 
553,707

Receivables, net
16,402


12,260

Deferred costs and intangible assets, net
87,005


116,404

Other assets
15,522


16,874

Total assets(1)
$
3,000,703


$
2,958,209

 
 
 
 
Liabilities
 
 
 
Mortgage and other notes payable, net
$
1,400,456

 
$
1,200,982

Senior housing mortgage obligations issued by a securitization trust, at fair value
520,205

 
522,933

Due to related party
5,406

 
219

Escrow deposits payable
4,461

 
3,209

Distribution payable
10,371

 
10,579

Accounts payable and accrued expenses
30,580

 
25,105

Other liabilities
2,841

 
3,208

Total liabilities(1)
1,974,320


1,766,235

Commitments and contingencies


 


Equity
 
 
 
NorthStar Healthcare Income, Inc. Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016

 

Common stock, $0.01 par value, 400,000,000 shares authorized, 186,914,418 and 185,034,967 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
1,869

 
1,850

Additional paid-in capital
1,683,081

 
1,666,479

Retained earnings (accumulated deficit)
(667,608
)
 
(480,516
)
Accumulated other comprehensive income (loss)
997

 
(1,188
)
Total NorthStar Healthcare Income, Inc. stockholders’ equity
1,018,339


1,186,625

Non-controlling interests
8,044

 
5,349

Total equity
1,026,383


1,191,974

Total liabilities and equity
$
3,000,703


$
2,958,209

_______________________________________
(1)
Represents the consolidated assets and liabilities of NorthStar Healthcare Income Operating Partnership, LP (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which the Company is the sole general partner and owns approximately 99.99%. As of September 30, 2017, the Operating Partnership includes $1.2 billion and $949.5 million of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. Refer to Note 2, “Summary of Significant Accounting Policies.”







Refer to accompanying notes to consolidated financial statements.

6





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Property and other revenues
 
 
 
 
 
 
 
Resident fee income
$
33,233

 
$
26,436

 
$
93,060

 
$
76,721

Rental income
40,507

 
38,143

 
114,189

 
94,165

Other revenue
661

 
594

 
2,191

 
1,063

Total property and other revenues
74,401

 
65,173

 
209,440

 
171,949

Net interest income
 
 
 
 
 
 
 
Interest income on debt investments
1,940

 
5,072

 
5,755

 
15,112

Interest income on mortgage loans held in a securitized trust
6,536

 

 
19,503

 

Interest expense on mortgage obligations issued by a securitization trust
(4,919
)
 

 
(14,662
)
 

Net interest income
3,557

 
5,072

 
10,596

 
15,112

Expenses
 
 
 
 
 
 
 
Real estate properties - operating expenses
42,981

 
35,489

 
118,526

 
93,868

Interest expense
15,687

 
13,424

 
44,479

 
34,951

Other expenses related to securitization trust
981

 

 
2,947

 

Transaction costs
3,814

 
31

 
6,778

 
1,563

Asset management and other fees - related party
13,299

 
8,579

 
32,716

 
36,659

General and administrative expenses
3,041

 
3,980

 
8,392

 
20,538

Depreciation and amortization
24,454

 
10,678

 
69,223

 
35,930

Total expenses
104,257

 
72,181

 
283,061

 
223,509

Other income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on senior housing mortgage loans and debt held in securitization trust, net
384

 

 
1,108

 

Realized gain (loss) on investments and other

 

 
118

 
411

Gain (loss) on consolidation of unconsolidated venture

 

 

 
6,408

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
(25,915
)
 
(1,936
)
 
(61,799
)
 
(29,629
)
Equity in earnings (losses) of unconsolidated ventures
(18,557
)
 
(15,604
)
 
(31,234
)
 
(47,073
)
Income tax benefit (expense)
(15
)
 
36

 
(56
)
 
(7,088
)
Net income (loss)
(44,487
)
 
(17,504
)
 
(93,089
)
 
(83,790
)
Net (income) loss attributable to non-controlling interests
97

 
(64
)
 
27

 
55

Net income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders
$
(44,390
)
 
$
(17,568
)
 
$
(93,062
)
 
$
(83,735
)
Net income (loss) per share of common stock, basic/diluted
$
(0.24
)
 
$
(0.10
)
 
$
(0.50
)
 
$
(0.46
)
Weighted average number of shares of common stock outstanding, basic/diluted
186,825,812

 
183,268,411

 
186,293,783

 
181,717,977

Distributions declared per share of common stock
$
0.17

 
$
0.17

 
$
0.51

 
$
0.51












Refer to accompanying notes to consolidated financial statements.

7





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(44,487
)
 
$
(17,504
)
 
$
(93,089
)
 
$
(83,790
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments related to investment in unconsolidated venture
605

 

 
2,185

 

Total other comprehensive income (loss)
605

 

 
2,185

 

Comprehensive income (loss)
(43,882
)
 
(17,504
)
 
(90,904
)
 
(83,790
)
Comprehensive (income) loss attributable to non-controlling interests
97

 
(64
)
 
27

 
55

Comprehensive income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders
$
(43,785
)
 
$
(17,568
)
 
$
(90,877
)
 
$
(83,735
)







































Refer to accompanying notes to consolidated financial statements.

8





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Company’s Stockholders’ Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance as of December 31, 2015
179,137


$
1,791


$
1,614,452


$
(216,099
)
 
$


$
1,400,144


$
5,356


$
1,405,500

Net proceeds from issuance of common stock
81

 
1

 
295

 

 

 
296

 

 
296

Issuance and amortization of equity-based compensation
14

 

 
166

 

 

 
166

 

 
166

Non-controlling interests - contributions

 

 

 

 

 

 
291

 
291

Non-controlling interests - distributions

 

 

 

 

 

 
(291
)
 
(291
)
Shares redeemed for cash
(1,765
)
 
(18
)
 
(16,120
)
 

 

 
(16,138
)
 

 
(16,138
)
Distributions declared

 

 

 
(123,142
)
 

 
(123,142
)
 

 
(123,142
)
Proceeds from distribution reinvestment plan
7,568

 
76

 
67,686

 

 

 
67,762

 

 
67,762

Other comprehensive income (loss)

 

 

 

 
(1,188
)
 
(1,188
)
 

 
(1,188
)
Net income (loss)

 

 

 
(141,275
)
 

 
(141,275
)
 
(7
)
 
(141,282
)
Balance as of December 31, 2016
185,035

 
$
1,850

 
$
1,666,479

 
$
(480,516
)
 
$
(1,188
)
 
$
1,186,625

 
$
5,349

 
$
1,191,974

Issuance and amortization of equity-based compensation

20

 

 
146

 

 

 
146

 

 
146

Non-controlling interests - contributions

 

 

 

 

 

 
2,952

 
2,952

Non-controlling interests - distributions

 

 

 

 

 

 
(230
)
 
(230
)
Shares redeemed for cash
(3,700
)
 
(37
)
 
(34,081
)
 

 

 
(34,118
)
 

 
(34,118
)
Distributions declared

 

 

 
(94,030
)
 

 
(94,030
)
 

 
(94,030
)
Proceeds from distribution reinvestment plan
5,559

 
56

 
50,537

 

 

 
50,593

 

 
50,593

Other comprehensive income (loss)


 


 


 


 
2,185

 
2,185

 


 
2,185

Net income (loss)

 

 

 
(93,062
)
 

 
(93,062
)
 
(27
)
 
(93,089
)
Balance as of September 30, 2017 (Unaudited)
186,914

 
$
1,869

 
$
1,683,081

 
$
(667,608
)
 
$
997

 
$
1,018,339

 
$
8,044

 
$
1,026,383



















Refer to accompanying notes to consolidated financial statements.

9





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(93,089
)
 
$
(83,790
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Equity in (earnings) losses of unconsolidated ventures
31,234

 
47,073

Depreciation and amortization
69,223

 
35,930

Amortization of below market debt
1,988

 

Straight-line rental income, net
(1,287
)
 
(1,538
)
Amortization of premium/accretion of discount on investments
(68
)
 
(28
)
Amortization of deferred financing costs
1,220

 
1,628

Amortization of equity-based compensation
146

 
117

Deferred income tax (benefit) expense, net

 
7,026

Realized (gain) loss on investments and other
(118
)
 
(411
)
(Gain) loss on consolidation of unconsolidated venture

 
(6,408
)
Unrealized (gain) loss on senior housing mortgage loans and debt held in securitization trust, net

(1,108
)
 

Allowance for uncollectible accounts
943

 

Distributions of cumulative earnings from unconsolidated ventures
427

 

Changes in assets and liabilities:
 
 
 
Restricted cash
(3,734
)
 
(2,276
)
Receivables
(3,623
)
 
(530
)
Other assets
(1,993
)
 
(1,099
)
Due to related party
5,187

 
(384
)
Escrow deposits payable
1,252

 
1,467

Accounts payable and accrued expenses
5,474

 
2,138

Other liabilities
(366
)
 
(396
)
Net cash provided by (used in) operating activities
11,708

 
(1,481
)
Cash flows from investing activities:
 
 
 
Acquisition of operating real estate investments
(297,955
)
 
(139,618
)
Improvement of operating real estate investments
(13,463
)
 
(22,476
)
Repayment on real estate debt investments

 
487

Investment in unconsolidated ventures
(9,099
)
 
(20,591
)
Distributions in excess of cumulative earnings from unconsolidated ventures
11,206

 
16,470

Change in restricted cash
692

 
(2,344
)
Other assets
3,288

 
798

Net cash provided by (used in) investing activities
(305,331
)
 
(167,274
)
Cash flows from financing activities:
 
 
 
Borrowing from mortgage notes
173,690

 
18,760

Repayment of mortgage notes
(1,834
)
 
(10,500
)
Payment of deferred financing costs
(2,111
)
 
(4,016
)
Change in restricted cash
3,212

 
2,132

Net proceeds from issuance of common stock

 
405

Shares redeemed for cash
(34,118
)
 
(9,931
)
Distributions paid on common stock
(94,238
)
 
(91,658
)
Proceeds from distribution reinvestment plan
50,593

 
50,877

Contributions from non-controlling interests
2,952

 
264

Distributions to non-controlling interests
(230
)
 
(278
)
Net cash provided by (used in) financing activities
97,916

 
(43,945
)
Net increase (decrease) in cash and cash equivalents
(195,707
)
 
(212,700
)
Cash and cash equivalents- beginning of period
223,102

 
354,229

Cash and cash equivalents- end of period
$
27,395

 
$
141,529

Refer to accompanying notes to consolidated financial statements.

10





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Escrow deposits related to real estate debt investments
$

 
$
25

Accrued distribution payable
10,371

 
10,168

Transfer of non-controlling interest in joint venture for controlling interest in
consolidated real estate investment (refer to Note 3)

 
103,005

Assumption of mortgage notes payable upon acquisition of operating real estate
21,685

 
648,211

Change in carrying value of securitization trust (VIE asset/liability)
2,728

 

Debt financing provided by seller for investment acquisition
3,500

 









































Refer to accompanying notes to consolidated financial statements.

11





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Organization
NorthStar Healthcare Income, Inc. (the “Company”) was formed to acquire, originate and asset manage a diversified portfolio of equity, debt and securities investments in healthcare real estate, directly or through joint ventures, with a focus on the mid-acuity senior housing sector, which the Company defines as assisted living (“ALF”), memory care (“MCF”), skilled nursing (“SNF”), independent living (“ILF”) facilities and continuing care retirement communities (“CCRC”), which may have independent living, assisted living, skilled nursing and memory care available on one campus. The Company also invests in other healthcare property types, including medical office buildings (“MOB”), hospitals, rehabilitation facilities and ancillary healthcare services businesses. The Company’s investments are predominantly in the United States, but it also selectively makes international investments. The Company was formed in October 2010 as a Maryland corporation and commenced operations in February 2013. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2013. The Company conducts its operations so as to continue to qualify as a REIT for U.S. federal income tax purposes.
The Company’s equity investments are generally healthcare properties, which are either structured as net leases to healthcare operators or operated through management agreements with independent third-party operators, where applicable through the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”) structures that permit the Company, through taxable REIT subsidiaries (“TRS”), to have direct exposure to resident fee income and incur related operating expenses. The Company’s debt investments may consist of first mortgage loans and mezzanine loans. The Company’s real estate securities investments may include commercial mortgage-backed securities (“CMBS”), and other securities backed primarily by loans secured by healthcare properties. Refer to Note 6, “Healthcare-Related Securities” and Note 13, “Segment Reporting” for further discussion.
The Company is externally managed and has no employees. Prior to January 11, 2017, the Company was managed by an affiliate of NorthStar Asset Management Group Inc. (NYSE: NSAM) (“NSAM”). Effective January 10, 2017, NSAM completed its previously announced mergers with Colony Capital, Inc. (“Colony”), NorthStar Realty Finance Corp. (“NorthStar Realty”) and Colony NorthStar, Inc. (“Colony NorthStar”), a wholly-owned subsidiary of NSAM, which the Company refers to as the mergers, with Colony NorthStar surviving the mergers and succeeding NSAM as the Company’s sponsor (the “Sponsor”). As a result of the mergers, the Sponsor became an internally-managed equity REIT, with a diversified real estate and investment management platform and publicly-traded on the NYSE under the ticker symbol “CLNS.” CNI NSHC Advisors, LLC, as successor to NSAM J-NSHC Ltd (the “Advisor”), is now a subsidiary of Colony NorthStar. The Advisor manages the Company’s day-to-day operations pursuant to an advisory agreement. The mergers had no material impact on the Company’s operations.
Colony NorthStar manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies.
Substantially all of the Company’s business is conducted through NorthStar Healthcare Income Operating Partnership, LP (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The limited partners of the Operating Partnership are NorthStar Healthcare Income Advisor, LLC (the “Prior Advisor”) and NorthStar Healthcare Income OP Holdings, LLC (the “Special Unit Holder”), each an affiliate of the Sponsor. The Prior Advisor invested $1,000 in the Operating Partnership in exchange for common units and the Special Unit Holder invested $1,000 in the Operating Partnership and was issued a separate class of limited partnership units (the “Special Units”), which are collectively recorded as non-controlling interests on the accompanying consolidated balance sheets as of September 30, 2017 and December 31, 2016. As the Company issued shares, it contributed substantially all of the proceeds from its continuous, public offerings to the Operating Partnership as a capital contribution. As of September 30, 2017, the Company’s limited partnership interest in the Operating Partnership was 99.99%.
The Company’s charter authorizes the issuance of up to 400.0 million shares of common stock with a par value of $0.01 per share and up to 50.0 million shares of preferred stock with a par value of $0.01 per share. The board of directors of the Company is authorized to amend its charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.
The Company initially registered to offer up to 100.0 million shares pursuant to its primary offering to the public (the “Initial Primary Offering”) and up to 10.5 million shares pursuant to its distribution reinvestment plan (the “Initial DRP”), which are herein collectively referred to as the Initial Offering. The Initial Offering (including 8.6 million shares reallocated from the Initial DRP) was completed on February 2, 2015 by raising gross proceeds of $1.1 billion. All of the shares initially registered for the Initial Offering were issued.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

From February 6, 2015 to January 19, 2016, the Company conducted a follow-on public offering of up to $700.0 million in shares (the “Follow-on Offering”), which included up to $500.0 million in shares pursuant to its follow-on primary offering (the “Follow-on Primary Offering”) and $200.0 million in shares pursuant to its follow-on distribution reinvestment plan (the “Follow-on DRP”). The Company registered an additional 30.0 million shares to be offered pursuant to its DRP beyond the completion of the Follow-on Offering and continues to offer such shares.
The Initial Primary Offering and the Follow-on Primary Offering are collectively referred to as the Primary Offering and the distribution reinvestment plan, including but not limited to, the Initial DRP and Follow-on DRP, are collectively referred to as the DRP. Additionally, the Primary Offering and the Initial DRP and Follow-on DRP are collectively referred to as the Offering.
From inception through November 13, 2017, the Company raised total gross proceeds of $1.9 billion, including $188.6 million in DRP proceeds.
2.
Summary of Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 30, 2017.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIEs”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company evaluates its investments and financings, including investments in unconsolidated ventures and securitization financing transactions to determine whether each investment or financing is a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
As of September 30, 2017, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the Operating Partnership, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company. The Company identified several VIEs which were originally consolidated under the voting interest model prior to changes in the consolidation rules under U.S. GAAP.
Consolidated VIEs
The most significant consolidated VIEs are the Operating Partnership, an Investing VIE (as discussed below) and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. The Operating Partnership consolidates certain properties that have non-controlling interests. Included in operating real estate, net on the Company’s consolidated balance sheet as of September 30, 2017 is $628.3 million related to such consolidated VIEs. Included in mortgage and other notes payable, net on the Company’s consolidated balance sheet as of September 30, 2017 is $413.2 million, collateralized by the real estate assets of the related consolidated VIEs.
Investing VIEs
The Company’s investment in a securitization financing entity (“Investing VIE”) consists of subordinate first-loss certificates in a securitization trust, generally referred to as Class B certificates, which represents interests in such VIE. Investing VIEs are structured as pass through entities that receive principal and interest payments from the underlying debt collateral assets and distribute those payments to the securitization trust’s certificate holders, including the Class B certificates. A securitization trust will name a directing certificate holder, who is generally afforded the unilateral right to terminate and appoint a replacement for the special servicer, and as such may qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss certificates in a securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by an Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidator of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of September 30, 2017, the Company held Class B certificates in an Investing VIE for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trust. The Company’s Class B certificates, which represent the retained interest and related interest income are eliminated in consolidation. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, the assets, liabilities (obligations to the certificate holders of the securitization trust, less the Company’s retained interest from the Class B certificates of the securitization), income and expense of the entire Investing VIE are presented in the consolidated financial statement of the Company. As a result, although the Company legally owns the Class B certificates only, U.S. GAAP requires the Company to present the assets, liabilities, income and expenses of the entire securitization trust on its consolidated financial statements. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the net income attributable to its retained interest in the Class B certificates. Refer to Note 6, “Healthcare-Related Securities” for further detail.
The Company elected the fair value option for the initial recognition of the assets and liabilities of its consolidated Investing VIE. Interest income and interest expense associated with this VIE is recorded separately on the consolidated statements of operations. The Company separately presents the assets and liabilities of its consolidated Investing VIE as “Senior housing mortgage loans held in a securitization trust, at fair value” and “Senior housing mortgage obligations issued by a securitization trust, at fair value,” respectively, on its consolidated balance sheets. Refer to Note 12, “Fair Value” for further detail.
The Company has adopted guidance issued by the FASB, allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIE, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the liabilities of the Company’s Investing VIE are marketable securities with observable trade data, their fair value is more observable and will be referenced to determine the fair value for assets of its Investing VIE. Refer to section “Fair Value Option” below for further discussion.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Unconsolidated VIEs
As of September 30, 2017, the Company identified unconsolidated VIEs related to its real estate equity investments with a carrying value of $329.0 million. The Company’s maximum exposure to loss as of September 30, 2017 would not exceed the carrying value of its investment in the VIEs and its investment in a mezzanine loan to a subsidiary of one of the VIEs. Based on management’s analysis, the Company determined that it is not the primary beneficiary. Accordingly, these VIEs are not consolidated in the Company’s financial statements as of September 30, 2017. The Company did not provide financial support to its unconsolidated VIEs during the nine months ended September 30, 2017. As of September 30, 2017, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to its unconsolidated VIEs.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Investments in Unconsolidated Ventures
A non-controlling, unconsolidated ownership interest in an entity may be accounted for using the equity method or the cost method, and for either method, the Company may elect the fair value option. The Company may account for an investment in an unconsolidated entity that does not qualify for equity method accounting using the cost method if the Company determines that it does not have significant influence.
Under the equity method, the investment is adjusted each period for capital contributions and distributions and its share of the entity’s net income (loss). Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of preferred returns and allocation formulas, if any, as described in such governing documents. Equity method investments are recognized using a cost accumulation model in which the investment is recognized based on the cost to the investor, which includes acquisition fees. The Company records as an expense certain acquisition costs and fees associated with consolidated investments deemed to be business combinations and capitalizes these costs for investments deemed to be acquisitions of an asset, including an equity method investment.
Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and comprehensive income (loss) attributable to controlling and non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and other comprehensive income (loss) (“OCI”). The only component of OCI for the Company is foreign currency translation adjustments related to its investment in an unconsolidated venture.
Fair Value Option
The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. The Company may elect to apply the fair value option for certain investments due to the nature of the instrument. Any change in fair value for assets and liabilities for which the election is made is recognized in earnings.
The Company has elected the fair value option to account for the eligible financial assets and liabilities of its consolidated Investing VIEs in order to mitigate potential accounting mismatches between the carrying value of the instruments and the related assets and liabilities to be consolidated. The Company has adopted guidance issued by the FASB allowing the Company to measure both the financial assets and liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity date of three months or less to be cash equivalents. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash and cash equivalents with major financial institutions. To date, the Company has not experienced any losses on cash and cash equivalents.
Restricted Cash
Restricted cash consists of amounts related to loan origination (escrow deposits) and operating real estate (escrows for taxes, insurance, capital expenditures and payments required under certain lease agreements).
Operating Real Estate
The Company accounts for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, furniture and fixtures, improvements and other identified intangibles such as in place leases, goodwill and above or below market mortgages assumed, as applicable. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life. Ordinary repairs and maintenance are expensed as incurred. Operating real estate is carried at historical cost less accumulated depreciation. Operating real estate is depreciated using the straight-line method over the estimated useful life of the assets, summarized as follows:
Category:
 
Term:
Building
 
40 years
Building improvements
 
Lesser of the useful life or remaining life of the building
Land improvements
 
15 years
Tenant improvements
 
Lesser of the useful life or remaining term of the lease
Furniture and fixtures
 
7 to 10 years
Construction costs incurred in connection with the Company’s investments are capitalized and included in operating real estate, net on the consolidated balance sheets. Construction in progress is not depreciated until the development is substantially completed. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations. The Company evaluates whether a real estate acquisition constitutes a business and whether business combination accounting is appropriate.
When the Company acquires a controlling interest in an existing unconsolidated joint venture, the Company records the consolidated investment at the updated purchase price, which is reflective of fair value. The difference between the carrying value of the Company’s investment in the existing unconsolidated joint venture on the acquisition date and the Company’s share of the fair

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

value of the investment’s purchase price is recorded in gain (loss) on consolidation of unconsolidated venture in the Company’s consolidated statements of operations.
Real Estate Debt Investments
Real estate debt investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments. Debt investments that are deemed to be impaired are carried at amortized cost less a reserve, if deemed appropriate, which would approximate fair value. Debt investments where the Company does not have the intent to hold the loan for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or estimated fair value.
Healthcare-Related Securities
The Company classifies its securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated OCI in the consolidated statements of equity. However, the Company has elected the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gain (loss) on investments and other in the consolidated statements of operations. As of September 30, 2017, the Company held Class B certificates of a securitization trust, which represents the Company’s retained interest in the securitization trust, which the Company consolidates under U.S. GAAP. Refer to Note 6, “Healthcare-Related Securities” for further discussion.
Deferred Costs and Intangible Assets
Deferred Costs
Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are recorded against the carrying value of such financing and are amortized to interest expense over the term of the financing using the effective interest method. Unamortized deferred financing costs are expensed to realized gain (loss) on investments and other, when the associated borrowing is repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.
Identified Intangibles
The Company records acquired identified intangibles, which includes intangible assets (such as the value of the above-market leases, in-place leases, goodwill and other intangibles) and intangible liabilities (such as the value of below market leases), based on estimated fair value. The value allocated to the identified intangibles are amortized over the remaining lease term. Above/below-market leases for which the Company is the lessor are amortized into rental income, below-market leases for which the Company is the lessee are amortized into real estate properties-operating expense and in-place leases are amortized into depreciation and amortization expense.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company performs an annual impairment test for goodwill and evaluates the recoverability whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. In making such assessment, qualitative factors are used to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the estimated fair value of the reporting unit is less than its carrying value, then an impairment charge is recorded.
Identified intangible assets are recorded in deferred costs and intangible assets, net on the consolidated balance sheets.

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents a summary of deferred costs and intangible assets as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
 
 
Deferred costs and intangible assets:
 
 
 
 
In-place lease value, net
 
$
64,208

 
$
93,554

Goodwill
 
22,112

 
22,112

Other intangible assets
 
380

 
380

Subtotal intangible assets
 
86,700

 
116,046

Deferred lease costs, net
 
305

 
358

Total
 
$
87,005

 
$
116,404

Acquisition Fees and Expenses
The total of all acquisition fees and expenses for an investment, including acquisition fees to the Advisor, cannot exceed, in the aggregate, 6.0% of the contract purchase price of such investment unless such excess is approved by a majority of the Company’s directors, including a majority of its independent directors. For the nine months ended September 30, 2017, total acquisition fees and expenses did not exceed the allowed limit for any investment. An acquisition fee incurred related to an equity investment will generally be expensed as incurred. An acquisition fee paid to the Advisor related to the acquisition of an equity or debt investment in an unconsolidated joint venture is included in investments in unconsolidated ventures on the consolidated balance sheets. An acquisition fee paid to the Advisor related to the origination or acquisition of debt investments is included in real estate debt investments, net on the consolidated balance sheets and is amortized to interest income over the life of the investment using the effective interest method. The Company records as an expense certain acquisition costs and fees associated with transactions deemed to be business combinations in which it consolidates the asset and capitalizes these costs for transactions deemed to be acquisitions of an asset, including an equity investment.
Other Assets
The following table presents a summary of other assets as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Other assets:
 
 
 
 
Healthcare facility regulatory reserve deposit
 
$
6,000

 
$
6,000

Remainder interest in condominium units(1)
 
3,704

 
4,554

Prepaid expenses
 
3,605

 
874

Lease inducements, net
 
617

 
799

Utility deposits
 
504

 
386

Pending deal deposits
 
250

 
2,324

Construction deposit
 

 
1,239

Other
 
842

 
698

Total
 
$
15,522

 
$
16,874

_______________________________________
(1)
Represents future interests in property subject to life estates (“Remainder Interest”).
Revenue Recognition
Operating Real Estate
Rental income includes rental and escalation income from operating real estate and is derived from leasing of space to various types of tenants and healthcare operators. Rental revenue recognition commences when the tenant takes legal possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for rentals and expense reimbursements to be paid in monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in receivables, net on the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Escalation income

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NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

represents revenue from tenant/operator leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is recognized in the same period as the expenses are incurred.
The Company also generates operating income from operating healthcare properties. Revenue related to operating healthcare properties includes resident room and care charges and other resident service charges. Rent is charged and revenue is recognized when such services are provided, generally defined per the resident agreement as the date upon which a resident occupies a room or uses the services and is recorded in resident fee income in the consolidated statements of operations.
In a situation in which a net lease(s) associated with a significant tenant has been, or is expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and depreciation and amortization for the remaining lease related asset groups in the consolidated statements of operations.
Real Estate Debt Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.
Healthcare-Related Securities
Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.
Credit Losses and Impairment on Investments
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow generated by the property is less than the carrying value. In conducting this review, the Company considers U.S. macroeconomic factors, real estate and healthcare sector conditions, together with asset specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value and recorded in impairment on operating real estate in the consolidated statements of operations. As of September 30, 2017, the Company did not have any impaired operating real estate.
An allowance for a doubtful account for a tenant/operator/resident receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of tenant/operator/resident to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant/operator/resident credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts. In June 2017, the Company completed the process of transitioning the operator for two of its properties. The Company previously recorded a full allowance on outstanding rent on the two properties and as of January 1, 2017, revenue was recognized on a cash basis until the end of the lease term on May 31, 2017.
Real Estate Debt Investments
Real estate debt investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of reserves on a quarterly basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the investment as well

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the investment, a reserve is recorded with a corresponding charge to a credit provision. The reserve for each investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for an investment at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the investment becomes contractually current and performance is demonstrated to be resumed. Interest accrued and not collected will be reversed against interest income. An investment is written off when it is no longer realizable and/or legally discharged. As of September 30, 2017, the Company did not have any impaired real estate debt investments.
Investments in Unconsolidated Ventures
The Company reviews its investments in unconsolidated ventures for which the Company did not elect the fair value option on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value may be impaired or that its carrying value may not be recoverable. An investment is considered impaired if the projected net recoverable amount over the expected holding period is less than the carrying value. In conducting this review, the Company considers global macroeconomic factors, including real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred and is considered to be other than temporary, the loss is measured as the excess of the carrying value of the investment over the estimated fair value and recorded in equity in earnings (losses) of unconsolidated ventures in the consolidated statements of operations.
As of September 30, 2017, the unconsolidated ventures in which the Company invests have recorded impairments and reserves, including a loan loss reserve for a direct financing lease receivable relating to the Espresso unconsolidated investment. The Company’s proportionate ownership share of the loan loss reserve within the Espresso portfolio totaled $15.8 million and was recognized through equity in earnings (losses). During the third quarter of 2017, the Espresso sub-portfolio associated with the direct financing lease commenced an operator transition and determined that certain future cash flows of the direct financing lease are not believed to be collectible. The cash flows deemed not to be collectible primarily impact distributions on mandatorily redeemable units issued at the time of the original acquisition that allowed the seller to participate in certain future cash flows from the direct financing lease following the closing of the original acquisition. Pursuant to ASC 480, Distinguishing Liabilities from Equity, the redemption value of the corresponding unconsolidated venture’s liability for the units issued to the seller has not been assessed in connection with the commencement of the operator transition, but will be assessed upon modification or termination of the lease, which is expected to occur at the completion of the operator transition. The Company has concluded that no additional impairment of its investments in unconsolidated ventures is required as of September 30, 2017.
Healthcare-Related Securities
Securities for which the fair value option is elected are not evaluated for other-than-temporary impairment (“OTTI”) as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss) on investments as losses occur. Securities for which the fair value option is not elected are evaluated for OTTI quarterly.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment is recorded as a component of accumulated OCI in the consolidated statements of equity.
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on investments and other in the consolidated statements of operations.

20




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

As of September 30, 2017 and December 31, 2016, the Company had exposure to foreign currency in an investment in an unconsolidated venture.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant. All fixed equity-based awards to directors, which have no vesting conditions other than time of service, are amortized to compensation expense over the awards’ vesting period on a straight-line basis. Equity-based compensation is classified within general and administrative expense in the consolidated statements of operations.
Income Taxes
The Company elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code beginning in its taxable year ended December 31, 2013. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least 90.0% of its REIT taxable income to its stockholders and meet certain other requirements. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax and potential interest and penalties, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable.
The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income.
The Company made a joint election to treat certain subsidiaries as TRSs which may be subject to U.S. federal, state and local income taxes. In general, a TRS of the Company may perform non-customary services for tenants/operators/residents of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.
Certain subsidiaries of the Company are subject to taxation by federal, state and foreign authorities for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by the Company with respect to its interest in the TRS. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in provision for income tax benefit (expense) in the consolidated statements of operations.
The Company recorded an income tax expense of approximately $15,000 and $56,000 for the three and nine months ended September 30, 2017, respectively. The Company recorded an income tax benefit of less than $0.1 million and an income tax expense of $7.1 million for the three and nine months ended September 30, 2016, respectively.
Recent Accounting Pronouncements
Revenue Recognition- In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The effective date of the new revenue standard for the Company will be January 1, 2018.

21




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company has commenced the process of adopting the new revenue standard, including forming a project team and compiling an inventory of the sources of revenue the Company expects will be impacted by the adoption of this standard. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification, therefore it will not impact rental income and interest income generated on financial instruments such as real estate debt investment and securities. The Company generates non-lease revenues, such certain resident fees in its RIDEA structures (a portion of which are not generated through leasing arrangements) and lease-related executory cost payments (payments for maintenance activities, including common area maintenance, such as cleaning services) which are considered non-lease components and subject to the new standard on revenue recognition. The Company expects to apply the revenue recognition guidance related to its common area maintenance components within leases on January 1, 2019, upon its adoption of the lease accounting update. The Company expects that the recognition of income for its non-lease revenues in its RIDEA structures will be consistent with the current accounting model because currently the revenues associated with these services are generally recognized on a monthly basis, the period in which the related services are performed.  The Company expects that the timing of other revenue recognition associated with non-lease service components that are charged outside of the resident fees may be affected by the new standards. The Company is in the process of evaluating the significance of the impact on the changes on its disclosures, controls and processes, and the recognition pattern of its revenue and is still completing its assessment of the overall impact of adopting this update.
Financial Instruments- In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 addresses certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair value be measured at fair value with changes in fair value recognized in results of operations. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company does not have any equity investments with readily determinable fair value recorded as available-for-sale. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Leases- In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Additionally, the new update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Equity Method of Accounting- In March 2016, the FASB issued ASU No. 2016-07, Investments- Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to Equity Method of Accounting, which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The update should be applied prospectively upon their effective date to increases in the level of ownership interests or degree of influence that results in the adoption of the equity method. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company adopted the new guidance prospectively on January 1, 2017 and the adoption of this standard did not have a material impact on its consolidated financial statements and related disclosures.
Equity-Based Compensation- In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Payment Accounting, which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The Company adopted the new guidance prospectively on January 1, 2017 and the adoption of this standard did not have a material impact on its consolidated financial statements and related disclosures.
Credit Losses- In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses, which changes the impairment model for certain financial instruments by requiring companies to recognize an allowance for expected losses, rather

22




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

than incurred losses as required currently by the incurred loss approach. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Cash Flow Classifications- In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Restricted Cash- In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires entities to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017 and will be applied retrospectively to all periods presented. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Business Combination- In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a business, which amends the guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of transferred assets and activities is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. The Company expects that most acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business combination. The Company plans to adopt the standard on its required effective date of January 1, 2018. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.
Goodwill Impairment- In January 2017, the FASB issued ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test that requires a hypothetical purchase price allocation. Goodwill impairment is now measured as the excess in carrying value over fair value of the reporting unit, with the loss recognized not to exceed the amount of goodwill assigned to that reporting unit. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, to be applied prospectively. Early adoption is permitted as of the first interim or annual impairment test of goodwill after January 1, 2017. The Company is currently assessing the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Derecognition and Partial Sales of Nonfinancial Assets- In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of recently established guidance on recognition of gains and losses from derecognition of non-financial assets, and defines in-substance non-financial assets. In addition, the guidance clarifies the accounting for partial sales of non-financial assets to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a non-customer, when a non-controlling interest is received or retained, the latter is considered a non-cash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. This guidance has the same effective date as the new revenue guidance, which is January 1, 2018, with early adoption permitted beginning January 1, 2017. Both the revenue guidance and this update must be adopted concurrently. While the transition method is similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach need not be aligned between both updates. The Company plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The Company does not believe that this guidance will have a material impact on its consolidated financial statements and related disclosures.

23




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.
Operating Real Estate
The following table presents operating real estate, net as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Land
 
$
289,561

 
$
221,353

Land improvements
 
10,121

 
9,462

Buildings and improvements
 
1,587,771

 
1,329,118

Tenant improvements
 
8,332

 
5,172

Construction in progress
 
5,090

 
3,509

Furniture and fixtures
 
68,605

 
63,539

Subtotal
 
1,969,480

 
1,632,153

Less: Accumulated depreciation
 
(99,385
)
 
(60,173
)
Operating real estate, net
 
$
1,870,095

 
$
1,571,980

Operating Real Estate Acquisitions
Bonaventure
In February 2017, the Company completed the acquisition of the Bonaventure portfolio, which is comprised of five ILF/ALFs totaling 453 units located in Oregon and Washington, for a purchase price of $98.9 million, excluding escrows and subject to customary prorations and adjustments. The Company funded the acquisition with approximately $28.5 million of equity, inclusive of escrows and fees and obtained five ten-year fixed rate mortgage notes payable, which are cross-collateralized and cross-defaulted with a total principal balance of $72.5 million at a fixed interest rate of 4.66%.
Oak Cottage of Santa Barbara (“Oak Cottage”)
In February 2017, the Company completed the acquisition of a 40 unit MCF located in Santa Barbara, California, for a purchase price of $19.4 million, excluding escrows and subject to customary pro-rations and adjustments. The Company funded the acquisition with approximately $16.2 million of equity and $3.5 million of seller financing at a fixed interest rate of 6.0%.
Rochester
In August 2017, through a joint venture with an affiliate of Watermark Retirement Communities (“Watermark”), the Company completed its acquisition of the Rochester portfolio for a purchase price of $204.0 million, excluding escrows and subject to customary prorations and adjustments. The portfolio is comprised of nine ILF/ALFs totaling 1,307 units located in New York, as well as two land parcels. The Company funded the acquisition with approximately $88.0 million of equity, inclusive of escrows and fees and with seven ten-year floating rate mortgage notes payable, which are cross-collateralized and cross defaulted with total principal balance of $101.2 million through Fannie Mae’s DUS Loan Program, and the assumption of a mortgage through a national lender totaling $21.7 million. The joint venture is owned 97.0% by a subsidiary of the Company and 3.0% by Watermark. In addition, as part of the Rochester portfolio, the Company committed to subsequently acquire a 45 unit ILF for $12.4 million, upon the completion of its construction, which was completed in the fourth quarter of 2017 and 100.0% seller financed a fixed interest rate of 6.0%. No additional equity was contributed, other than closing costs.
Winterfell
In March 2016, the Company acquired NorthStar Realty’s 60.0% interest in a joint venture (the “Winterfell JV”) which owned 32 private pay ILFs (the “Winterfell portfolio”) for a purchase price of $537.8 million, excluding escrows and subject to customary proration and adjustments. The transaction was approved by the Company’s board of directors, including all of its independent directors, and was supported by an independent third-party appraisal for the Winterfell portfolio. The Company originally acquired a 40.0% equity interest in the Winterfell JV in May 2015. Accordingly, as of March 1, 2016, the Company held 100.0% of the equity and consolidated the Winterfell portfolio. Prior to March 1, 2016, the Company accounted for its equity investment in the Winterfell JV as an unconsolidated venture under the equity method. The Company finalized the purchase price allocation for the Winterfell portfolio as of March 31, 2017.

24




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table summarizes operating real estate acquisitions for the nine months ended September 30, 2017 (dollars in thousands):
Acquisition Date
 
Type
 
Portfolio
 
Amount(1)
 
Properties
 
Units
 
Location
 
Financing
 
Companys Equity
 
Ownership Interest
 
Transaction Costs(2)
February 2017
 
Operating Facility
 
Bonaventure
 
$
99,438

 
5
 
453
 
Various locations
 
$
72,466

 
$
28,459

 
100.0%
 
$
1,042

February 2017
 
Operating Facility
 
Oak Cottage
 
19,427

 
1
 
40
 
Santa Barbara, CA
 
3,500

 
16,191

 
100.0%
 
233

August 2017
 
Operating Facility
 
Rochester
 
205,318

 
9
 
1,307
 
Rochester, NY
 
122,861

 
88,039

 
97.0%
 
3,453

Total
 
 
 
 
 
$
324,183

 
15
 
1,800
 
 
 
$
198,827

 
$
132,689

 
 
 
$
4,728

_______________________________________
(1)
Represents the purchase price, including deferred costs and other assets, and may be adjusted upon completion of the final purchase price allocation, which will not be later than one year from the date of acquisition. Includes cost associated with purchased land parcels that are not included in the properties count.
(2)
Includes $0.2 million of transaction costs expensed during the year ended December 31, 2016 related to the Bonaventure portfolio.
The purchase price of the assets and liabilities acquired from the acquisition of the Bonaventure, Oak Cottage and Rochester portfolios are preliminarily allocated 20.0% to land and 80.0% to buildings. From acquisition date through September 30, 2017, the Company recorded aggregate revenue and net income attributable to the Bonaventure portfolio of $9.2 million and $0.3 million, respectively, in its consolidated statements of operations. The net income includes depreciation expense and transaction costs of $1.3 million and $1.0 million, respectively. From acquisition date through September 30, 2017, the Company recorded aggregate revenue and net loss attributable to the Oak Cottage portfolio of $1.9 million and $0.2 million, respectively, in its consolidated statements of operations. The net loss includes transaction costs and depreciation expense of $0.2 million and $0.2 million, respectively. From acquisition date through September 30, 2017, the Company recorded aggregate revenue and net loss attributable to the Rochester portfolio of $4.2 million and $4.2 million, respectively, in its consolidated statements of operations. The net loss includes depreciation expense and transaction costs of $1.8 million and $3.5 million, respectively.
Land Acquisitions
Pinebrook
In July 2017, the Company completed the acquisition of a land parcel adjacent to one of the Company’s operating facilities in Milford, Ohio, for a purchase price of $0.7 million, excluding escrows and subject to customary pro-rations and adjustments. The acquisition was funded 100.0% with equity. The Company has commenced construction on a new memory care facility on the land parcel, with a projected completion date in the fourth quarter of 2018.


25




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.
Investments in Unconsolidated Ventures
All investments in unconsolidated ventures are accounted for under the equity method. The following tables present the Company’s investments in unconsolidated ventures as of September 30, 2017 and December 31, 2016 and activity for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Properties as of September 30, 2017(1)
Portfolio
 
Partner(2)
 
Acquisition Date
 
Ownership
 
Purchase Price(3)
 
Equity Investment(4)
 
Senior Housing Facilities
 
MOB
 
SNF
 
Hospitals
 
Total
Eclipse
 
Colony NorthStar/Formation Capital, LLC
 
May-2014
 
5.6
%
 
$
1,048,000

 
$
23,400

 
44

 

 
32

 

 
76

Envoy
 
Formation Capital, LLC/Safanad Management Limited
 
Sep-2014
 
11.4
%
 
145,000

 
5,000

 

 

 
14

 

 
14

Griffin - American
 
Colony NorthStar
 
Dec-2014
 
14.3
%
 
3,238,547

 
202,297

 
90

 
108

 
41

 
14

 
253

Espresso
 
Formation Capital, LLC/Safanad Management Limited
 
Jul-2015
 
36.7
%
 
870,000

 
55,146

 
6

 

 
152

 

 
158

Trilogy
 
Griffin-American Healthcare REIT III, Inc./Management Team of Trilogy Investors, LLC
 
Dec-2015
 
29.0
%
 
1,162,613

 
228,820

 
8

 

 
66

 

 
74

Subtotal
 
 
 
 
 
 
 
6,464,160

 
514,663

 
148

 
108

 
305

 
14

 
575

Operator Platform(5)
 
Jul-2017
 
20.0
%
 
2

 
2

 

 

 

 

 

Total
 
 
 
 
 
 
 
$
6,464,162

 
$
514,665

 
148

 
108

 
305

 
14

 
575

_______________________________________
(1)
Excludes 10 properties sold and three properties designated held for sale during the nine months ended September 30, 2017.
(2)
In January 2017, NorthStar Realty completed its previously announced merger with Colony and NSAM, with Colony NorthStar surviving the mergers.
(3)
Purchase price represents the actual or implied gross purchase price for the joint venture on the acquisition date. Purchase price is not adjusted for subsequent acquisitions or dispositions of interest.
(4)
Represents initial and subsequent contributions to the underlying joint venture through September 30, 2017. In January 2017 and September 2017, the Company funded additional capital contributions of $5.3 million and $3.0 million, respectively, into the Trilogy joint venture. The additional fundings related to certain business initiatives, including the acquisition of additional senior housing and skilled nursing facilities and repayment of certain outstanding obligations.
(5)
Represents investment in Solstice Senior Living, LLC (“Solstice”). In July 2017, the Company commenced the transition of operations of the Winterfell portfolio from the current manager, Holiday AL Management Sub, LLC, an affiliate of Holiday Retirement, to a new manager, Solstice. Solstice is a newly formed joint venture between affiliates of Integral Senior Living, LLC, a leading management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and the Company, which owns 20.0%. The Company completed the transition in November 2017.
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Carrying Value
 
 
 
 
Depreciation, Amortization Expense & Transaction Costs
 
 
 
 
 
Depreciation, Amortization Expense & Transaction Costs
 
 
 
 
 
 
Portfolio
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
September 30, 2017 (Unaudited)(1)
 
December 31, 2016(2)
Eclipse
 
$
(776
)
 
$
(442
)
 
$
581

 
$
123

 
$
(450
)
 
$
496

 
$
13,761

 
$
15,932

Envoy
 
247

 
(2
)
 
248

 
(2
)
 
(1
)
 

 
6,389

 
6,398

Griffin - American
 
(1,261
)
 
(3,605
)
 
1,216

 
(2,109
)
 
(4,782
)
 
3,792

 
134,356

 
144,629

Espresso
 
(16,609
)
(3) 
(1,157
)
 

 
283

 
(1,070
)
 
1,789

 
6,787

 
29,353

Trilogy
 
(158
)
 
(4,374
)
 

 
(13,899
)
 
(17,764
)
 

 
167,656

 
164,222

Subtotal
 
(18,557
)
 
(9,580
)
 
2,045

 
(15,604
)
 
(24,067
)
 
6,077

 
328,949

 
360,534

Operator Platform(4)
 

 

 

 

 

 

 
2

 

Total
 
$
(18,557
)
 
$
(9,580
)
 
$
2,045

 
$
(15,604
)
 
$
(24,067
)
 
$
6,077

 
$
328,951

 
$
360,534

_______________________________________
(1)
Includes $1.3 million, $0.4 million, $13.4 million, $7.6 million and $9.8 million of capitalized acquisition costs for the Company’s investments in the Eclipse, Envoy, Griffin-American, Espresso and Trilogy joint ventures, respectively.
(2)
Includes $1.3 million, $0.4 million, $13.4 million, $7.6 million and $9.3 million of capitalized acquisition costs for the Company’s investments in the Eclipse, Envoy, Griffin-American, Espresso and Trilogy joint ventures, respectively.
(3)
Includes a loan loss reserve recorded by the joint venture, of which the Company’s proportionate share totaled $15.8 million. Refer to Credit Losses and Impairment on Investments in Note 2, “Summary of Significant Accounting Policies” for additional discussion.

26




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(4)
Represents investment in Solstice. For the three and nine months ended September 30, 2017, the Company’s investment in Solstice did not generate equity in earnings (losses).
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
 
 
Depreciation, Amortization Expense & Transaction Costs
 
 
 
 
 
Depreciation, Amortization Expense & Transaction Costs
 
 
Portfolio
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
Equity in Earnings (Losses)
 
 
Cash Distributions
Eclipse
 
$
(1,186
)
 
$
(1,337
)
 
$
985

 
$
418

 
$
(1,346
)
 
$
1,478

Envoy
 
419

 
(2
)
 
427

 
(311
)
 
177

 

Griffin - American
 
(5,795
)
 
(10,789
)
 
6,913

 
(8,324
)
 
(14,359
)
 
9,373

Winterfell(1)
 

 

 

 
1,423

 

 
591

Espresso
 
(19,258
)
(2) 
(3,545
)
 
3,307

 
(1,102
)
 
(2,823
)
 
5,028

Trilogy
 
(5,414
)
 
(15,064
)
 

 
(39,177
)
 
(49,684
)
 

Total
 
$
(31,234
)
 
$
(30,737
)
 
$
11,632

 
$
(47,073
)
 
$
(68,035
)
 
$
16,470

_______________________________________
(1)
In March 2016, the Company acquired NorthStar Realty’s 60.0% interest in the Winterfell JV. The transaction was approved by the Company’s board of directors, including all of its independent directors, and the purchase price was supported by an independent third-party appraisal for the Winterfell portfolio. The Company originally acquired a 40.0% equity interest in the Winterfell JV in May 2015. The Company accordingly now owns 100.0% of the equity in the Winterfell portfolio as of March 1, 2016 and consolidates the portfolio.
(2)
Includes a loan loss reserve recorded by the joint venture, of which the Company’s proportionate share totaled $15.8 million. Refer to Credit Losses and Impairment on Investments in Note 2, “Summary of Significant Accounting Policies” for additional discussion.
Divestitures by Joint Ventures
The Griffin-American joint venture sold 35 MOBs in December 2016 and one MOB in January 2017 for $782.5 million. The Company’s proportionate share of net proceeds generated from the sale after repayment of debt totaled $13.5 million, of which $0.5 million was received related to the sale in January 2017. The Company’s proportionate share of realized gains recognized from this sale was $1.2 million.
Summarized Financial Data
The Company evaluates whether disclosure of summarized financial statement information is required for any individually significant investment in unconsolidated ventures and determined one investment to be significant for the nine months ended September 30, 2017. The balance sheets as of September 30, 2017 and December 31, 2016 and statements of operations for the three and nine months ended September 30, 2017 and 2016 for the Espresso unconsolidated venture are as follows (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
771,821

 
$
858,107

 
Total revenues
 
$
26,021

 
$
23,783

 
$
74,556

 
$
70,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
Net income (loss)
 
$
(45,283
)
 
$
773

 
$
(52,367
)
 
$
767

Total liabilities
 
$
773,631

 
$
804,013

 
 
 
 
 
 
 
 
 
 
Equity
 
(1,810
)
 
54,094

 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
771,821

 
$
858,107

 
 
 
 
 
 
 
 
 
 
5.
Real Estate Debt Investments
The following table presents one debt investment as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)

December 31, 2016
 
 
Asset Type:

Principal
Amount
 
Carrying
Value

Carrying
Value
 
Fixed Rate

Unlevered Current Yield
Mezzanine loan(1)

$
75,000

 
$
74,626

 
$
74,558

 
10.0
%
 
10.3
%
_______________________________________
(1)
Loan has a final maturity date of January 30, 2021.

27




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Credit Quality Monitoring
Certain debt investments are secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its debt investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a debt investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality debt investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality debt investment that is not performing, which the Company defines as a loan in maturity default and/or past due at least 90 days on its contractual debt service payments, as a non-performing loan (“NPL”). The Company’s definition of an NPL may differ from that of other companies that track NPLs.
As of September 30, 2017, the Company’s debt investment was not performing in accordance with the contractual terms of its governing documents as a result of non-monetary defaults.  The Company’s debt investment is a mezzanine loan on a portfolio that has several sub-portfolios, two of which have experienced tenant lease defaults and currently have operator transitions in process.  The underlying tenant defaults resulted in defaults under the senior loans with respect to the applicable sub-portfolios, which in turn resulted in defaults under the mezzanine loan.  The Company is actively monitoring the actions of the senior lenders of each sub-portfolio and assessing our rights and remedies.  Subsequent to September 30, 2017, the Company is also actively monitoring other potential operator transitions that would impact the mezzanine loan and continues to assess the collectability of principal and interest. As of September 30, 2017, contractual debt service on the Company’s mezzanine loan has been paid in accordance with contractual terms.  As of September 30, 2017, the Company expects to receive full payment of contractual principal and interest and, accordingly, the debt investment was categorized as a performing loan.
For the nine months ended September 30, 2017, the debt investment contributed 100.0% the Company’s interest income on debt investments as presented on the consolidated statement of operations.
6.
Healthcare-Related Securities
In October 2016, the Company purchased the Class B certificates in a $575.1 million securitization trust (Freddie Mac 2016-KS06 Mortgage Trust), which is secured by a pool of 41 mortgage loans related to senior housing facilities. The securitization trust issued $517.6 million of permanent, non-recourse, investment grade securitization bonds, or Class A certificates, which were purchased by unrelated third parties, and $57.5 million of subordinate Class B certificates which were purchased by the Company at a discount to par of $27.0 million, or 47.0%, and have a fixed coupon of 4.47% and produce a bond equivalent yield of 13.1%.
The Company is the securitization trust’s directing certificate holder and has the ability to appoint and replace the special servicer on a majority of the mortgage loans. The remaining mortgage loans relate to properties in which the Company has an equity interest and therefore the Company is not the directing certificate holder. As such, U.S. GAAP requires the Company to consolidate the assets, liabilities, income and expenses of the securitization trust as an Investing VIE. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on Investing VIEs.
Other than the securities represented by the Company’s Class B certificates, the Company does not have any claim to the assets or exposure to the liabilities of the securitization trust. The original issuer, an unrelated third party, guarantees the interest and principal payments related to the investment grade securitization bonds in the securitization trust, therefore these obligations do not have any recourse to the general credit of the Company as the consolidator of the securitization trust. The Company’s maximum exposure to loss would not exceed the carrying value of its retained investment in the securitization trust, or the Class B certificates.

28




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table presents the assets and liabilities recorded on the consolidated balance sheets attributable to the securitization trust as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
Assets
 
 
 
 
Senior housing mortgage loans held in a securitization trust, at fair value
 
$
552,087

 
$
553,707

Receivables
 
2,133

 
2,141

Total assets
 
$
554,220

 
$
555,848

Liabilities
 
 
 
 
Senior housing mortgage obligations issued by a securitization trust, at fair value
 
$
520,205

 
$
522,933

Accounts payable and accrued expenses
 
1,926

 
1,934

Total liabilities
 
$
522,131

 
$
524,867

As of September 30, 2017, the senior housing mortgage loans and the related mortgage obligations held in the securitization trust had an unpaid principal balance of $571.5 million and $513.9 million, respectively.
The Company elected the fair value option to measure the assets and liabilities of the securitization trust, which requires that changes in valuations of the securitization trust be reflected in the Company’s consolidated statements of operations.
The difference between the carrying values of the senior housing mortgage loans held in the securitization trust and the carrying value of the securitized mortgage obligations was $31.9 million and $30.8 million as of September 30, 2017 and December 31, 2016, respectively, and approximates the fair value of the Company’s underlying investment in Class B certificates of the securitization trust. Refer to Note 12, “Fair Value” for a description of the valuation techniques used to measure fair value of assets and liabilities of the Investing VIE.
The following table presents the activity recorded for the three and nine months ended September 30, 2017 related to the consolidated securitization trust on the consolidated statement of operations. The Company generated net income of $1.0 million and $3.0 million from its investment in Class B certificates for the three and nine months ended September 30, 2017, respectively.

 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Statement of Operations
 
 
 
 
Interest income on mortgage loans held in a securitized trust
 
$
6,536

 
$
19,503

Interest expense on mortgage obligations issued by a securitization trust
 
(4,919
)
 
(14,662
)
Net interest income
 
1,617

 
4,841

Other expenses related to securitization trust
 
981

 
2,947

Unrealized gain (loss) on senior housing mortgage loans and debt held in securitization trust, net
 
384

 
1,108

Net income attributable to NorthStar Healthcare Income, Inc. common stockholders
 
$
1,020

 
$
3,002


For the nine months ended September 30, 2017, the consolidated securitization trust contributed 100.0% the Company’s interest income on mortgage loans held in a securitized trust as presented on the consolidated statement of operations.

29




NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

7.
Borrowings
The following table presents the Company’s borrowings as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
September 30, 2017 (Unaudited)
 
December 31, 2016
 
Recourse vs. Non-Recourse
 
Final
Maturity
 
Contractual
Interest Rate(1)
 
Principal
Amount(2)
 
Carrying
Value(2)
 
Principal
Amount
(2)
 
Carrying
Value
(2)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
 
 
Peregrine Portfolio(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Dec-19
 
LIBOR + 3.50%
 
$
23,577

 
$
23,233

 
$
24,000

 
$
23,528

Watermark Aqua Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Denver, CO
Non-recourse
 
Feb-21
 
LIBOR + 2.92%
 
21,283

 
21,130

 
21,500

 
21,309

Frisco, TX
Non-recourse
 
Mar-21
 
LIBOR + 3.04%
 
19,837

 
19,701

 
20,000

 
19,830

Milford, OH
Non-recourse
 
Sep-26
 
LIBOR + 2.68%
 
18,760

 
18,198

 
18,760

 
18,142

Rochester Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Rochester, NY
Non-recourse
 
Feb-25
 
4.25%
 
21,589

 
21,455

 

 

Rochester, NY(4)
Non-recourse
 
Aug-27
 
LIBOR + 2.34%
 
101,224

 
100,036

 

 

Arbors Portfolio(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Feb-25
 
3.99%
 
92,814

 
91,255

 
93,750

 
91,992

Watermark Fountains Portfolio(6)
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Jun-22
 
3.92%
 
410,000

 
406,253

 
410,000

 
405,564

Winterfell Portfolio(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Jun-25
 
4.17%
 
648,211

 
623,943

 
648,211

 
620,617

Bonaventure Portfolio(8)
 
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Feb-27
 
4.66%
 
72,466

 
71,752

 

 

Subtotal mortgage notes payable, net
 
 
 
 
 
1,429,761