10-Q 1 nshi0630201810-q.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 June 30, 2018

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.)
590 Madison Avenue, 34th 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, 187,089,402 shares outstanding as of August 9, 2018.
 






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. 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;
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 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 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;
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, 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;
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;
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;
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;
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;
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;

3





the performance of our advisor, our sponsor and their affiliates;
the impact of our sponsor’s merger with NorthStar Realty Finance Corp. and Colony Capital, Inc.;
our advisor’s and its affiliates’ ability to attract and retain qualified personnel to support our 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, and various potential conflicts of interest in our relationship with our sponsor;
changes in our business or investment strategy;
any failure in our advisor’s and its affiliates’ due diligence to identify relevant facts during our underwriting process or otherwise;
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;
illiquidity of properties or debt investments in our portfolio;
environmental compliance costs and liabilities;
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;
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;
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.
Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the United States 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, 2017 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.



4





PART I. Financial Information
Item 1.    Financial Statements
NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Assets
 
 
 

Cash and cash equivalents
$
52,214


$
50,046

Restricted cash
22,521


30,442

Operating real estate, net
1,823,496


1,852,428

Investments in unconsolidated ventures
310,117

 
325,582

Real estate debt investments, net
74,699


74,650

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

 
545,048

Assets held for sale
11,640

 

Receivables, net
15,034


18,363

Deferred costs and intangible assets, net
57,746


84,720

Other assets
13,456


17,474

Total assets(1)
$
2,380,923


$
2,998,753

 
 
 
 
Liabilities
 
 
 
Mortgage and other notes payable, net
$
1,481,791

 
$
1,487,480

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

 
512,772

Due to related party
2,930

 
1,046

Escrow deposits payable
4,785

 
3,817

Distribution payable
5,192

 
10,704

Accounts payable and accrued expenses
26,742

 
33,478

Other liabilities
7,293

 
4,657

Total liabilities(1)
1,528,733


2,053,954

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 June 30, 2018 and December 31, 2017

 

Common stock, $0.01 par value, 400,000,000 shares authorized, 187,466,049 and 186,709,303 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
1,874

 
1,867

Additional paid-in capital
1,688,734

 
1,681,040

Retained earnings (accumulated deficit)
(843,162
)
 
(744,090
)
Accumulated other comprehensive income (loss)
(1,202
)
 
(316
)
Total NorthStar Healthcare Income, Inc. stockholders’ equity
846,244


938,501

Non-controlling interests
5,946

 
6,298

Total equity
852,190


944,799

Total liabilities and equity
$
2,380,923


$
2,998,753

_______________________________________
(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 June 30, 2018, the Operating Partnership includes $0.7 billion and $0.5 billion 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.

5





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Property and other revenues
 
 
 
 
 
 
 
Resident fee income
$
32,956

 
$
31,080

 
$
65,764

 
$
59,827

Rental income
38,891

 
36,561

 
79,640

 
73,682

Other revenue
930

 
953

 
1,678

 
1,530

Total property and other revenues
72,777

 
68,594

 
147,082

 
135,039

Net interest income
 
 
 
 
 
 
 
Interest income on debt investments
1,921

 
1,918

 
3,820

 
3,815

Interest income on mortgage loans held in a securitized trust

 
6,486

 
5,149

 
12,967

Interest expense on mortgage obligations issued by a securitization trust

 
(4,866
)
 
(3,824
)
 
(9,743
)
Net interest income
1,921

 
3,538

 
5,145

 
7,039

Expenses
 
 
 
 
 
 
 
Real estate properties - operating expenses
47,731

 
38,234

 
94,157

 
75,545

Interest expense
17,693

 
14,764

 
34,731

 
28,792

Other expenses related to securitization trust

 
990

 
811

 
1,966

Transaction costs
41

 
1,946

 
804

 
2,964

Asset management and other fees - related party
5,951

 
8,437

 
11,894

 
19,417

General and administrative expenses
3,424

 
2,848

 
7,111

 
5,351

Depreciation and amortization
27,494

 
19,851

 
56,314

 
44,769

Impairment loss
2,456

 

 
5,239

 

Total expenses
104,790

 
87,070

 
211,061

 
178,804

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

 
358

 

 
724

Realized gain (loss) on investments and other

 
90

 
3,495

 
118

Income (loss) before equity in earnings (losses) of unconsolidated ventures and income tax benefit (expense)
(30,092
)
 
(14,490
)
 
(55,339
)
 
(35,884
)
Equity in earnings (losses) of unconsolidated ventures
(4,098
)
 
(7,055
)
 
(12,724
)
 
(12,677
)
Income tax benefit (expense)
(15
)
 
(15
)
 
(30
)
 
(41
)
Net income (loss)
(34,205
)
 
(21,560
)
 
(68,093
)
 
(48,602
)
Net (income) loss attributable to non-controlling interests
111

 
(33
)
 
331

 
(70
)
Net income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders
$
(34,094
)
 
$
(21,593
)
 
$
(67,762
)
 
$
(48,672
)
Net income (loss) per share of common stock, basic/diluted
$
(0.18
)
 
$
(0.12
)
 
$
(0.36
)
 
$
(0.26
)
Weighted average number of shares of common stock outstanding, basic/diluted
187,326,437

 
186,392,469

 
187,200,347

 
186,023,359

Distributions declared per share of common stock
0.08

 
0.17

 
0.17

 
0.34












Refer to accompanying notes to consolidated financial statements.

6





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Net income (loss)
$
(34,205
)
 
$
(21,560
)
 
$
(68,093
)
 
$
(48,602
)
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments related to investment in unconsolidated venture
(1,629
)
 
2,601

 
(886
)
 
1,580

 
Total other comprehensive income (loss)
(1,629
)
 
2,601

 
(886
)
 
1,580

 
Comprehensive income (loss)
(35,834
)
 
(18,959
)
 
(68,979
)
 
(47,022
)
 
Comprehensive (income) loss attributable to non-controlling interests
111

 
(33
)
 
331

 
(70
)
 
Comprehensive income (loss) attributable to NorthStar Healthcare Income, Inc. common stockholders
$
(35,723
)
 
$
(18,992
)
 
$
(68,648
)
 
$
(47,092
)
 





































Refer to accompanying notes to consolidated financial statements.

7





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, 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

 

 
99

 

 

 
99

 

 
99

Non-controlling interests - contributions

 

 

 

 

 

 
67

 
67

Non-controlling interests - distributions

 

 

 

 

 

 
(76
)
 
(76
)
Shares redeemed for cash
(2,090
)
 
(20
)
 
(19,227
)
 

 

 
(19,247
)
 

 
(19,247
)
Distributions declared

 

 

 
(62,258
)
 

 
(62,258
)
 

 
(62,258
)
Proceeds from distribution reinvestment plan
3,701

 
37

 
33,639

 

 

 
33,676

 

 
33,676

Other comprehensive income (loss)

 

 

 

 
1,580

 
1,580

 

 
1,580

Net income (loss)

 

 

 
(48,672
)
 

 
(48,672
)
 
70

 
(48,602
)
Balance as of June 30, 2017 (Unaudited)
186,666

 
$
1,867

 
$
1,680,990

 
$
(591,446
)
 
$
392

 
$
1,091,803

 
$
5,410

 
$
1,097,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2017
186,709

 
$
1,867

 
$
1,681,040

 
$
(744,090
)
 
$
(316
)
 
$
938,501

 
$
6,298

 
$
944,799

Share-based payment of advisor asset management fees
588

 
6

 
4,994

 

 

 
5,000

 

 
5,000

Issuance and amortization of equity-based compensation
21

 

 
84

 

 

 
84

 

 
84

Non-controlling interests - contributions

 

 

 

 

 

 
289

 
289

Non-controlling interests - distributions

 

 

 

 

 

 
(310
)
 
(310
)
Shares redeemed for cash
(2,051
)
 
(21
)
 
(16,052
)
 

 

 
(16,073
)
 

 
(16,073
)
Distributions declared

 

 

 
(31,310
)
 

 
(31,310
)
 

 
(31,310
)
Proceeds from distribution reinvestment plan
2,199

 
22

 
18,668

 

 

 
18,690

 

 
18,690

Other comprehensive income (loss)

 

 

 

 
(886
)
 
(886
)
 

 
(886
)
Net income (loss)

 

 

 
(67,762
)
 

 
(67,762
)
 
(331
)
 
(68,093
)
Balance as of June 30, 2018 (Unaudited)
187,466

 
$
1,874

 
$
1,688,734

 
$
(843,162
)
 
$
(1,202
)
 
$
846,244

 
$
5,946

 
$
852,190







Refer to accompanying notes to consolidated financial statements.

8





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(68,093
)
 
$
(48,602
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Equity in (earnings) losses of unconsolidated ventures
12,724

 
12,677

Depreciation and amortization
56,314

 
44,769

Impairment loss
5,239

 

Amortization of below market debt
1,453

 
1,283

Straight-line rental income, net and amortization of lease inducements
876

 
(963
)
Amortization of premium/accretion of discount on investments
(49
)
 
(44
)
Amortization of deferred financing costs
1,024

 
796

Amortization of equity-based compensation
84

 
99

Realized (gain) loss on investments and other
(3,495
)
 
(118
)
Unrealized (gain) loss on senior housing mortgage loans and debt held in securitization trust, net

 
(724
)
Allowance for uncollectible accounts
585

 
651

Distributions of cumulative earnings from unconsolidated ventures

 
179

Changes in assets and liabilities:
 
 
 
Receivables
2,772

 
(902
)
Other assets
2,329

 
281

Due to related party
6,884

 
414

Escrow deposits payable
969

 
19

Accounts payable and accrued expenses
(6,952
)
 
1,728

Other liabilities
598

 
(127
)
Net cash provided by (used in) operating activities
13,262

 
11,416

Cash flows from investing activities:
 
 
 
Acquisition of operating real estate investments

 
(114,827
)
Improvement of operating real estate investments
(13,732
)
 
(9,330
)
Sale of healthcare-related securities
35,771

 

Investment in unconsolidated ventures
(4,470
)
 
(6,045
)
Distributions in excess of cumulative earnings from unconsolidated ventures
6,325

 
9,408

Escrow deposits payable

 

Other assets

 
(2,913
)
Net cash provided by (used in) investing activities
23,894

 
(123,707
)
Cash flows from financing activities:
 
 
 
Borrowing from mortgage notes

 
72,466

Repayment of mortgage notes
(8,105
)
 
(1,019
)
Payment of deferred financing costs
(284
)
 
(765
)
Shares redeemed for cash
(16,073
)
 
(19,247
)
Payments under capital leases
(294
)
 

Distributions paid on common stock
(36,822
)
 
(62,481
)
Proceeds from distribution reinvestment plan
18,690

 
33,676

Contributions from non-controlling interests
289

 
67

Distributions to non-controlling interests
(310
)
 
(76
)
Net cash provided by (used in) financing activities
(42,909
)
 
22,621

Net increase (decrease) in cash, cash equivalents and restricted cash
(5,753
)
 
(89,670
)
Cash, cash equivalents and restricted cash-beginning of period
80,488

 
251,892

Cash, cash equivalents and restricted cash-end of period
$
74,735

 
$
162,222


Refer to accompanying notes to consolidated financial statements.

9





NORTHSTAR HEALTHCARE INCOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Accrued distribution payable
$
5,192

 
$
10,356

Accrued capital expenditures
623

 

Reclassification of assets held for sale
14,423

 

Issuance of common stock as payment for asset management fees
5,000

 

Deconsolidation of securitization trust (VIE asset/liability)
512,772

 

Acquisition of operating real estate under capital lease obligations
1,921

 

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

 
1,355

Debt financing provided by seller for investment acquisition

 
3,500










































Refer to accompanying notes to consolidated financial statements.


10





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.
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 Company’s 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 June 30, 2018 and December 31, 2017. 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 June 30, 2018, 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 completed its initial public offering (the “Initial Offering”) on February 2, 2015 by raising gross proceeds of $1.1 billion, including 108.6 million shares issued in its initial primary offering (the “Initial Primary Offering”) and 2.0 million shares issued pursuant to its distribution reinvestment plan (the “DRP”). In addition, the Company completed its follow-on offering (the “Follow-On Offering”) on January 19, 2016 by raising gross proceeds of $700.0 million, including 64.9 million shares issued in its follow-on primary offering (the “Follow-on Primary Offering”) and 4.2 million shares issued pursuant to the DRP. The Company refers to its Initial Primary Offering and its Follow-on Primary Offering collectively as the “Primary Offering” and its Initial Offering and Follow-On Offering collectively as the “Offering.” In December 2015, the Company registered an additional 30.0 million shares to be offered pursuant to the DRP and continues to offer such shares. From inception through August 9, 2018, the Company raised total gross proceeds of $2.0 billion, including $217.8 million in DRP proceeds.
The Company is externally managed and has no employees. The Company is sponsored by Colony Capital, Inc. (NYSE: CLNY) (“Colony Capital” or the “Sponsor”), which was formed as a result of the mergers of NorthStar Asset Management Group Inc.(“NSAM”), its prior sponsor, with Colony Capital, Inc. (“Colony”) and NorthStar Realty Finance Corp. (“NorthStar Realty”) in January 2017. Effective June 25, 2018, the Sponsor changed its name from Colony NorthStar, Inc. to Colony Capital, Inc. and its ticker symbol from “CLNS” to “CLNY.” Following the mergers, the Sponsor became an internally-managed equity REIT, with a diversified real estate and investment management platform.
Colony Capital 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. The Company’s advisor, CNI NSHC Advisors, LLC (the “Advisor”), is a subsidiary of Colony Capital and manages its day-to-day operations pursuant to an advisory agreement.
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

11




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

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, 2017, which was filed with the SEC on April 2, 2018.
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.
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 June 30, 2018, 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 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 June 30, 2018 is $616.7 million related to such consolidated VIEs. Included in mortgage and other notes payable, net on the Company’s consolidated balance sheet as of June 30, 2018 is $477.2 million, collateralized by the real estate assets of the related consolidated VIEs.

12




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

Investing VIEs
The Company’s investment in a securitization financing entity (“Investing VIE”) consisted 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 December 31, 2017, the Company held Class B certificates in an Investing VIE for which the Company had determined it was the primary beneficiary because it had the power to direct the activities that most significantly impact the economic performance of the securitization trust. The Company’s Class B certificates, which represented the retained interest and related interest income were 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 were presented in the consolidated financial statements of the Company. As a result, although the Company legally owned the Class B certificates only, U.S. GAAP required 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 presented 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.
In March 2018, the Company sold the Class B certificates of its consolidated Investing VIE, relinquishing its rights as directing certificate holder. As a result, the Company was no longer deemed the primary beneficiary of the securitization trust and, accordingly, did not present the assets or liabilities of the securitization trust on its consolidated balance sheets as of June 30, 2018. The Company has presented the income and expenses of the securitization trust on its consolidated statements of operations for the period that the Company owned the Class B certificates and was considered the primary beneficiary in 2018.
Unconsolidated VIEs
As of June 30, 2018, the Company identified unconsolidated VIEs related to its real estate equity investments with a carrying value of $310.1 million. The Company’s maximum exposure to loss as of June 30, 2018 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 of these VIEs and, accordingly, they are not consolidated in the Company’s financial statements as of June 30, 2018. The Company did not provide financial support to its unconsolidated VIEs during the six months ended June 30, 2018, except for funding its proportionate share of capital call contributions. As of June 30, 2018, 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

13




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

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 Company may elect the fair value option.
The Company will account for an investment under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. 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.
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.
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 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 adopted guidance issued by the FASB allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”) it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable.

14




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

Cash, Cash Equivalents and Restricted Cash
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 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).
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets to the total of such amounts as reported on the consolidated statements of cash flows (dollars in thousands):
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Cash and cash equivalents
 
$
52,214

 
$
50,046

Restricted cash
 
22,521

 
30,442

Total cash, cash equivalents and restricted cash
 
$
74,735

 
$
80,488

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, fixtures, and equipment, 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
 
30 to 50 years
Building improvements
 
Lesser of the useful life or remaining life of the building
Land improvements
 
9 to 15 years
Tenant improvements
 
Lesser of the useful life or remaining term of the lease
Furniture, fixtures and equipment
 
5 to 14 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 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.
The Company may from time to time enter into capital leases in order to finance tangible assets, such as equipment, at properties. A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75.0% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90.0% of the fair value of the leased asset. Assets under capital leases are amortized over either the useful life of the asset or lease term, as appropriate, on a straight line basis. The present value of the related lease payments is recorded as a debt obligation.
The Company has entered into capital leases for equipment totaling $2.7 million which is included within operating real estate on the Company’s consolidated balance sheets. The leased equipment is amortized on a straight line basis over seven years. The

15




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

following table presents the future minimum lease payments under capital leases and the present value of the minimum lease payments as of June 30, 2018, which is included in other liabilities on the Company’s consolidated balance sheets (dollars in thousands):
July 1 to December 31, 2018
 
$
320

Years Ending December 31:
 
 
2019
 
552

2020
 
513

2021
 
474

2022
 
382

Thereafter
 
1

Total minimum lease payments
 
$
2,242

Less: Amount representing interest
 
$
(204
)
Present value of minimum lease payments
 
$
2,038

The weighted average interest rate related to the lease obligations is 5.3% with a final maturity date in January 2023.
Assets Held For Sale
The Company classifies certain long-lived assets as held for sale once the criteria, as defined by U.S. GAAP, have been met and are expected to sell within one year. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value minus cost to sell, with any write-down recorded to impairment loss on the consolidated statements of operations. Depreciation and amortization is not recorded for assets classified as held for sale. As of June 30, 2018, the Company has one of its operating real estate properties classified as held for sale, as presented on its consolidated balance sheets.
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) on available for sale securities are recorded as a component of accumulated OCI in the consolidated statements of equity. However, the Company has elected the fair value option for its available for sale security, and as a result, any unrealized gains (losses) are recorded in unrealized gain (loss) on senior housing mortgage loans and debt held in securitization trust, net in the consolidated statements of operations. 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

16




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

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. In 2018 to date, the Company reclassified an operating property as held for sale, which is part of a reporting unit with goodwill. The Company determined that the carrying value of the property was in excess of its fair value, which resulted in the partial impairment of goodwill totaling $0.7 million, proportionate to the fair value of the reporting unit.
Identified intangible assets are recorded in deferred costs and intangible assets, net on the consolidated balance sheets. The following table presents a summary of deferred costs and intangible assets, net as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Deferred costs and intangible assets, net:
 
 
 
 
In-place lease value, net
 
$
35,155

 
$
61,593

Goodwill
 
21,387

 
22,112

Other intangible assets
 
380

 
380

Subtotal intangible assets
 
56,922

 
84,085

Deferred costs, net
 
824

 
635

Total
 
$
57,746

 
$
84,720

The Company recorded $12.7 million and $26.5 million of in-place lease and deferred cost amortization expense for the three and six months ended June 30, 2018, respectively. The Company recorded $9.9 million and $20.1 million of in-place lease and deferred cost amortization expense for the three and six months ended June 30, 2017, respectively
The following table presents future amortization of in-place lease value and deferred costs (dollars in thousands):
July 1 to December 31, 2018
 
$
20,737

Years Ending December 31:
 
 
2019
 
8,427

2020
 
2,093

2021
 
1,871

2022
 
595

Thereafter
 
2,256

Total
 
$
35,979

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. In December 2017, the Company’s advisory agreement was amended and effective January 1, 2018, the Advisor no longer receives an acquisition fee in connection with the Company’s acquisitions of real estate properties or debt investments. For the six months ended June 30, 2018, total acquisition fees and expenses incurred to third parties 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

17




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

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 June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Other assets:
 
 
 
 
Healthcare facility regulatory reserve deposit
 
$
6,000

 
$
6,000

Remainder interest in condominium units(1)
 
3,704

 
3,704

Prepaid expenses
 
2,697

 
3,352

Lease inducements, net
 

 
1,691

Utility deposits
 
359

 
503

Construction deposit
 

 
993

Other
 
696

 
1,231

Total
 
$
13,456

 
$
17,474

_______________________________________
(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 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.

18




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

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 loss in the consolidated statements of operations. In 2018 to date, the Company has recognized impairment of $4.5 million on consolidated operating real estate and assets held for sale, excluding impairment of goodwill. The impairment recognized in 2018 to date includes $2.1 million for a consolidated operating property, which was designated held for sale and reduced the carrying value of the property to its estimated fair value, as well as $2.4 million for a consolidated net lease property, as a result of continuing deteriorating operating results of the tenant. As of December 31, 2017, the Company had recognized an impairment of $5.0 million related to the same consolidated net lease property.
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.
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 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 June 30, 2018, 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

19




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

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 June 30, 2018, certain of the unconsolidated ventures in which the Company invests have recorded impairments and the Company has concluded that no additional impairment of its investments in unconsolidated ventures is required. The Company’s proportionate ownership share of a loan loss reserve within the Espresso portfolio totaled $11.4 million and was recognized through equity in earnings (losses) of unconsolidated ventures during the year ended December 31, 2017. 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 believed to be uncollectible. The cash flows deemed uncollectible 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.
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 and other 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.
As of June 30, 2018 and December 31, 2017, the Company had exposure to foreign currency through 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 expenses 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.

20




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

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 taxable REIT subsidiaries (“TRS”) 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 has a deferred tax asset, which as of June 30, 2018 totaled $10.5 million and continues to have a full valuation allowance recognized, as there are no changes in the facts and circumstances to indicate that the Company should release the valuation allowance. 
The Company recorded an income tax expense of approximately $15,000 and $30,000 for the three and six months ended June 30, 2018, respectively. The Company recorded an income tax expense of approximately $15,000 and $41,000 for the three and six months ended June 30, 2017, respectively.
Recent Accounting Pronouncements
Recently Adopted
Revenue Recognition—In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“New Revenue Recognition Standard”), 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 Company has adopted the New Revenue Recognition Standard on its required effective date of January 1, 2018 using the modified retrospective approach, and has applied the guidance to contracts not yet completed as of the date of adoption. The New Revenue Recognition 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 is the lessor for triple net and gross leases classified as operating leases in which rental income and tenant reimbursements are recorded. The revenue from these leases are scoped out of the New Revenue Recognition Standard guidance. All leases are accounted for under ASC 840 until the adoption of the new leasing guidance within ASC 842. Within resident fee income, the Company records room, care and other resident service revenue for operating healthcare properties. Such revenues include skilled nursing services provided at CCRCs, which were deemed to fall under the New Revenue Recognition Standard. These services are a series of distinct services satisfied over time and revenue is recognized monthly. There were no significant changes as a result of the New Revenue Recognition Standard.
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

21




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

fair value recorded as available-for-sale. The Company has adopted this guidance on its required effective date and it did not impact 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 has adopted this guidance and it did not 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 that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item of the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions on the balance sheet. The new guidance also requires disclosure of the nature of the restricted cash and restricted cash equivalents, similar to the existing requirements under Regulation S-X, however, it does not define restricted cash and restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018 and the required retrospective application of this new standard resulted in changes to the previously reported statement of cash flows as follows (dollars in thousands):
 
 
Six Months Ended June 30, 2017
Cash flow provided by (used in):
 
As Previously Reported
 
After Adoption of ASU 2016-18
Operating activities
 
$
11,039

 
$
11,416

Investing activities
 
(124,306
)
 
(123,707
)
Financing activities
 
25,804

 
22,621

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 adopted the standard on its required effective date of January 1, 2018. This guidance did not have a material impact 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 has adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach. Under the new standard, if the Company sells a partial interest in its real estate assets to non-customers or contributes real estate assets to unconsolidated ventures, and the Company retains a non-controlling interest in the asset, such transactions could result in a larger gain on sale.  The adoption of this standard could

22




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

have a material impact to the Company’s results of operations in a period if the Company sells a significant partial interest in a real estate asset. There were no such sales for the six months ended June 30, 2018.
Pending Adoption
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 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 expects to adopt the package of practical expedients under the guidance and the Company will not need to reassess whether any expired or expiring contracts contain leases; will not need to revisit lease classification for any expired or expiring leases; and will not need to reassess initial direct costs for any existing leases. In addition, the Company expects to adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of transfer is the same and the lease is classified an operating lease. The Company continues to assess the potential effect the adoption of this guidance will have 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 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.
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.
3.
Operating Real Estate
The following table presents operating real estate, net as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Land
 
$
237,340

 
$
239,580

Land improvements
 
21,785

 
21,908

Buildings and improvements
 
1,597,095

 
1,608,180

Tenant improvements
 
11,284

 
8,291

Construction in progress
 
11,764

 
5,376

Furniture, fixtures and equipment
 
86,452

 
83,017

Subtotal
 
1,965,720

 
1,966,352

Less: Accumulated depreciation
 
(142,224
)
 
(113,924
)
Operating real estate, net
 
$
1,823,496

 
$
1,852,428

Within the table above, buildings and improvements includes impairment totaling $7.4 million and $5.0 million as of June 30, 2018 and December 31, 2017, respectively, related to one of the Company’s consolidated net lease properties. Impairment recorded for the three and six months ended June 30, 2018 is included in impairment loss in the consolidated statements of operations.

23




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 June 30, 2018 and December 31, 2017 and activity for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Properties as of June 30, 2018(1)
Portfolio
 
Partner
 
Acquisition Date
 
Ownership
 
Purchase Price(2)
 
Equity Investment(3)
 
Senior Housing Facilities
 
MOB
 
SNF
 
Hospitals
 
Total
Eclipse
 
Colony Capital/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

 

 

 
12

 

 
12

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

 
206,143

 
91

 
108

 
41

 
14

 
254

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

 
55,146

 
6

 

 
150

 

 
156

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

 
233,290

 
8

 

 
67

 

 
75

Subtotal
 
 
 
 
 
 
 
6,464,160

 
522,979

 
149

 
108

 
302

 
14

 
573

Operator Platform(4)
 
Jul-2017
 
20.0
%
 
2

 
2

 

 

 

 

 

Total
 
 
 
 
 
 
 
$
6,464,162

 
$
522,981

 
149

 
108

 
302

 
14

 
573

_______________________________________
(1)
Excludes four properties sold during the six months ended June 30, 2018 and three properties designated as held for sale as of June 30, 2018.
(2)
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.
(3)
Represents initial and subsequent contributions to the underlying joint venture through June 30, 2018. During the six months ended June 30, 2018, the Company funded an additional capital contribution of $4.5 million into the Trilogy joint venture. The additional funding related to certain business initiatives, including the development of additional senior housing and SNFs.
(4)
Represents investment in Solstice Senior Living, LLC (“Solstice”). In November 2017, the Company completed the transition of operations of the Winterfell portfolio from the former manager, an affiliate of Holiday Retirement, to a new manager, Solstice. Solstice is a joint venture between affiliates of Integral Senior Living, LLC (“ISL”), a leading management company of ILF, ALF and MCF founded in 2000, which owns 80.0%, and the Company, which owns 20.0%.
 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Carrying Value
 
 
 
 
Select Revenues and Expenses, net(1)
 
 
 
 
 
Select Revenues and Expenses, net(1)
 
 
 
 
Portfolio
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
June 30, 2018 (Unaudited)(2)
 
December 31, 2017(2)
Eclipse
 
$
75

 
$
(442
)
 
$
191

 
$
(558
)
 
$
(993
)
 
$
116

 
$
12,777

 
$
13,143

Envoy
 
(366
)
 
(363
)
 

 
(5
)
 

 

 
4,670

 
5,037

Griffin - American
 
(1,843
)
 
(5,126
)
 
1,706

 
(2,417
)
 
(5,584
)
 
4,219

 
129,024

 
134,219

Espresso
 
(2,651
)
 
(3,794
)
 

 
(2,402
)
 
(4,305
)
 
1,334

 
(6,247
)
(3) 
5,308

Trilogy
 
640

 
(3,779
)
 
1,451

 
(1,673
)
 
(5,737
)
 

 
169,847

 
167,845

Subtotal
 
(4,145
)
 
(13,504
)
 
3,348

 
(7,055
)
 
(16,619
)
 
5,669

 
310,071

 
325,552

Operator Platform(4)
 
47

 

 
92

 

 

 

 
46

 
30

Total
 
$
(4,098
)
 
$
(13,504
)
 
$
3,440

 
$
(7,055
)
 
$
(16,619
)
 
$
5,669

 
$
310,117

 
$
325,582

_______________________________________
(1)
Represents the net amount of the Company’s proportionate share of the following revenues and expenses: straight-line rental income (expense), (above)/below market lease and in-place lease amortization, (above)/below market debt and deferred financing costs amortization, depreciation and amortization expense, acquisition fees and transaction costs, loan loss reserves, impairment, as well as unrealized and realized gain (loss) from sales of real estate and investments.
(2)
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.
(3)
As a result of a loan loss reserve recorded for a direct financing lease, which the Company’s proportionate share totaled $11.4 million, the Company’s investment in the Espresso joint venture has been reduced to a negative carrying value. Refer to “Credit Losses and Impairment on Investments” in Note 2, “Summary of Significant Accounting Policies” for further discussion.
(4)
Represents the Company’s investment in Solstice.

24




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

 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
 
 
 
Select Revenues and Expenses, net(1)
 
 
 
 
 
Select Revenues and Expenses, net(1)
 
 
Portfolio
 
Equity in Earnings (Losses)
 
 
Cash Distributions
 
Equity in Earnings (Losses)
 
 
Cash Distributions
Eclipse
 
$
80

 
$
(842
)
 
$
445

 
$
(410
)
 
$
(1,431
)
 
$
404

Envoy
 
(368
)
 
(364
)
 

 
172

 

 
179

Griffin - American
 
(1,887
)
 
(8,812
)
 
2,422

 
(4,534
)
 
(10,675
)
 
5,697

Espresso
 
(11,555
)
 
(13,686
)
 

 
(2,649
)
 
(7,068
)
 
3,307

Trilogy
 
898

 
(7,585
)
 
3,366

 
(5,256
)
 
(12,737
)
 

Subtotal
 
$
(12,832
)
 
$
(31,289
)
 
$
6,233

 
$
(12,677
)
 
$
(31,911
)
 
$
9,587

Operator Platform(2)
 
108

 

 
92

 

 

 

Total
 
$
(12,724
)
 
$
(31,289
)
 
$
6,325

 
$
(12,677
)
 
$
(31,911
)
 
$
9,587

_______________________________________
(1)
Represents the net amount of the Company’s proportionate share of the following revenues and expenses: straight-line rental income (expense), (above)/below market lease and in-place lease amortization, (above)/below market debt and deferred financing costs amortization, depreciation and amortization expense, acquisition fees and transaction costs, loan loss reserves, impairment, as well as unrealized and realized gain (loss) from sales of real estate and investments.
(2)
Represents the Company’s investment in Solstice.
5.
Real Estate Debt Investments
The following table presents the Company’s one debt investment as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
Carrying Value
 
 
Asset Type:

Principal Amount
 
June 30, 2018 (Unaudited)
 
December 31, 2017
 
Fixed Rate

Unlevered Current Yield
Mezzanine loan(1)

$
75,000

 
$
74,699

 
$
74,650

 
10.0
%
 
10.3
%
_______________________________________
(1)
Loan has a final maturity date of January 30, 2021.
Credit Quality Monitoring
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 June 30, 2018, the Company’s debt investment was not performing in accordance with the contractual terms of its governing documents.  The Company’s debt investment is a mezzanine loan on the Espresso portfolio that has several sub-portfolios, three 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 the Company’s rights and remedies.  The Company is also actively monitoring the operator transitions and continues to assess the collectability of principal and interest. As of June 30, 2018, contractual debt service has been paid in accordance with contractual terms and the Company expects to receive full payment of contractual principal and interest. Accordingly, the debt investment was categorized as a performing loan.
For the six months ended June 30, 2018, the debt investment contributed 100.0% of the Company’s interest income on debt investments as presented on the consolidated statement of operations.

25




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

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 with a weighted average maturity of 9.8 years at the time of the acquisition. 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%, producing a bond equivalent yield of 13.1%.
U.S. GAAP required 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.
In March 2018, the Company sold the Class B certificates of its consolidated Investing VIE and no longer presented the assets or liabilities of the entire securitization trust on its consolidated balance sheets as of June 30, 2018. The Company has presented the income and expenses of the entire securitization trust on its consolidated statements of operations for the period that the Company owned the Class B certificates in 2018. The Company recorded a gain of $3.5 million related to the sale of the Class B certificates in realized gain (loss) on investments and other on its consolidated statement of operations for the six months ended June 30, 2018.
The following table presents the assets and liabilities recorded on the consolidated balance sheets attributable to the securitization trust as of December 31, 2017 (dollars in thousands):
 
 
December 31, 2017
Assets
 
 
Senior housing mortgage loans held in a securitization trust, at fair value
 
$
545,048

Receivables
 
2,127

Total assets
 
$
547,175

Liabilities
 
 
Senior housing mortgage obligations issued by a securitization trust, at fair value
 
$
512,772

Accounts payable and accrued expenses
 
1,918

Total liabilities
 
$
514,690

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 $32.3 million as of December 31, 2017 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 six months ended June 30, 2018 and 2017 related to the securitization trust on the consolidated statements of operations (dollars in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Statements of Operations
 
 
 
 
 
 
 
 
Interest income on mortgage loans held in a securitized trust
 
$

 
$
6,486

 
$
5,149

 
$
12,967

Interest expense on mortgage obligations issued by a securitization trust
 

 
(4,866
)
 
(3,824
)
 
(9,743
)
Net interest income
 

 
1,620

 
1,325

 
3,224

Other expenses related to securitization trust
 

 
(990
)
 
(811
)
 
(1,966
)
Unrealized gain (loss) on senior housing mortgage loans and debt held in securitization trust, net
 

 
358

 

 
724

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

 
$
988

 
$
514

 
$
1,982

For the six months ended June 30, 2018, the consolidated securitization trust contributed 100.0% of the Company’s interest income on mortgage loans held in a securitized trust as presented on the consolidated statements of operations.

26




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 June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
 
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%
 
$
16,754

 
$
16,512

 
$
23,417

 
$
23,030

Watermark Aqua Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Denver, CO
Non-recourse
 
Feb-21
 
LIBOR + 2.92%
 
21,023

 
20,906

 
21,193

 
21,053

Frisco, TX
Non-recourse
 
Mar-21
 
LIBOR + 3.04%
 
19,601

 
19,498

 
19,755

 
19,630

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

 
18,252

 
18,760

 
18,216

Rochester Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Rochester, NY
Non-recourse
 
Feb-25
 
4.25%
 
21,150

 
21,022

 
21,444

 
21,312

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

 
100,110

 
101,224

 
100,061

Arbors Portfolio(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
Various locations
Non-recourse
 
Feb-25
 
3.99%
 
91,582

 
90,213

 
92,407

 
90,913

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

 
406,731

 
410,000

 
406,207

Various locations
Non-recourse
 
Jun-22
 
5.56%
 
75,401

 
74,776

 
75,401

 
74,776

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

 
626,107

 
648,211

 
624,656

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

 
71,809

 
72,466

 
71,771

Subtotal mortgage notes payable, net
 
 
 
 
 
1,496,172


1,465,936


1,504,278


1,471,625

Other notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
Oak Cottage
 
 
 
 
 
 
 
 
 
 
 
 
 
Santa Barbara, CA
Non-recourse
 
Feb-22
 
6.00%
 
3,500

 
3,500

 
3,500

 
3,500

Rochester Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Rochester, NY
Non-recourse
 
Aug-19
 
6.00%
 
12,355

 
12,355

 
12,355

 
12,355

Subtotal other notes payable, net
 
 
 
 
 
15,855

 
15,855

 
15,855

 
15,855

Total mortgage and other notes payable, net
 
 
 
 
 
$
1,512,027

 
$
1,481,791

 
$
1,520,133

 
$
1,487,480
</