NORTHSTAR HEALTHCARE INCOME, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included in Part I, Item 1. "Financial
Statements" and the risk factors in Part II, Item 1A. "Risk Factors." References
to "we," "us" or "our" refer to NorthStar Healthcare Income, Inc. and its
subsidiaries unless the context specifically requires otherwise.
Overview
We were 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 we define as assisted living, memory care, skilled nursing and independent
living facilities and continuing care retirement communities. We also invest in
other healthcare property types, including medical office buildings, hospitals,
rehabilitation facilities and ancillary healthcare services businesses. Our
investments are predominantly in the United States, but we also selectively make
international investments.
We were formed in  as a Maryland corporation and commenced
operations in . We elected to be taxed as a real estate investment
trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the
Internal Revenue Code, commencing with the taxable year ended .
We conduct our operations so as to continue to qualify as a REIT for U.S.
federal income tax purposes.
We completed our initial public offering, or our Initial Offering, on  by raising gross proceeds of $1.1 billion, including 108.6 million
shares issued in our initial primary offering, or our Initial Primary Offering,
and 2.0 million shares issued pursuant to our distribution reinvestment plan, or
our DRP. In addition, we completed our follow-on offering, or our Follow-On
Offering, on  by raising gross proceeds of $700.0 million,
including 64.9 million shares issued in our follow-on primary offering, or our
Follow-on Primary Offering, and 4.2 million shares issued pursuant to our DRP.
We refer to our Initial Primary Offering and our Follow-on Primary Offering
collectively as our Primary Offering and our Initial Offering and Follow-On
Offering collectively as our Offering. In , we registered an
additional 30.0 million shares to be offered pursuant to our DRP and continue to
offer such shares. From inception through , we raised total gross
proceeds of $2.0 billion, including $217.8 million in DRP proceeds.
We are externally managed and have no employees. We are sponsored by Colony
Capital, Inc. (NYSE: CLNY), or Colony Capital or our Sponsor, which was formed
as a result of the mergers of NorthStar Asset Management Group Inc., or NSAM,
our prior sponsor, with Colony Capital, Inc., or Colony, and NorthStar Realty
Finance Corp., or NorthStar Realty, in . Effective ,
the Sponsor changed its name from Colony NorthStar, Inc. to Colony Capital, Inc.
and its ticker symbol from "CLNS" to "CLNY." Following the mergers, our 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. As of , our Sponsor had $43.0 billion of assets under management, including Colony
Capital's balance sheet investments and third-party managed investments. Our
advisor, CNI NSHC Advisors, LLC, or our Advisor, is a subsidiary of Colony
Capital and manages our day-to-day operations pursuant to an advisory agreement.
2018 Highlights
Performance Summary
For the six months ended , the operating real estate in our
consolidated equity investment portfolios experienced a decline in performance,
on a same store basis, as compared to prior year results. More specifically,
senior housing operating performance was negatively impacted by the following:
•      Ongoing, industry-wide declines in occupancy and rate increases
       predominantly as a result of supply growth;

• Tightening labor markets and select statutory wage increases resulting in

expense increases for labor and benefits;

• Unfavorable seasonal conditions, driving higher costs for utilities and

maintenance;

• A particularly severe flu season, with the Center for Disease Control

(CDC) reporting an increase in the percentage of outpatient visits due to

Influenza-like Illness (ILI) that approached the peak seen in 2009-2010;

and

• Disruptions and related expenses due to operator transitions, particularly

for the Winterfell portfolio (transition completed in ) and

the Rochester portfolio (operator transition upon acquisition in 2017).

Elevated expenses and operational disruptions continue to impact operating

performance after completion of the transitions.



Similarly, the operating real estate in our unconsolidated equity investment
portfolios collectively experienced a decline in operational performance for the
six months ended . Our unconsolidated investments include
significant exposure to skilled nursing, which continues to experience
challenges in the face of regulatory uncertainties, a deteriorating payor mix
and

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lower average reimbursement rates, in addition to the labor market challenges
faced by the senior housing sector. In particular, our investments in the
Espresso portfolio experienced adverse impacts related to occupancy and rate
deterioration, which, in select instances, resulted in the need to execute
operator transitions. Further, cash distribution holdbacks in the Espresso
portfolio, and overall decreases in cash flow from our unconsolidated ventures,
continue to impact our liquidity position.
For additional information on financial results, refer to "-Results of
Operations."
Investments and Dispositions
•      In , we sold our investment in the Freddie Mac securitization,
       generating net proceeds of $35.8 million. We originally purchased the
       investment for $30.5 million.

• In , we executed a purchase and sale agreement for one of our

consolidated operating properties, a non-core asset within the Watermark

Fountains portfolio, for $12.0 million and expect the sale to close in the

third quarter of 2018.

• In , we contributed $4.5 million to the Trilogy portfolio for

       approved business initiatives, including senior housing campus
       development. During the six months ended  we received
       distributions from Trilogy totaling $3.4 million.

Liquidity, Capital and Dividends • In , we satisfied all post-closing obligations, including the

pledge of borrowing base assets, and now have $25.0 million of borrowing

availability under a corporate credit facility with Key Bank, or our

Corporate Facility. In addition, we amended our revolving line of credit

from an affiliate of our Sponsor, or our Sponsor Line, to extend the

maturity consistent with the Corporate Facility and make other conforming

changes to the events of default.

• In , we made a partial repayment to the Peregrine mortgage

       loan totaling $6.4 million, which released one property from the
       collateral pool and cured the outstanding non-monetary default.

• Our board of directors approved a daily cash distribution of $0.000924658

per share of common stock for each of the six months ended .

Portfolio

• In , we completed the transition of operations of the

Bonaventure portfolio from the former manager, an affiliate of Bonaventure

Senior Living, to a new manager, Avamere.

• Development and construction of the memory care facility adjacent to the

Pinebrook facility continued throughout 2018 to date, with a projected

completion date in the fourth quarter of 2018.

• During the first and second quarters of 2018, the Espresso portfolio

continued the process of transitioning operators within three of its

sub-portfolios. Through , one sub-portfolio has successfully

executed its operator transition plan, while a second sub-portfolio

transitioned 15 facilities between two new operators, refinanced existing

debt, and sold one operating facility.

• On a same store basis (which excludes properties purchased during 2017),

rental and resident fee income, net of operating expenses, of our

consolidated equity investment portfolios decreased to $21.5 million for

the three months ended as compared to $27.5 million for the

three months ended , and as compared to $25.1 million for the

three months ended . Declines in average occupancy, most

significantly in the Winterfell portfolio, were the primary driver of the

decrease.

• The Winterfell portfolio's occupancy decreased from an average of 88.2% in

the second quarter of 2017 and an average of 82.4% in the first quarter of

2018 to 78.6% in the second quarter of 2018. In , we began

the transition of management for the Winterfell portfolio to Solstice

Senior Living ("Solstice"). This portfolio represents 32 of the 49

communities that underwent tenant, manager and/or operator transitions

within our consolidated portfolios beginning in 2017 and continuing into

early 2018. The portfolio continues to experience the inherent challenges

       and obstacles that occur with an operator transition of this size and
       complexity. Our management team is working closely with Solstice and the

rest of our operating partners to implement focused and strategic plans to

increase occupancy and improve performance in this challenging market.



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Our Investments
Our primary investment types are as follows:
•      Real Estate Equity - Our equity investments, which may be owned directly

or through joint ventures, include independent living facilities, or ILF,

assisted living facilities, or ALF, memory care facilities, or MCF,

continuing care retirement communities, or CCRC, which we collectively

refer to as senior housing facilities, skilled nursing facilities, or SNF,

medical office buildings, or MOB, and hospitals. Our healthcare properties

       are typically operated under net leases or pursuant to management
       agreements with healthcare operators. As of , 97.9% of our
       investments were invested in healthcare real estate equity, either
       directly or through joint ventures.


•      Real Estate Debt - Our debt investments may include mortgage loans or
       mezzanine loans to owners of healthcare real estate. As of ,

we had one mezzanine loan, which represented 2.1% of our investments.

Healthcare-Related Securities - Our securities investments may include

       commercial mortgage backed securities, or CMBS, backed primarily by loans
       secured by healthcare properties. We disposed of our investment in a
       Freddie Mac securitization trust in .


The following table presents our investments as of  (dollars in
thousands):
Investment Type:        Count(1)      Amount(2)(3)     % of Total           Capacity           Primary Locations

Real estate
equity(4)
MOB                         108     $      187,486           5.3 %   3.8 million square feet   IL, GA, OH, TX, IN
Net lease
Senior housing
facilities(5)                85            578,571          16.3 %      6,182    units         NY, CA, FL, UK, WA
SNF                         232            442,451          12.5 %     24,903    beds          PA, MI, KY, IN, WI
Hospitals                    14             40,772           1.1 %       872     beds          CA, TX, MO, UT, GA
Operating
Senior housing
facilities(5)               141          1,848,950          52.1 %     13,573    units         CA, WA, TX, NY, IL
SNF                          70            373,160          10.5 %      7,761    beds          IN, OH, MI, KY, MA
Ancillary(6)                 NA              2,214           0.1 %             N/A
Total real estate
equity                      650          3,473,604          97.9 %

Real estate debt
Mezzanine loan                1             75,000           2.1 %
Total real estate
debt                          1             75,000           2.1 %

Corporate
investments
Operator platform(7)          1                  2             - %
Total corporate
investments                   1                  2             - %

Total investments           652     $    3,548,606         100.0 %

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(1) For real estate equity, the count represents the number of properties. For

real estate debt, the count represents the number of respective financial

instruments. Does not include properties held for sale.

(2) Based on cost for real estate equity investments, which includes purchase

price allocations related to net intangibles, deferred costs, other assets,

if any, and adjusted for subsequent capital expenditures. Does not include

cost of properties held for sale. For real estate debt, based on principal

amount. For real estate equity investments, includes cost associated with

purchased land parcels that are not included in the count.

(3) Includes our proportionate interest in the underlying real estate held

through unconsolidated joint ventures of $1.3 billion.

(4) Classification of investment type based on predominant services provided, but

may include other services.

(5) Includes ALF, MCF, ILF and CCRC.

(6) Includes institutional pharmacy in connection with the Trilogy investment.

(7) Represents investment in Solstice. In , we 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, a leading management company of ILF, ALF and MCF founded in 2000, which

owns 80.0%, and us, who owns 20.0%.

For financial information regarding our reportable segments, refer to Note 13, "Segment Reporting" in our accompanying consolidated financial statements included in Part I, Item 1. "Financial Statements."

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Real Estate Equity Overview
As of , $3.5 billion, or 97.9%, based on cost, of our investments
were invested in healthcare real estate equity, either directly or through joint
ventures. Our healthcare properties are typically operated under net leases or
pursuant to management agreements with healthcare operators. For our net leased
properties, we enter into net leases that generally provide for fixed rental
payments, subject to periodic increases based on certain percentages or the
consumer price index, and obligate the tenant to pay all property-related
expenses, including maintenance, utilities, repairs, taxes, insurance and
capital expenditures. For our operating properties, we enter in management
agreements that generally provide for the payment of a fee to a manager,
typically 4-5% of gross revenues with the potential for certain incentive
compensation, and have direct exposure to the revenues and operating expenses of
a property. As a result, our operating properties allow us to participate in the
risks and rewards of the operations of healthcare facilities, while our net
leased properties are for fixed contractual rents.
Our equity investments, including both net lease and operating investments,
primarily consisted of the following types of healthcare facilities as of
:
•      Senior Housing. We define senior housing to include ILFs, ALFs, MCFs and

CCRCs, as described in further detail below. Revenues generated by senior

housing facilities typically come from private pay sources, including

private insurance, and to a much lesser extent government reimbursement

programs, such as Medicare and Medicaid.


•            Assisted living facilities. ALFs provide services that include
             minimal assistance for activities in daily living and permit
             residents to maintain some of their privacy and independence as they
             do not require constant supervision and assistance. Services bundled
             within one regular monthly fee usually include three meals per day
             in a central dining room, daily housekeeping, laundry, medical
             reminders and 24-hour availability of assistance with the activities
             of daily living, such as eating, dressing and bathing.

Professional

             nursing and healthcare services are usually available at the
             facility on call or at regularly scheduled times. ALFs

typically are

             comprised of one and two bedroom suites equipped with private
             bathrooms and efficiency kitchens.


•            Independent living facilities. ILFs are age-restricted

multi-family

             properties with central dining facilities that provide

services that

             include security, housekeeping, nutrition and limited laundry
             services. ILFs are designed specifically for independent seniors who
             are able to live on their own, but desire the security and
             conveniences of community living. ILFs typically offer several
             services covered under a regular monthly fee.


•            Memory care facilities. MCFs offer specialized options for seniors
             with Alzheimer's disease and other forms of dementia. Purpose built,
             free-standing memory care facilities offer an attractive alternative
             for private-pay residents affected by memory loss in

comparison to

             other accommodations that typically have been provided within a
             secured unit of an ALF or SNF. These facilities offer

dedicated care

             and specialized programming for various conditions relating to
             memory loss in a secured environment that is typically smaller in
             scale and more residential in nature than traditional assisted
             living facilities. Residents require a higher level of care and more
             assistance with activities of daily living than in assisted living
             facilities. Therefore, these facilities have staff available 24
             hours a day to respond to the unique needs of their residents.


•            Continuing care retirement community. CCRCs provide, as a continuum
             of care, the services described for ILFs, ALFs and SNFs in an
             integrated campus, generally under contracts with the residents
             (frequently lasting the term of the resident's lifetime).


•      Skilled Nursing Facilities. SNFs provide services that include daily
       nursing, therapeutic rehabilitation, social services, housekeeping,

nutrition and administrative services for individuals requiring certain

assistance for activities in daily living. A typical SNF includes mostly

one and two bed units, each equipped with a private or shared bathroom and

community dining facilities. Revenues generated from SNFs typically come

from government reimbursement programs, including Medicare and Medicaid,

       as well as private pay sources, including private insurance.


•      Medical Office Buildings. MOBs are typically either single-tenant

properties associated with a specialty group or multi-tenant properties

leased to several unrelated medical practices. Tenants include physicians,

dentists, psychologists, therapists and other healthcare providers, who

require space devoted to patient examination and treatment, diagnostic

imaging, outpatient surgery and other outpatient services. MOBs are

similar to commercial office buildings, although they require greater

plumbing, electrical and mechanical systems to accommodate physicians'

requirements such as sinks in every room, brighter lights and specialized

       medical equipment.


•      Hospitals. Services provided by operators and tenants in hospitals are
       paid for by private sources, third-party payers (e.g., insurance and

Health Maintenance Organizations), or through the Medicare and Medicaid

programs. Our hospital properties typically will include acute care,

long-term acute care, specialty and rehabilitation hospitals and generally

       are leased to single tenants or operators under triple-net lease
       structures.



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The following presents our real estate equity portfolio diversity across property type and geographic location based on cost: Real Estate Equity by Property Type(1) Real Estate Equity by Geographic Location

[[Image Removed: capturetypea09.jpg]] [[Image Removed: captureloca13.jpg]]

_______________________________________

(1) Classification based on predominant services provided, but may include other

services.

The following table presents a summary of our real estate equity investments as of (dollars in thousands):

                                                                        Properties(1)
                                                        Senior
                      Investment                       Housing                                                    Primary            Ownership
    Portfolio          Structure        Amount(2)     Facilities    MOB      SNF     Hospitals   Total           Locations           Interest
Direct Investments
                    Operating
Watermark Aqua      Facilities        $   114,187         4          -        -          -         4       West/Southwest/Midwest      97.0%
Peregrine           Net Lease              36,498         4          -        -          -         4        Northeast/Southeast       100.0%
                    Operating
Kansas City         Facilities             15,000         2          -        -          -         2              Midwest             100.0%
Arbors              Net Lease             126,825         4          -        -          -         4             Northeast            100.0%
                    Net
Watermark           Lease/Operating
Fountains(3)        Facilities            645,751         15         -        -          -         15             Various             Various
                    Operating
Winterfell          Facilities            904,985         32         -        -          -         32             Various             100.0%
                    Operating
Bonaventure         Facilities             99,438         5          -        -          -         5             Northwest            100.0%
                    Operating
Oak Cottage         Facilities             19,427         1          -        -          -         1                West              100.0%
                    Operating
Rochester           Facilities            219,518         10         -        -          -         10            Northeast             97.0%
Total Direct
Investments                             2,181,629         77         -        -          -         77
Joint Venture Investments(4)
                    Net
                    Lease/Operating
Eclipse             Facilities             56,540         44         -        32         -         76             Various              5.6%
Envoy               Net Lease              13,944         -          -        12         -         12     Mid - Atlantic/Northeast     11.4%
                    Net
                    Lease/Operating
Griffin-American    Facilities            475,861         91        108       41        14        254             Various              14.3%
Espresso            Net Lease             320,373         6          -       150         -        156             Various              36.7%
                    Operating
Trilogy(5)          Facilities            425,257         8          -        67         -         75             Various              29.0%
Total Joint
Venture
Investments                             1,291,975        149        108      302        14        573
Total                                 $ 3,473,604        226        108      302        14        650

_______________________________________

(1) Classification based on predominant services provided, but may include other

services.

(2) Includes purchase price allocations related to net intangibles, deferred

costs, other assets, if any, and adjusted for subsequent capital

expenditures.

(3) Watermark Fountains portfolio consists of six wholly-owned net lease

properties totaling $288.8 million and nine operating facilities totaling

$356.9 million, in which we own a 97.0% interest. One of these properties

consists of 14 condominium units in which we hold future interests, or the

Remainder Interests.

(4) Represents our proportionate interest in real estate assets held through

unconsolidated joint ventures.

(5) Includes institutional pharmacy, which are not subject to property count.



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Unconsolidated Investments
As of , our unconsolidated joint venture investments, totaling $1.3
billion, comprised 37.2% of our total real estate equity investments portfolio
and represented a 19.0% indirect exposure to over $6.8 billion in real estate
equity investment, in each case based on cost, alongside our joint venture
partners. As of , our unconsolidated joint venture investments
included the following:
•      Trilogy. We own a 29.0% interest in a $1.5 billion portfolio, based on

cost, of predominantly SNFs located in the Midwest and operated pursuant

to management agreements with Trilogy Health Services, as well as

ancillary services businesses, including a therapy business and a pharmacy

       business. Griffin-American Healthcare REIT III, Inc., or GAHR 3, and
       management of Trilogy own the remaining 71.0% of this portfolio.

• Griffin-American. We own a 14.3% interest in a $3.3 billion portfolio,

based on cost, of SNFs, ALFs, MOBs and hospitals across the United States

and care homes in the United Kingdom. Our Sponsor owns the remaining 85.7%

of this portfolio.

• Espresso. We own a 36.7% interest in a $0.9 billion portfolio, based on

cost, of predominantly SNFs, located in various regions across the United

States, and organized in six sub-portfolios and currently leased to nine

different operators under net leases. An affiliate of Formation Capital,

or Formation, acts as the general partner and manager of this investment.

We also have a mezzanine loan relating to this portfolio. Refer to "-Real

       Estate Debt Overview" below.


•      Eclipse. We own a 5.6% interest in a $1.0 billion portfolio, based on

cost, of SNFs and ALFs leased to, or managed by, a variety of different

operators across the United States. Our Sponsor and Formation own 86.4%

and 8.0% of this portfolio, respectively.

• Envoy. We own an 11.4% interest in a $122.8 million portfolio, based on

cost, of SNFs located in the Mid-Atlantic region and operated by a single

operator. Formation acts as the general partner and manager of this

investment.



Operators and Managers
The following table presents the operators and tenants of our properties,
excluding properties owned through unconsolidated joint ventures, as of  (dollars in thousands):
                                                                       Six Months Ended June 30, 2018
                                Properties
                                   Under         Units Under     Property and Other     % of Total Property
Operator / Tenant               Management      Management(1)         Revenues           and Other Revenues
Watermark Retirement
Communities                             29             5,225     $         77,058               52.5  %
Solstice Senior Living    (2)           32             4,000               52,995               36.0  %
Avamere Health Services   (3)            5               453                8,416                5.7  %
Arcadia Management                       4               572                5,308                3.6  %
Integral Senior Living    (2)            3               162                2,690                1.8  %
Peregrine Senior Living                  2               114                  761                0.5  %
Senior Lifestyle
Corporation               (4)            2               115                 (441 )             (0.3 )%
Other                     (5)            -                 -                  295                0.2  %
Total                                   77            10,641     $        147,082              100.0  %

_______________________________________

(1) Represents rooms for ALF and ILF and beds for MCF and SNF, based predominant

type.

(2) Solstice Senior Living, LLC is a joint venture of which affiliates of

Integral Senior Living own 80%.

(3) Effective , properties under the management of Bonaventure were

transitioned to Avamere Health Services.

(4) As a result of the tenant failing to remit rental payments, we accelerated

the amortization of capitalized lease inducements.

(5) Represents interest income earned on corporate-level cash accounts.




Our net lease properties are leased to four operators, with a remaining weighted
average lease term of 8.2 years as of .
Watermark Retirement Communities and Solstice, together with their affiliates,
manage substantially all of our operating properties. As a result, we are
dependent upon their personnel, expertise, technical resources and information
systems, proprietary information, good faith and judgment to manage our
properties efficiently and effectively. We also own 20% of Solstice, which
entitles us to certain rights and minority protections.
The weighted average resident occupancy of our operating facilities is 81.1% as
of .

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We have been and are currently in the process of transitioning several of our
portfolios to new operators or managers. In certain instances, we are
transitioning portfolios as part of our overall business plan, or as a result of
a decision that a seller does not want to continue managing the portfolio
following the acquisition. For example, in , we 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, or ISL, a leading
management company of senior independent living, assisted living and memory care
properties founded in 2000, which owns 80%, and us, who owns 20%. We have also
transitioned operations of the newly acquired Rochester, Bonaventure and Oak
Cottage portfolios, which were planned in connection with the acquisitions.
In other instances, the transition is the result of the failure of an operator
to meet certain of their lease obligations, such as the Kansas City portfolio,
for which we entered into a new management agreement with a third party manager,
ISL, in , and the Peregrine portfolio, for which we entered into a new
lease with an affiliate of Senior Lifestyle Corporation, or SLC, and
transitioned two of the four properties to SLC in the third quarter of 2016.
In addition, certain of our unconsolidated joint ventures are also in the
process of transitioning portfolios to new operators.  For the Espresso
portfolio, in particular, three of the sub-portfolios within the Espresso joint
venture have experienced tenant lease defaults and have operator transitions in
process.
While several of our portfolios have completed the process of transitioning
operators and managers during 2017, the ongoing impact of the completed
transitions and potential new transitions is expected to continue through 2018.
Real Estate Debt Overview
As of , $75.0 million, or 2.1%, of our investments were invested in
real estate debt secured by healthcare facilities, consisting of one mezzanine
loan, which matures on . Our mezzanine loan relates to the
Espresso portfolio, in which we also have an equity investment. Refer to
"-Unconsolidated Investments" above.
The following table presents a summary of our debt investment as of  (dollars in thousands):
                                                                           Unleveraged
                                      Principal      Carrying    Fixed       Current
Investment Type:             Count      Amount        Value       Rate        Yield
Espresso Mezzanine loan(1)     1     $    75,000    $  74,699    10.0 %        10.3 %

_______________________________________

(1) Property types securing the mezzanine loan predominately include SNFs, which

are located primarily in the Midwest, Northeast and Southeast regions of the

United States.



As of , our debt investment was not performing in accordance with
the contractual terms of its governing documents.  The Espresso mezzanine loan
is secured by a 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 our mezzanine loan as of .  We are actively
monitoring the actions of the senior lenders of each sub-portfolio and assessing
our rights and remedies.  We are also actively monitoring the operator
transitions and continue to assess the collectability of principal and interest.
As of , contractual debt service on the Espresso mezzanine loan
has been paid in accordance with contractual terms.
Healthcare-Related Securities Overview
Healthcare-related securities consisted of the Class B certificates in a Federal
Home Loan Mortgage Corporation, or Freddie Mac, securitization trust. The Class
B certificates were purchased at a 47.0% discount, or $27.0 million, producing a
bond equivalent yield of 13.1%, collateralized by a pool of 41 mortgage loans
with a weighted average maturity of 9.8 years at the time of the acquisition.
We disposed of the Freddie Mac investment in .
Sources of Operating Revenues and Cash Flows
We generate revenues from resident fees, rental income and net interest income.
Resident fee income from our senior housing operating facilities is recorded
when services are rendered and includes resident room and care charges and other
resident charges. Rental income is generated from our real estate for the
leasing of space to various types of healthcare operators/tenants. Net interest
income is generated from our debt and securities investments. Additionally, we
report our proportionate interest of revenues and expenses from unconsolidated
joint ventures, which own healthcare real estate, through equity in earnings
(losses) of unconsolidated ventures on our consolidated income statements.

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Profitability and Performance Metrics
We calculate Funds from Operations, or FFO, and Modified Funds from Operations,
or MFFO (see "Non-GAAP Financial Measures-Funds from Operations and Modified
Funds from Operations" for a description of these metrics) to evaluate the
profitability and performance of our business.
Outlook and Recent Trends
The U.S. economy continues to demonstrate positive underlying fundamentals, with
strong gross domestic product, or GDP, growth and improving employment
conditions. With the national unemployment rate at 4.0% as of June and second
quarter GDP growth of 4.1%, overall macroeconomic conditions remain strong. The
Federal Reserve's  decision to raise the federal funds rate for the
second time in 2018 reflects a consensus that the economic foundation driving
the current expansion remains sound, as well as a belief that the labor market
is close to or already at full employment resulting in wage growth and increased
consumer confidence levels. Market participants expect additional rate increases
during the second half of 2018, reflecting general optimism about the current
path of the U.S. economy. While higher interest rates may potentially reduce
investor demand in the broader commercial real estate and income-oriented
investment markets, we expect real estate prices and returns to remain
attractive while inflation is targeted to remain at 2.0% in the near term.
Despite a backdrop of continued economic strength and positive corporate
earnings results, rising treasury yields and the threat of trade protectionism
have increased volatility in the markets, creating instability in stock
valuations. While the reduction of U.S. corporate and personal tax rates is
widely credited for stimulating strong GDP growth and market valuations in the
first half of 2018, volatility will likely persist as investors adjust to higher
risk-free rates and other geopolitical developments. Overall, however, the
market outlook remains positive, due to synchronized global growth, low
inflation and modest perceived near-term recession risks. Corporate earnings
remain strong, providing fundamental support for record stock valuations in the
United States and Europe. In addition, benchmark 10-year interest rates in
several other key global economies, including England, Germany and Japan, have
trended to positive territory, signaling normalized market conditions while many
global central banks continue to ease monetary policy to combat low inflation
and economic stagnation. The pace of these changes may create volatility in
global debt and equity markets, while at the same time the Federal Reserve
experiences increased pressure to raise interest rates and reduce its large
balance sheet holdings of financial instruments acquired during the financial
crisis. In addition, the impact of potentially significant fiscal and regulatory
policy changes, including significant changes to U.S. trade policy,
infrastructure investment programs and fiscal deficit growth, may also have a
considerable impact on the trajectory of the U.S. and global economies over the
next few years.
Commercial real estate fundamentals remain relatively healthy across U.S.
property types. Given certain dynamics in the current market including (i) the
continuing strength of the economy; (ii) a low interest rate environment; (iii)
low relative new commercial real estate supply; and (iv) robust international
demand for U.S. commercial real estate, we expect real estate values to trend
positively due to increased property-level net operating income, strong
transaction volume or a combination of both. Although commercial real estate
transaction volume slowed slightly during 2017, property valuations remain at
all-time highs across property sectors. The rise in interest rates may present
new challenges to the commercial mortgage market as well, although rising
property values and potential net operating income growth should continue to
make the commercial real estate sector an attractive financing proposition.
Despite the highest quarterly issuance in three years during the fourth quarter
2017, overall CMBS issuance remains below pre-crisis levels due in part to
uncertainty around the Dodd-Frank risk retention rules and capital requirements
for banks. Given these trends, traditional capital sources may lack sufficient
lending capacity to absorb the high refinancing demand, which may provide
attractive lending opportunities for new market participants such as alternative
investment platforms, REITs and insurance companies. Overall, economic and
industry trends should support robust commercial real estate investment
activity, providing attractive investment opportunities for commercial real
estate capital providers with strong balance sheets and high underwriting
standards.
Healthcare Markets
The healthcare real estate equity and finance markets tend to attract new equity
and debt capital more slowly than more traditional commercial real estate
property types because of barriers to entry for new investors or lenders to
healthcare property owners. Investing in and lending to the healthcare real
estate sector requires an in-depth understanding of the specialized nature of
healthcare facility operations and the healthcare regulatory environment. While
these competitive constraints may create opportunities for attractive
investments in the healthcare property sector, they may also provide challenges
and risks when seeking attractive terms for our investments.
Overall, healthcare REITs have underperformed the broader REIT sector throughout
2018. Publicly traded healthcare REITs have experienced decreases in stock price
as underlying same-store metrics and coverage ratios were generally below
expectations and guidance on performance was cautious. However, longer-term
demographics remain favorable, with potential upside for future increases to
valuations.

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We believe owners and operators of senior housing facilities and other
healthcare properties may benefit from demographic and economic trends,
specifically the aging of the United States population whereby Americans aged 65
years old and older are expected to increase from 47.8 million in 2015 to 79.2
million in 2035 (source: U.S. Census Bureau 2014 National Population
Projections), and the increasing demand for care for seniors outside of their
homes. As a result of these demographic trends, we expect healthcare costs to
increase at a faster rate than the available funding from both private sources
and government-sponsored healthcare programs. Healthcare spending in the U.S. is
projected to increase from $2.6 trillion in 2010 to $4.1 trillion in 2020
(source: CMS) and, as healthcare costs increase, insurers, individuals and the
U.S. government are pursuing lower cost options for healthcare, and senior
housing facilities, such as ALF, MCF, SNF and ILF, are generally more cost
effective than higher acuity healthcare settings, such as short or long-term
acute-care hospitals, in-patient rehabilitation facilities and other post-acute
care settings. The growth in total demand for healthcare, cost constraints, new
regulations, broad U.S. demographic changes and the shift towards cost effective
community-based settings is resulting in dynamic changes to the healthcare
delivery system.
Notwithstanding the growth in the industry and demographics, economic and
healthcare market uncertainty has had a negative impact, weakening the market's
fundamentals and ultimately reducing a tenant's/operator's ability to make rent
payments in accordance with the contractual terms of the lease, as well as
reduced income for our operating investments. In addition, increased development
and competitive pressures has had an impact on some of our assets. As of the
second quarter 2018, senior housing occupancy is at its lowest occupancy rate in
seven years and has been in decline ten consecutive quarters, just two quarters
shy of the 12-quarter downturn during the Great Recession (source: NIC). While
annual absorption has averaged a solid 2.4% during this current downturn, the
total number of seniors housing units absorbed only amounts to 63% of the
inventory growth during this period (source: NIC). Further, a tight labor market
and competition to attract quality staff continues to drive increased wages and
personnel costs, resulting in lower margins. To the extent that occupancy and
market rental rates decline, property-level cash flow could be negatively
affected and decreased cash flow, in turn, is expected to impact the value of
underlying properties and the borrowers' ability to service their outstanding
loans and payoff the loans at maturity.
Our SNF operators receive a majority of their revenues from governmental payors,
primarily Medicare and Medicaid. Changes in reimbursement rates and limits on
the scope of services reimbursed to SNFs could have a material impact on a SNF
operator's liquidity and financial condition. SNF operators are currently facing
various operational, reimbursement, legal and regulatory challenges due to,
among other things, increased wages and labor costs, narrowing of referral
networks, shorter lengths of stay, staffing shortages, expenses associated with
increased government investigations, enforcement proceedings and legal actions
related to professional and general liability claims. With a dependence on
government reimbursement as the primary source of their revenues, SNF operators
are also subject to intensified efforts to impose pricing pressures and more
stringent cost controls, through value-based payments, managed care and similar
programs, which could result in lower daily reimbursement rates, lower lease
coverage, decreased occupancies and declining operating margins.
Further third-party payor rules and regulatory changes that are being
implemented by the federal and even some state governments and commercial payors
to improve quality of care and control healthcare spending may continue to
affect reimbursement and increase operating costs to our operators and tenants.
For example, CMS updated Medicare payments to SNFs by 1.0% under the prospective
payment system (PPS) for federal fiscal year 2018, as compared to the 2.4%
increase for the federal fiscal year 2017. CMS has also implemented quality
reporting programs and SNFs that fail to submit the required quality data to CMS
are subject to payment reductions. Further, in 2016, CMS adopted new
regulations, or the Final Rule, that significantly revised the conditions of
participation in Medicare and Medicaid for long-term care providers. Phase 2 of
the Final Rule became effective on  and Phase 3 becomes
effective .  Implementing and complying with the Final Rule has
created additional operating burdens and increased expenses on the industry.  We
continue to monitor reimbursement program requirements and assess the potential
impact that changes in the political environment may have on such programs and
the ability of our tenants/operators to meet their payment obligations.
Despite the barriers and constraints to investing in the senior housing sector,
demographic and other market dynamics continue to attract investors and capital
to the sector. The supply and demand fundamentals that are driven by the
increasing need for healthcare services by an aging population have created
investment opportunities for investors and thus acquisition activity within the
sector continues to be strong.
Our Strategy
Our primary objective is to invest and manage our portfolio to maximize
shareholder value by generating attractive risk-adjusted returns, while
maintaining stable cash flow for distributions. The key elements of our strategy
include:
•      Maintain a Diversified Portfolio. We believe that mid-acuity senior

housing facilities provide an opportunity to generate risk-adjusted

returns and benefit from positive future demographic trends. In addition,

we believe that maintaining a balanced portfolio of assets diversified by

       investment type, geographic location, asset type, revenue source and
       operating model may mitigate the risk that any single factor or event
       could materially harm our business. Portfolio diversification



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also enhances the reliability of our cash flows by reducing our exposure to
single-state regulatory or reimbursement changes, regional climate events and
local economic downturns.
•      Pursue Strategic Capital Expenditures and Development Opportunities. We

will continue to invest capital into our operating portfolio in order to

maintain market position as well as functional and operating standards. In

addition, we will continue to execute on and identify strategic

development opportunities for our existing investments that may involve

replacing, converting or renovating facilities in our portfolio which, in

turn, would allow us to provide an optimal mix of services and enhance the

overall value of our assets.

• Execute on Our Operator Transition Plan and Stabilize Our Portfolio. We

have been and are currently in the process of transitioning several of our

portfolios to new operators or managers, both as a result of execution of

our business plan in connection with recent acquisitions and to reposition

       properties as a result of performance issues by certain operators or
       managers. Refer to "-Operators and Managers" above.

• Assess Opportunities for Asset Repositioning. As the healthcare industry

evolves, we will continue to assess the need for strategic asset

repositioning, including evaluating assets, operators and markets to

position our portfolio for optimal performance. Our strategy includes

potentially selling and transitioning assets that do not meet our

operator, real estate or market criteria or overall portfolio management

strategy.

• Consider Selective Dispositions. We will consider selective dispositions

of assets in connection with strategic repositioning of assets or

otherwise where we believe the disposition will achieve a desired return

or opportunities exist to enhance overall returns.

• Financing Strategy. We use asset-level financing as part of our investment

       strategy to leverage our investments while managing refinancing and
       interest rate risk. We typically finance our investments with medium to
       long-term, non-recourse mortgage loans, though our borrowing levels and
       terms vary depending upon the nature of the assets and the related

financing. In addition, we have a revolving line of credit to provide

additional short-term liquidity as needed. Refer to "-Liquidity and

Capital Resources" for additional information.



Portfolio Management
Our Advisor and its affiliates, directly or together with third party
sub-advisors, maintain a comprehensive portfolio management process that
generally includes oversight by an asset management team, regular management
meetings and an exhaustive quarterly credit and operating results review
process. These processes are designed to enable management to evaluate and
proactively identify asset-specific credit issues and trends on a
portfolio-wide, sub-portfolio or by asset type basis. Nevertheless, we cannot be
certain that our Advisor's review, or any third parties acting on our or our
Advisor's behalf, will identify all issues within our portfolio due to, among
other things, adverse economic conditions or events adversely affecting specific
assets; therefore, potential future losses may also stem from issues that are
not identified during these portfolio reviews or the asset and portfolio
management process.
Our Advisor has delegated certain asset management functions in connection with
our portfolio to American Healthcare Investors, LLC, or AHI. As of , AHI provides these asset management services in connection with our
Griffin-American and Winterfell portfolios, though our Advisor is in the process
of internalizing these asset management services. In addition, Formation
provides similar asset management services to us in connection with the Eclipse,
Espresso and Envoy joint ventures. Our Advisor, under the direction of its
investment committee, supervises AHI and Formation and retains ultimate
oversight and responsibility for the management of our portfolio.
Our Advisor, together with AHI or Formation (referred to herein as our Advisor's
asset management team), uses many methods to actively manage our asset base to
enhance or preserve our income, value and capital and mitigate risk. Our
Advisor's asset management team seeks to identify strategic development
opportunities for our existing and future investments that may involve
replacing, converting or renovating facilities in our portfolio which, in turn,
would allow us to provide optimal mix of services and enhance the overall value
of our assets. To manage risk, our Advisor's asset management team engages in
frequent review and dialogue with operators/managers/borrowers/third party
advisors and periodic inspections of our owned properties and collateral. In
addition, our Advisor's asset management team considers the impact of regulatory
changes on the performance of our portfolio. During the quarterly credit and
operating results review, or more frequently as necessary, investments are put
on highly-monitored status, as appropriate, based upon several factors,
including missed or late contractual payments, significant declines in
performance and other data which may indicate a potential issue in our ability
to recover our invested capital from an investment. Each situation depends on
many factors, including the number of properties, the type of property, macro
and local market conditions impacting supply/demand, cash flow and the financial
condition of our operators/managers/borrowers. Our Advisor's asset management
team is an experienced asset management team that monitors these factors on our
behalf.

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Our investments are reviewed on a quarterly basis, or more frequently as
necessary, to assess whether there are any indicators that the value of our
investments may be impaired or that carrying value may not be recoverable. In
conducting these reviews, we consider macroeconomic factors, including
healthcare sector conditions, together with asset and market specific
circumstances among other factors. To the extent an impairment has occurred, the
loss will be measured as compared to the carrying amount of the investment. 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, we establish,
on a current basis, an allowance for future operator/tenant credit losses on
unbilled rents receivable based upon an evaluation of the collectability of such
amounts.
As of , the unconsolidated ventures in which we invest have
recorded impairments and reserves, including a loan loss reserve for a direct
financing lease receivable relating to our Espresso unconsolidated investment.
Our proportionate ownership share of a loan loss reserve within our Espresso
portfolio totaled $11.4 million and was recognized through equity in earnings
(losses) during the year ended . 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 to be 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.
As of , we had impaired a property located in Clinton, Connecticut
within the Peregrine net lease portfolio by $7.4 million, which includes a $2.4
million impairment recognized during the six months ended , as the
result of deteriorating operating results of the tenant. During the six months
ended , we also recorded an impairment loss of $2.8 million to
reflect the fair value of one of our consolidated operating properties within
the Watermark Fountains Portfolio as a result of designating the property and
its operations as held for sale.
We will continue to monitor the performance of, and actively manage, all of our
investments. However, there can be no assurance that our investments will
continue to perform in accordance with the contractual terms of the governing
documents or underwriting and we may, in the future, record impairment, as
appropriate, if required.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, or U.S. GAAP, which requires
the use of estimates and assumptions that involve the exercise of judgment and
that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  For critical accounting policies, refer
to Note 2, "Summary of Significant Accounting Policies" in our accompanying
consolidated financial statements included in Part I, Item 1. "Financial
Statements."
Recent Accounting Pronouncements
For recent accounting pronouncements, refer to Note 2, "Summary of Significant
Accounting Policies" in our accompanying consolidated financial statements
included in Part I, Item 1. "Financial Statements."

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Results of Operations
Comparison of the Three Months Ended  to  (dollars in
thousands):
                                             Three Months Ended June 30,          Increase (Decrease)
                                               2018               2017            Amount           %
Property and other revenues
Resident fee income                      $      32,956       $      31,080     $    1,876          6.0  %
Rental income                                   38,891              36,561          2,330          6.4  %
Other revenue                                      930                 953            (23 )       (2.4 )%
Total property and other revenues               72,777              68,594          4,183          6.1  %
Net interest income
Interest income on debt investments              1,921               1,918              3          0.2  %
Interest income on mortgage loans held
in a securitized trust                               -               6,486         (6,486 )     (100.0 )%
Interest expense on mortgage
obligations issued by a securitization
trust                                                -              (4,866 )        4,866       (100.0 )%
Net interest income                              1,921               3,538         (1,617 )      (45.7 )%

Expenses
Real estate properties - operating
expenses                                        47,731              38,234          9,497         24.8  %
Interest expense                                17,693              14,764          2,929         19.8  %
Other expenses related to
securitization trust                                 -                 990           (990 )     (100.0 )%
Transaction costs                                   41               1,946         (1,905 )      (97.9 )%
Asset management and other
fees-related party                               5,951               8,437         (2,486 )      (29.5 )%
General and administrative expenses              3,424               2,848            576         20.2  %
Depreciation and amortization                   27,494              19,851          7,643         38.5  %
Impairment loss                                  2,456                   -          2,456        100.0  %
Total expenses                                 104,790              87,070         17,720         20.4  %
Other income (loss)
Unrealized gain (loss) on senior
housing mortgage loans and debt held
in securitization trust, net                         -                 358           (358 )     (100.0 )%
Realized gain (loss) on investments
and other                                            -                  90            (90 )     (100.0 )%
Income (loss) before equity in
earnings (losses) of unconsolidated
ventures and income tax benefit
(expense)                                      (30,092 )           (14,490 )      (15,602 )      107.7  %
Equity in earnings (losses) of
unconsolidated ventures                         (4,098 )            (7,055 )        2,957        (41.9 )%
Income tax benefit (expense)                       (15 )               (15 )            -            -  %
Net income (loss)                        $     (34,205 )     $     (21,560 )   $  (12,645 )       58.7  %


Revenues
Resident Fee Income
The following table presents resident fee income generated during the three
months ended  as compared to the three months ended 
(dollars in thousands):
                                            Three Months Ended June 30,        Increase (Decrease)
                                               2018              2017          Amount           %
Same store portfolios (placed in
service - 2016 and prior)                 $     27,610        $  26,701     $       909          3.4 %
Portfolios placed in service - 2017              5,346   (1)      4,379             967         22.1 %
Total resident fee income                 $     32,956        $  31,080     $     1,876          6.0 %

_______________________________________

(1) Includes resident fee income generated from our Kansas City portfolio, which

transitioned from a net leased portfolio to an operating portfolio during the

year ended .



Resident fee income increased $1.9 million primarily as a result of the
acquisition of the Rochester portfolio, which closed in the third and fourth
quarters of 2017. On a same store basis, occupancy and billing rates improved
for 2018 as compared to 2017 for the Aqua and Fountains portfolios, driving an
increase in resident fee income.

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Rental Income
The following table presents rental income generated during the three months
ended  as compared to the three months ended  (dollars
in thousands):
                                            Three Months Ended June 30,         Increase (Decrease)
                                                2018             2017          Amount            %
Same store portfolios (placed in
service - 2016 and prior)                 $       33,321     $   36,561     $    (3,240 )       (8.9 )%
Portfolios placed in service - 2017                5,570              -           5,570        100.0  %
Total rental income                       $       38,891     $   36,561     $     2,330          6.4  %


Rental income increased $2.3 million primarily as a result of the Rochester
portfolio acquisition, which closed during the third and fourth quarters of
2017. On a same store basis, average occupancy for the Winterfell portfolio
decreased to 78.6% for the three months ended  as compared to 88.2%
for the three months ended , partially offsetting the overall
increase to rental income.
Other Revenue
Other revenue decreased by a de minimis amount and primarily represent
additional revenue recognized from non-recurring services and fees at our
operating facilities as well as interest earned on uninvested cash.
Net Interest Income
Net interest income decreased $1.6 million primarily as a result of the sale of
our investment in the Freddie Mac securitization in the first quarter of 2018.
Expenses
Property Operating Expenses
The following table presents property operating expenses incurred during the
three months ended  as compared to the three months ended  (dollars in thousands):
                                           Three Months Ended June 30,      

Increase (Decrease)

                                              2018               2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                $     39,396        $   35,811     $     3,585              10.0 %
Portfolios placed in service - 2017             8,335   (1)       2,423           5,912             244.0 %

Total property operating expense $ 47,731 $ 38,234 $ 9,497

              24.8 %


_______________________________________

(1) Includes operating expenses incurred by our Kansas City portfolio, which

transitioned from a net leased portfolio to an operating portfolio during the

year ended .



Property operating expenses increased $9.5 million, primarily as a result of
real estate portfolios acquired during 2017. On a same store basis, property
operating expenses increased primarily as a result of rising labor and benefits
costs.
Interest Expense
The following table presents interest expense incurred during the three months
ended  as compared to the three months ended  (dollars
in thousands):
                                            Three Months Ended June 30,           Increase (Decrease)
                                                2018             2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                 $       15,238     $   13,839     $     1,399              10.1 %
Portfolios placed in service - 2017                2,455            925           1,530             165.4 %
Total interest expense                    $       17,693     $   14,764     $     2,929              19.8 %


Interest expense increased $2.9 million, as a result of mortgage and seller
financing obtained for 2017 real estate portfolios acquisitions. On a same store
basis, additional financing obtained for the Fountains portfolio in  resulted in an increase to interest expense.

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Other Expenses Related to Securitization Trust
Other expenses related to securitization trust decreased $1.0 million as a
result of the sale of our investment in the Freddie Mac securitization in the
first quarter of 2018. Securitization trust expenses were primarily comprised of
fees paid to Freddie Mac, the original issuer, as guarantor of the interest and
principal payments related to the investment grade securitization bonds.
Transaction Costs
Transaction costs primarily represent professional fees associated with new
investments. Transaction costs for the three months ended 
represents costs related to the sale of our investment in the Freddie Mac
securitization. Transaction costs for the three months ended  are
primarily a result of a pending acquisition, which closed in .
Asset Management and Other Fees - Related Party
Asset management and other fees - related party decreased $2.5 million primarily
as a result of the  amendment to the advisory agreement which
became effective during the first quarter of 2018. The amended advisory
agreement reduced the monthly asset management fee and eliminated acquisition
fees paid to the advisor.
General and Administrative Expenses
General and administrative expenses are incurred at the corporate level and
include auditing and professional fees, director fees, and other costs
associated with operating our business. General and administrative expenses
increased $0.6 million, primarily as a result of increased professional fees,
partially offset by lower indirect overhead expense allocated for the three
months ended .
Depreciation and Amortization
The following table presents depreciation and amortization expense incurred
during the three months ended  as compared to the three months
ended  (dollars in thousands):
                                            Three Months Ended ,     

Increase (Decrease)

                                                2018             2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                 $       22,214     $   19,166     $     3,048              15.9 %
Portfolios placed in service - 2017                5,280            685           4,595             670.8 %
Total depreciation and amortization
expense                                   $       27,494     $   19,851     $     7,643              38.5 %


Depreciation and amortization expense increased $7.6 million, primarily as a
result of real estate portfolios acquired during 2017 and capital improvements
funded on same store portfolios.
Impairment Loss
During the three months ended , impairment loss of $2.5 million was
recorded related to a property located in Clinton, Connecticut within the
Peregrine net lease portfolio, due to deteriorating operating results of the
tenant resulting in failure to remit rental payments. There was no impairment
losses recorded for the three months ended .
Other Income (Loss)
Unrealized Gain (loss) on Senior Housing Mortgage Loans and Debt Held in
Securitization Trust, Net
During the three months ended , unrealized gain of $0.4 million on
senior housing mortgage loans and debt held in a securitization trust represents
the change in the fair value of the consolidated assets and liabilities of our
investment in the Freddie Mac securitization. There was no unrealized gain
recognized for the three months ended  as a result of the disposal
of the investment.

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Equity in Earnings (Losses) of Unconsolidated Ventures and Income Tax Benefit
(Expense)
Equity in Earnings (Losses) of Unconsolidated Ventures (dollars in thousands):
                                                                            

Three Months Ended ,

                     2018               2017             2018             2017            2018                2017                                        2018           2017
                                                     Select Revenues and 

Expenses, Equity in Earnings, Net of Select

 Portfolio         Equity in Earnings (Losses)                  net(1)                     Revenues and Expenses           Increase (Decrease)           Cash Distributions
Eclipse        $          75       $        (558 )   $     (442 )     $     (993 )   $      517           $      435     $      82        18.9  %   $      191         $   116
Envoy                   (366 )                (5 )         (363 )              -             (3 )                 (5 )           2       (40.0 )%            -               -
Griffin -
American              (1,843 )            (2,417 )       (5,126 )         (5,584 )        3,283                3,167           116         3.7  %        1,706           4,219
Espresso              (2,651 )            (2,402 )       (3,794 )         (4,305 )        1,143                1,903          (760 )     (39.9 )%            -           1,334
Trilogy                  640              (1,673 )       (3,779 )         (5,737 )        4,419                4,064           355         8.7  %        1,451               -
Subtotal              (4,145 )            (7,055 )      (13,504 )        (16,619 )        9,359                9,564          (205 )      (2.1 )%        3,348           5,669
Operator
Platform(2)               47                   -              -                -             47                    -            47       100.0  %           92               -
Total          $      (4,098 )     $      (7,055 )   $  (13,504 )     $  (16,619 )   $    9,406           $    9,564     $    (158 )      (1.7 )%   $    3,440         $ 5,669

_______________________________________

(1) Represents our proportionate share of revenues and expenses excluded from the

calculation of FFO and MFFO. Refer to "-Non-GAAP Financial Measures" for

additional discussion.

(2) Represents our investment in Solstice.




Equity in losses of unconsolidated ventures decreased by $3.0 million primarily
due to our investment in the Trilogy joint venture, which recorded lower
amortization expense as acquisition-related intangible assets continue to become
fully amortized.
Equity in earnings, net of select revenues and expenses, decreased by $0.2
million primarily due to the Espresso portfolio, which has three operator
transitions ongoing as of , resulting in a decrease to revenues.
The decrease in the Espresso portfolio was partially offset by development and
operational improvements in the Trilogy portfolio.
Income Tax Benefit (Expense)
Income tax expense for the three months ended  was $15,000 and
related to our operating properties, which operate through a taxable REIT
subsidiary structure. Income tax expense for the three months ended  was $15,000.


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Comparison of the Six Months Ended  to  (dollars in
thousands):
                                            Six Months Ended June 30,          Increase (Decrease)
                                               2018              2017         Amount           %
Property and other revenues
Resident fee income                      $      65,764       $   59,827     $   5,937          9.9  %
Rental income                                   79,640           73,682         5,958          8.1  %
Other revenue                                    1,678            1,530           148          9.7  %
Total property and other revenues              147,082          135,039        12,043          8.9  %
Net interest income
Interest income on debt investments              3,820            3,815             5          0.1  %
Interest income on mortgage loans held
in a securitized trust                           5,149           12,967        (7,818 )      (60.3 )%
Interest expense on mortgage
obligations issued by a securitization
trust                                           (3,824 )         (9,743 )       5,919        (60.8 )%
Net interest income                              5,145            7,039        (1,894 )      (26.9 )%

Expenses
Real estate properties - operating
expenses                                        94,157           75,545        18,612         24.6  %
Interest expense                                34,731           28,792         5,939         20.6  %
Other expenses related to
securitization trust                               811            1,966        (1,155 )      (58.7 )%
Transaction costs                                  804            2,964        (2,160 )      (72.9 )%
Asset management and other
fees-related party                              11,894           19,417        (7,523 )      (38.7 )%
General and administrative expenses              7,111            5,351         1,760         32.9  %
Depreciation and amortization                   56,314           44,769        11,545         25.8  %
Impairment loss                                  5,239                -         5,239        100.0  %
Total expenses                                 211,061          178,804        32,257         18.0  %
Other income (loss)
Unrealized gain (loss) on senior
housing mortgage loans and debt held
in securitization trust, net                         -              724          (724 )     (100.0 )%
Realized gain (loss) on investments
and other                                        3,495              118         3,377      2,861.9  %
Income (loss) before equity in
earnings (losses) of unconsolidated
ventures and income tax benefit
(expense)                                      (55,339 )        (35,884 )     (19,455 )       54.2  %
Equity in earnings (losses) of
unconsolidated ventures                        (12,724 )        (12,677 )         (47 )        0.4  %
Income tax benefit (expense)                       (30 )            (41 )          11        (26.8 )%
Net income (loss)                        $     (68,093 )     $  (48,602 )   $ (19,491 )       40.1  %


Revenues
Resident Fee Income
The following table presents resident fee income generated during the six months
ended  as compared to the six months ended  (dollars
in thousands):
                                             Six Months Ended June 30,         Increase (Decrease)
                                               2018              2017          Amount           %
Same store portfolios (placed in
service - 2016 and prior)                 $     55,083        $  53,177     $     1,906          3.6 %
Portfolios placed in service - 2017             10,681   (1)      6,650           4,031         60.6 %
Total resident fee income                 $     65,764        $  59,827     $     5,937          9.9 %

_______________________________________

(1) Includes resident fee income generated from our Kansas City portfolio, which

transitioned from a net leased portfolio to an operating portfolio during the

year ended .



Resident fee income increased $5.9 million primarily as a result of the
acquisition of the Rochester portfolio, which closed in the third and fourth
quarters of 2017. Additionally, a full six months of activity from the Oak
Cottage and Bonaventure portfolios, acquired in the first quarter of 2017,
contributed to the increase. On a same store basis, occupancy and billing rates
improved for 2018 as compared to 2017 for the Aqua and Fountains portfolios,
driving an increase in resident fee income.

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Rental Income
The following table presents rental income generated during the six months ended
 as compared to the six months ended  (dollars in
thousands):
                                            Six Months Ended June 30,          Increase (Decrease)
                                               2018             2017          Amount            %
Same store portfolios (placed in
service - 2016 and prior)                 $      68,495     $   73,682     $    (5,187 )       (7.0 )%
Portfolios placed in service - 2017              11,145              -          11,145        100.0  %
Total rental income                       $      79,640     $   73,682     

$ 5,958 8.1 %



Rental income increased $6.0 million primarily as a result of the Rochester
portfolio acquisition, which closed during the third and fourth quarters of
2017. On a same store basis, average occupancy for the Winterfell portfolio
decreased to 80.4% for the six months ended  as compared to 89.0%
for the six months ended , partially offsetting the overall
increase to rental income.
Other Revenue
Other revenue increased $0.1 million primarily as a result of additional revenue
recognized from non-recurring services and fees at our operating facilities as
well as interest earned on uninvested cash.
Net Interest Income
Net interest income decreased $1.9 million primarily as a result of the sale of
our investment in the Freddie Mac securitization in the first quarter of 2018.
Expenses
Property Operating Expenses
The following table presents property operating expenses incurred during the six
months ended  as compared to the six months ended 
(dollars in thousands):
                                            Six Months Ended June 30,             Increase (Decrease)
                                              2018               2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                $     76,986        $   72,015     $      4,971              6.9 %
Portfolios placed in service - 2017            17,171   (1)       3,530           13,641            386.4 %

Total property operating expense $ 94,157 $ 75,545 $ 18,612

             24.6 %


_______________________________________

(1) Includes operating expenses incurred by our Kansas City portfolio, which

transitioned from a net leased portfolio to an operating portfolio during the

year ended .



Property operating expenses increased $18.6 million, primarily as a result of
real estate portfolios acquired during 2017. On a same store basis, property
operating expenses increased primarily as a result of rising labor and benefits
costs.
Interest Expense
The following table presents interest expense incurred during the six months
ended  as compared to the six months ended  (dollars
in thousands):
                                            Six Months Ended June 30,            Increase (Decrease)
                                               2018             2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                 $      29,927     $   27,283     $     2,644               9.7 %
Portfolios placed in service - 2017               4,804          1,509           3,295             218.4 %
Total interest expense                    $      34,731     $   28,792     $     5,939              20.6 %


Interest expense increased $5.9 million, as a result of mortgage and seller
financing obtained for 2017 real estate portfolios acquisitions. On a same store
basis, additional financing obtained for the Fountains portfolio in  resulted in an increase to interest expense.

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Other Expenses Related to Securitization Trust
Other expenses related to securitization trust decreased $1.2 million as a
result of the sale of our investment in the Freddie Mac securitization in the
first quarter of 2018. Securitization trust expenses were primarily comprised of
fees paid to Freddie Mac, the original issuer, as guarantor of the interest and
principal payments related to the investment grade securitization bonds.
Transaction Costs
Transaction costs primarily represent professional fees associated with new
investments. Transaction costs for the six months ended  are
primarily a result of the residual costs incurred for the Winterfell and
Bonaventure operator transition. Transaction costs for the six months ended
 are primarily a result of two real estate portfolio acquisitions
that closed during the quarter.
Asset Management and Other Fees - Related Party
Asset management and other fees - related party decreased $7.5 million primarily
as a result of the  amendment to the advisory agreement which
became effective during the first quarter of 2018. The amended advisory
agreement reduced the monthly asset management fee and eliminated acquisition
fees paid to the advisor.
General and Administrative Expenses
General and administrative expenses are incurred at the corporate level and
include auditing and professional fees, director fees, and other costs
associated with operating our business. General and administrative expenses
increased $1.8 million, primarily as a result of an increase in professional
fees, partially offset by lower indirect overhead expense allocated for the six
months ended .
Depreciation and Amortization
The following table presents depreciation and amortization expense incurred
during the six months ended  as compared to the six months ended
 (dollars in thousands):
                                            Six Months Ended ,       

Increase (Decrease)

                                               2018             2017             Amount             %
Same store portfolios (placed in
service - 2016 and prior)                 $      44,623     $   43,628     $        995              2.3 %
Portfolios placed in service - 2017              11,691          1,141           10,550            924.6 %
Total depreciation and amortization
expense                                   $      56,314     $   44,769     $     11,545             25.8 %


Depreciation and amortization expense increased $11.5 million, primarily as a
result of real estate portfolios acquired during 2017 and capital improvements
funded on same store portfolios.
Impairment Loss
During the six months ended , impairment loss of $5.2 million was
recorded consisting of $2.8 million related to a property located in Franklin,
Michigan within the Fountains portfolio, as a result of estimating the fair
value of the property upon its reclassification to held for sale and $2.4
million related to a property located in Clinton, Connecticut within the
Peregrine net lease portfolio, due to deteriorating operating results of the
tenant resulting in failure to remit rental payments. There was no impairment
losses recorded for the six months ended .
Other Income (Loss)
Unrealized Gain (loss) on Senior Housing Mortgage Loans and Debt Held in
Securitization Trust, Net
During the six months ended , unrealized gain of $0.7 million on
senior housing mortgage loans and debt held in a securitization trust represents
the change in the fair value of the consolidated assets and liabilities of our
investment in the Freddie Mac securitization. There was no unrealized gain
recognized for the six months ended  as a result of the disposal of
the investment.

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Equity in Earnings (Losses) of Unconsolidated Ventures and Income Tax Benefit
(Expense)
Equity in Earnings (Losses) of Unconsolidated Ventures (dollars in thousands):
                                                                                    Six Months Ended June 30,
                     2018               2017             2018             2017             2018                2017                                         2018           2017
                                                     Select Revenues and

Expenses, Equity in Earnings, Net of Select

 Portfolio         Equity in Earnings (Losses)                  net(1)                      Revenues and Expenses            Increase (Decrease)           Cash Distributions
Eclipse        $          80       $        (410 )   $     (842 )     $   (1,431 )   $       922           $     1,021     $     (99 )      (9.7 )%   $      445         $   404
Envoy                   (368 )               172           (364 )              -              (4 )                 172          (176 )    (102.3 )%            -             179
Griffin -
American              (1,887 )            (4,534 )       (8,812 )        (10,675 )         6,925                 6,141           784        12.8  %        2,422           5,697
Espresso             (11,555 )            (2,649 )      (13,686 )         (7,068 )         2,131                 4,419        (2,288 )     (51.8 )%            -           3,307
Trilogy                  898              (5,256 )       (7,585 )        (12,737 )         8,483                 7,481         1,002        13.4  %        3,366               -
Subtotal             (12,832 )           (12,677 )      (31,289 )        (31,911 )        18,457                19,234          (777 )      (4.0 )%        6,233           9,587
Operator
Platform(2)              108                   -              -                -             108                     -           108       100.0  %           92               -
Total          $     (12,724 )     $     (12,677 )   $  (31,289 )     $  (31,911 )   $    18,565           $    19,234     $    (669 )      (3.5 )%   $    6,325         $ 9,587

_______________________________________

(1) Represents our proportionate share of revenues and expenses excluded from the

calculation of FFO and MFFO. Refer to "-Non-GAAP Financial Measures" for

additional discussion.

(2) Represents our investment in Solstice.




Equity in losses of unconsolidated ventures increased by a de minimis amount.
Additional reserves and allowances recorded for receivables due from an operator
in receivership within the Espresso portfolio were offset by overall lower
depreciation and amortization expense recorded by the unconsolidated ventures as
acquisition-related intangible assets continue to become fully amortized.
Equity in earnings, net of select revenues and expenses, decreased by $0.7
million primarily due to the Espresso portfolio, which has three operator
transitions ongoing as of , resulting in a decrease to revenues.
The decrease in the Espresso portfolio was partially offset by development and
operational improvements in the Trilogy portfolio.
Income Tax Benefit (Expense)
Income tax expense for the six months ended  was $30,000 and
related to our operating properties, which operate through a taxable REIT
subsidiary structure. Income tax expense for the six months ended 
was $41,000.
Liquidity and Capital Resources
Our current principal liquidity needs are to fund: (i) principal and interest
payments on our borrowings and other commitments; (ii) operating expenses; (iii)
capital expenditures, development and redevelopment activities; and (iv)
distributions to our stockholders and repurchases of our shares.
Our current primary sources of liquidity include the following: (i) cash on
hand; (ii) cash flow generated by our investments, both from our operating
activities and distributions from our unconsolidated joint ventures; (iii)
secured or unsecured financings from banks and other lenders, including
investment-level financing and/or a corporate credit facility; and (iv) proceeds
from full or partial realization of investments.
We currently believe that our capital resources are sufficient to meet our
capital needs. If the performance of our investments falls below our
expectations or we are unable to execute our financing strategy, we may be
unable to pay distributions to our stockholders and repurchase shares consistent
at current levels, or at all, and may be required to sell assets. For additional
information regarding our liquidity needs and sources of liquidity, see below.
As of , we had $40.1 million of unrestricted cash.
Use of Liquidity
Borrowings and Other Commitments
Our commitments generally include principal and interest payments on our
borrowings, including the obligations of our unconsolidated joint ventures.
Borrowings that are maturing in our unconsolidated joint ventures may require us
to fund additional contributions, if favorable refinancing is not obtained. Our
proportionate share of unconsolidated joint venture borrowings includes
approximately $300 million for debt maturing in 2019 in our Griffin-American
portfolio.

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We use or have used our capital resources to make certain payments to our
Advisor. We expect to continue to make payments to our Advisor, or its
affiliates, pursuant to our advisory agreement, as applicable, in connection
with the management of our assets and costs incurred by our Advisor in providing
services to us. In , our advisory agreement was amended with
changes to the asset management and acquisition fee structure. We renewed our
advisory agreement with our Advisor on  for an additional one-year
term on terms identical to those previously in effect. Refer to "Related Party
Arrangements" for further information regarding our advisory fees.
Operating Expenses
In addition to our own operating expenses, as of , we operated 63
properties, or 79.3% of our assets, excluding our unconsolidated ventures and
properties designated held for sale, pursuant to management agreements, whereby
we are directly exposed to various operational risks with respect to these
healthcare properties. To the extent revenues are not sufficient to cover
expenses at these properties, we will need to fund operating shortfalls.
Capital Expenditures, Development and Redevelopment Activities
The terms of our net leases generally obligate our tenants to pay all capital
expenditures necessary to maintain and improve our net leased properties.
However, from time to time, we may fund the capital expenditures for our net
leased properties through loans or advances to the tenant, which may increase
the amount of rent payable with respect to the properties in certain cases. We
may also fund capital expenditures for which we may become responsible upon
expiration of our net leases or in the event that our tenants are unable or
unwilling to meet their obligations under those leases or capital expenditures
related to operating properties.
We are also party to certain agreements that contemplate development of
healthcare properties funded by us and our joint venture partners. Although we
may not be obligated to fund such capital contributions or capital projects, we
may be subject to adverse consequences under our joint venture governing
documents for any such failure to fund. In addition, from time to time, we may
engage in redevelopment projects with respect to our existing senior housing
communities to maximize the value, increase operating income, maintain a
market-competitive position, achieve property stabilization or change the
primary use of the property.
Distributions
To continue to qualify as a REIT, we are required to distribute annually at
least 90% of our taxable income, subject to certain adjustments, to
stockholders. In addition, we generally pay distributions on a monthly basis
based on daily record dates. Refer to "Distributions Declared and Paid" for
further information.
Repurchases
We have adopted a Share Repurchase Program effective , as most
recently amended in , which enables stockholders to sell their
shares to us in limited circumstances. However, our board of directors may
amend, suspend or terminate our Share Repurchase Program at any time, subject to
certain notice requirements. Refer to Note 10, "Stockholders' Equity" in our
accompanying consolidated financial statements included in Part I, Item 1.
"Financial Statements."
Sources of Liquidity
Cash From Operations
Our investments generate cash, either from operations or as a return of our
invested capital. We primarily generate revenue from net operating income of
real estate properties, as well as interest income from our debt and securities
investments and distributions from our investments in unconsolidated ventures.
This income is partially offset by interest expense associated with our
borrowings.
The failure of any of our investments to perform consistent with our
expectations may have a material adverse impact on our liquidity needs. In
addition, we have significant joint ventures, with unconsolidated joint ventures
and consolidated joint ventures representing 37.2% and 19.9%, respectively, of
our total real estate equity investments as of , and we may not be
able to control the timing of distributions from these investments, if any.
Borrowings
We have various forms of asset-level financing. Refer to Note 7, "Borrowings" of
Part I, Item 1. "Financial Statements" for further information.
In , we obtained our Sponsor Line, for up to $15.0 million at an
interest rate of 3.5% plus LIBOR to provide additional short-term liquidity. Our
Sponsor Line had an initial one year term, with an extension option of six
months. In , the borrowing capacity under our Sponsor Line was
increased to $35.0 million. In , our Sponsor Line maturity was
extended through . As of , we had drawn and fully
repaid $25.0 million under our Sponsor Line and we have not utilized our Sponsor
Line in 2018.

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In , we obtained our Corporate Facility for up to $25.0 million,
which remains subject to satisfaction of certain post-closing obligations,
including the pledge of borrowing base assets. Our Corporate Facility has a
three year term at interest rates ranging between 2.5% and 3.5% plus LIBOR and
has not been utilized as of .
Our charter limits us from incurring borrowings that would exceed 300.0% of our
net assets. We cannot exceed this limit unless any excess in borrowing over such
level is approved by a majority of our independent directors. We would need to
disclose any such approval to our stockholders in our next quarterly report
along with the justification for such excess. An approximation of this leverage
calculation, excluding indirect leverage held through our unconsolidated joint
venture investments and any securitized mortgage obligations to third parties,
is 75.0% of our assets, other than intangibles, before deducting loan loss
reserves, other non- cash reserves and depreciation and as of , our
leverage was 62.1%. As of , indirect leverage on assets, other than
intangibles, before deducting loan loss reserves, other non-cash reserves and
depreciation, held through our unconsolidated joint ventures was 70.7%.
Disposition of Investments
We may, from time to time, consider dispositions of investments to provide an
additional source of liquidity. During the six months ended , we
reclassified an operating property as held for sale.
Offering
From inception through , we have raised total gross proceeds of
$2.0 billion, including $217.8 million in DRP proceeds. We are no longer raising
capital from our Offering and we have invested substantially all of the net
proceeds from our Offering. Since the successful completion of our Offering, we
have only been raising new equity capital through our DRP, and as such, do not
expect significant new investment activity.
Cash Flows
The following presents a summary of our consolidated statements of cash flows
for the six months ended  and 2017 (dollars in thousands):
                                           Six Months Ended June 30,
Cash flow provided by (used in):          2018                   2017           2018 vs. 2017 Change
Operating activities               $         13,262       $         11,416     $             1,846
Investing activities                         23,894               (123,707 )               147,601
Financing activities                        (42,909 )               22,621                 (65,530 )
Net increase (decrease) in cash,
cash equivalents and restricted
cash                               $         (5,753 )     $        (89,670 )   $            83,917


Six Months Ended  compared to 
Operating Activities
Net cash provided by operating activities was $13.3 million for the six months
ended  compared to $11.4 million for the six months ended . The increase of $1.8 million was primarily attributable to a decrease in
asset management and acquisition fees paid to our Advisor.
Investing Activities
Our cash flows from investing activities are generally used to fund investment
acquisitions, net of any repayment activity. Net cash provided by investing
activities was $23.9 million for the six months ended  compared to
net cash used of $123.7 million for the six months ended . Cash
flows provided by investing activities for the six months ended 
are primarily attributable to the sale of our investment in the Freddie Mac
securitization partially offset by additional capital improvements to existing
investments. Cash flows used in investing activities for the six months ended
 primarily relate to the acquisition of two operating real estate
portfolios and additional capital contributions to joint venture investments.

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The following table presents capital improvements made during the six months
ended  as compared to the six months ended , excluding
capital improvements made at our unconsolidated ventures (dollars in thousands):
                                         Six Months Ended June 30,
Capital Improvements                      2018                2017            2018 vs. 2017 Change
Development projects               $          2,107     $           481     $                1,626
Recurring                                    11,625               8,849                      2,776
Total improvement of operating
real estate investments            $         13,732     $         9,330     $                4,402


Financing Activities
Our cash flows from financing activities are principally impacted by our
distributions paid on common stock and changes in our mortgage notes payable.
Cash flows used in financing activities was $42.9 million for the six months
ended  compared to cash flow provided by financing activities of
$22.6 million for the six months ended . The change of $65.5
million was primarily attributable to payments of dividends and share
repurchases, with no proceeds obtained from real estate financings during the
six months ended .
Off-Balance Sheet Arrangements
As of , we are not dependent on the use of any off-balance sheet
financing arrangements for liquidity. We have made investments in unconsolidated
ventures. Refer to Note 4, "Investments in Unconsolidated Ventures" in Part I.
Item 1. "Financial Statements" for a discussion of such unconsolidated ventures
in our consolidated financial statements. In each case, our exposure to loss is
limited to the carrying value of our investment.
Inflation
Some of our assets and liabilities are interest rate sensitive in nature. As a
result, interest rates and other factors may influence our performance. A change
in interest rates may correlate with the inflation rate. Substantially all of
the leases allow for annual rent increases based on the greater of certain
percentages or increase in the relevant consumer price index. Such types of
leases generally minimize the risks of inflation on our healthcare properties.
Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk"
for additional details.
Related Party Arrangements
Advisor
Subject to certain restrictions and limitations, our Advisor is responsible for
managing our affairs on a day-to-day basis and for identifying, acquiring,
originating and asset managing investments on our behalf. Our Advisor may
delegate certain of its obligations to affiliated entities, which may be
organized under the laws of the United States or foreign jurisdictions.
References to our Advisor include our Advisor and any such affiliated entities.
For such services, to the extent permitted by law and regulations, our Advisor
receives fees and reimbursements from us. Pursuant to our advisory agreement,
our advisor may defer or waive fees in its discretion. Below is a description
and table of the fees and reimbursements incurred to our Advisor.
In , our advisory agreement was amended with changes to the asset
management and acquisition fee structure as further described below. In , our advisory agreement was renewed for an additional one-year term
commencing on , with terms identical to those in effect through
.
Fees to Advisor
Asset Management Fee
From inception through , our Advisor received a monthly asset
management fee equal to one-twelfth of 1.0% of the sum of the amount funded or
allocated for investments, including expenses and any financing attributable to
such investments, less any principal received on debt and securities investments
(or our proportionate share thereof in the case of an investment made through a
joint venture).
In , our advisory agreement was amended. Effective ,
our Advisor receives a monthly asset management fee equal to one-twelfth of 1.5%
of our most recently published aggregate estimated net asset value, as may be
subsequently adjusted for any special distribution declared by our board of
directors in connection with a sale, transfer or other

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disposition of a substantial portion of our assets, with $2.5 million per
calendar quarter of such fee paid in shares of our common stock at a price per
share equal to the most recently published net asset value per share.
Our Advisor has also agreed that all shares of our common stock issued to it in
consideration of the asset management fee will be subordinate in the share
repurchase program to shares of our common stock held by third party
stockholders for a period of two years, unless our advisory agreement is earlier
terminated.
Incentive Fee
Our Advisor is entitled to receive distributions equal to 15.0% of our net cash
flows, whether from continuing operations, repayment of loans, disposition of
assets or otherwise, but only after stockholders have received, in the
aggregate, cumulative distributions equal to their invested capital plus a 6.75%
cumulative, non-compounded annual pre-tax return on such invested capital.
Acquisition Fee
From inception through , our Advisor received fees for
providing structuring, diligence, underwriting advice and related services in
connection with real estate acquisitions equal to 2.25% of each real estate
property acquired by us, including acquisition costs and any financing
attributable to an equity investment (or the proportionate share thereof in the
case of an indirect equity investment made through a joint venture or other
investment vehicle) and 1.0% of the amount funded or allocated by us to acquire
or originate debt investments, including acquisition costs and any financing
attributable to such investments (or the proportionate share thereof in the case
of an indirect investment made through a joint venture or other investment
vehicle).
In , our advisory agreement was amended. Effective ,
our Advisor no longer receives an acquisition fee in connection with our
acquisitions of real estate properties or debt investments.
Disposition Fee
For substantial assistance in connection with the sale of investments and based
on the services provided, as determined by our independent directors, our
Advisor may receive a disposition fee of 2.0% of the contract sales price of
each property sold and 1.0% of the contract sales price of each debt investment
sold. We do not pay a disposition fee upon the maturity, prepayment, workout,
modification or extension of a debt investment unless there is a corresponding
fee paid by our borrower, in which case the disposition fee is the lesser of:
(i) 1.0% of the principal amount of the debt investment prior to such
transaction; or (ii) the amount of the fee paid by our borrower in connection
with such transaction. If we take ownership of a property as a result of a
workout or foreclosure of a debt investment, we will pay a disposition fee upon
the sale of such property. A disposition fee from the sale of an investment is
generally expensed and included in asset management and other fees - related
party in our consolidated statements of operations. A disposition fee for a debt
investment incurred in a transaction other than a sale is included in debt
investments, net on our consolidated balance sheets and is amortized to interest
income over the life of the investment using the effective interest method.
Reimbursements to Advisor
Operating Costs
Our Advisor is entitled to receive reimbursement for direct and indirect
operating costs incurred by our Advisor in connection with administrative
services provided to us. Our Advisor allocates, in good faith, indirect costs to
us related to our Advisor's and its affiliates' employees, occupancy and other
general and administrative costs and expenses in accordance with the terms of,
and subject to the limitations contained in, the advisory agreement with our
Advisor. The indirect costs include our allocable share of our Advisor's
compensation and benefit costs associated with dedicated or partially dedicated
personnel who spend all or a portion of their time managing our affairs, based
upon the percentage of time devoted by such personnel to our affairs. The
indirect costs also include rental and occupancy, technology, office supplies,
travel and entertainment and other general and administrative costs and
expenses. However, there is no reimbursement for personnel costs related to our
executive officers (although there may be reimbursement for certain executive
officers of our Advisor) and other personnel involved in activities for which
our Advisor receives an acquisition fee or a disposition fee. Our Advisor
allocates these costs to us relative to its and its affiliates' other managed
companies in good faith and has reviewed the allocation with our board of
directors, including our independent directors. Our Advisor updates our board of
directors on a quarterly basis of any material changes to the expense allocation
and provides a detailed review to the board of directors, at least annually, and
as otherwise requested by the board of directors. We reimburse our Advisor
quarterly for operating costs (including the asset management fee) based on a
calculation for the four preceding fiscal quarters not to exceed the greater of:
(i) 2.0% of our average invested assets; or (ii) 25.0% of our net income
determined without reduction for any additions to reserves for depreciation,
loan losses or other similar non-cash reserves and excluding any gain from the
sale of assets for that period. Notwithstanding the above, we may reimburse our
Advisor for expenses in excess of this limitation if a majority of our
independent directors determines that such excess expenses are justified based
on unusual and non-recurring factors. We calculate the expense reimbursement
quarterly based upon the trailing twelve-month period.

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Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred to our Advisor
for the six months ended  and the amount due to related party as of
 and  (dollars in thousands):
                                               Due to Related                                               Due to Related
                                                 Party as of        Six Months Ended June 30, 2018            Party as of
Type of Fee or        Financial Statement       December 31,                                                 June 30, 2018
Reimbursement              Location                 2017             Incurred              Paid               (Unaudited)
Fees to Advisor
Entities
  Asset            Asset management and
management(1)      other fees-related party    $           -     $      11,902       $       (11,902 ) (2)  $           -
                   Investments in
                   unconsolidated
                   ventures/Asset management
                   and other fees-related
  Acquisition(2)   party                                   8               
(8 )                   -                    -
Reimbursements
to Advisor
Entities
  Operating        General and
costs(3)           administrative expenses             1,038             6,130                (4,238 )              2,930
Total                                          $       1,046     $      18,024       $       (16,140 )      $       2,930

_______________________________________

(1) Includes $5.0 million paid in shares of our common stock.

(2) From inception through , our Advisor waived $0.3 million of

acquisition fees related to healthcare-related securities. We did not incur

any disposition fees during the six months ended , nor were any

such fees outstanding as of .

(3) As of , our Advisor does not have any unreimbursed operating

costs which remain eligible to be allocated to us.



Issuance of Common Stock to our Advisor
Pursuant to the  amendment of our advisory agreement, for the six
months ended , we issued 0.6 million shares totaling $5.0 million
to an affiliate of our Advisor as part of its asset management fee.
Investments in Joint Ventures
The below table indicates our investments for which our Sponsor is also an
equity partner in the joint venture. Each investment was approved by our board
of directors, including all of its independent directors. Refer to Note 4,
"Investments in Unconsolidated Ventures" of Part I, Item 1. "Financial
Statements" for further discussion of these investments:
      Portfolio                 Partner(s)           Acquisition Date     Ownership
                         Colony Capital/Formation
Eclipse                  Capital, LLC                    May-2014           5.6%
Griffin-American         Colony Capital                  Dec-2014           14.3%



In connection with the acquisition of the Griffin-American portfolio by
NorthStar Realty, now a subsidiary of Colony Capital, and us, our Sponsor
acquired a 43.0%, as adjusted, ownership interest in AHI and Mr. James F.
Flaherty III, a partner of our Sponsor, acquired a 12.3% ownership interest in
AHI. AHI is a healthcare-focused real estate investment management firm that
co-sponsored and advised Griffin-American, until Griffin-American was acquired
by us and NorthStar Realty.
In , we, through a joint venture with Griffin-American Healthcare
REIT III, Inc., or GAHR3, a REIT sponsored and advised by AHI, acquired a 29.0%
interest in the Trilogy portfolio, a $1.2 billion healthcare portfolio and
contributed $201.7 million for our interest. The purchase was approved by our
board of directors, including all of our independent directors. In 2016 and
2017, we funded additional capital contributions of $18.8 million and $8.3
million, respectively, in accordance with the joint venture agreement.
Additionally, in 2018, we funded capital contributions of $4.5 million for a
total contribution of $233.3 million. The additional fundings related to certain
business initiatives, including the acquisition of additional senior housing and
skilled nursing facilities and repayment of certain outstanding obligations.
Origination of Mezzanine Loan
In , we originated a $75.0 million mezzanine loan to a subsidiary of
our joint venture with Formation and Safanad Management Limited, or the Espresso
joint venture, which bears interest at a fixed rate of 10.0% per year and
matures in .
Colony Capital Line of Credit
In , we obtained our Sponsor Line for up to $15.0 million at an
interest rate of 3.5% plus LIBOR. Our Sponsor Line has an initial one year term,
with an extension option of six months. Our Sponsor Line was approved by our
board of directors, including all of our independent directors. In , the borrowing capacity under our Sponsor Line was increased to $35.0
million. In , our Sponsor Line maturity was extended through . As of , we

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had drawn and fully repaid $25.0 million under our Sponsor Line. We did not
utilize our Sponsor Line during the six months ended .
Recent Developments
Distribution Reinvestment Plan
For the period from  through , we issued 0.6 million
shares pursuant to our DRP, representing gross proceeds of $5.1 million.
Share Repurchases
For the period from  through , we repurchased 1.0
million shares for a total of $7.7 million or a weighted average price of $7.91
per share under our Share Repurchase Program. We fund repurchase requests
received during a quarter with cash received from proceeds pursuant to the DRP.
As of , we had a total of $64.1 million in unfulfilled repurchase
requests. Refer to Item 1. "Financial Statements," Note 10, "Stockholders'
Equity" for additional information regarding our Share Repurchase Program.
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We believe that FFO and MFFO are additional appropriate measures of the
operating performance of a REIT and of us in particular. We compute FFO in
accordance with the standards established by the National Association of Real
Estate Investment Trusts, or NAREIT, as net income (loss) (computed in
accordance with U.S. GAAP), excluding gains (losses) from sales of depreciable
property, the cumulative effect of changes in accounting principles, real
estate-related depreciation and amortization, impairment on depreciable property
owned directly or indirectly and after adjustments for unconsolidated ventures.
Changes in the accounting and reporting rules under U.S. GAAP that have been put
into effect since the establishment of NAREIT's definition of FFO have prompted
an increase in the non-cash and non-operating items included in FFO. For
instance, the accounting treatment for acquisition fees related to business
combinations has changed from being capitalized to being expensed. Additionally,
publicly registered, non-traded REITs are typically different from traded REITs
because they generally have a limited life followed by a liquidity event or
other targeted exit strategy. Non-traded REITs typically have a significant
amount of acquisition activity and are substantially more dynamic during their
initial years of investment and operation as compared to later years when the
proceeds from their initial public offering have been fully invested and when
they may seek to implement a liquidity event or other exit strategy. However, it
is likely that we will make investments past the acquisition and development
stage, albeit at a substantially lower pace.
Acquisition fees paid to our Advisor in connection with the origination and
acquisition of debt investments are amortized over the life of the investment as
an adjustment to interest income under U.S. GAAP and are therefore included in
the computation of net income (loss) and income (loss) before equity in earnings
(losses) of unconsolidated ventures and income tax benefit (expense), both of
which are performance measures under U.S. GAAP. We adjust MFFO for the
amortization of acquisition fees in the period when such amortization is
recognized under U.S. GAAP. Acquisition fees are paid in cash that would
otherwise be available to distribute to our stockholders. In the event that
proceeds from our Offering are not sufficient to fund the payment or
reimbursement of acquisition fees and expenses to our Advisor, such fees would
be paid from other sources, including new financing, operating cash flow, net
proceeds from the sale of investments or from other cash flow. We believe that
acquisition fees incurred by us negatively impact our operating performance
during the period in which such investments are originated or acquired by
reducing cash flow and therefore the potential distributions to our
stockholders. However, in general, we earn origination fees for debt investments
from our borrowers in an amount equal to the acquisition fees paid to our
Advisor, and as a result, the impact of acquisition fees to our operating
performance and cash flow would be minimal. In , our advisory
agreement was amended. Effective , our Advisor no longer receives
an acquisition fee in connection with our acquisition of real estate properties
or debt investments.
Acquisition fees and expenses paid to our Advisor and third parties in
connection with the acquisition of equity investments are generally considered
expenses and are included in the determination of net income (loss) and income
(loss) before equity in earnings (losses) of unconsolidated ventures and income
tax benefit (expense), both of which are performance measures under U.S. GAAP.
Such fees and expenses will not be reimbursed by our Advisor or its affiliates
and third parties, and therefore, if there are no further proceeds from the sale
of shares of our common stock to fund future acquisition fees and expenses, such
fees and expenses will need to be paid from either additional debt, operating
earnings, cash flow or net proceeds from the sale of investments or properties.
All paid and accrued acquisition fees and expenses will have negative effects on
future distributions to stockholders and cash flow generated by us, unless
earnings from operations or net sales proceeds from the disposition of other
properties are generated to cover the purchase price of the property, these fees
and expenses and other costs related to such property.

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Due to certain of the unique features of publicly-registered, non-traded REITs,
the Institute for Portfolio Alternatives, or the IPA, an industry trade group,
standardized a performance measure known as MFFO and recommends the use of MFFO
for such REITs. Management believes MFFO is a useful performance measure to
evaluate our business and further believes it is important to disclose MFFO in
order to be consistent with the IPA recommendation and other non-traded REITs.
MFFO adjusts for items such as acquisition fees would only be comparable to
non-traded REITs that have completed the majority of their acquisition activity
and have other similar operating characteristics as us. Neither the U.S.
Securities and Exchange Commission, or SEC, nor any other regulatory body has
approved the acceptability of the adjustments that we use to calculate MFFO. In
the future, the SEC or another regulatory body may decide to standardize
permitted adjustments across the non-listed REIT industry and we may need to
adjust our calculation and characterization of MFFO.
MFFO is a metric used by management to evaluate our future operating performance
once our organization and offering and acquisition and development stages are
complete and is not intended to be used as a liquidity measure. Although
management uses the MFFO metric to evaluate future operating performance, this
metric excludes certain key operating items and other adjustments that may
affect our overall operating performance. MFFO is not equivalent to net income
(loss) as determined under U.S. GAAP. In addition, MFFO is not a useful measure
in evaluating net asset value, since an impairment is taken into account in
determining net asset value but not in determining MFFO.
We define MFFO in accordance with the concepts established by the IPA, and
adjust for certain items, such as accretion of a discount and amortization of a
premium on borrowings and related deferred financing costs, as such adjustments
are comparable to adjustments for debt investments and will be helpful in
assessing our operating performance. We also adjust MFFO for the non-recurring
impact of the non-cash effect of deferred income tax benefits or expenses, as
applicable, as such items are not indicative of our operating performance.
Similarly, we adjust for the non-cash effect of unrealized gains or losses on
unconsolidated ventures. Our computation of MFFO may not be comparable to other
REITs that do not calculate MFFO using the same method. MFFO is calculated using
FFO. FFO, as defined by NAREIT, is a computation made by analysts and investors
to measure a real estate company's operating performance. The IPA's definition
of MFFO excludes from FFO the following items:
• acquisition fees and expenses;


• non-cash amounts related to straight-line rent and the amortization of

above or below market and in-place intangible lease assets and liabilities

(which are adjusted in order to reflect such payments from an accrual

basis of accounting under U.S. GAAP to a cash basis of accounting);

• amortization of a premium and accretion of a discount on debt investments;

• non-recurring impairment of real estate-related investments that meet the

specified criteria identified in the rules and regulations of the SEC;

• realized gains (losses) from the early extinguishment of debt;

• realized gains (losses) on the extinguishment or sales of hedges, foreign

exchange, securities and other derivative holdings except where the

trading of such instruments is a fundamental attribute of our business;

• unrealized gains (losses) from fair value adjustments on real estate

       securities, including CMBS and other securities, interest rate swaps and
       other derivatives not deemed hedges and foreign exchange holdings;

• unrealized gains (losses) from the consolidation from, or deconsolidation

to, equity accounting;

• adjustments related to contingent purchase price obligations; and


•      adjustments for consolidated and unconsolidated partnerships and joint
       ventures calculated to reflect MFFO on the same basis as above.


Certain of the above adjustments are also made to reconcile net income (loss) to
net cash provided by (used in) operating activities, such as for the
amortization of a premium and accretion of a discount on debt and securities
investments, amortization of fees, any unrealized gains (losses) on derivatives,
securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We
assess the credit quality of our investments and adequacy of reserves/impairment
on a quarterly basis, or more frequently as necessary. Significant judgment is
required in this analysis. With respect to debt investments, we consider the
estimated net recoverable value of the loan 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 prospects for the borrower and the competitive situation
of the region where the borrower does business. Fair value is typically
estimated based on discounting expected future cash flow of the underlying
collateral taking into consideration the discount rate, capitalization rate,
occupancy, creditworthiness of major tenants and many other factors. This
requires significant judgment and because it is

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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 the estimated fair value of the underlying
collateral for the debt investment is less than its net carrying value, a loan
loss reserve is recorded with a corresponding charge to provision for loan
losses. With respect to a real estate investment, a property's value is
considered impaired if a triggering event is identified and our estimate of the
aggregate future undiscounted cash flow to be generated by the property is less
than the carrying value of the property. The value of our investments may be
impaired and their carrying values may not be recoverable due to our limited
life. Investors should note that while impairment charges are excluded from the
calculation of MFFO, investors are cautioned that due to the fact that
impairments are based on estimated future undiscounted cash flow and the
relatively limited term of a non-traded REIT's anticipated operations, it could
be difficult to recover any impairment charges through operational net revenues
or cash flow prior to any liquidity event.
We believe that MFFO is a useful non-GAAP measure for non-traded REITs. It is
helpful to management and stockholders in assessing our future operating
performance once our organization and offering and acquisition and development
stages are complete, because it eliminates from net income non-cash fair value
adjustments on our real estate securities and acquisition fees and expenses that
are incurred as part of our investment activities. However, MFFO may not be a
useful measure of our operating performance or as a comparable measure to other
typical non-traded REITs if we do not continue to operate in a similar manner to
other non-traded REITs, including if we were to extend our acquisition and
development stage or if we determined not to pursue an exit strategy.
However, MFFO does have certain limitations. For instance, the effect of any
amortization or accretion on debt investments originated or acquired at a
premium or discount, respectively, is not reported in MFFO. In addition,
realized gains (losses) from acquisitions and dispositions and other adjustments
listed above are not reported in MFFO, even though such realized gains (losses)
and other adjustments could affect our operating performance and cash available
for distribution. Stockholders should note that any cash gains generated from
the sale of investments would generally be used to fund new investments. Any
mark-to-market or fair value adjustments may be based on many factors, including
current operational or individual property issues or general market or overall
industry conditions.
We purchased Class B healthcare-related securities in a securitization trust at
a discount to par value, and would have recorded the accretion of the discount
as interest income (which we refer to as the effective yield) had we been able
to record the transaction as an available for sale security. As we were granted
certain rights with our purchase, U.S. GAAP requires us to consolidate the whole
securitization trust and eliminate the Class B securities. We believe that
reporting the effective yield in MFFO provides better insight to the expected
contractual cash flows and is more consistent with our review of operating
performance. The effective yield computation under U.S. GAAP and MFFO is the
same.
Neither FFO nor MFFO is equivalent to net income (loss) or cash flow provided by
operating activities determined in accordance with U.S. GAAP and should not be
construed to be more relevant or accurate than the U.S. GAAP methodology in
evaluating our operating performance. Neither FFO nor MFFO is necessarily
indicative of cash flow available to fund our cash needs including our ability
to make distributions to our stockholders. FFO and MFFO do not represent amounts
available for management's discretionary use because of needed capital
replacement or expansion, debt service obligations or other commitments or
uncertainties. Furthermore, neither FFO nor MFFO should be considered as an
alternative to net income (loss) as an indicator of our operating performance.

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The following table presents a reconciliation of net income (loss) attributable
to common stockholders to FFO and MFFO attributable to common stockholders
(dollars in thousands):
                                         Three Months Ended June 30,          Six Months Ended June 30,
                                           2018               2017               2018              2017
Funds from operations:
Net income (loss) attributable to
NorthStar Healthcare Income, Inc.
common stockholders                  $     (34,094 )     $     (21,593 )   $     (67,762 )     $  (48,672 )
Adjustments:
Depreciation and amortization               27,494              19,851            56,314           44,769
Impairment losses of depreciable
real estate                                  2,456                   -             4,514                -
Depreciation and amortization
related to unconsolidated ventures           8,461              10,867            16,735           21,186
Depreciation and amortization
related to non-controlling interests          (219 )               (94 )            (459 )           (187 )
Impairment loss on real estate
related to non-controlling interests             -                   -               (62 )              -
Realized (gain) loss from sales of
property related to unconsolidated
ventures                                       479              (1,082 )           2,722             (547 )
Impairment losses of depreciable
real estate held by unconsolidated
ventures                                       329               2,339               326            3,530
Funds from operations attributable
to NorthStar Healthcare Income, Inc.
common stockholders                  $       4,906       $      10,288     $      12,328       $   20,079
Modified funds from operations:
Funds from operations attributable
to NorthStar Healthcare Income, Inc.
common stockholders                  $       4,906       $      10,288     $      12,328       $   20,079
Adjustments:
Acquisition fees and transaction
costs                                           41               1,997               796            5,727
Straight-line rental (income) loss           1,235                (434 )             876             (963 )
Amortization of premiums, discounts
and fees on investments and
borrowings                                   1,198               1,117             2,404            2,026
Amortization of discounts on
healthcare-related securities                    -                 383               314              733
Adjustments related to
unconsolidated ventures(1)                   4,235               4,495            11,506            7,742
Adjustments related to
non-controlling interests                       (8 )                (7 )             (39 )            (13 )
Realized (gain) loss on investments
and other                                        -                 (90 )          (3,495 )           (118 )
Unrealized (gain) loss on senior
housing mortgage loans and debt held
in securitization trust                          -                (358 )               -             (724 )
Impairment of assets other than real
estate                                           -                   -               725                -
Modified funds from operations
attributable to NorthStar Healthcare
Income, Inc. common stockholders     $      11,607       $      17,391     $      25,415       $   34,489


_______________________________________

(1) Primarily represents our proportionate share of loan loss reserves,

transaction costs and amortization of above/below market debt adjustments and

deferred financing costs incurred through our investments in unconsolidated

ventures.



Distributions Declared and Paid
We generally pay distributions on a monthly basis based on daily record dates.
From the date of our first investment on  through , we paid an annualized distribution amount of $0.675 per share of our
common stock. Our board of directors approved a daily cash distribution of
$0.000924658 per share of common stock, equivalent to an annualized distribution
amount of $0.3375 per share, for each of the six months ended .
Distributions are generally paid to stockholders on the first business day of
the month following the month for which the distribution has accrued.

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The following table presents distributions declared for the six months ended and year ended (dollars in thousands):

                                        Six Months Ended June 30, 2018      Year Ended December 31, 2017
Distributions(1)
  Cash                                 $              15,712              $              58,766
  DRP                                                 15,598                             67,037
Total                                  $              31,310              $             125,803

Sources of Distributions(1)

  FFO(2)                               $              12,328       39 %   $              16,831       13 %
  Offering proceeds - Other                           18,982       61 %                 108,972       87 %
Total                                  $              31,310      100 %   $             125,803      100 %

Cash Flow Provided by (Used in)
Operations                             $              13,262              $               7,858


_______________________________________

(1) Represents distributions declared for such period, even though such

distributions are actually paid to stockholders the month following such

period.

(2) From inception of our first investment on through ,

2018, we declared $396.5 million in distributions. Cumulative FFO for the

period from through was $27.0 million.



For the six months ended  and year ended ,
distributions in excess of FFO were paid using available capital sources,
including proceeds from borrowings and dispositions. To the extent distributions
are paid from sources other than FFO, the ownership interest of our public
stockholders will be diluted. Future distributions declared and paid may exceed
FFO and cash flow provided by operations. FFO, as defined, may not reflect
actual cash available for distributions. Our ability to pay distributions from
FFO or cash flow provided by operations depends upon our operating performance,
including the financial performance of our investments in the current real
estate and financial environment, the type and mix of our investments,
accounting of our investments in accordance with U.S. GAAP, the performance of
underlying debt and ability to maintain liquidity. We will continue to assess
our distribution policy in light of our operating performance and capital needs.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
We are primarily subject to interest rate risk, credit spread risk and credit
risk. These risks are dependent on various factors beyond our control, including
monetary and fiscal policies, domestic and international economic conditions and
political considerations. Our market risk sensitive assets, liabilities and
related derivative positions (if any) are held for investment and not for
trading purposes.
Interest Rate Risk
Changes in interest rates may affect our net income as a result of changes in
interest expense incurred in connection with floating-rate borrowings used to
finance our equity investments. As of , 11.7% of our total
borrowings were floating rate liabilities and none of our real estate debt
investments were floating rate investments. Of the floating rate liabilities
outstanding as of , 100.0% related to our directly owned operating
real estate equity investments' mortgage notes payable. As of , we
had two lines of credit which carry floating interest rates. There were no
outstanding liabilities under either line of credit as of .
Our interest rate risk management objectives are to limit the impact of interest
rate changes on earnings, prepayment penalties and cash flows and to lower
overall borrowing costs by borrowing primarily at fixed rates or variable rates
with the lowest margins available and by evaluating hedging opportunities.
For longer duration, relatively stable real estate cash flows such as those
derived from net lease assets, we seek to use fixed rate financing. For real
estate cash flows with greater growth potential such as operating properties, we
may use floating rate financing which provides prepayment flexibility and may
provide a better match between underlying cash flow projections and potential
increases in interest rates.
The interest rate on our floating-rate liabilities is a fixed spread over an
index such as LIBOR and typically reprices every 30 days based on LIBOR in
effect at the time. As of , a hypothetical 100 basis point increase
in interest rates would increase net interest expense by $1.8 million annually.
We did not have any floating rate real estate debt investments as of .
A change in interest rates could affect the value of our fixed-rate debt
investments. For instance, an increase in interest rates would result in a
higher required yield on investments, which would decrease the value on existing
fixed-rate investments in order to

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adjust their yields to current market levels. As of , we had one
fixed-rate debt investment with a carrying value of $74.7 million.
Credit Spread Risk
The value of our fixed and floating-rate investments also changes with market
credit spreads. This means that when market-demanded risk premium, or credit
spread, increases, the value of our fixed and floating-rate assets decrease and
vice versa. Fixed-rate assets are valued based on a market credit spread over
the rate payable on fixed-rate U.S. Treasuries of like maturity. This means that
their value is dependent on the yield demanded on such assets by the market,
based on their credit relative to U.S. Treasuries. The floating-rate debt and
securities investments are valued based on a market credit spread over the
applicable LIBOR. Demand for a higher yield on investments results in higher or
"wider" spread over the benchmark rate (usually the applicable U.S. Treasury
yield) to value these assets. Under these conditions, the value of our portfolio
should decrease. Conversely, if the spread used to value these assets were to
decrease or "tighten," the value of these assets should increase.
Credit Risk
We are subject to the credit risk of the operators or managers of our healthcare
properties. We undertake a rigorous credit evaluation of each healthcare
operator prior to acquiring healthcare properties. This analysis includes an
extensive due diligence investigation of the operator or manager's business as
well as an assessment of the strategic importance of the underlying real estate
to the operator or manager's core business operations. Where appropriate, we may
seek to augment the operator or manager's commitment to the facility by
structuring various credit enhancement mechanisms into the underlying leases,
management agreements or joint venture arrangements. These mechanisms could
include security deposit requirements or guarantees from entities we deem
creditworthy. In addition, we actively monitor lease coverage at each facility
within our healthcare portfolio. The extent of pending or future healthcare
regulation may have a material impact on the valuation and financial performance
of this portion of our portfolio.
The following table presents the operators and tenants of our properties,
excluding properties owned through unconsolidated joint ventures as of  (dollars in thousands):
                                                                       Six Months Ended June 30, 2018
                               Properties
                                  Under         Units Under      Property and Other     % of Total Property
Operator / Tenant              Management      Management(1)          Revenues           and Other Revenues
Watermark Retirement
Communities                            29             5,225     $          77,058               52.5  %
Solstice Senior Living   (2)           32             4,000                52,995               36.0  %
Avamere Health Services  (3)            5               453                 8,416                5.7  %
Arcadia Management                      4               572                 5,308                3.6  %
Integral Senior Living   (2)            3               162                 2,690                1.8  %
Peregrine Senior Living                 2               114                   761                0.5  %
Senior Lifestyle
Corporation              (4)            2               115                  (441 )             (0.3 )%
Other                    (5)            -                 -                   295                0.2  %
Total                                  77            10,641     $         147,082              100.0  %

_______________________________________

(1) Represents rooms for ALF and ILF and beds for MCF and SNF, based predominant

type.

(2) Solstice Senior Living, LLC is a joint venture of which affiliates of

Integral Senior Living own 80%.

(3) Effective , properties under the management of Bonaventure were

transitioned to Avamere Health Services.

(4) As a result of the tenant failing to remit rental payments, we accelerated

the amortization of capitalized lease inducements.

(5) Represents interest income earned on corporate-level cash accounts.



Credit risk in our debt and securities investments relates to each individual
borrower's ability to make required interest and principal payments on scheduled
due dates. We seek to manage credit risk through our Advisor's comprehensive
credit analysis prior to making an investment, actively monitoring our portfolio
and the underlying credit quality, including subordination and diversification
of our portfolio. Our analysis is based on a broad range of real estate,
financial, economic and borrower-related factors which we believe are critical
to the evaluation of credit risk inherent in a transaction. For the six months
ended , the Espresso mezzanine loan and the Freddie Investment
contributed 100.0% of interest income. As of , one borrower, a
subsidiary of the Espresso joint venture, represented 100.0% of the aggregate
principal amount of our debt investments. Currently, three of the portfolios
within the Espresso joint venture are in the process of being transitioned to
new operators, which has resulted in certain non-monetary events of default
under the borrowings of the Espresso joint venture, including our mezzanine
loan. We are in active dialogue with the other lenders to the Espresso joint
venture and continue to monitor the situation.

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Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
XOM

     

Crypto World in Review: Taking in the Good with the Bad

A lot happened in the cryptocurrency industry this week.

Emerging Growth

DirectView Holdings Inc

DirectView Holdings Inc designs and installs surveillance systems, digital video recording and services. The company through its subsidiaries operates within two divisions security and surveillance and video conferencing services.