SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


	FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-53969

SENTIO HEALTHCARE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

MARYLAND	20-5721212
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

189 South Orange Avenue, Suite 1700,
Orlando, FL	32801
(Address of principal executive offices)	(Zip Code)

407-999-7679

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of November 4, 2013, there were 12,609,784 shares of common stock of Sentio Healthcare Properties, Inc. outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

FORM 10-Q

SENTIO HEALTHCARE PROPERTIES, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012 (unaudited)		1

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2013 (unaudited) and 2012 (unaudited)		2

Condensed Consolidated Statements of Equity for the Nine months ended September 30, 2013 (unaudited) and 2012 (unaudited)		3

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2013 (unaudited) and 2012 (unaudited)		4

Notes to Condensed Consolidated Financial Statements (unaudited)		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4. Controls and Procedures		27

PART II. OTHER INFORMATION		28

Item 1A. Risk Factors		28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 6. Exhibits		29

SIGNATURES		30

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2013		December 31, 2012
ASSETS
Cash and cash equivalents	$	18,265,000	$	21,507,000
Investments in real estate:
Land		23,193,000		23,193,000
Buildings and improvements, net		154,439,000		157,845,000
Furniture, fixtures and equipment, net		2,786,000		3,315,000
Intangible lease assets, net		3,334,000		5,383,000
		183,752,000		189,736,000
Deferred financing costs, net		1,496,000		1,697,000
Investment in unconsolidated entities		1,458,000		3,529,000
Tenant and other receivable, net		2,912,000		1,988,000
Deferred costs and other assets		8,249,000		2,987,000
Restricted cash		3,869,000		3,821,000
Goodwill		5,965,000		5,965,000
Total assets	$	225,966,000	$	231,230,000
LIABILITIES AND EQUITY
Liabilities:
Notes payable, net	$	143,605,000	$	145,364,000
Accounts payable and accrued liabilities		4,554,000		4,545,000
Prepaid rent and security deposits		1,984,000		1,879,000
Distributions payable		1,544,000		1,533,000
Total liabilities		151,687,000		153,321,000
Commitments and contingencies
Equity:
Common stock, $0.01 par value per share; 580,000,000 shares authorized; 12,615,208, and 12,807,673 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		126,000		128,000
Additional paid-in capital		84,953,000		91,589,000
Accumulated deficit		(14,419,000)		(17,936,000)
Total stockholders’ equity		70,660,000		73,781,000
Noncontrolling interests		3,619,000		4,128,000
Total equity		74,279,000		77,909,000
Total liabilities and equity	$	225,966,000	$	231,230,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

	1

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Revenue:
Rental revenue	$	8,499,000	$	8,422,000	$	25,373,000	$	24,525,000
Resident services and fee income		6,195,000		3,655,000		18,115,000		8,243,000
Tenant reimbursements and other income		403,000		312,000		1,212,000		1,121,000
		15,097,000		12,389,000		44,700,000		33,889,000
Expenses:
Property operating and maintenance		9,181,000		7,473,000		26,899,000		20,921,000
General and administrative expenses		523,000		423,000		1,186,000		1,632,000
Asset management fees and expenses		732,000		559,000		2,125,000		1,543,000
Real estate acquisition costs and contingent consideration		—		1,016,000		—		1,229,000
Depreciation and amortization		1,528,000		1,689,000		6,317,000		4,653,000
		11,964,000		11,160,000		36,527,000		29,978,000
Income from operations		3,133,000		1,229,000		8,173,000		3,911,000
Other (income) expense:
Interest expense, net		2,031,000		1,788,000		6,121,000		4,808,000
Loss on debt extinguishment and other expense		—		—		—		151,000
Equity in loss (income) from unconsolidated entities		56,000		(14,000)		(24,000)		363,000
Gain on remeasurement of investment in unconsolidated entity		—		—		—		(1,282,000)
Gain on disposition of investment in unconsolidated entity		(1,701,000)		—		(1,701,000)		—
Net income (loss)		2,747,000		(545,000)		3,777,000		(129,000)
Net income (loss) attributable to noncontrolling interests		215,000		(16,000)		260,000		108,000
Net income (loss) attributable to common stockholders	$	2,532,000	$	(529,000)	$	3,517,000	$	(237,000)
Basic and diluted net income (loss) per common share attributable to common stockholders	$	0.20	$	(0.04)	$	0.28	$	(0.02)
Basic and diluted weighted average number of common shares		12,673,194		12,853,483		12,756,221		12,877,929

The accompanying notes are an integral part of these condensed consolidated financial statements.

	2

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2013 and 2012

(Unaudited)

	Common Stock
	Number of Shares		Common Stock Par Value		Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity		Noncontrolling Interests		Total Equity
Balance — December 31, 2012		12,807,673	$	128,000	$	91,589,000	$	(17,936,000)	$	73,781,000	$	4,128,000	$	77,909,000
Redeemed shares		(192,465)		(2,000)		(1,922,000)		—		(1,924,000)		—		(1,924,000)
Offering costs		—		—		(92,000)		—		(92,000)		—		(92,000)
Distributions		—		—		(4,622,000)		—		(4,622,000)		(769,000)		(5,391,000)
Net income		—		—		—		3,517,000		3,517,000		260,000		3,777,000
Balance — September 30, 2013		12,615,208	$	126,000	$	84,953,000	$	(14,419,000)	$	70,660,000	$	3,619,000	$	74,279,000

	Common Stock
	Number of Shares		Common Stock Par Value		Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity		Noncontrolling Interests		Total Equity
Balance — December 31, 2011		12,916,612	$	129,000	$	96,542,000	$	(17,054,000)	$	79,617,000	$	1,242,000	$	80,859,000
Redeemed shares		(76,293)		—		(719,000)		—		(719,000)		—		(719,000)
Noncontrolling interest contribution		—		—		—		—		—		3,444,000		3,444,000
Distributions		—		—		(2,407,000)		—		(2,407,000)		(302,000)		(2,709,000)
Net (loss) income		—		—		—		(237,000)		(237,000)		108,000		(129,000)
Balance —September 30, 2012		12,840,319	$	129,000	$	93,416,000	$	(17,291,000)	$	76,254,000	$	4,492,000	$	80,746,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

	3

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2013		2012
Cash flows from operating activities:
Net income (loss)	$	3,777,000	$	(129,000)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of deferred financing costs		308,000		356,000
Depreciation and amortization		6,317,000		4,653,000
Straight-line rent and above/below market lease amortization		(487,000)		(527,000)
Gain on disposition of investment in unconsolidated entity		(1,701,000)		—
Amortization of loan premium		(52,000)		—
Real estate contingent consideration		—		110,000
Gain on remeasurement of investment in unconsolidated entity		—		(1,282,000)
Equity in (income) loss from unconsolidated entities		(24,000)		363,000
Bad debt expense		27,000		40,000
Deferred tax (benefit)		(569,000)		(191,000)
Change in operating assets and liabilities:
Tenant and other receivables		(285,000)		205,000
Deferred costs and other assets		152,000		441,000
Restricted cash		9,000		95,000
Prepaid rent and security deposits		105,000		142,000
Accounts payable and accrued liabilities		1,000		145,000
Net cash provided by operating activities		7,578,000		4,421,000
Cash flows from investing activities:
Real estate acquisitions		—		(18,151,000)
Additions to real estate		(489,000)		(383,000)
Purchase of an interest in an unconsolidated entity		—		(2,490,000)
Proceeds from disposition of investment in unconsolidated entity		3,534,000		—
Changes in restricted cash		(57,000)		47,000
Acquisition deposits		(886,000)		—
Distributions from unconsolidated entities		342,000		143,000
Net cash provided by (used in) investing activities		2,444,000		(20,834,000)
Cash flows from financing activities:
Redeemed shares		(1,924,000)		(719,000)
Proceeds from notes payable		—		40,763,000
Repayments of notes payable		(1,707,000)		(25,529,000)
Offering costs		(84,000)		—
Deferred financing costs		(107,000)		(1,247,000)
Noncontrolling interest contribution		—		603,000
Payment of real estate contingent consideration		—		(980,000)
Distributions paid to stockholders		(4,611,000)		(2,407,000)
Distributions paid to noncontrolling interests		(769,000)		(302,000)
Prepaid preferred stock offering costs		(4,062,000)		—
Net cash (used in) provided by financing activities		(13,264,000)		10,182,000
Net (decrease) in cash and cash equivalents		(3,242,000)		(6,231,000)
Cash and cash equivalents — beginning of period		21,507,000		27,972,000
Cash and cash equivalents — end of period	$	18,265,000	$	21,741,000
Supplemental disclosure of cash flow information:
Cash paid for interest	$	5,808,000	$	4,694,000
Cash paid for income taxes		367,000		549,000
Supplemental disclosure of non-cash financing and investing activities:
Distributions declared not paid		1,544,000		807,000
Accrued offering costs		8,000		—
Notes payable assumed and non-cash equity contribution in connection with real estate acquisition		—		50,236,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

	4

SENTIO HEALTHCARE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

1. Organization

Sentio Healthcare Properties, Inc., a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Sentio Healthcare Properties, Inc. and its consolidated subsidiaries, except where context otherwise requires. Our business is managed by Sentio Investments, LLC, a Florida limited liability company that was formed on December 20, 2011 (the “Advisor”), which is majority-owned and controlled by John Mark Ramsey, our Chief Executive Officer. Beginning with the taxable year ended December 31, 2008, Sentio Healthcare Properties, Inc. has elected to be taxed as a real estate investment trust (“REIT”).

Sentio Healthcare Properties OP, LP, a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. At September 30, 2013, we owned 100% of the interest in the Operating Partnership and the HC Operating Partnership, LP, a subsidiary of the Operating Partnership. We anticipate that we will conduct substantially all of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the guidance for the consolidation of variable interest entities (“VIEs”), we analyze our variable interests, including investments in partnerships and joint ventures, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews, based on our review of the design of the entity, its organizational structure including decision-making ability, risk and reward sharing experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions and financial agreements. We also use quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the SEC. Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Our accompanying interim condensed consolidated financial statements should be read in conjunction with our audited condensed consolidated financial statements and the notes thereto included on our 2012 Annual Report on Form 10-K, as filed with the SEC.

3. Investments in Real Estate

As of September 30, 2013, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Land		Buildings and improvements		Furniture, fixtures and equipment		Intangible lease assets
Cost	$	23,193,000	$	167,224,000	$	5,270,000	$	14,757,000
Accumulated depreciation and amortization		—		(12,785,000)		(2,484,000)		(11,423,000)
Net	$	23,193,000	$	154,439,000	$	2,786,000	$	3,334,000

	5

As of December 31, 2012, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Land		Buildings and improvements		Furniture, fixtures and equipment		Intangible lease assets
Cost	$	23,193,000	$	166,996,000	$	5,118,000	$	14,757,000
Accumulated depreciation and amortization		—		(9,151,000)		(1,803,000)		(9,374,000)
Net	$	23,193,000	$	157,845,000	$	3,315,000	$	5,383,000

Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended September 30, 2013 and 2012 was approximately $1.4 million and $1.2 million, respectively. Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the nine months ended September 30, 2013 and 2012 was approximately $4.3 million and $3.2 million, respectively.

Amortization associated with intangible assets for the three months ended September 30, 2013 and 2012 was $0.1 million and $0.5 million, respectively. Amortization associated with intangible assets for the nine months ended September 30, 2013 and 2012 was $2.0 million and $1.5 million, respectively.

Estimated amortization for October 1, 2013 through December 31, 2013 and each of the subsequent years is as follows:

	Intangible assets
October 1, 2013 — December 31, 2013	$	82,000
2014		330,000
2015		330,000
2016		329,000
2017		328,000
2018		328,000
2019 and thereafter		1,607,000

The estimated useful lives for intangible assets range from approximately three to sixteen years. As of September 30, 2013, the weighted-average amortization period for intangible assets was eleven years.

4. Investments in Unconsolidated Entities

As of September 30, 2013, the Company owns an interest in the following entity that is accounted for under the equity method of accounting:

Entity⁽¹⁾		Property Type		Acquired		Investment⁽²⁾			Ownership%
Physicians Center MOB		Medical Office Building		April 2012			1,458,000			71.9

(1)	This entity is not consolidated because the Company exercises significant influence, but does not control or direct the activities that most significantly impact the entity’s performance.
(2)	Represents the carrying value of the Company’s investment in the unconsolidated entity.

Summarized combined financial information for the Company’s unconsolidated entities is as follows:

	September 30, 2013⁽²⁾		December 31, 2012⁽¹⁾⁽²⁾
Cash and cash equivalents	$	370,000	$	423,000
Investments in real estate, net		8,949,000		16,312,000
Other assets		173,000		549,000
Total assets	$	9,492,000	$	17,284,000

Notes payable		7,240,000		12,504,000
Accounts payable and accrued liabilities		252,000		219,000
Other liabilities		26,000		99,000
Total stockholders’ equity		1,974,000		4,462,000
Total liabilities and equity	$	9,492,000	$	17,284,000

	6

	Three Months Ended September 30,				Nine Months Ended September 30,
		2013⁽¹⁾⁽²⁾		2012⁽¹⁾⁽²⁾		2013⁽¹⁾⁽²⁾		2012^(1)(2)(3)
Total revenues	$	505,000	$	689,000	$	1,898,000	$	1,754,000
Net loss		(81,000)		(15,000)		(22,000)		(486,000)
Company’s equity in loss (income) from unconsolidated entities		56,000		(14,000)		(24,000)		363,000

(1)	Littleton Specialty Rehabilitation Facility was completed in April 2012 and the single tenant began paying rent in July 2012, in accordance with the lease. Tenant operations commenced upon licensure of the facility in July 2012 and Littleton Specialty Rehabilitation Facility was accounted for under the equity method of accounting. On December 17, 2012, our joint venture partner noticed the Company of their intent to exercise their promote monetization right. The Company elected to satisfy the monetization provision through a sale of the property. The property was sold on August 8, 2013 for $11.3 million, which resulted in the Company receiving cash proceeds, net of debt repayment, of approximately $3.5 million. The Company recorded a gain of $1.7 million in the quarter ended September 30, 2013. The Company’s equity in income from the Littleton Specialty Rehabilitation Facility is included in the statement of operations through the date of the sale.
(2)	The Physicians Centre MOB joint venture was acquired in April 2012 and was accounted for under the equity method of accounting beginning with the second quarter of 2012.
(3)	The Company acquired the controlling interest in the operations of Rome LTACH in April 2012 and as a result, Rome LTACH was consolidated in the second quarter of 2012. Accordingly, Rome LTACH was accounted for under the equity method of accounting during the three months ended March 31, 2012.

5. Income Taxes

For federal income tax purposes, we have elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our taxable year ended December 31, 2008. REIT status imposes limitations related to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly operate assisted-living facilities. However, such facilities may generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease with the Company. Therefore, we have formed Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of HC Operating Partnership, LP, to lease any assisted-living properties we acquire and to operate the assisted-living properties pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the management companies have direct control of the daily operations of these assisted-living properties.

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would establish a valuation allowance which would reduce the provision for income taxes.

The Master TRS recognized a $0.1 million expense and a $0.1 million expense for Federal and State income taxes in the three months ended September 30, 2013 and 2012, respectively, and a $0.1 million benefit and a $0.1 million expense for Federal and State income taxes in the nine months ended September 30, 2013 and 2012, respectively, which have been recorded in general and administrative expenses. Net deferred tax assets related to the TRS entities totaled approximately $1.9 million at September 30, 2013 and $1.3 million at December 31, 2012, respectively, related primarily to book and tax basis differences for straight-line rent and accrued liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. These deferred tax assets are included in deferred costs and other assets in our condensed consolidated balance sheets. We have not recorded a valuation allowance against our deferred tax assets as of September 30, 2013, as we have determined that the future projected taxable income from the operations of the TRS entities are sufficient to cover the additional future expenses resulting from these book tax differences.

	7

6. Segment Reporting

As of September 30, 2013, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our medical office building operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

We evaluate performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenue less property operating and maintenance expenses. There are no intersegment sales or transfers. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, asset management fees and expenses, real estate acquisition costs, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

	8

The following tables reconcile the segment activity to consolidated net income for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30, 2013								Three Months Ended September 30, 2012
	Senior living operations		Triple-net leased properties		Medical office building		Consolidated		Senior living operations		Triple-net leased properties		Medical office building		Consolidated
Rental revenue	$	6,976,000	$	1,309,000	$	214,000	$	8,499,000	$	6,910,000	$	1,298,000	$	214,000	$	8,422,000
Resident services and fee income		6,195,000		—		—		6,195,000		3,655,000		—		—		3,655,000
Tenant reimbursements and other income		103,000		226,000		74,000		403,000		15,000		222,000		75,000		312,000
	$	13,274,000	$	1,535,000	$	288,000	$	15,097,000	$	10,580,000	$	1,520,000	$	289,000	$	12,389,000
Property operating and maintenance		8,875,000		227,000		79,000		9,181,000		7,159,000		220,000		94,000		7,473,000

Net operating income	$	4,399,000	$	1,308,000	$	209,000	$	5,916,000	$	3,421,000	$	1,300,000	$	195,000	$	4,916,000
General and administrative expenses								523,000								423,000
Asset management fees and expenses								732,000								559,000
Real estate acquisition costs and contingent consideration								—								1,016,000
Depreciation and amortization								1,528,000								1,689,000
Interest expense, net								2,031,000								1,788,000
Equity in loss (income) from unconsolidated entities								56,000								(14,000)
Gain on disposition of investment in unconsolidated entity								(1,701,000)								—
Net income (loss)							$	2,747,000							$	(545,000)

	Nine Months Ended September 30, 2013								Nine Months Ended September 30, 2012
	Senior living operations		Triple-net leased properties		Medical office building		Consolidated		Senior living operations		Triple-net leased properties		Medical office building		Consolidated
Rental revenue	$	20,805,000	$	3,928,000	$	640,000	$	25,373,000	$	20,453,000	$	3,436,000	$	636,000	$	24,525,000
Resident services and fee income		18,115,000		—		—		18,115,000		8,243,000		—		—		8,243,000
Tenant reimbursements and other income		328,000		663,000		221,000		1,212,000		294,000		593,000		234,000		1,121,000
	$	39,248,000	$	4,591,000	$	861,000	$	44,700,000	$	28,990,000	$	4,029,000	$	870,000	$	33,889,000
Property operating and maintenance		25,987,000		682,000		230,000		26,899,000		20,084,000		594,000		243,000		20,921,000

Net operating income	$	13,261,000	$	3,909,000	$	631,000	$	17,801,000	$	8,906,000	$	3,435,000	$	627,000	$	12,968,000
General and administrative expenses								1,186,000								1,632,000
Asset management fees and expenses								2,125,000								1,543,000
Real estate acquisition costs and contingent consideration								—								1,229,000
Depreciation and amortization								6,317,000								4,653,000
Interest expense, net								6,121,000								4,808,000
Loss on debt extinguishment and other expense								—								151,000
Equity in (income) loss from unconsolidated entities								(24,000)								363,000
Gain in remeasurement of investment in unconsolidated entity								—								(1,282,000)
Gain on disposition of investment in unconsolidated entity								(1,701,000)								—
Net income (loss)							$	3,777,000							$	(129,000)

	9

The following table reconciles the segment activity to consolidated financial position as of September 30, 2013 and December 31, 2012.

	September 30, 2013		December 31, 2012
Assets
Investment in real estate:
Senior living operations	$	133,296,000	$	137,784,000
Triple-net leased properties		42,523,000		43,781,000
Medical office building		7,933,000		8,171,000
Total reportable segments	$	183,752,000	$	189,736,000
Reconciliation to consolidated assets:
Cash and cash equivalents		18,265,000		21,507,000
Deferred financing costs, net		1,496,000		1,697,000
Investment in unconsolidated entities		1,458,000		3,529,000
Tenant and other receivables, net		2,912,000		1,988,000
Deferred costs and other assets		8,249,000		2,987,000
Restricted cash		3,869,000		3,821,000
Goodwill		5,965,000		5,965,000
Total assets	$	225,966,000	$	231,230,000

As of September 30, 2013 and December 31, 2012, goodwill had a balance of approximately $6.0 million, all of which related to the senior living operations segment. The Company historically has not recorded any impairment charges for goodwill.

7. Fair Value Measurements

FASB Accounting Standards Codification (“ASC”) 825-10, “Financial Instruments” , requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). The amendments in this update result in additional fair value measurement and disclosure requirements within U.S. GAAP and International Financial Reporting Standards and change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.

Level 1. Quoted prices in active markets for identical instruments.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified as a Level 3 instrument.

We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. We consider the carrying values of our financial instruments, other than notes payable, to approximate fair value because they generally expose the Company to limited credit risk and because of the short period of time between origination of the financial assets and liabilities and their expected settlement.

	10

The fair value of the Company’s notes payable is estimated by discounting future cash flows of each instrument at rates that reflect the current market rates available to the Company for debt of the same terms and maturities. The fair value of the notes payable was determined using Level 2 inputs of the fair value hierarchy. Based on the estimates used by the Company, the fair value of notes payable was $143.7 million and $146.2 million, compared to the carrying values of $ 143.6 ($143.2 million, net of premium) million and $145.4 ($145.0 million, net of premium) million at September 30, 2013 and December 31, 2012, respectively.

There were no transfers between Level 1 or 2 during the three and nine months ended September 30, 2013.

8. Notes Payable

Notes payable were $143.6 million ($143.2 million, net of premium) and $145.4 million ($145.0 million, net of premium) as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.80% to 6.50% per annum and a weighted average effective interest rate of 5.45% per annum. As of September 30, 2013, notes payable consisted of $112.4 million of fixed rate debt, or approximately 79% of notes payable, at a weighted average interest rate of 5.35% per annum and $30.8 million of variable rate debt, or approximately 21% of notes payable, at a weighted average interest rate of 5.83% per annum. As of December 31, 2012, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.80% to 6.50% per annum and a weighted-average effective interest rate of 5.45% per annum. As of December 31, 2012, notes payable consisted of $113.8 million of fixed rate debt, or 79% of notes payable, at a weighted average interest rate of 5.35% per annum and $31.1 million of variable rate debt, or 21% of notes payable, at a weighted average interest rate of 5.83% per annum.

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of September 30, 2013, we were in compliance with all such covenants and requirements.

Principal payments due on our notes payable for October 1, 2013 to December 31, 2013 and each of the subsequent years is as follows:

Year	Principal amount
October 1, 2013 to December 31, 2013	$	604,000
2014		8,596,000
2015		25,420,000
2016		9,030,000
2017		2,098,000
2018 and thereafter		97,447,000
	$	143,195,000
Add: premium		410,000
	$	143,605,000

Interest Expense and Deferred Financing Cost

For the three months ended September 30, 2013 and 2012, the Company incurred interest expense, including amortization of deferred financing costs of, $2.0 million and $1.8 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company incurred interest expense, including amortization of deferred financing costs of, $6.1 million and $4.8 million, respectively. As of September 30, 2013 and December 31, 2012, the Company’s net deferred financing costs were approximately $1.5 million and $1.7 million, respectively. All deferred financing costs are capitalized and amortized over the life of the respective loan agreement.

9. Stockholders’ Equity

Common Stock

Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of September 30, 2013, including distributions reinvested, we had issued approximately 13.3 million shares of common stock for a total of approximately $132.3 million of gross proceeds in our initial and follow-on public offerings.

Preferred Stock and OP Units

On February 10, 2013, we entered into a series of agreements with Sentinel RE Investment Holdings LP, an affiliate of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) for the purpose of obtaining up to a $150 million equity commitment to be used to finance future real estate acquisitions (such investment and the related agreements, are referred to herein collectively as the “KKR Equity Commitment”). Pursuant to the KKR Equity Commitment, the Company may issue up to 1,000 shares of 3% Senior Cumulative Preferred Stock, Series A, $0.01 par value per share (the “Series A Preferred Stock”), or 3% Senior Cumulative Preferred Stock, Series C, $0.01 par value per share (the “Series C Preferred Stock”), in either case representing up to an aggregate issuance amount of $100,000. The Operating Partnership may issue 7.5% Series B Convertible Preferred Units (the “Series B Preferred Units”) up to an aggregate issuance amount of $149.9 million. Subject to certain limitations, the Series B Preferred Units may be converted into common stock of the Company. The obligations of KKR to fund and the Company to draw funds under the KKR Equity Commitment are subject to various conditions, limitations and penalties as more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the proxy statement related to our 2013 annual meeting of stockholders as filed with the SEC on April 9, 2013.

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The Series A Preferred Stock and the Series C Preferred Stock will rank senior to the Company’s common stock with respect to dividend rights and rights on liquidation. The holders of the Series A Preferred Stock and the Series C Preferred Stock will be entitled to receive dividends, as and if authorized by our board of directors out of funds legally available for that purpose, at an annual rate equal to 3% of the liquidation preference for each share. Dividends on the Series A Preferred Stock and the Series C Preferred Stock will be payable annually in arrears.

The Series B Preferred Units will rank senior to the Operating Partnership’s common units with respect to distribution rights and rights on liquidation. The Series B Preferred Units will be entitled to receive cash distributions at an annual rate equal to 7.5% of the Series B liquidation preference to any distributions paid to common units of the Operating Partnership. If the Operating Partnership is unable to pay cash distributions, distributions will be paid in kind at an annual rate of 10% of the Series B liquidation preference. After payment of the preferred distributions, additional distributions will be paid first to the common units until they have received an aggregate return of 7.5% per unit in annual distributions commencing from February 10, 2013, and thereafter to the common units and Series B Preferred Units pro rata.

As of September 30, 2013, no shares or units had been issued pursuant to the KKR Equity Commitment. On October 21, 2013, in connection with the first put exercise pursuant to the KKR Equity Commitment, we issued 1,000 shares of our Series C Preferred Stock and 142,000 Series B Preferred Units in our Operating Partnership to KKR (See Note 13).

Distributions

The following are the distributions declared during the nine months ended September 30, 2013 and 2012:

	Distributions Declared						Cash Flow from
Period	Cash		Reinvested		Total		Operations
First quarter 2012	$	801,000	$	—	$	801,000	$	1,277,000
Second quarter 2012		799,000				799,000		214,000
Third quarter 2012		807,000		—		807,000		2,930,000
First quarter 2013		1,493,000		—		1,493,000		2,643,000
Second quarter 2013		1,585,000		—		1,585,000		2,522,000
Third quarter 2013		1,544,000		52,000		1,596,000		2,413,000

Effective October 1, 2012, our board of directors declared distributions for daily record dates occurring in the first quarter of 2013 in amounts per share that, if declared and paid each day for a 365 -day period, would equate to an annualized rate of $.475 per share (4.75 % based on share price of $ 10.00). Effective July 1, 2013, our board of directors declared distributions for daily record dates occurring in the third quarter of 2013 in amounts per share that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.50 per share (5.00 % based on a share price of $ 10.00).

The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.

On June 19, 2013, we filed a registration statement on Form S-3 to register up to $ 99,000,000 of shares of common stock to be offered to our existing stockholders pursuant to an amended and restated distribution reinvestment plan (the “DRIP offering”). The DRIP offering shares will initially be offered at a purchase price of $10.02, which is 100% of the current estimated per-share value of our common stock. The distributions declared in the third quarter of 2013 to be reinvested in the Company’s common stock will result in approximately 5,205 shares of common stock issued in October 2013.

Stock Repurchase Program

In 2007, we adopted a stock repurchase program for investors who had held their shares for at least one year. Under our stock repurchase program, the repurchase price varies depending on the purchase price paid by the stockholder and the number of years the shares are held. Our board of directors may amend, suspend or terminate the program at any time with 30 days prior notice to stockholders. We have no obligation to repurchase our stockholders’ shares. In 2009, our board of directors waived the one-year holding period in the event of the death of a stockholder and adjusted the repurchase price to 100% of such stockholder’s purchase price if the stockholder held the shares for less than three years.

On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our public offering, our dividend reinvestment program and our stock repurchase program (except for repurchases due to death). As a result our stock repurchase program has been suspended since May 29, 2011 for all repurchases, except repurchases due to death of a stockholder.

During the nine months ended September 30, 2013, we repurchased shares pursuant to our stock repurchase program as follows:

	12

Period	Total Number of Shares Redeemed		Average Price Paid per Share
First quarter 2013		60,432	$	9.98
Second quarter 2013		30,153		10.02
Third quarter 2013		101,880		10.02
		192,465

10. Related Party Transactions

The Company has no employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the policies established by our board of directors. We are party to an advisory agreement that entitles the Advisor to specified fees upon the provision of certain services to us.

Advisory Agreement and Transition to Internal Management Agreement

Sentio Investments, LLC became our Advisor on January 1, 2012, pursuant to an advisory agreement dated December 22, 2011. As required by our charter, that advisory agreement had a one-year term that ended on December 31, 2012. Effective January 1, 2013, we renewed the advisory agreement on substantially similar terms for an additional one-year term ending on December 31, 2013.

Under the terms of the current advisory agreement, the Advisor is required to use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. The advisory agreement calls for the Advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties.

On February 10, 2013 in connection with the execution of the KKR Equity Commitment (See Note 9), we entered into a Transition to Internal Management Agreement (the “Transition Agreement”) with our Advisor and KKR. The Transition Agreement provides, following the satisfaction of certain conditions, for certain amendments to the advisory agreement between us and the Advisor and sets forth the terms for our transition to an internal management structure.

The terms of our advisory agreement with our Advisor and the terms of the Transition Agreement are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the proxy statement related to our 2013 annual meeting of stockholders as filed with the SEC on April 9, 2013.

The fees and expense reimbursements payable to the Advisor under the advisory agreement for the three and nine months ended September 30, 2013 and September 30, 2012 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Asset management fees	$	732,000	$	559,000	$	2,125,000	$	1,543,000

	13

Consistent with limitations set forth in our charter, the advisory agreement further provides that, commencing four fiscal quarters after the acquisition of our first real estate asset, we shall not reimburse the Advisor at the end of any fiscal quarter management fees and expenses and operating expenses that, in the four consecutive fiscal quarters then ended exceed (the “Excess Amount”) the greater of 2% of our average invested assets or 25% of our net income for such year (the “2%/25% Guidelines”) unless the Independent Directors Committee of our board of directors determines that such excess was justified, based on unusual and nonrecurring factors which it deems sufficient. If the Independent Directors Committee does not approve such excess as being so justified, the advisory agreement requires that any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our charter provides that, if the Independent Directors Committee does not determine that the Excess Amount is justified, the Advisor shall reimburse us the amount by which the aggregate annual expenses paid to the Advisor during the four consecutive fiscal quarters then ended exceed the 2%/25% Guidelines.

For the four quarters ended September 30, 2013, our management fees and expenses and operating expenses totaled did not exceed the greater of 2% of our average invested assets and 25% of our net income.

11. Commitments and Contingencies

We monitor our properties for the presence of hazardous or toxic substances. We are not currently aware of any environmental liability with respect to the properties that we believe would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our condensed consolidated financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.

	14

12. Immaterial Correction to Prior Period Financial Statements

In the third quarter of 2013, we revised our disclosure related to the consolidated statement of cash flows for the nine months ended September 30, 2012 to reflect i) a decrease in cash provided by operating activities of $ 3.0 million and ii) a decrease in cash used in investing activities of $3.0 million. This adjustment was made after completing an analysis that determined the change in accounts payable and accrued liabilities improperly reflected payments which primarily relate to the buyout of the Company’s partners in Rome LTH in April 2012.

The Company has determined that the cash flow statement for the year ended December 31, 2012, is correct as reported. After evaluating the quantitative and qualitative effects of this adjustment, we have concluded that the impact on the Company’s prior interim period financial statements was not material.

13. Subsequent Events

On October 21, 2013, through wholly-owned subsidiaries, we acquired real estate property (“Woodbury Mews”) from Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating, none of which are affiliated with us, for a purchase price of $38.1 million plus closing costs. We funded the purchase of Woodbury Mews with proceeds from the sale of Series C Preferred Stock and Series B Preferred Units in our Operating Partnership to KKR, pursuant to the KKR Equity Commitment (See Note 9) and with proceeds from a mortgage loan from Key Bank National Association, Inc.

On October 18, 2013, in connection with our acquisition of Woodbury Mews, Sentinel RE Investment Holdings, LP, an affiliate of KKR, completed the first put exercise under the KKR Equity Commitment, purchasing the following securities for an aggregate purchase price of $14.3 million:

	•	1,000 shares of newly issued Series C Preferred Stock and

	•	142,000 newly-issued Series B Preferred Units of the Operating Partnership, which are convertible into approximately 1,417,166 shares of the Company’s common stock at the currently effective conversion price.

On October 21, 2013, also in connection with our acquisition of Woodbury Mews, we entered into a mortgage agreement with Key Bank National Association, Inc. (“Key”), an unaffiliated lender, with an outstanding principal balance of approximately $25.0 million (the “Woodbury Loan”), which is secured by Woodbury Mews. The Woodbury Loan has an initial term of twelve months with two 12-month extensions available assuming certain criteria are met, and bears interest at a rate of one month LIBOR plus 3.0%. Payments on the loans are due monthly and consist of accrued interest-only during the initial term. If the extension option is exercised, payments will consist of interest plus principal amortization payments based upon a 25-year amortization schedule.

	15

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. The 2012 financial information reflects the effects of the corrections described in Note 12, Immaterial Corrections to Prior Period Financial Statements included in Item 1 of this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward —looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2012 as listed with the SEC, and the risks identified in Part II, Item 1A of the quarterly report.

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

•

Macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets.

•

changes in national and local economic conditions in the real estate and healthcare markets specifically;

•

legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;

•

legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation;

•

the availability of debt and equity capital;

•

changes in interest rates;

•

competition in the real estate industry;

•

the supply and demand for operating properties in our market areas;

•

changes in accounting principles generally accepted in the United States of America, or GAAP; and

•

the risk factors in our Annual Report for the year ended December 31, 2012 and this quarterly report on Form 10-Q.

Overview

We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing in and owning commercial real estate. We intend to invest primarily in real estate including health care properties and other real estate related assets located in markets in the United States.

On June 20, 2008, we commenced an initial public offering of our common stock. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan. On February 4, 2011, we commenced a follow-on offering of our common stock. We suspended primary offering sales in our follow-on offering on April 29, 2011 and completed the final sale of shares under the dividend reinvestment plan on May 10, 2011. We raised gross offering proceeds under the follow-on offering of $8.4 million from the sale of approximately 800,000 shares, including shares sold under the distribution reinvestment plan. On June 12, 2013 we deregistered all remaining unsold follow-on offering shares.

Since January 1, 2012, our business has been managed by Sentio Investments, LLC (the “Advisor”) pursuant to an advisory agreement (the “Advisory Agreement”). As required by our charter, the term of the Advisory Agreement is limited to one year, but can be renewed for an unlimited number of successive one-year terms. The term of our initial Advisory Agreement ended on December 31, 2012. Effective January 1, 2013, we renewed the Advisory Agreement on substantially similar terms for an additional one-year term ending on December 31, 2013.

	16

On February 10, 2013, in connection with the execution of the KKR Equity Commitment (See Note 9 of the accompanying condensed consolidated financial statements), we entered into a Transition Agreement, which provides, following the satisfaction of certain conditions, for certain amendments to the Advisory Agreement between us and the Advisor and sets forth the terms for our transition to an internal management structure. The Transition Agreement requires that, unless the parties agree otherwise or certain third party consents cannot be obtained in time, the existing external advisory structure will remain in place upon substantially the same terms as currently in effect for a period of two years from the Transition Agreement date, upon which time the advisory function will be internalized in accordance with procedures set forth in the Transition Agreement. The terms of the Advisory Agreement and the Transition Agreement are more fully outlined in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the proxy statement related to our 2013 annual meeting of stockholders as filed with the SEC on April 9, 2013.

Our revenues, which are comprised largely of rental income, include rents reported on a straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; (ii) control operating and other expenses; and (iii) maximize tenant recoveries given the underlying lease structures. Our operations are impacted by property specific, market-specific, general economic and other conditions.

Market Outlook — Real Estate and Real Estate Finance Markets

In recent years, both the national and most global economies have experienced substantially increased unemployment and a downturn in economic activity over an extended period, as well as significant market fluctuations. Despite certain recent more positive economic indicators and improved stock market performance, the economic environment continues to be unpredictable and to present challenges that may delay the implementation of our business strategy or force us to modify it.

Despite the economic conditions discussed above, the demand for health care services is projected to continue to grow for the foreseeable future. According to The National Coalition on Healthcare, by 2016 nearly $1 in every $5 in the U.S. will be spent on healthcare, and the aging US population is expected to continue to fuel the need for healthcare services. The over age 65 population of the United States is projected to grow 36% between 2010 and 2020, compared with 9% for the general population, according to the US Census Bureau. Presently, the healthcare real estate market is fragmented, with a local or regional focus, offering opportunities for consolidation and market dominance. We believe that a diversified portfolio of healthcare property types minimizes risks associated with third-party payors, such as Medicare and Medicaid, while also allowing us to capitalize on the favorable demographic trends described above.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC.

Results of Operations

As of September 30, 2013, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment invests in and directs the operations of assisted-living, memory care and other senior housing communities located in the United States. We engage independent third party managers to operate these properties. Our triple-net leased properties segment invests in healthcare properties in the United States leased under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings and leases those properties to healthcare providers under long-term “full service” leases which may require tenants to reimburse property related expenses to us.

	17

As of September 30, 2013, we owned or had joint venture interests in 19 properties. These properties included fourteen assisted-living facilities which comprise our senior housing segment, one medical office building, which comprises our MOB segment, three operating healthcare facilities, which comprise our triple-net leased segment and one medical office building held as an unconsolidated entity. Four senior living properties, the Leah Bay portfolio, were acquired at the end of August 2012. Physicians Centre MOB, which is held in an unconsolidated entity, was acquired in April 2012. In April 2012, we also acquired our partners’ interests in the Rome LTACH investment, and as a result of the acquisition, the investment is consolidated in our September 30, 2013 condensed consolidated financial statements. The Rome LTACH investment is presented under the equity method in periods prior to the April 2012 acquisition. The disposition of the Company’s investment in the Littleton Specialty Rehabilitation Facility occurred on August 8, 2013. As of September 30, 2012, we owned or had joint venture interests in 20 properties, including fourteen assisted-living facilities, one medical office building and three operating healthcare facilities, one medical office building and one net leased healthcare facility held as unconsolidated entities. The results of our operations for the three and nine months ended September 30, 2013 reflect the acquisitions indicated above that are not included in our results of operations for the three and nine months ended September 30, 2012, and differ accordingly.

Comparison of the Three Months Ended September 30, 2013 and 2012

	Three Months Ended September 30,
		2013		2012		$ Change	% Change
Net operating income, as defined (1)
Senior living operations	$	4,399,000	$	3,421,000	$	978,000	29	%
Triple-net leased properties		1,308,000		1,300,000		8,000	1	%
Medical office building		209,000		195,000		14,000	7	%
Total portfolio net operating income	$	5,916,000	$	4,916,000	$	1,000,000	20	%

Reconciliation to net income:
Net operating income, as defined (1)	$	5,916,000	$	4,916,000	$	1,000,000	20	%
Unallocated (expenses) income:
General and administrative expenses		523,000		423,000		100,000	24	%
Asset management fees and expenses		732,000		559,000		173,000	31	%
Real estate acquisition costs and earn out costs		—		1,016,000		(1,016,000)	(100)	%
Depreciation and amortization		1,528,000		1,689,000		(161,000)	(10)	%
Interest expense, net		2,031,000		1,788,000		243,000	14	%
Equity in loss (income) from unconsolidated entities		56,000		(14,000)		(70,000)	(500)	%
Gain on disposition of investment in unconsolidated entity		(1,701,000)		—		1,701,000	100	%
Net income (loss)	$	2,747,000	$	(545,000)	$	3,292,000	604	%

(1)

Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our consolidated real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of our consolidated income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as a gain or loss from investments in unconsolidated entities depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

	18

Senior Living Operations

	Three Months Ended September 30,
	2013		2012		$ Change		% Change
Senior Living Operations — Net operating income
Total revenues
Rental revenue	$	6,976,000	$	6,910,000	$	66,000	1	%
Resident services and fee income		6,195,000		3,655,000		2,540,000	69	%
Tenant reimbursement and other income		103,000		15,000		88,000	587	%
Less:
Property operating and maintenance expenses		(8,875,000)		(7,159,000)		1,716,000	24	%
Total portfolio net operating income	$	4,399,000	$	3,421,000	$	978,000	29	%

Triple-Net Leased Properties

	Three Months Ended September 30,
	2013		2012		$ Change		% Change
Triple-Net Leased Properties — Net operating income
Total revenues
Rental revenue	$	1,309,000	$	1,298,000	$	11,000	1	%
Tenant reimbursement and other income		226,000		222,000		4,000	2	%
Less:
Property operating and maintenance expenses		(227,000)		(220,000)		7,000	3	%
Total portfolio net operating income	$	1,308,000	$	1,300,000	$	8,000	1	%

	19

Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the three month period ended September 30, 2013 of $0.2 million was comparable to net operating income for the three month period ended September 30, 2012.

	Three Months Ended September 30,
	2013		2012		$ Change		% Change
Medical Office Buildings — Net operating income
Total revenues
Rental revenue	$	214,000	$	214,000	$	—	—
Tenant reimbursement and other income		74,000		75,000		(1,000)	(1)	%
Less:
Property operating and maintenance expenses		(79,000)		(94,000)		(15,000)	(16)	%
Total portfolio net operating income	$	209,000	$	195,000	$	14,000	7	%

Unallocated (expenses) income

General and administrative expenses increased to $0.5 million for the three months ended September 30, 2013 from $0.4 million for the three months ended September 30, 2012. The increase was primarily due to higher professional fees, as compared to the three months ended September 30, 2012.

	20

Asset management fees for the three months ended September 30, 2013 of $0.7 million was comparable to asset management fees for the three months ended September 30, 2012 and the bonus asset management fee earned in the quarters ended June 30, 2013 and September 30, 2013. Depreciation and amortization for the same periods decreased to $1.5 million from $1.7 million, as a result of the in-place lease value assigned in the Leah Bay purchase price allocation, which was amortized over the expected resident lease term and fully amortized as of June 30, 2013.

For the three months ended September 30, 2013 and 2012, real estate acquisition costs and contingent consideration were $0.0 million and $1.0 million, respectively. Real estate acquisition costs and contingent consideration in 2012 consisted primarily of costs associated with the acquisition of an interest in the Physicians Centre MOB property and the costs associated with the acquisition of the Leah Bay joint venture.

Interest expense, net, for the three months ended September 30, 2013 increased to $2.0 million from $1.8 million for the three months ended September 30, 2012, principally due to the acquisition of the Leah Bay properties, which was completed during the third quarter of 2012, respectively.

The Company recognized a loss from unconsolidated entities of $0.1 for the three months ended September 30, 2013 as compared to income of $0.1 million for the three months ended September 30, 2012, which is primarily due to the operations of Physicians Centre MOB, acquired in April 2012 and Littleton Specialty Rehabilitation Center, in which began operations in July 2012. Our equity interest in the Littleton Specialty Rehabilitation Facility was sold in August 2013, which resulted in the Company receiving cash proceeds, net of debt repayment, of approximately $3.5 million. The Company recorded a gain of $1.7 million in the quarter ended September 30, 2013.

Comparison of the Nine Months Ended September 30, 2013 and 2012

	Nine Months Ended September 30,
	2013		2012		$ Change		% Change

Net operating income, as defined (1)
Senior living operations	$	13,261,000	$	8,906,000	$	4,355,000	49	%
Triple-net leased properties		3,909,000		3,435,000		474,000	14	%
Medical office building		631,000		627,000		4,000	1	%
Total portfolio net operating income	$	17,801,000	$	12,968,000	$	4,833,000	37	%

Reconciliation to net income:
Net operating income, as defined (1)	$	17,801,000	$	12,968,000	$	4,833,000	37	%
Unallocated (expenses) income:
General and administrative expenses		1,186,000		1,632,000		(446,000)	(27)	%
Asset management fees and expenses		2,125,000		1,543,000		582,000	38	%
Real estate acquisition costs and earn out costs		—		1,229,000		(1,229,000)	(100)	%
Depreciation and amortization		6,317,000		4,653,000		1,664,000	36	%
Interest expense, net		6,121,000		4,808,000		1,313,000	27	%
Loss on debt extinguishment and other expense		—		151,000		(151,000)	(100)	%
Equity in (income) loss from unconsolidated entities		(24,000)		363,000		387,000	107	%
Gain on remeasurement of investment in unconsolidated entity		—		(1,282,000)		(1,282,000)	(100)	%
Gain on disposition of investment in unconsolidated entity		(1,701,000)		—		1,701,000	100	%
Net income (loss)	$	3,777,000	$	(129,000)	$	3,906,000	3,028	%

(1)

	21

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the nine months ended September 30, 2013 increased to $13.3 million from $8.9 million for the nine months ended September 30, 2012. The increase is primarily due to an additional $3.6 million of net operating income in the nine months ended September 30, 2013 from the acquisition and consolidation of the Leah Bay joint venture in August of 2012, but also reflects higher levels of care at several senior living properties, including Spring Village at Floral Vale and Forestview Manor.

	Nine Months Ended September 30,
	2013		2012		$ Change		% Change
Senior Living Operations — Net operating income
Total revenues
Rental revenue	$	20,805,000	$	20,453,000	$	352,000	2%
Resident services and fee income		18,115,000		8,243,000		9,872,000	120%
Tenant reimbursement and other income		328,000		294,000		34,000	12%
Less:
Property operating and maintenance expenses		(25,987,000)		(20,084,000)		5,903,000	29%
Total portfolio net operating income	$	13,261,000	$	8,906,000	$	4,355,000	49%

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income increased to $3.9 million for the nine months ended September 30, 2013 compared to $3.4 million for the nine months ended September 30, 2012, due to the acquisition of a controlling interest in the Rome LTACH in April 2012. As a result of this acquisition, Rome LTACH operations are included in our condensed consolidated financial statements and included in the operations of our triple-net leased segment for the nine months ended September 30, 2013. In the comparable period of 2012, Rome LTACH was accounted for as an equity method investment and its operating results were not included in our triple-net leased properties segment prior to April 2012.

	Nine Months Ended September 30,
		2013		2012		$ Change	% Change
Triple-Net Leased Properties — Net operating income
Total revenues
Rental revenue	$	3,928,000	$	3,436,000	$	492,000	14%
Tenant reimbursement and other income		663,000		593,000		70,000	12%
Less:
Property operating and maintenance expenses		(682,000)		(594,000)		88,000	15%
Total portfolio net operating income	$	3,909,000	$	3,435,000	$	474,000	14%

Medical Office Buildings

Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income for the nine month period ended September 30, 2013 of $0.6 million was comparable to net operating income for the nine months ended September 30, 2012.

	Nine Months Ended September 30,
		2013		2012		$ Change	% Change
Medical Office Buildings — Net operating income
Total revenues
Rental revenue	$	640,000	$	636,000	$	4,000	1%
Tenant reimbursement and other income		221,000		234,000		(13,000)	(6)%
Less:
Property operating and maintenance expenses		(230,000)		(243,000)		(13,000)	(5)%
Total portfolio net operating income	$	631,000	$	627,000	$	4,000	1%

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Unallocated (expenses) income

General and administrative expenses decreased to $1.2 million for the nine months ended September 30, 2013 from $1.6 million for the nine months ended September 30, 2012. The decrease was due to lower professional fees in the nine months ended September 30, 2013 as a result of the Company’s transition to a new advisor beginning in January 2012. The remaining decrease is due to a $0.1 million tax benefit for the nine months ended September 30, 2013, as compared to a $0.1 million tax expense for the nine months ended September 30, 2012.

Asset management fees for the nine months ended September 30, 2013 increased to $2.1 million from $1.5 million as a result of a higher portfolio value in the quarter ended September 30, 2013 and the bonus asset management fee earned in the quarters ended June 30, 2013 and September 30, 2013. Depreciation and amortization for the same periods increased to $6.3 million from $4.7 million, as a result of increases in depreciation of buildings, improvements and tenant improvements and the in-place lease value assigned in the Leah Bay purchase price allocation. In-place lease value is amortized over the expected resident lease term, resulting in a higher than average amortization expense in the first year after the acquisition.

For the nine months ended September 30, 2013 and 2012, real estate acquisition costs and contingent consideration were $0.0 million and $1.2 million, respectively. Real estate acquisition costs and contingent consideration in 2012 consisted primarily of costs associated with the acquisition of the minority interest in the Rome LTACH property, the costs associated with the acquisition of an interest in the Physicians Centre MOB property and the costs associated with the acquisition of the Leah Bay joint venture.

Interest expense, net, for the nine months ended September 30, 2013 increased to $6.1 million from $4.8 million for the nine months ended September 30, 2012, respectively, principally due to higher debt levels associated with the acquisitions of the Rome LTACH and Leah Bay properties, which were completed during the second and third quarters of 2012, respectively.

Our equity interest in the Rome LTACH joint venture was revalued in connection with the acquisition of our partners’ joint venture interests resulting in a gain of $1.3 million for the nine months ended September 30, 2012.

Income (loss) from unconsolidated entities increased to $0.1 million for the nine months ended September 30, 2013 from ($0.4) million for the nine months ended September 30, 2012, primarily due to the income reported as a result of the single tenant at Littleton Specialty Rehabilitation Facility paying rent beginning in July 2012. Our equity interest in the Littleton Specialty Rehabilitation Facility was sold in August 2013, which resulted in the Company receiving cash proceeds, net of debt repayment, of approximately $3.5 million. The Company recorded a gain of $1.7 million in the quarter ended September 30, 2013.

Liquidity and Capital Resources

Primary offering sales in our follow-on public offering have been suspended since April 29, 2011 and the final sale of shares under the related dividend reinvestment plan was completed on May 10, 2011. On June 12, 2013 we concluded the follow-on offering by deregistering all remaining unsold shares that had been registered in connection with the offering.

On February 10, 2013, we entered into the KKR Equity Commitment for the purpose of obtaining up to $150 million of equity funding to be used to finance future real estate acquisitions. Pursuant to the KKR Equity Commitment, we may issue and sell to the Investor and its affiliates on a private placement basis from time to time over a period of two to three years, up to $150 million in aggregate issuance amount of shares of newly issued Series A Preferred Stock, newly issued Series C Preferred Stock and newly issued Series B Convertible Preferred Units of our Operating Partnership. As of September 30, 2013, no shares or units had been issued pursuant to the KKR equity commitment. On October 21, 2013, in connection with the first put exercise pursuant to the KKR Equity Commitment, we issued 1,000 shares of our Series C Preferred Stock and 142,000 Series B Preferred Units in our Operating Partnership to KKR (See Note 13 to the accompanying condensed consolidated financial statements).

We expect that primary sources of capital over the long-term will include net proceeds from the sale of our capital stock, the sale of preferred units of partnership interest in our Operating Partnership in accordance with the terms of the KKR Equity Commitment, debt financing, and net cash flows from operations. We expect that our primary uses of capital will be for property acquisitions, including promote monetization payments, for the payment of tenant improvements and capital improvements and operating expenses, including interest expense on any outstanding indebtedness, reducing outstanding indebtedness and for the payment of distributions.

We intend to own our stabilized properties with low to moderate levels of debt financing. We will incur moderate to high levels of indebtedness when acquiring development or value-added properties and possibly other real estate investments. For our stabilized core plus properties, our long-term goal will be to use low to moderate levels of debt financing with leverage ranging from 50% to 65% of the value of the asset. For development and value-added properties, our goal will be to acquire and develop or redevelop these properties using moderate to high levels of debt financing with leverage ranging from 65% to 75% of the cost of the asset. Once these properties are developed, redeveloped and stabilized with tenants, we plan to reduce the levels of debt to fall within target debt ranges appropriate for core plus properties. While we seek to fall within the outlined targets on a portfolio basis, for any specific property we may exceed these estimates. To the extent sufficient proceeds from public offerings, debt financing, the KKR Equity Commitment or a combination of these are unavailable to repay acquisition debt financing down to the target ranges within a reasonable time as determined by our board of directors, we will endeavor to raise additional equity or sell properties to repay such debt so that we will own our properties with low to moderate levels of permanent financing. In the event that we are unable to raise additional equity, our ability to diversify our investments may be diminished.

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As of September 30, 2013, we had approximately $18.3 million in cash and cash equivalents on hand. Our liquidity will increase from the sale of common stock, the sale of preferred units of partnership interest in our Operating Partnership, and if refinancing results in excess loan proceeds. The Company’s liquidity will decrease as net offering proceeds are expended in connection with the acquisition and distributions are made in excess of cash available from operating cash flows.

Cash flows provided by operating activities for the nine months ended September 30, 2013 and 2012 were $7.6 million and $4.4 million, respectively. The increase in cash flows from operations was primarily due to an increase in operating income of $4.8 million and lower real estate acquisition costs, partially offset by the timing of cash receipts and payments.

Cash flows provided by and (used in) investing activities for the nine months ended September 30, 2013 and 2012 were $2.4 million and ($20.8) million, respectively. The 2013 amount was comprised of capital expenditures related to existing properties and proceeds from the disposition of the investment in the Littleton Specialty Rehabilitation Facility, while the 2012 amount reflects the acquisition of additional equity interest in the Rome LTACH Project, the acquisition interest in the Leah Bay joint venture and the acquisition of a joint venture interest in Physicians Center MOB.

Cash flows (used in) and provided by financing activities for the nine months ended September 30, 2013 and 2012 were ($13.3) million and $10.2 million, respectively. During the nine months ended September 30, 2013, the Company paid $4.1 million of fees and expenses in connection with the KKR Equity Commitment, and redeemed shares in the amount of $1.7 million. In addition, the Company’s distribution payment for the nine months ended September 30, 2013 and 2012 were $4.6 million and $2.7 million, respectively, due to an increase in the Company’s distribution rate to 4.75% from 2.5%, effective October 1, 2012. During the nine months ended September 30, 2012, the Company received net proceeds of approximately $15.2 million, and paid $1.2 million in deferred financing costs.

We expect to have sufficient cash available from cash on hand and operations to fund capital improvements and principal payments due on our borrowings in the next twelve months. We expect to fund stockholder distributions from cash on hand and from the excess of cash provided by operations over required capital improvements and debt payments. This excess may be insufficient to make distributions at the current level or at all.

There may be a delay between the sale of our shares or equity securities and the purchase of properties. During this period, proceeds from sales of securities may be temporarily invested in short-term, liquid investments that could yield lower returns than investments in real estate.

Potential future sources of capital include proceeds from future equity offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations.

Funds from Operations and Modified Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by the accounting principles generally accepted in the United States of America (“GAAP”) , and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and subsidiaries. Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions, as well as dividend sustainability.

Changes in the accounting and reporting rules under GAAP have prompted a significant increase in the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use modified funds from operations (“MFFO”), which excludes from FFO real estate acquisition expenses, and non-cash amounts related to straight line rent to further evaluate our operating performance as well as dividend sustainability. We compute MFFO consistently with the definition suggested by the Investment Program Association (the “IPA”), the trade association for direct investment programs (including non-listed REITs). However, certain adjustments included in the IPA’s definition are not applicable to us and are therefore not included in the foregoing definition.

We believe that MFFO is a helpful measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes. Accordingly, we believe that MFFO can be a useful metric to assist management, investors and analysts in assessing the sustainability of our operating performance. As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following considerations:

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	⋅	Adjustments for straight line rents. Under GAAP, rental income recognition can be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the economic impact of our lease terms and presents results in a manner more consistent with management’s analysis of our operating performance.
	⋅	Real estate acquisition costs. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. These acquisition costs have been funded from the proceeds of our initial public offering and other financing sources and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. Real estate acquisition expenses include those paid to our advisor and to third parties.
	⋅	Non-recurring gains or losses included in net income from the extinguishment or sale of debt.
	⋅	Unrealized gains or losses resulting from consolidation to, or deconsolidation from equity accounting.

	25

FFO or MFFO should not be considered as an alternative to net income (loss) nor as an indication of our liquidity. Nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and MFFO should be reviewed along with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs. In addition, FFO and MFFO presented for different periods may not be directly comparable.

We believe that MFFO is helpful as a measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating changes.

Our calculations of FFO and MFFO for the three and nine months ended September 30, 2013 and 2012 are presented below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net income (loss)	$	2,532,000	$	(529,000)	$	3,517,000	$	(237,000)
Adjustments:

Real estate depreciation and amortization		1,528,000		1,689,000		6,317,000		4,653,000
Joint venture depreciation and amortization		154,000		236,000		509,000		478,000
Gain on disposition of investment in unconsolidated entity		(1,701,000)				(1,701,000)
Funds from operations (FFO)		2,513,000	$	1,396,000		8,642,000	$	4,894,000
Adjustments:
Straight-line rent		(190,000)		(218,000)		(629,000)		(527,000)
Above/Below market lease amortization		34,000		27,000		103,000		2,000
Real estate acquisition costs		—		1,016,000		—		1,229,000
Loss on debt extinguishment		—		—		—		151,000
Gain on remeasurement of investment in unconsolidated entity		—		—		—		(1,282,000)
Modified funds from operations (MFFO)		2,357,000	$	2,221,000		8,116,000	$	4,465,000

Weighted average shares		12,673,194		12,853,483		12,756,221		12,877,929

FFO per weighted average shares	$	0.20	$	0.11	$	0.68	$	0.38
MFFO per weighted average shares	$	0.19	$	0.17	$	0.64	$	0.34

Distributions

Through June 30, 2011, we made cash distributions to our stockholders at an annualized rate of 7.5%, based on a $10.00 per-share purchase price. Effective July 1, 2011, our board of directors resolved to lower our distributions to an annualized rate of $0.25 per share (2.5% based on a share price of $10.00) to more closely align distributions to funds available from operations at that date. Beginning on October 1, 2012, our board of directors declared distributions that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.475 per share (4.75% based on share price of $10.00), and beginning April 1, 2013, our board of directors have declared distributions for daily record dates occurring in the second and third quarters of 2013 that, if declared and paid each day for a 365-day period, would equate to an annualized rate of $.50 per share (5.0% based on share price of $10.00). The rate and frequency of distributions is subject to the discretion of our board of directors and may change from time to time based on our operating results and cash flow.

	Distributions Declared						Cash Flow
							from
Period	Cash		Reinvested		Total		Operations

First quarter 2012	$	801,000	$	—	$	801,000	$	1,277,000
Second quarter 2012		799,000		—		799,000		214,000
Third quarter 2012		807,000		—		807,000		2,930,000
First quarter 2013		1,493,000		—		1,493,000		2,643,000
Second quarter 2013		1,585,000		—		1,585,000		2,522,000
Third quarter 2013		1,544,000		52,000		1,596,000		2,413,000

For the nine months ended September 30, 2013, we paid aggregate distributions of approximately $4.6 million, all of which were paid in cash. The distributions declared in the third quarter of 2013 to be reinvested in the Company’s common stock will result in approximately 5,205 shares of common stock issued in October 2013. FFO for the nine months ended September 30, 2013 was approximately $8.7 million and cash flow from operations was approximately $7.6 million. We funded our total distributions paid with cash flows from operations. For the purposes of determining the source of our distributions paid, we assume first that we use cash flows from operations from the relevant periods to fund distribution payments. See the reconciliation of FFO to net income above.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We invest our cash and cash equivalents in government-backed securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate fluctuations. However, we believe that the primary market risk to which we will be exposed is interest rate risk relating the variable portion of our debt financing. As of September 30, 2013, we had approximately $30.8 million of variable rate debt, the majority of which is at a rate tied to the 3-month LIBOR. A 1.0% change in 3-Month LIBOR would result in a change in annual interest expense of approximately $0.3 million per year. Our interest rate risk management objectives will be to monitor and manage the impact of interest rate changes on earnings and cash flows by using certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the fair value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for healthcare facilities, local, regional and national economic conditions and changes in the credit worthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1A. Risk Factors

In addition to the risk factors disclosed under Item 1.A of the Company’s Annual Report on Form 10-K for a year ended 2012 please consider the additional risk disclosed below:

Our equity commitment transaction with KKR dilutes the interests of our common shareholders and grants important rights to KKR.

On October 18, 2013, in connection with our acquisition of the Woodbury Mews property, the first purchase of securities was completed by Sentinel RE Investment Holdings, LP (the “KKR Investor”), an affiliate of Kohlberg Kravis Roberts & Co., (together with its affiliates, “KKR”) pursuant to the Securities Purchase Agreement dated as of February 10, 2013 between us, Sentio Healthcare Properties OP, L.P. (our “Operating Partnership”), and the KKR Investor. We refer to the Securities Purchase Agreement and the related agreements, collectively, as the “KKR Equity Commitment.” Under the KKR Equity Commitment, we may issue and sell to the KKR Investor and its affiliates from time to time over a period of two to three years, up to $150 million in aggregate issuance amount of shares of newly issued 3% Senior Cumulative Preferred Stock, Series A, $0.01 par value per share, newly issued 3% Senior Cumulative Preferred Stock, Series C, $0.01 par value per share (the “Series C Preferred Stock”) and newly issued 7.5% Series B Convertible Preferred Units (the “Series B Preferred Units”) of our Operating Partnership.

In connection with the first put exercise on October 18, 2013, the KKR Investor acquired 1,000 shares of Series C Preferred Stock and 142,000 Series B Preferred Units for an aggregate purchase price of $14.3 million. After giving effect to the first put exercise, 1,357,000 Series B Preferred Units remain issuable under the Purchase Agreement.

The KKR Equity Commitment and the transactions contemplated thereby may result in a change of control of the Company. Based on the capitalization of the Company as of February 10, 2013 if the maximum amount of $150 million is drawn by us under the KKR Equity Commitment, then the KKR Investor and its affiliates would hold 53.9% of our voting capital stock as well as the same percentage of our as-converted common stock by virtue of their combined interests in the Series C Preferred Stock and Series B Preferred Units.

Disclosure concerning the terms, rights and conditions of the Series C Preferred Stock and the Series B Convertible Preferred Operating Partnership units, the transfer and registration thereof and the other provisions of the KKR Equity Commitment are described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2013. There can be no assurance that the interests of the KKR Investor are aligned with that of our other stockholders. Investor interests can differ from each other and from other corporate interests and it is possible that this significant stockholder with a stake in corporate management may have interests that differ from us and those of other shareholders.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

On October 21, 2013, in connection with the first put exercise pursuant to the KKR Equity Commitment, we issued 1,000 shares of our Series C Preferred Stock and 142,000 Series B Preferred Units in our Operating Partnership to KKR (See Note 13 to the accompanying condensed consolidated financial statements). The first put exercise was made pursuant to the private placement exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated by the SEC thereunder. The terms of the first put exercise were disclosed in the Company’s current report on Form 8-K filed with the SEC on October 24, 2013.

(c)	During the nine months ended September 30, 2013, we repurchased shares pursuant to our stock repurchase program as follows:

Period	Total Number of Shares Redeemed		Average Price Paid per Share		Approximate Dollar Value of Shares Available that may yet be Redeemed under the program
January		3,028	$	9.02	(1)
February		—	$	—	(1)
March		57,404	$	10.02	(1)
April		26,827		10.02	(1)
May		3,326		10.02	(1)
June		—		—	(1)
July		40,226		10.02	(1)
August		34,501		10.02	(1)
September		27,153		10.02	(1)
		192,465

(1)

As further discussed in Note 9 (Stockholders’ Equity) of the condensed consolidated financial statements included in this report, the stock repurchase program has been suspended since May 29, 2011 for all repurchases except repurchases in connection with the death of a stockholder. The plan does not specify a limit on the number of shares that may be repurchased upon the death of stockholders.

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Item 6.

Exhibits

Ex.		Description

3.1		Articles of Amendment and Restatement of the Registrant, as amended on December 29, 2009 and January 24, 2012 (incorporated by reference to Exhibit 3.1 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2011).

3.2		Articles of Amendment of the Registrant, dated August 6, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.3		Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series A, dated August 6, 2013 (incorporated by reference to Exhibit 3.3 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.4		Articles Supplementary, 3% Senior Cumulative Preferred Stock, Series C, dated August 6, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.5		Second Amended and Restated Bylaws of the Registrant as adopted on August 6, 2013 (incorporated by reference to Exhibit 3.5 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

3.6		Second Amended and Restated Limited Partnership Agreement of Sentio Healthcare Properties OP, L.P., dated August 5, 2013 (incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013).

4.1		Form of Distribution Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Registrant’s prospectus filed on June 19, 2013).

4.2		Statement regarding restrictions on transferability of the Registrant’s shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007 (“Pre-Effective Amendment No. 2”).

4.3		Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on June 19, 2013).

10.1		Agreement of Sale dated as of June 26, 2013 by and among Woodbury Mews III, LLC, Woodbury Mews IV, LLC and Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating.

10.2		First Amendment dated as of August 9, 2013 to Agreement of Sale dated June 26, 2013 by and among Woodbury Mews III, LLC, Woodbury Mews IV, LLC, Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating.

10.3		Second Amendment dated as of August 23, 2013 to Agreement of Sale dated June 26, 2013 by and among Woodbury Mews III, LLC, Woodbury Mews IV, LLC, Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating.

10.4		Third Amendment dated as of August 28, 2013 to Agreement of Sale dated June 26, 2013 by and among Woodbury Mews III, LLC, Woodbury Mews IV, LLC, Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating.

10.5		Fourth Amendment dated as of October 21, 2013 to Agreement of Sale dated June 26, 2013 by and among Woodbury Mews III, LLC, Woodbury Mews IV, LLC, Three WM Real Estate, LLC, Three WM Operating, LLC, Four WM Real Estate, LLC and Four WM Operating.

10.6		Term Loan Agreement dated as of October 21, 2013 among Woodbury Mews III, LLC and Woodbury Mews IV, LLC as the Borrowers, the Lenders from time to time party hereto as the Lenders, and KeyBank National Association, as a Lender and Agent.

10.7		Guaranty dated as of October 21, 2013 by Sentio Healthcare Properties, Inc. in favor of the Lenders from time to time party hereto as the Lenders, and KeyBank National Association, as a Lender and Agent.

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 8th day of November 2013.

	SENTIO HEALTHCARE PROPERTIES, INC.

	By:	/s/ JOHN MARK RAMSEY
		John Mark Ramsey, President and Chief
		Executive Officer
		(Principal Executive Officer)

	By:	/s/ SHARON C. KAISER
		Sharon C. Kaiser, Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

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