UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	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: 000-55777

CNL Healthcare Properties II, Inc.

(Exact name of registrant as specified in its charter)


Maryland		47-4524619
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
CNL Center at City Commons 450 South Orange Avenue Orlando, Florida		32801
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (407) 650-1000

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

None

N/A

The number of shares of the registrant’s outstanding common stock as of July 31, 2019 was 4,899,139 Class A shares.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

INDEX



PART I. FINANCIAL INFORMATION		PAGE

Item 1.	Condensed Consolidated Financial Information (unaudited):	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION		33

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

Exhibit Index		41
Signatures		42

Item 1.

Condensed Consolidated Financial Information

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30,			December 31,
ASSETS	2019			2018
Real estate investment properties, net	$	42,224,947		$	42,969,180
Assets held for sale, net		—			14,202,202
Cash		4,431,446			8,003,576
Intangibles, net		983,925			1,497,809
Other assets		315,869			382,637
Restricted cash		367,035			233,971
Total assets	$	48,323,222		$	67,289,375

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans, net	$	6,047,401		$	18,665,013
Liabilities associated with assets held for sale		—			6,247,187
Accounts payable and accrued liabilities		705,664			497,081
Other liabilities		156,208			128,957
Due to related parties		67,660			85,902
Total liabilities		6,976,933			25,624,140

Commitments and contingencies (Note 10)

Stockholders' equity:
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized; none issued or outstanding		—			—
Class A Common stock, $0.01 par value per share, 1,200,000,000 shares authorized; 4,899,139 and 4,899,139 shares both issued and outstanding, respectively		48,995			48,995
Class T Common stock, $0.01 par value per share, 700,000,000 shares authorized; none issued or outstanding		—			—
Class I Common stock, $0.01 par value per share, 100,000,000 shares authorized; none issued or outstanding		—			—
Capital in excess of par value		48,039,220			48,039,220
Accumulated loss		(3,077,633	)		(3,464,160	)
Accumulated distributions		(3,664,293	)		(2,958,820	)
Total stockholders' equity		41,346,289			41,665,235
Total liabilities and stockholders' equity	$	48,323,222		$	67,289,375

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Revenues:
Resident fees and services	$	2,152,100		$	1,140,235		$	4,350,450		$	2,264,760
Total revenues		2,152,100			1,140,235			4,350,450			2,264,760

Operating expenses:
Property operating expenses		1,322,985			622,018			2,715,453			1,239,166
General and administrative expenses		421,992			285,464			825,239			604,697
Acquisition fees and expenses		—			—			—			818
Property management fees		107,879			80,360			217,626			154,322
Depreciation and amortization		674,109			324,954			1,344,290			648,678
Total operating expenses		2,526,965			1,312,796			5,102,608			2,647,681

Operating loss		(374,865	)		(172,561	)		(752,158	)		(382,921	)

Other income (expense):
Interest and other income		12,035			40			18,260			62
Interest expense and loan cost amortization		(258,341	)		(194,099	)		(515,910	)		(375,183	)
Total other expense		(246,306	)		(194,059	)		(497,650	)		(375,121	)
Loss before income taxes		(621,171	)		(366,620	)		(1,249,808	)		(758,042	)
Income tax expense		—			(13,827	)		(30,533	)		(45,183	)
Loss from continuing operations		(621,171	)		(380,447	)		(1,280,341	)		(803,225	)
Income from discontinued operations		1,563,821			30,254			1,666,868			62,794
Net income (loss)	$	942,650		$	(350,193	)	$	386,527		$	(740,431	)

Class A common stock (basic and diluted):
Net income (loss) attributable to Class A stockholders	$	942,650		$	(76,206	)	$	386,527		$	(170,164	)
Net income (loss) per share of Class A common stock outstanding	$	0.19		$	(0.09	)	$	0.08		$	(0.20	)
Weighted average number of Class A common shares outstanding		4,899,139			867,723			4,899,139			846,574
Distributions declared per Class A common share	$	—		$	0.1440		$	0.1440		$	0.2880

Class T common stock (basic and diluted):
Net loss attributable to Class T stockholders	$	—		$	(246,458	)	$	—		$	(517,528	)
Net loss per share of Class T common stock outstanding	$	—		$	(0.09	)	$	—		$	(0.20	)
Weighted average number of Class T common shares outstanding		—			2,806,307			—			2,574,718
Distributions declared per Class T common share	$	—		$	0.1175		$	—		$	0.2354

Class I common stock (basic and diluted):
Net loss attributable to Class I stockholders	$	—		$	(27,529	)	$	—		$	(52,739	)
Net loss per share of Class I common stock outstanding	$	—		$	(0.09	)	$	—		$	(0.20	)
Weighted average number of Class I common shares outstanding		—			313,463			—			262,378
Distributions declared per Class I common share	$	—		$	0.1314		$	—		$	0.2626

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

	Common Stock
	Class A						Class T						Class I				Capital in									Total
	Number			Par			Number			Par			Number		Par		Excess of			Accumulated			Accumulated			Stockholders'
	of Shares			Value			of Shares			Value			of Shares		Value		Par Value			Loss			Distributions			Equity
Balance at March 31, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(4,020,283	)	$	(3,664,293	)	$	40,403,639
Net income		—			—			—			—			—		—		—			942,650			—			942,650
Balance at June 30, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,077,633	)	$	(3,664,293	)	$	41,346,289

Balance at December 31, 2018		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,464,160	)	$	(2,958,820	)	$	41,665,235
Net income		—			—			—			—			—		—		—			386,527			—			386,527
Cash distributions declared		—			—			—			—			—		—		—		―				(705,473	)		(705,473	)
Balance at June 30, 2019		4,899,139		$	48,995			—		$	—			—	$	—	$	48,039,220		$	(3,077,633	)	$	(3,664,293	)	$	41,346,289

Balance at March 31, 2018		839,410		$	8,394			2,620,776		$	26,206			253,489	$	2,535	$	35,549,090		$	(2,049,215	)	$	(1,248,505	)	$	32,288,505
Subscriptions received for common stock, including distribution reinvestments		36,771			367			382,015			3,821			94,274		943		5,355,565			—			—			5,360,696
Stock dividends issued		2,758			28			8,257			82			881		9		(119	)		—			—			—
Redemptions of common stock		(12,614	)		(126	)		(180	)		—			—		—		(126,773	)		—			—			(126,899	)
Stock issuance and offering costs		—			—			—			—			—		—		(421,830	)		—			—			(421,830	)
Net loss		—			—			—			—			—		—		—			(350,193	)		—			(350,193	)
Cash distributions declared		—			—			—			—			—		—		—			—			(483,068	)		(483,068	)
Balance at June 30, 2018		866,325		$	8,663			3,010,868		$	30,109			348,644	$	3,487	$	40,355,933		$	(2,399,408	)	$	(1,731,573	)	$	36,267,211

Balance at December 31, 2017		808,011		$	8,080			2,049,223		$	20,492			160,490	$	1,605	$	28,984,932		$	(1,658,977	)	$	(846,200	)	$	26,509,932
Subscriptions received for common stock, including distribution reinvestments		65,726			657			949,264			9,493			186,687		1,867		12,536,152			—			—			12,548,169
Stock dividends issued		5,202			52			14,919			149			1,467		15		(216	)		—			—			—
Redemptions of common stock		(12,614	)		(126	)		(2,538	)		(25	)		—		—		(152,130	)		—			—			(152,281	)
Stock issuance and offering costs		—			—		―				—			—		—		(1,012,805	)		—			—			(1,012,805	)
Net loss		—			—		―				—			—		—		—			(740,431	)		—			(740,431	)
Cash distributions declared		—			—		―				—			—		—		—			—			(885,373	)		(885,373	)
Balance at June 30, 2018		866,325		$	8,663			3,010,868		$	30,109			348,644	$	3,487	$	40,355,933		$	(2,399,408	)	$	(1,731,573	)	$	36,267,211

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended
	June 30,
	2019			2018
Operating activities:
Net cash flows provided by (used in) operating activities – continuing operations	$	470,175		$	(429,933	)
Net cash flows provided by operating activities – discontinued operations		188,175			345,124
Net cash flows provided by (used in) operating activities		658,350			(84,809	)

Investing activities:
Capital expenditures		(86,174	)		(16,749	)
Net cash flows used in investing activities – continuing operations		(86,174	)		(16,749	)

Capital expenditures		—			(23,520	)
Proceeds from sale of real estate		15,044,231			—
Net cash flows provided by (used in) investing activities – discontinued operations		15,044,231			(23,520	)

Net cash flows provided by (used in) investing activities		14,958,057			(40,269	)

Financing activities:
Subscriptions received for common stock through primary offering		—			12,039,730
Payment of underwriting compensation		—			(641,724	)
Payment of cash distributions, net of distribution reinvestments during 2018		(705,473	)		(376,934	)
Redemptions of common stock		—			(152,281	)
Repayment of mortgage loans		(18,350,000	)		—
Payment of loan costs		—			(10,397	)
Net cash flows (used in) provided by financing activities		(19,055,473	)		10,858,394

Net (decrease) increase in cash and restricted cash		(3,439,066	)		10,733,316
Cash and restricted cash at beginning of period, including held for sale		8,237,547			12,421,919
Cash and restricted cash at end of period, including held for sale	$	4,798,481		$	23,155,235

Supplemental disclosure of non-cash investing and financing activities:
Amounts incurred but not paid (including amounts due to related parties):
Selling commissions and Dealer Manager fees	$	—		$	20,711
Annual distribution and stockholder servicing fee	$	—		$	1,177,044

See accompanying notes to condensed consolidated financial statements.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

1.	Organization

CNL Healthcare Properties II, Inc. (“Company”) is a Maryland corporation that incorporated on July 10, 2015 and elected to be taxed as a real estate investment trust (“REIT”) for United States (“U.S.”) federal income tax purposes beginning with the year ended December 31, 2017. The Company is sponsored by CNL Financial Group, LLC (“Sponsor” or “CNL”) and is externally managed and advised by CHP II Advisors, LLC (“Advisor”), an affiliate of CNL. The Advisor provides advisory services to the Company relating to substantially all aspects of its investments and operations, including real estate acquisitions and dispositions, asset management and other operational matters.

On March 2, 2016, pursuant to a registration statement on Form S-11 under the Securities Act of 1933, the Company commenced its initial public offering of up to $1.75 billion (“Primary Offering”), in any combination, of Class A, Class T and Class I shares of common stock on a “best efforts” basis, which meant that CNL Securities Corp. (“Dealer Manager”), an affiliate of the Sponsor, used its best efforts but was not required to sell any specific amount of shares. The Company also offered up to $250 million, in any combination, of Class A, Class T and Class I shares pursuant to its distribution reinvestment plan (“Reinvestment Plan” and, together with the Primary Offering, the “Offering”). The Company has contributed the net proceeds from its Offering to CHP II Partners, LP (“Operating Partnership”) in exchange for partnership interests. The Company owns substantially all of its assets either directly or indirectly through the Operating Partnership in which the Company is the sole limited partner and its wholly-owned subsidiary, CHP II GP, LLC, is the sole general partner. The Operating Partnership owns assets through: (1) a wholly-owned taxable REIT subsidiary (“TRS”), CHP II TRS Holding, Inc. (“TRS Holdings”) and (2) property owner subsidiaries, which are single purpose entities.

On August 31, 2018, the Company’s board of directors approved the termination of its Offering and the suspension of its Reinvestment Plan, effective October 1, 2018. The Company also suspended its share redemption plan (“Redemption Plan”) and discontinued its stock dividends concurrently. In October 2018, the Company deregistered the unsold shares of its common stock under its previous registration statement on Form S-11. Through the close of its Offering, the Company had received aggregate proceeds of approximately $51.2 million (4.9 million shares), including approximately $1.2 million (0.1 million shares) of proceeds pursuant to the Reinvestment Plan.

In 2018, the Company announced it had formed a special committee consisting solely of its independent directors (“Special Committee”) to consider possible strategic alternatives available to the Company, including, without limitation, (i) an orderly disposition of the Company’s assets or one or more of the Company’s asset classes and the distribution of the net sale proceeds thereof to the stockholders of the Company and (ii) a potential business combination or other transaction with an unrelated third-party or affiliated party of the Company’s Sponsor. In January 2019, the Special Committee engaged SunTrust Robinson Humphrey, Inc., an investment banker, to act as a financial advisor to the aforementioned Special Committee and, subsequently, the Company committed to a plan to sell its medical office building (“MOB”), Mid America Surgery Institute (“Mid America Surgery”).

In March 2019, the Company entered into an asset purchase agreement (“Sale Agreement”) with HCP Medical Office Buildings, LLC related to the sale of Mid America Surgery for a gross sales price of $15.4 million (“MOB Sale”), subject to certain pro-rations and other adjustments as described in the Sale Agreement. In May 2019, the Company completed the MOB Sale.

In March 2019, in connection with the exploration of strategic alternatives, the Company’s board of directors suspended regular cash distributions to stockholders effective April 1, 2019. In addition, in March 2019, the Company’s advisory agreement was amended and restated to eliminate acquisition fees and dispositions fees as well as to reduce the asset management fees (“AUM Fees”) to 0.40% per annum of average invested assets. The Company’s board of directors and its Advisor also agreed to terminate the Expense Support Agreement effective April 1, 2019; refer to Note 8. “Related Party Arrangements” for additional information. Moreover, effective April 1, 2019, the Advisor waived its rights to any AUM Fees going forward, with such waiver to remain in effect through the Company’s dissolution and liquidation.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

1.	Organization (continued)

As of June 30, 2019, the Company owned two seniors housing communities that are leased to single member limited liability companies wholly-owned by TRS Holdings, a subsidiary of the Company. TRS Holdings has engaged independent third-party managers under management agreements to operate the properties as permitted under the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”) structures.

In July 2019, the Company filed a definitive proxy statement with the Securities and Exchange Commission (“SEC”) requesting, among other items, the stockholders' approval of a plan of dissolution ("Plan of Dissolution") authorizing the Company to undertake the sale of all its assets, distribute the net proceeds after payment of all of the Company's liabilities to stockholders as liquidating distributions, wind-up the Company’s operations and dissolve the Company in accordance with Maryland law. There can be no assurance that stockholders will approve the Plan of Dissolution or that the Company will have a liquidity event in the near term. The Company expects to distribute all of the net proceeds from the sale of its assets to stockholders within 24 months following the stockholders’ approval of the Plan of Dissolution. However, if the Company cannot sell its assets and pay its debts within 24 months, or if the board of directors and the Special Committee determine that it is otherwise advisable to do so, the Company may transfer and assign its remaining assets to a liquidating trust. Upon such transfer and assignment, stockholders will receive interests in the liquidating trust. The liquidating trust will pay or provide for all of the Company’s liabilities and distribute any remaining net proceeds from the sale of its assets to the holders of interests in the liquidating trust.

2.	Summary of Significant Accounting Policies

Basis of Presentation and Consolidation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the U.S. (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair statement of the Company’s operating results for the interim period presented. Operating results for the six months ended June 30, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019. Amounts as of December 31, 2018 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date but do not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, the Operating Partnership and its other subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Assets Held for Sale, net and Discontinued Operations — The Company determines to classify a property as held for sale once management has the authority to approve and commits to a plan to sell the property, the property is available for immediate sale, there is an active program to locate a buyer, the sale of the property is probable and the transfer of the property is expected to occur within one year. Upon the determination to classify a property as held for sale, the Company ceases recording further depreciation and amortization relating to the associated assets and those assets are measured at the lower of its carrying amount or fair value less disposition costs and are presented separately in the consolidated balance sheets for all periods presented. In addition, the Company classifies assets held for sale as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. For any disposal(s) qualifying as discontinued operations, the Company allocates interest expense and loan cost amortization that directly relates to any mortgage loan(s) collateralized by properties classified as discontinued operations.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

2.	Summary of Significant Accounting Policies (continued)

Reclassifications – Certain amounts in the prior year’s condensed consolidated balance sheet, statement of operations and statement of cash flows have been reclassified to conform to the current year’s presentation, primarily related to the classification of the Company’s MOB property as held for sale and discontinued operations, with no effect on the other previously reported consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Adopted Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842): Accounting for Leases,” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The ASU also requires qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which includes a practical expedient for lessors that allows them to elect to not separate lease and non-lease components in a contract for the purpose of revenue recognition and disclosure if certain criteria are met. The Company elected the practical expedient and applied the guidance to all of the leases that qualified under the established criteria. In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which addressed challenges encountered in determining certain lessor costs paid by the lessee directly to third parties by allowing lessors to exclude these costs from its variable lease payments. This amendment did not have a material impact on the Company’s financial statements and related disclosures as it conformed Accounting Standard Codification (“ASC”) 842 to the Company’s historical accounting under ASC 840. In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements,” which clarified the transition guidance related to interim disclosure requirements in the year of adoption. All of the ASC 842 ASUs are effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018.

The Company adopted these ASUs on January 1, 2019 using a modified retrospective approach, the adoption of these ASUs did not have a material impact on the Company’s consolidated results of operations or cash flows. However, the adoption of these ASUs did impact the Company’s consolidated financial position for arrangements such as ground or other leases in which the Company is the lessee. More specifically, the adoption of ASC 842 resulted in the Company recording operating lease assets and liabilities on January 1, 2019. The following table provides additional details by financial statement line item of the adjusted presentation in the Company’s consolidated financial position:

	As Presented			Effect of			As Adjusted
	December 31,			ASC 842			January 1,
	2018			Adoption			2019
Other assets	$	382,637		$	32,500		$	415,137
Total assets	$	67,289,375		$	32,500		$	67,321,875

Other liabilities	$	(128,957	)	$	(32,500	)	$	(161,457	)
Total liabilities	$	(25,624,140	)	$	(32,500	)	$	(25,656,640	)

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

2.	Summary of Significant Accounting Policies (continued)

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payments. The amendments also clarify that this ASU does not apply to share-based payments used to provide financing to the issuer or awards granted in conjunction with selling of goods or services to customers as a part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company adopted this ASU prospectively on January 1, 2019; the adoption of which did not have a material impact on the Company’s consolidated results of operations or cash flows.

Other Accounting Pronouncements — As described in Note 1. “Organization,” in July 2019, the Company filed a definitive proxy statement with the SEC requesting, among other items, the stockholders' approval of a Plan of Dissolution. If and upon approval by stockholders of a Plan of Dissolution, the Company’s financial position and results of operations will prospectively be presented using the liquidation basis of accounting (“Liquidation Basis”) as of the approval date and for each subsequent period thereafter. As a result, a new statement of financial position (Statement of Net Assets) will be presented, which will reflect the estimated amount of net cash proceeds that the Company expects to collect from the sale of all its assets as it completes the Plan of Dissolution. In addition, a new statement of operations (Statement of Changes in Net Assets) will be presented, which will reflect changes in net assets from the original estimated net cash proceeds as of the approval date through each subsequent period presented. All financial results and disclosures up through the approval date (if any) will be presented on a going concern basis (“Going Concern Basis”), which contemplates the realization of assets and liabilities in the normal course of business.

Revenue

The following table presents disaggregated revenue related to the Company’s resident fees and services during the six months ended June 30, 2019 and 2018:

Six Months Ended June 30,
Type of Investment	Number of Units				Revenues				Percentage of Revenues
Resident fees and services:	2019		2018		2019		2018		2019			2018
Assisted living		125		63	$	2,996,810	$	1,651,054		68.9	%		72.9	%
Memory care		50		20		1,304,913		584,920		30.0	%		25.8	%
Other revenues		—		—		48,727		28,786		1.1	%		1.3	%
		175		83	$	4,350,450	$	2,264,760		100.0	%		100.0	%

4. Real Estate Assets, net

The gross carrying amount and accumulated depreciation of the Company’s real estate assets as of June 30, 2019 and December 31, 2018, excluding assets held for sale, are as follows:

	June 30,			December 31,
	2019			2018
Land and land improvements	$	4,075,733		$	4,075,733
Building and building improvements		38,714,651			38,700,052
Furniture, fixtures and equipment		1,944,534			1,872,959
Less: accumulated depreciation		(2,509,971	)		(1,679,564	)
Real estate investment properties, net	$	42,224,947		$	42,969,180

Depreciation expense on the Company’s real estate investment properties, net was approximately $0.4 million and $0.8 million for the quarter and six months ended June 30, 2019, respectively, and approximately $0.2 million and $0.4 million for the quarter and six months ended June 30, 2018, respectively.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

5.	Intangibles, net

The gross carrying amount and accumulated amortization of the Company’s intangibles as of June 30, 2019 and December 31, 2018, excluding assets held for sale, are as follows:

	June 30,			December 31,
	2019			2018
In-place resident agreement intangibles	$	2,569,419		$	2,569,419
Less: accumulated amortization		(1,585,494	)		(1,071,610	)
Intangible assets, net	$	983,925		$	1,497,809

For the quarter and six months ended June 30, 2019, amortization on the Company’s intangibles was approximately $0.3 million and $0.5 million, respectively, all of which was included in depreciation and amortization. For the quarter and six months ended June 30, 2018, amortization on the Company’s intangibles was approximately $0.1 million and $0.3 million, respectively, all of which was included in depreciation and amortization.

6.	Assets and Associated Liabilities Held for Sale and Discontinued Operations

As part of executing on strategic alternatives, the Company committed to a plan to sell its MOB, Mid America Surgery, and classified the property as held for sale. The Company believed the sale of Mid America Surgery would cause a strategic shift in the Company’s operations and, therefore, classified the corresponding revenues and expenses for its MOB property as discontinued operations. In March 2019, the Company entered into a Sale Agreement with HCP Medical Office Buildings, LLC related to the MOB Sale. In May 2019, the Company completed the MOB Sale and recognized a gain on the sale of approximately $1.6 million for financial reporting purposes.

As of June 30, 2019 and December 31, 2018, the amounts classified as assets held for sale and the liabilities associated with those assets held for sale consisted of the following:

	June 30,		December 31,
	2019		2018
Real estate investment properties, net	$	—	$	10,603,833
Intangibles, net		—		3,485,818
Other assets		—		112,551
Assets held for sale, net	$	—	$	14,202,202
Mortgage loan, net	$	—	$	5,532,346
Accounts payable and accrued liabilities		—		391,735
Other liabilities		—		323,106
Liabilities associated with assets held for sale	$	—	$	6,247,187

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

6.	Assets and Associated Liabilities Held for Sale and Discontinued Operations

The following table is a summary of the Company’s income from discontinued operations for the quarter and six months ended June 30, 2019 and 2018:

	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Revenues:
Rental income and related revenues	$	144,022		$	421,426		$	486,294		$	830,242

Operating expenses:
Property operating expenses		54,097			178,987			165,782			350,220
General and administrative expenses		232			934			791			1,385
Property management fees		5,941			11,343			13,869			21,393
Depreciation and amortization		—			131,235			43,793			261,929
Total operating expenses		60,270			322,499			224,235			634,927
Gain on sale of real estate		1,566,321			—			1,566,321			—
Operating income		1,650,073			98,927			1,828,380			195,315

Other expense:
Interest expense and loan cost amortization		(86,252	)		(68,673	)		(161,512	)		(132,521	)
Total other expense		(86,252	)		(68,673	)		(161,512	)		(132,521	)
Income before income taxes		1,563,821			30,254			1,666,868			62,794
Income tax expense		—			—			—			—
Income from discontinued operations	$	1,563,821		$	30,254		$	1,666,868		$	62,794

7.	Indebtedness

In May 2019, in connection with the MOB Sale, the Company strategically paid down approximately $12.8 million of debt secured by its Summer Vista Assisted Living (“Summer Vista”) property. In connection therewith, the Company wrote-off approximately $0.1 million in unamortized loan costs as a loss on the early extinguishment of debt, which is included in interest expense and loan cost amortization in the accompanying condensed consolidated statements of operations for the quarter and six months ended June 30, 2019.

The following table provides details of the Company’s indebtedness as of June 30, 2019 and December 31, 2018:

	June 30,			December 31,
	2019			2018
Mortgage loans, net:
Mortgage loans (1)	$	6,150,000		$	18,900,000
Loan costs, net		(102,599	)		(234,987	)
Total mortgage loans, net	$	6,047,401		$	18,665,013

FOOTNOTE:

(1)

As of June 30, 2019, the Company’s mortgage loans are collateralized by its Summer Vista and Riverview properties.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

7.	Indebtedness (continued)

The fair market value of the Company’s mortgage loans was approximately $6.1 million and $18.9 million as of June 30, 2019 and December 31, 2018, respectively, which is based on then-current rates and spreads the Company would expect to obtain for similar borrowings. Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values is categorized as Level 3 on the three-level valuation hierarchy.

The following is a schedule of future principal payments and maturity for the Company’s mortgage loans for the remainder of 2019, each of the next four years and thereafter, in the aggregate, as of June 30, 2019:

2019	$	—
2020		31,849
2021		85,947
2022		1,192,460
2023		4,839,744
Thereafter		—
	$	6,150,000

8.	Related Party Arrangements

The Company is externally advised and has no direct employees. All of the Company’s executive officers are executive officers, or on the board of managers, of the Advisor. In connection with services provided to the Company, affiliates are entitled to the following fees:

Dealer Manager — Through the termination of the Offering in October 2018, the Dealer Manager received a combined selling commission and dealer manager fee of up to 8.5% of the sale price for each Class A share and up to 4.75% of the sale price for each Class T share sold in the Primary Offering, all or a portion of which could be reallowed to participating broker dealers. In addition, for Class T shares sold in the Primary Offering, the Dealer Manager could choose the respective amounts of the commission and dealer manager fee, provided that the selling commission did not exceed 3.0% of the gross proceeds from the completed sale of such Class T shares.

The Company paid a distribution and stockholder servicing fee, subject to certain underwriting compensation limits, with respect to the Class T and Class I shares sold in the Primary Offering in an annual amount equal to 1% and 0.50%, respectively, of the then-current gross offering price per Class T or Class I share.

The Company recorded the annual distribution and stockholder servicing fees as a reduction to capital in excess of par value and measured the related liability in an amount equal to the maximum fees owed in relation to the Class T and Class I shares on the shares’ issuance date. The liability was relieved over time, as the fees were paid to the Dealer Manager. In connection with the close of the Offering effective October 1, 2018, certain underwriting compensation limits were met and, effective October 31, 2018, each Class T and Class I share automatically converted into a Class A share pursuant to the terms of the Company’s charter. The Class T and Class I shares converted into Class A shares on a one-for-one basis because the then-current estimated net asset value (“NAV”) per share of $10.06 was the same for all share classes. Effective October 31, 2018, Class T and Class I shares were no longer subject to class specific expenses upon conversion into Class A shares. The Company’s obligation to pay the remaining distribution and stockholder servicing fees liability of approximately $1.4 million to the Dealer Manager ceased effective October 31, 2018 upon the conversion of the Class T and Class I shares into Class A Shares.

CNL Capital Markets, LLC — The Company will pay CNL Capital Markets, LLC, an affiliate of CNL, an annual fee payable monthly based on the average number of total investor accounts that are open during the term of the capital markets service agreement pursuant to which certain administrative services are provided to the Company. These services may include, but are not limited to, the facilitation and coordination of the transfer agent’s activities, client services and administrative call center activities, financial advisor administrative correspondence services, material distribution services and various reporting and troubleshooting activities.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

8.	Related Party Arrangements (continued)

Advisor — Pursuant to the Company’s advisory agreement, dated as of March 2, 2016, the Company paid the Advisor AUM Fees in an amount equal to 0.80% per annum of average invested assets. In March 2019, the Company’s advisory agreement was amended and restated to eliminate acquisition fees and dispositions fees as well as to reduce the AUM Fees to 0.40% per annum of average invested assets. The reduced AUM Fees were further subject and subordinate to an agreed upon hurdle relating to the total operating expenses (as described in the amended and restated advisory agreement) of the Company, though to the extent any portion of the AUM Fees are not paid as a result of total operating expenses exceeding the prescribed limits, it may be recovered by the Advisor if certain Company performance thresholds are subsequently met. The Company’s board of directors approved renewing the amended and restated advisory agreement through March 2020. Effective as of April 1, 2019, the Advisor waived its rights to any AUM Fees going forward, with such waiver to remain in effect through the Company’s dissolution and liquidation.

The Advisor, its affiliates and related parties also are entitled to reimbursement of certain operating expenses in connection with their provision of services to the Company, including personnel costs, subject to the limitation that the Company will not reimburse the Advisor for any amount by which operating expenses exceed the greater of 2% of its average invested assets or 25% of its net income in any four consecutive fiscal quarters (“Expense Year”) unless approved by the independent directors. For the Expense Year ended June 30, 2019, the Company did not incur operating expenses in excess of the limitation. As of June 30, 2019, the Company had received cumulative approvals from its independent directors for total operating expenses in excess of this limitation of approximately $0.9 million.

For the six months ended June 30, 2019, the Company paid cash distributions of approximately $38,000 to the Advisor related to the Class A common stock held by the Advisor. There were no cash distributions for the quarter ended June 30, 2019 as the Company suspended regular cash distributions to stockholders effective April 1, 2019. In addition, there were no stock dividends for the quarter and six months ended June 30, 2019 as the Company discontinued its stock dividends in October 2018. For the quarter and six months ended June 30, 2018, the Company paid cash distributions of approximately $62,000 and $176,000, respectively, and issued stock dividends of approximately 1,000 shares and 2,000 shares, respectively, to the Advisor related to the Class A common stock held by the Advisor.

Pursuant to an expense support arrangement, the Advisor agreed to accept payment in restricted stock in lieu of cash for services rendered, in the event that the Company did not achieve established distribution coverage targets (“Expense Support Agreement”). In exchange for services rendered and in consideration of the expense support provided under this arrangement, the Company issued, following each determination date, a number of shares of restricted stock equal to the quotient of the expense support amount provided by the Advisor for the preceding year divided by the board of directors’ most recent determination of NAV per share of the Class A common shares on the terms and conditions and subject to the restrictions set forth in the Expense Support Agreement. The restricted stock is subordinated and forfeited to the extent that shareholders do not receive a Priority Return on their Invested Capital (as such terms are defined in the Company’s advisory agreement), excluding for the purposes of calculating this threshold any shares of restricted stock owned by the Advisor. In March 2019, the Company’s board of directors and the Advisor agreed to terminate the Expense Support Agreement effective April 1, 2019. Any restricted stock shares granted to the Advisor under the Expense Support Agreement shall continue to be held by the Advisor, subject to the vesting and forfeiture provisions of the Expense Support Agreement which survive termination.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

8.	Related Party Arrangements (continued)

The following fees for services rendered were settled in the form of restricted stock pursuant to the Expense Support Agreement for the quarter and six months ended June 30, 2019 and 2018 and cumulatively through the termination date effective April 1, 2019:

	Quarter Ended				Six Months Ended				Cumulative
	June 30,				June 30,				Fees
	2019		2018		2019		2018		Settled
Fees for services rendered:
Asset management fees	$	—	$	70,800	$	99,417	$	141,600	$	578,171
Advisor personnel expenses ⁽¹⁾		—		123,142		127,950		249,771		1,058,676
Total fees for services rendered	$	—	$	193,942	$	227,367	$	391,371	$	1,636,847

Then-current NAV	$	9.92	$	10.06	$	9.92	$	10.06	$	9.92
Restricted stock shares ⁽²⁾		—		19,279		22,920		38,904		164,210

Cash distributions on restricted stock ⁽³⁾	$	—	$	8,113	$	8,113	$	8,113	$	16,226
Stock dividends on restricted stock ⁽⁴⁾		—		170		—		170		340

FOOTNOTES:

(1)

Amounts consisted of personnel and related overhead costs of the Advisor or its affiliates (which, in general, are those expenses relating to the Company’s administration on an on-going basis) that are reimbursable by the Company.

(2)

Represents restricted stock shares issued to the Advisor pursuant to the Expense Support Agreement through its termination effective April 1, 2019. No fair value was assigned to the restricted stock shares as the shares do not vest until a liquidity event is consummated and certain market conditions are achieved. In addition, the restricted stock shares will be treated as unissued for financial reporting purposes until the vesting criteria are met.

(3)

The cash distributions were recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

(4)

The par value of the stock dividends was recognized as compensation expense as issued and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

CNL HEALTHCARE PROPERTIES II, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)

8.	Related Party Arrangements (continued)

The fees payable through the termination of the Offering in October 2018 to the Dealer Manager for the quarter and six months ended June 30, 2019 and 2018, and related amounts unpaid as of June 30, 2019 and December 31, 2018 were as follows:

	Quarter Ended				Six Months Ended				Unpaid amounts as of ⁽¹⁾
	June 30,				June 30,				June 30,		December 31,
	2019		2018		2019		2018		2019		2018
Selling commissions ⁽²⁾	$	—	$	89,834	$	—	$	221,675	$	—	$	—
Dealer manager fees ⁽²⁾		—		110,527		—		276,283		—		—
Distribution and stockholder
servicing fees ⁽²⁾		—		221,469		—		514,847		—		—
	$	—	$	421,830	$	—	$	1,012,805	$	—	$	—

The expenses incurred by and reimbursable to the Company’s related parties, including amounts included in income from discontinued operations, for the quarter and six months ended June 30, 2019 and 2018, and related amounts unpaid as of June 30, 2019 and December 31, 2018 are as follows:

	Quarter Ended				Six Months Ended				Unpaid amounts as of ⁽¹⁾
	June 30,				June 30,				June 30,	December 31,
	2019		2018		2019		2018		2019	2018
Reimbursable expenses:
Operating expenses ⁽³⁾	$	178,746	$	263,201	$	409,570	$	526,795

CNL Healthcare Properties II, Inc. 10-Q