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Section 1: 10-K/A (10-K/A)

mrt-10ka_20171231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

(Mark One)

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

For the fiscal year ended December 31, 2017

OR

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 001-37887

 

MEDEQUITIES REALTY TRUST, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Maryland

46-5477146

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

3100 West End Avenue, Suite 1000

Nashville, TN

37203

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (615) 627-4710

 

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

 

Title of Each Class

Name of Each Exchange On Which Registered

Common Stock, $0.01 par value per share

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  NO 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES  NO 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES  NO 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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  ☐

(Do not check if a smaller reporting company)

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 

As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $358,216,529, based on the closing stock price of $12.62 as reported on the New York Stock Exchange.

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The number of shares of registrant’s common stock outstanding as of February 14, 2018 was 31,886,684.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. The registrant expects to file its Definitive Proxy Statement with the Securities and Exchange Commission within 120 days after December 31, 2017.

 

 

 

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EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K (this “Amendment”) of MedEquities Realty Trust, Inc. (the “Company”) amends the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2018 (the “2017 Form 10-K”). This Amendment is being filed to include the audited financial statements of GruenePointe Holdings, LLC (“GruenePointe”) as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 as Exhibit 99.1 hereto and the consents from their independent auditors as Exhibits 23.2 and 23.3 hereto.  GruenePointe is the guarantor of the triple-net master lease for the Company’s Texas SNF Portfolio, which accounted for more than 20% of the Company’s total assets as of December 31, 2017; therefore, GruenePointe’s audited financial statements are being filed herewith in accordance with Section 2340 of the SEC’s Division of Corporation Finance Financial Reporting Manual.

This Amendment also is being filed to file an updated consent from KPMG LLP as Exhibit 23.1 hereto to add a reference to one of the Company’s registration statements on Form S-3, which was inadvertently omitted from Exhibit 23.1 to the 2017 Form 10-K.  

In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, updated certifications of the Company’s principal executive officer and principal financial officer are included as exhibits hereto.

Item 15 of Part IV is the only portion of the 2017 Form 10-K being amended by this Amendment. Except as described above, this Amendment does not amend, update or change the financial statements, consents or any other items or disclosures contained in the 2017 Form 10-K and does not otherwise reflect events occurring after the original filing date of the 2017 Form 10-K. Accordingly, this Amendment should be read in conjunction with the 2017 Form 10-K and the Company’s other filings with the SEC subsequent to the filing of the 2017 Form 10-K.

 

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

The Consolidated Financial Statements are included in Item 8 and are filed as part of this report.

(2) Financial Statement Schedules

The Financial Statement Schedules are included in Item 8 and are filed as part of this report.  All other schedules are omitted because they are not applicable or not present in amounts sufficient to require submission or the required information is shown in the Consolidated Financial Statements and the Notes thereto.

(3) Exhibits

The Exhibits are included in Item 15(b) and are incorporated by reference herein.

 

(b)

Exhibits

 

Exhibit Number

Description

3.1

Articles of Amendment and Restatement (Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

3.2

Articles Supplementary, designating MedEquities Realty Trust, Inc.’s 12.5% Series A Redeemable Cumulative Preferred Stock (Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

3.3

Articles Supplementary, designating MedEquities Realty Trust, Inc.’s 7.875% Series B Redeemable Cumulative Preferred Stock (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-11 filed on August 20, 2015).

 

3.4

Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

10.1

 

First Amended and Restated Agreement of Limited Partnership of MedEquities Realty Operating Partnership, LP, dated July 31, 2014 (Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

3


10.2

 

Amendment No. 1, dated January 28, 2015, to the First Amended and Restated Agreement of Limited Partnership of MedEquities Realty Operating Partnership, LP (Incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

10.3

 

Amendment No. 2, dated March 10, 2015, to the First Amended and Restated Agreement of Limited Partnership of MedEquities Realty Operating Partnership, LP (Incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

10.4

MedEquities Realty Trust, Inc. Amended and Restated 2014 Equity Incentive Plan (as amended and restated effective May 3, 2017) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 4, 2017).

 

10.5

Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8, filed on October 6, 2016).

 

10.6

Form of Restricted Stock Award Agreement for Officers (Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-8, filed on October 6, 2016).

 

10.7

 

Form of Restricted Stock Award Agreement for Directors (Incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-8, filed on October 6, 2016).

 

10.8

 

Amended and Restated Employment Agreement, dated as of September 15, 2016, by and among MedEquities Realty Trust, Inc., MedEquities Realty Operating Partnership, LP and John W. McRoberts (Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-11/A, filed on September 19, 2016).

 

10.9

Amended and Restated Employment Agreement, dated as of September 15, 2016, by and among MedEquities Realty Trust, Inc., MedEquities Realty Operating Partnership, LP and William C. Harlan (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-11/A, filed on September 19, 2016).

 

10.10

Amended and Restated Employment Agreement, dated as of September 15, 2016, by and among MedEquities Realty Trust, Inc., MedEquities Realty Operating Partnership, LP and Jeffery C. Walraven (Incorporated by reference to Exhibit 10.10 of the Company’s Registration Statement on Form S-11/A, filed on September 19, 2016).

 

10.11

Indemnification Agreement by and between MedEquities Realty Trust, Inc. and each of its directors and officers listed on Schedule A thereto (Incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-11/A, filed on September 19, 2016).

 

10.12

Master Lease, dated as of March 31, 2015, by and among MRT of La Mesa, CA – SNF, LLC, MRT of National City CA – SNF I, LLC, MRT of National City CA – SNF II, LLC and MRT of Upland CA – SNF/ALF, LLC and GHC of La Mesa, LLC, GHC of National City II, LLC, GHC of National City I, LLC, GHC of Upland SNF, LLC and GHC of Upland RCFE, LLC (Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.13

First Amendment to Master Lease, dated as of October 1, 2015, by and among MRT of La Mesa, CA – SNF, LLC, MRT of National City CA – SNF I, LLC, MRT of National City CA – SNF II, LLC, MRT of Upland CA – SNF/ALF, LLC and MRT of San Diego CA – SNF, LLC and GHC of La Mesa, LLC, GHC of National City II, LLC, GHC of National City I, LLC, GHC of Upland SNF, LLC, GHC of Upland RCFE, LLC and GHC of Kearny Mesa, LLC (Incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.14

Second Amendment to Master Lease, dated as of June 8, 2016, by and among MRT of La Mesa, CA - SNF, LLC, MRT of National City CA - SNF I, LLC, MRT of National City CA - SNF II, LLC, MRT of Upland CA - SNF/ALF, LLC and MRT of San Diego CA - SNF, LLC and GHC of La Mesa, LLC, GHC of National City II, LLC, GHC of National City I, LLC, GHC of Upland SNF, LLC, GHC of Upland RCFE, LLC and GHC of Kearny Mesa, LLC (Incorporated by reference to Exhibit 10.34 to the Company’s Registration Statement on Form S-11/A, filed on August 22, 2016).

 

4


10.15

Guaranty of Master Lease, dated as of March 31, 2015 by Life Generations Healthcare LLC in favor of MRT of La Mesa, CA – SNF, LLC, MRT of National City CA – SNF I, LLC, MRT of National City CA – SNF II, LLC and MRT of Upland CA – SNF/ALF, LLC (Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.16

Master Lease Agreement, dated as of, 2016, by and between Lakeway Realty, L.L.C., Scott & White Hospital Round Rock and Baylor University Medical Center (Incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-11/A, filed on September 19, 2016).

 

10.17

Amended and Restated Operating Agreement of Lakeway Realty, L.L.C., dated as of March 20, 2015 (Incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.18

BlueMountain Rights Agreement, dated as of July 25, 2014, by and between MedEquities Realty Trust, Inc. and BlueMountain Capital Management, LLC (Incorporated by reference to Exhibit 10.25 of the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

10.19

Purchase and Sale Agreement, dated as of July 29, 2015, by and among GruenePointe Acquisition I, LLC, MRT of San Antonio TX – SNF I, LLC, MRT of San Antonio TX – SNF II, LLC, MRT of Graham TX – SNF, LLC, MRT of Kemp TX – SNF, LLC, MRT of Kerens TX – SNF, LLC, MRT of Brownwood TX – SNF, LLC, MRT of El Paso TX – SNF, LLC, MRT of Kaufman TX – SNF, LLC, MRT of Longview TX – SNF, LLC and MRT of Mt. Pleasant TX – SNF, LLC (Incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-11/A,  filed on May 5, 2016).

 

10.20

Master Lease, dated July 29, 2015, by and between MRT of San Antonio TX – SNF I, LLC, MRT of San Antonio TX – SNF II, LLC, MRT of Graham TX – SNF, LLC, MRT of Kemp TX – SNF, LLC, MRT of Kerens TX – SNF, LLC, MRT of Brownwood TX – SNF, LLC, MRT of El Paso TX – SNF, LLC, MRT of Kaufman TX – SNF, LLC, MRT of Longview TX – SNF, LLC, MRT of Mt. Pleasant TX – SNF, LLC and GruenePoint 1 Graham, LLC, GruenePointe 1 El Paso, LLC, GruenePointe 1 Kerens, LLC, GruenePointe 1 Casa Rio, LLC, GruenePointe 1 River City, LLC, GruenePointe 1 Brownwood, LLC, GruenePointe 1 Longview, LLC, GruenePointe 1 Kemp, LLC, GruenePointe 1 Mt. Pleasant, LLC and GruenePointe 1 Kaufman, LLC (Incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.21

First Amendment to Master Lease, dated as of January 13, 2016, by and among MRT of San Antonio TX - SNF I, LLC, MRT of San Antonio TX - SNF II, LLC, MRT of Graham TX - SNF, LLC, MRT of Kemp TX - SNF, LLC, MRT of Kerens TX - SNF, LLC, MRT of Brownwood TX - SNF, LLC, MRT of El Paso TX - SNF, LLC, MRT of Kaufman TX - SNF, LLC, MRT of Longview TX - SNF, LLC, and MRT of Mt. Pleasant TX - SNF, LLC, and GruenePointe 1 Graham, LLC, GruenePointe 1 El Paso, LLC, GruenePointe 1 Kerens, LLC, GruenePointe 1 Casa Rio, LLC, GruenePointe 1 River City, LLC, GruenePointe 1 Brownwood, LLC, GruenePointe 1 Longview, LLC, GruenePointe 1 Kemp, LLC, GruenePointe 1 Mt. Pleasant, LLC, and GruenePointe 1 Kaufman, LLC (Incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-11/A, filed on May 5, 2016).

 

10.22

Registration Rights Agreement, dated as of July 31, 2014, by and among MedEquities Realty Trust, Inc. and FBR Capital Markets & Co. (Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-11, filed on August 20, 2015).

 

 

10.23

Second Amended and Restated Credit Agreement, dated as of February 10, 2017, by and among the Operating Partnership and KeyBank National Association, as administrative agent and a lender, and the other agents and lenders part thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 13, 2017).

 

 

10.24

Second Amended and Restated Unconditional Guaranty of Payment and Performance, dated as of February 10, 2017, by and among the Company and its subsidiaries party thereto, in favor of KeyBank National Association and the other lenders under the Amended Credit Agreement (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on February 13, 2017).

 

 

5


10.25

Amended and Restated Master Lease between MRT of Las Vegas NV – ACH, LLC, MRT of Las Vegas NV – LTACH, LLC, MRT of Fort Worth TX – SNF, LLC and MRT of Spartanburg SC – SNF, LLC as Landlord, and Nashville Leasehold Interest, LLC, as Tenant, dated as of April 27, 2017 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on August 8, 2017).

 

 

10.26

Master Lease Guaranty, dated as of April 27, 2017, by THI of Baltimore, Inc. in favor of MRT of Las Vegas NV – ACH, LLC, MRT of Las Vegas NV – LTACH, LLC, MRT of Fort Worth TX – SNF, LLC and MRT of Spartanburg SC – SNF, LLC as Landlord (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed on August 8, 2017).

 

 

10.27

Letter Agreement, dated March 28, 2017, by and among the Company and certain funds managed by BlueMountain Capital Management, LLC (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed on August 8, 2017).

 

 

10.28**

First Amendment to BlueMountain Rights Agreement, dated December 29, 2017, by and between the Company and BlueMountain Capital Management, LLC.

 

 

10.29**

First Amendment to the Second Amended and Restated Credit Agreement, dated December 22, 2017, by and among the Operating Partnership and KeyBank National Association, as administrative agent and a lender, and the other agents and lenders part thereto.

 

 

10.30

2016 Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on May 8, 2017).

 

 

10.31†**

2017 Form of Restricted Stock Unit Award Agreement.

 

 

21.1**

List of subsidiaries.

 

23.1*

Consent of KPMG.

 

23.2*

Consent of Whitley Penn LLP.

 

 

23.3*

Consent of McNair, McLemore, Middlebrooks & Co., LLC.

 

 

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

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

 

99.1*

Financial Statements of GruenePointe Holdings, LLC.

 

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

 

*Filed herewith

** Previously filed as an exhibit to the original Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 21, 2018.

Management contract or compensatory plan or arrangement.

6


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

MedEquities Realty Trust, Inc.

 

 

 

 

Date: April 2, 2018

 

By:

/s/ John W. McRoberts

 

 

 

John W. McRoberts

Chairman and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

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Section 2: EX-23.1 (EX-23.1)

mrt-ex231_57.htm

Exhibit 23.1

 

 

Consent of Independent Registered Public Accounting Firm

The Board of Directors
MedEquities Realty Trust, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-220757 and No. 333-206519) on Form S-3 and the registration statements (No. 333-217890 and No. 333-214014) on Form S-8 of MedEquities Realty Trust, Inc. of our report dated February 21, 2018, with respect to the consolidated balance sheets of MedEquities Realty Trust, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement Schedules III and IV (collectively, the “consolidated financial statements”), which report appears in the December 31, 2017 annual report on Form 10-K of MedEquities Realty Trust, Inc.

 

/s/ KPMG LLP

Atlanta, Georgia
April 2, 2018

 

 

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Section 3: EX-23.2 (EX-23.2)

mrt-ex232_78.htm

Exhibit 23.2

 

Consent of Independent Auditor

Board of Directors

MedEquities Realty Trust, Inc.

We consent to the incorporation by reference in the Registration Statements (No. 333-220757 and No. 333-206519) on Form S-3 and the Registration Statements (No. 333-217890 and No. 333-214014) on Form S-8 of MedEquities Realty Trust, Inc. of our report dated March 30, 2018, related to the consolidated financial statements of GruenePointe Holdings, LLC and subsidiaries, as of December 31, 2017 and 2016, and for the years then ended, which report is included as Exhibit 99.1 in this Annual Report on Form 10-K/A.

/s/ Whitley Penn LLP

 

Dallas, Texas

March 30, 2018 

 

 

 

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Section 4: EX-23.3 (EX-23.3)

mrt-ex233_77.htm

Exhibit 23.3

 

Consent of Independent Auditor

 

We consent to the incorporation by reference in the registration statements (No. 333-220757 and No. 333-206519) on Form S-3 and the registration statements (No. 333-217890 and No. 333-214014) on Form S-8 of MedEquities Realty Trust, Inc. of our report dated March 10, 2016, relating to the consolidated financial statements of GruenePointe Holdings, LLC and Subsidiaries, comprising the consolidated statements of operations and changes in members’ equity, and cash flows for the year ended December 31, 2015, which report appears in the Annual Report on Form 10-K of MedEquities Realty Trust, Inc. for the year ended December 31, 2017, as amended (Form 10-K/A).

 

 

/s/ McNair, McLemore, Middlebrooks & Co., LLC

March 31, 2018

Macon, Georgia

 

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Section 5: EX-31.1 (EX-31.1)

mrt-ex311_8.htm

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. McRoberts, certify that:

1.

I have reviewed this Amendment No. 1 to the annual report on Form 10-K of the registrant, MedEquities Realty Trust, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

Date: April 2, 2018

 

By:

/s/ John W. McRoberts

 

 

 

John W. McRoberts

 

 

 

Chief Executive Officer

 

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Section 6: EX-31.2 (EX-31.2)

mrt-ex312_6.htm

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffery C. Walraven, certify that:

1.

I have reviewed this Amendment No. 1 to the annual report on Form 10-K of the registrant, MedEquities Realty Trust, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

 

Date: April 2, 2018

 

By:

/s/ Jeffery C. Walraven

 

 

 

Jeffery C. Walraven

 

 

 

Executive Vice President and Chief Financial Officer

 

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Section 7: EX-32.1 (EX-32.1)

mrt-ex321_7.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, in connection with Amendment No. 1 to the Annual Report on Form 10-K of MedEquities Realty Trust, Inc. (“Company”) for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that, to the undersigned’s best knowledge and belief:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 2, 2018

 

By:

/s/ John W. McRoberts

 

 

 

John W. McRoberts

 

 

 

Chief Executive Officer

 

 

 

By:

/s/ Jeffery C. Walraven

 

 

 

Jeffery C. Walraven

 

 

 

Executive Vice President and Chief Financial Officer

 

 

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Section 8: EX-99.1 (EX-99.1)

mrt-ex991_79.htm

Exhibit 99.1

 

 

 

 

GRUENEPOINTE HOLDINGS, LLC

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2017 and 2016 and

Years Ended December 31, 2017, 2016, and 2015

with Reports of Independent Auditors

 

 


 

GRUENEPOINTE HOLDINGS, LLC

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2017 and 2016 and

Years Ended December 31, 2017, 2016, and 2015

with Reports of Independent Auditors

Table of Contents

 

Reports of Independent Auditors

 

 

 

 

 

Audited Consolidated Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets

 

4

 

 

 

Consolidated Statements of Operations

 

6

 

 

 

Consolidated Statements of Members’ Equity (Deficit)

 

7

 

 

 

Consolidated Statements of Cash Flows

 

8

 

 

 

Notes to Consolidated Financial Statements

 

9

 

 

 

 


 

REPORT OF INDEPENDENT AUDITORS

To the Members of

GruenePointe Holdings, LLC

We have audited the accompanying consolidated financial statements of GruenePointe Holdings, LLC and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of operations, members’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”); this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of GruenePointe Holdings, LLC and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with GAAP.

/s/ Whitley Penn LLP

Dallas, Texas

March 30, 2018


 


 

March 10, 2016

INDEPENDENT AUDITOR’S REPORT

The Management

GruenePointe Holdings, LLC

We have audited the accompanying consolidated financial statements of GruenePointe Holdings, LLC and Subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations, members’ equity, and cash flows for the year ended December 31, 2015 and the period from April 21, 2014 (date of inception) through December 31, 2014, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 


 

Opinion

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GruenePointe Holdings, LLC and Subsidiaries as of December 31, 2015 and 2014 and the results of its operations and cash flows for the year ended December 31, 2015 and period from April 21, 2014 (date of inception) through December 31, 2014, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ McNair, McLemore, Middlebrooks & Co., LLC

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

 

 

 

 


 

GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,691,519

 

 

$

1,967,602

 

Patient accounts receivable, net of allowance for doubtful

 

 

 

 

 

 

 

 

   accounts of $2,239,488 in 2017 and $741,308 in 2016

 

 

15,095,818

 

 

 

11,018,428

 

Prepaid expenses and other current assets

 

 

571,513

 

 

 

801,624

 

Total current assets

 

 

18,358,850

 

 

 

13,787,654

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

Land

 

 

2,478,592

 

 

 

2,101,000

 

Buildings and improvements

 

 

17,994,329

 

 

 

20,727

 

Departmental equipment

 

 

3,001,504

 

 

 

338,439

 

Construction in progress

 

 

-

 

 

 

4,825,618

 

 

 

 

23,474,425

 

 

 

7,285,784

 

Accumulated depreciation

 

 

(220,688

)

 

 

(53,367

)

 

 

 

23,253,737

 

 

 

7,232,417

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

License

 

 

-

 

 

 

1,204,226

 

Assets limited as to use

 

 

469,765

 

 

 

716,756

 

Pre-construction costs

 

 

1,637,802

 

 

 

5,712,759

 

Deposits

 

 

2,381,106

 

 

 

2,339,201

 

 

 

 

4,488,673

 

 

 

9,972,942

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

 

3,963,687

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

50,064,947

 

 

$

30,993,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

4


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEETS (continued)

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Liabilities and Members' Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

13,430,506

 

 

$

-

 

Receivables financing

 

 

6,597,826

 

 

 

4,811,441

 

Accounts payable

 

 

10,582,228

 

 

 

5,377,944

 

Related party payables

 

 

5,184,863

 

 

 

2,823,716

 

Accrued payroll, benefits, and taxes

 

 

1,457,392

 

 

 

1,347,172

 

Other accrued liabilities

 

 

4,418,153

 

 

 

2,953,007

 

Total current liabilities

 

 

41,670,968

 

 

 

17,313,280

 

Deferred lease liability

 

 

4,386,765

 

 

 

2,754,693

 

Deferred gain on sale/leaseback

 

 

13,403,602

 

 

 

13,515,146

 

Total liabilities

 

 

59,461,335

 

 

 

33,583,119

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Members' equity (deficit)

 

 

(9,396,388

)

 

 

(2,590,106

)

Total liabilities and members' equity (deficit)

 

$

50,064,947

 

 

$

30,993,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net patient service revenues

 

$

79,559,883

 

 

$

83,638,952

 

 

$

34,208,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Nursing services

 

 

40,749,485

 

 

 

40,257,924

 

 

 

17,428,143

 

Medical records

 

 

493,865

 

 

 

474,568

 

 

 

-

 

Recreational and social

 

 

1,809,007

 

 

 

989,391

 

 

 

467,073

 

Dietary services

 

 

4,601,031

 

 

 

4,562,663

 

 

 

1,946,750

 

Housekeeping services

 

 

1,667,239

 

 

 

1,697,529

 

 

 

758,823

 

Laundry services

 

 

690,787

 

 

 

653,137

 

 

 

256,750

 

Repairs and maintenance

 

 

2,649,582

 

 

 

2,384,331

 

 

 

1,028,924

 

General and administrative

 

 

13,823,414

 

 

 

12,287,377

 

 

 

3,615,723

 

Facility lease

 

 

15,727,199

 

 

 

15,727,199

 

 

 

6,583,470

 

Property taxes and insurance

 

 

1,708,934

 

 

 

932,003

 

 

 

472,958

 

Interest expense

 

 

889,710

 

 

 

568,344

 

 

 

394,188

 

Depreciation

 

 

168,244

 

 

 

50,831

 

 

 

2,535

 

Management fees

 

 

3,712,323

 

 

 

4,163,583

 

 

 

1,724,792

 

 

 

 

88,690,820

 

 

 

84,748,880

 

 

 

34,680,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(9,130,937

)

 

 

(1,109,928

)

 

 

(471,361

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

7,515

 

 

 

6,479

 

 

 

7,087

 

Other income (expense)

 

 

(582,860

)

 

 

(226,380

)

 

 

(396,858

)

Total other expenses

 

 

(575,345

)

 

 

(219,901

)

 

 

(389,771

)

Net loss

 

 

(9,706,282

)

 

 

(1,329,829

)

 

 

(861,132

)

Net loss attributable to noncontrolling interest

 

 

56,081

 

 

 

13,886

 

 

 

9,851

 

Net loss attributable to the Company

 

$

(9,650,201

)

 

$

(1,315,943

)

 

$

(851,281

)

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)

Years Ended December 31, 2017, 2016, and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

Members'

 

 

 

 

Accumulated

 

 

 

 

Controlling

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

Interest

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

695,000

 

 

 

 

$

(1,145

)

 

 

 

$

-

 

 

 

 

$

693,855

 

Net loss

 

 

-

 

 

 

 

 

(851,281

)

 

 

 

 

(9,851

)

 

 

 

 

(861,132

)

Capital contributions

 

 

1,002,000

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

1,002,000

 

Conversion of equity to debt

 

 

(695,000

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(695,000

)

Balance at December 31, 2015

 

 

1,002,000

 

 

 

 

 

(852,426

)

 

 

 

 

(9,851

)

 

 

 

 

139,723

 

Net loss

 

 

-

 

 

 

 

 

(1,315,943

)

 

 

 

 

(13,886

)

 

 

 

 

(1,329,829

)

Distributions

 

 

-

 

 

 

 

 

(3,500,000

)

 

 

 

 

-

 

 

 

 

 

(3,500,000

)

Capital contributions

 

 

2,100,000

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

2,100,000

 

Balance at December 31, 2016

 

 

3,102,000

 

 

 

 

 

(5,668,369

)

 

 

 

 

(23,737

)

 

 

 

 

(2,590,106

)

Net loss

 

 

-

 

 

 

 

 

(9,650,201

)

 

 

 

 

(56,081

)

 

 

 

 

(9,706,282

)

Capital contributions

 

 

3,900,000

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

3,900,000

 

Conversion of equity to debt

 

 

(1,000,000

)

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

(1,000,000

)

Balance at December 31, 2017

 

$

6,002,000

 

 

 

 

$

(15,318,570

)

 

 

 

$

(79,818

)

 

 

 

$

(9,396,388

)

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.


7


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,706,282

)

 

$

(1,329,829

)

 

$

(861,132

)

   Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

 

 

 

 

 

provided by (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

168,244

 

 

 

50,831

 

 

 

2,535

 

Amortization of debt issuance costs

 

 

135,708

 

 

 

128,125

 

 

 

15,136

 

Bad debt expense

 

 

4,742,677

 

 

 

2,512,356

 

 

 

345,000

 

Recognized gain on sale/leaseback

 

 

(111,544

)

 

 

(111,544

)

 

 

(46,477

)

Impairment on held for sale assets

 

 

164,687

 

 

 

-

 

 

 

-

 

Change in:

 

 

 

 

 

 

 

 

 

 

 

 

Patient accounts receivable

 

 

(8,820,067

)

 

 

3,368,440

 

 

 

(17,244,224

)

Prepaids and other assets

 

 

94,403

 

 

 

1,918,711

 

 

 

(2,539,391

)

Deposits

 

 

(41,905

)

 

 

(91,082

)

 

 

(2,248,119

)

Accounts payable

 

 

7,565,431

 

 

 

(1,608,290

)

 

 

6,780,414

 

Accrued payroll, benefits, and taxes

 

 

110,220

 

 

 

(59,195

)

 

 

1,406,367

 

Other accrued liabilities

 

 

1,465,146

 

 

 

2,477,620

 

 

 

475,387

 

Deferred lease liability

 

 

1,632,072

 

 

 

1,910,634

 

 

 

844,059

 

Net cash provided by (used in) operating activities

 

 

(2,601,210

)

 

 

9,166,777

 

 

 

(13,070,445

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment and

   pre-construction costs

 

 

(15,038,755

)

 

 

(5,564,059

)

 

 

(4,096,857

)

Funds released from (deposited to) escrow

 

 

246,991

 

 

 

5,523,006

 

 

 

(6,239,762

)

Investment in Thirteen Moons

 

 

-

 

 

 

(3,500,000

)

 

 

-

 

Net cash used in investing activities

 

 

(14,791,764

)

 

 

(3,541,053

)

 

 

(10,336,619

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from receivables financing

 

 

74,793,003

 

 

 

88,191,546

 

 

 

18,664,601

 

Payments on receivables financing

 

 

(73,006,618

)

 

 

(88,631,717

)

 

 

(13,412,989

)

Debt issuance costs

 

 

-

 

 

 

(54,353

)

 

 

(269,852

)

Proceeds from notes payable

 

 

12,430,506

 

 

 

-

 

 

 

3,450,000

 

Principal payments on note payable

 

 

-

 

 

 

(3,450,000

)

 

 

-

 

Proceeds from related party loans

 

 

-

 

 

 

-

 

 

 

1,879,421

 

Proceeds from sale/leaseback transaction

 

 

-

 

 

 

-

 

 

 

13,673,167

 

Capital contributions

 

 

3,900,000

 

 

 

2,100,000

 

 

 

1,002,000

 

Capital distributions

 

 

-

 

 

 

(3,500,000

)

 

 

-

 

Net cash provided by (used in) financing activities

 

 

18,116,891

 

 

 

(5,344,524

)

 

 

24,986,348

 

Net increase in cash

 

 

723,917

 

 

 

281,200

 

 

 

1,579,284

 

Cash and cash equivalents at beginning of year

 

 

1,967,602

 

 

 

1,686,402

 

 

 

107,118

 

Cash and cash equivalents at end of year

 

$

2,691,519

 

 

$

1,967,602

 

 

$

1,686,402

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

532,481

 

 

$

667,970

 

 

$

153,525

 

Cash paid during the year for state income taxes

 

$

-

 

 

$

44,081

 

 

$

-

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

 

 

 

 

 

 

 

Equity converted to debt

 

$

1,000,000

 

 

$

-

 

 

$

695,000

 

Investment in Thirteen Moons in accounts payable

 

$

-

 

 

$

200,000

 

 

$

-

 

Reclass of assets held for sale

 

$

3,963,687

 

 

 

 

 

 

$

-

 

 

See accompanying notes to consolidated financial statements.

 

 

8


 

GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

A.  Nature of Business

GruenePointe Holdings, LLC (a domestic limited liability company) (the “Company”) was established on April 21, 2014, in Dallas, Texas as a holding company for the development, construction, acquisition, and operation of healthcare facilities.  The Company is comprised of the following consolidated subsidiaries, all of which are wholly-owned with the exception of Adora 9, LLC which is 84.8% owned.

Adora Entities

The Adora entities were established to develop, construct, and operate senior living communities, consisting of assisted living and skilled nursing facilities.  The Company was actively developing three projects in Texas as of December 31, 2017.

 

    Adora Holdings, LLC

    Adora 9, LLC

 

 

    Adora Holdings Development, LLC

    Adora 9 Realty, LLC

 

 

    Adora 8, LLC

    Adora 9 Operations, LLC

 

 

    Adora Creekside Realty, LLC

    Adora 10, LLC

The Texas Ten Entities

The Texas Ten Entities (“Texas Ten”) were established to conduct the purchase and sale and leaseback and to facilitate the continuing operations of ten skilled nursing facilities with a total of 1,145 licensed beds.  The facilities are located throughout Texas.

 

    GruenePointe 1 Graham, LLC

    GruenePointe 1 Brownwood, LLC

 

 

    GruenePointe 1 El Paso, LLC

    GruenePointe 1 Longview, LLC

 

 

    GruenePointe 1 Kerens, LLC

    GruenePointe 1 Kemp, LLC

 

 

    GruenePointe 1 Casa Rio, LLC

    GruenePointe 1 Mt. Pleasant, LLC

 

 

    GruenePointe 1 River City, LLC

    GruenePointe 1 Kaufman, LLC

Other Entities

GruenePointe 1 St. Giles, LLC operates a skilled nursing facility in Texas with a total of 124 licensed beds.

 

 

9


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

 

A.  Nature of Business – continued

Other Entities – continued

GruenePointe 1 Salvado, LLC was formed to maintain custody of reserve funds required by the Master Lease Agreement and Guaranty Agreement executed in conjunction with the sale and leaseback of the Texas Ten skilled nursing facilities.

GruenePointe Acquisition 1, LLC was formed to pursue the acquisition of the Texas Ten skilled nursing facilities.  It later assigned its rights in transaction agreements to the Company.

Thirteen Moons, LLC is consolidated by the Company as a variable interest entity (“VIE”). See Note F for further discussion and Notes B and L for subsequent event related to the disposal of the related assets.

Going Concern

The Company has experienced significant recurring losses and has a net capital deficiency as of December 31, 2017. These factors raise substantial doubts about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage cash flows and divest of certain operating assets. Additionally, if these actions don’t provide sufficient capital, the Company will have to obtain additional financing through debt or equity to fully implement its business plan, including continued growth.

The Company is currently in the final stages of negotiations with a member to sell the Texas Ten facilities, the St. Giles facility, and the GP Salvado entity to an affiliate of that member.  Upon consummation of the sale, the Company will receive total consideration of $4,000,000, including debt forgiven in the amount of $673,378 and a promissory note in the amount of $3,326,622. The promissory note will accrue interest at 6% annually and will have a five year term with a balloon payment due at maturity.  The payment obligation is accelerated in the event that any of the underlying assets securing the note are sold or otherwise disposed of. Additionally, this transaction would eliminate a significant portion of the Company’s liabilities.  The largest remaining liability is debt of approximately $12.4 million and is due in November 2018, but contains two six month extensions at the option of the Company.

The remaining operations, after the consummation of the above sale, primarily include the Adora entities.  Operations of the Adora entities will be funded by cash on hand, investor funds held in escrow which are expected to be released in the second quarter of 2018, and remaining availability to draw on the construction loan. Management of the Company believes it is probable that they will be able to execute their plans to divest of certain operational assets and to fund the operations of the Company for at least twelve months from the issuance of these consolidated financial statements. Ownership of the Company has the ability and wherewithal to provide capital as needed during this period if required.

Failure to execute the above strategy could have a material adverse effect on the Company’s business, financial condition, and results of operations.  The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

10

 


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

B.  Summary of Significant Accounting Policies

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Basis of Accounting

The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Principles of Consolidation

The consolidated financial statements include the Company’s majority owned and controlled subsidiaries.  VIE’s have been consolidated as controlled subsidiaries when the Company is identified as the primary beneficiary.  All intercompany transactions and balances have been eliminated through consolidation.  For subsidiaries that are not wholly-owned by the Company, the portions not controlled by the Company are presented as noncontrolling interests in the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes.  Actual results could differ from these estimates and assumptions.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents.  At December 31, 2017 and 2016, the Company had no such investments.  The Company maintains deposits in various financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”).  The Company has not experienced any losses related to amounts in excess of FDIC limits.

Accounts Receivable

Accounts receivable are stated at amounts management expects to collect for providing patient care.  Management provides for probable uncollectible amounts through a charge to bad debt expense and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual accounts.  Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to patient accounts receivable.


11


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

B.  Summary of Significant Accounting Policies – continued

Accounts Receivable Reserve Methodology

The Company has implemented a standardized approach to estimate and review the collectability of its receivables based on accounts receivable aging trends.  The Company analyzes historical collection trends and reimbursement experience by major payers, including Medicare, Medicaid, and other payers, as well as by business lines as an integral part of the estimation process related to determining the valuation allowance for accounts receivable.  In addition, the Company assesses the current state of its billing functions on a quarterly basis in order to identify any known collection or reimbursement issues to determine the impact, if any, on its reserve estimates, which involve judgment.  Revisions in reserve estimates are recorded as an adjustment to the provision for doubtful accounts, which is reflected in general and administrative expenses in the consolidated statements of operations beginning in 2016. In prior periods, adjustments were recorded against revenues.

Property, Equipment, and Leases

Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets (generally three to ten years).  Maintenance and repairs of property and equipment are charged to operations when incurred.  Gains or losses on the disposal of property and equipment are recognized in operations in the year of disposition.

The Company evaluates the recoverability of the carrying values of its properties and other long-lived assets on a property-by-property basis.  The Company reviews its properties for recoverability when events or circumstances, including significant physical changes in a property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair value of a property, indicate that the carrying amount of the property may not be recoverable.  The need to recognize an impairment is based on the estimated future undiscounted cash flows from a property compared to the carrying value of that property.  If recognition of an impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.  

Subsequent to the year ended December 31, 2017, the Company sold all assets related to the
Thirteen Moons entity.  The subsequent disposition meets the criteria for held for sale accounting at December 31, 2017.  As such, the related assets have been separately stated on the consolidated balance sheet for the current period and were revalued at the lower of carrying value or fair value less costs to sale.  As a result of revaluation, the Company recorded an impairment loss of $164,867 and has been recorded in other income (expense) in the consolidated statement of operations.

Management did not identify any significant impairments during 2016. See Note D regarding 2015.

At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating or capital lease.  The Company records rent expense for leases that contain scheduled rental escalations on a straight-line basis over the term of the lease.  The lease term used for straight-line rent expense is calculated from the date the Company obtains control of the leased premises through the end of the lease term.


12


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

B.   Summary of Significant Accounting Policies – continued

License

Licenses are considered indefinite lived intangibles and are acquired in order to provide services to patients under care.  On at least an annual basis the licenses are reviewed for impairment by first analyzing qualitative factors and, if necessary, assessing the intangible asset’s fair value.  No impairment charges were recorded in 2017, 2016, or 2015.

Deposits

Deposits consists of security deposits in the amount of two month’s rent required by the Texas Ten facility lease, one month’s rent required by the St. Giles lease, and various utility deposits.

Revenue Recognition and Patient Service Revenue

Revenues are derived from services rendered to patients for long-term care, including skilled and intermediate care, and rehabilitation services.  Revenues are recorded when services are provided based upon established rates adjusted for amounts expected to be received under third-party contractual arrangements with governmental providers, Medicare, and Medicaid.  These revenues and receivables are stated at amounts estimated by management to be at their net realizable value.

For private pay in long-term care, the facilities bill in advance for the following month, with the remittance being due upon receipt of the statement and generally by the 10th day of the month the services are performed.  Private pay revenues billed in advance are deferred and recognized as services are rendered.

Payments are received from the Medicare program under a prospective payment system (“PPS”).  For skilled nursing services, Medicare pays a fixed fee per Medicare patient day, based on the acuity level of the patient.  Medicare program payments for long-term care services are based upon fixed per diem rates negotiated with a managed care organization contracted by the applicable state.  The Medicaid program is jointly funded by the federal government and states.  The federal government pays states for a specific percentage of program expenditures, called Federal Medical Assistance Percentages (“FMAP”).  FMAP varies by state based on criteria such as per capital income.  FMAPs are adjusted for each state on a three-year cycle to account for fluctuations in the economy.  The FMAP is published annually in the Federal Register.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation.  Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs.  Management believes the facilities are in material compliance with all applicable laws and regulations.


13


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

B.  Summary of Significant Accounting Policies – continued

Revenue Recognition and Patient Service Revenue – continued

The Medicare PPS methodology requires that patients be assigned to Resource Utilization Groups (“RUG”) based on the acuity level of the patient to determine the amount paid for patient services.  The assignment on patients to the various RUG categories is subject to post-payment review by Medicare intermediaries.  Management believes the Company has made adequate provision for any adjustments that may result from these reviews.  Any differences between the net revenues and the final determination will be adjusted in future periods as adjustment become known.

Concentrations of Credit Risk

The Company grants credit without collateral to its residents, of whom most are insured under governmental programs or third party contractual agreements.  The collectability or reliability of the accounts receivable is dependent primarily upon the performance of the government unit, the third party, or the resident’s family.  Management does not believe significant credit risks are associated with accounts receivable.

Capitalization of Pre-Construction Costs

The Company capitalizes pre-construction costs until the project is placed in-service, at which time the asset is depreciated over its useful life.

Income Taxes

The members have elected to be taxed under sections of the federal and state income tax laws which provide that, in lieu of income taxes, the members separately account for their pro rata shares of the Company’s items of income, deductions, losses, and credits.  Therefore, these statements do not include any provision for income taxes.

The Company classifies any interest recognized on an underpayment of income taxes as interest expense and classifies any statutory penalties recognized on a tax position taken as general and administrative expense.  Management of the Company believes that they have not taken a tax position that, if challenged, would be expected to have a material effect on the consolidated financial statements in 2017, 2016, or 2015.

The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions within the United States.


14


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

B.  Summary of Significant Accounting Policies – continued

Fair Value of Financial Instruments

The Company calculates the fair value of its assets and liabilities, which qualify as financial instruments and includes this information in the notes to consolidated financial statements when the fair value is different than the carrying value of those financial instruments.  The estimated fair value of patient accounts receivable, prepaid expenses and other current assets, accounts payable, related party payables, accrued expenses, and other accrued liabilities approximate the carrying amounts due to the relatively short maturity of these instruments.  The carrying value of the notes payable and receivables financing also approximates fair value since these instruments bear market rates of interest.  None of these instruments are held for trading purposes.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.  These reclassifications had no effect on previously reported results of operations.

C.  Assets Limited as to Use

Assets limited as to use consist of designated working capital reserves and replacement reserves as required by the Master Lease Agreement and Guaranty Agreement, respectively, executed in conjunction with the sale and leaseback of the Texas Ten nursing facilities.  The reserve funds are held in liquid savings account owned by GruenePointe 1 Salvado, LLC, whose sole purpose is to maintain the required reserves.

The working capital reserve was established as a liquid working capital reserve fund for operation of the facilities and any withdrawal requires consent of the landlord.

In lieu of additional financing on other projects, the landlord approved the withdrawal of the working capital reserve funds.  These funds were used for construction costs on certain Adora projects.

The replacement reserve fund calls for an amount of $500 per bed to be used for capital improvements throughout the life of the lease.  As of December 31, 2017 and 2016, the total replacement reserve required is $569,000 and $572,500, respectively. The assets limited to use balance of $469,765 is below the required reserve as of December 31, 2017. The Company received temporary relief for this shortfall as of December 31, 2017.

D.  Pre-construction Costs

The Company is currently developing skilled nursing and assisted living facilities in Texas. These pre-construction amounts are classed into three specific projects: Adora 8 (Creekside); Adora 9 (Midtown); and Adora 14 (Austin). Funding sources for these projects are based on the approximate ratio of 10% equity financing, 65% conventional debt financing, and 25% mezzanine debt financing.

15


GRUENEPOINTE HOLDINGS, LLC AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

D. Pre-construction Costs – continued

Below is a breakdown of the accumulated construction costs and projected project total cost as of December 31:

 

Pre-Construction Costs:

 

Adora 8

 

 

Adora 14

 

 

 

 

 

 

 

(Creekside)

 

 

(Austin)

 

 

Total Cost

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Architecture fees

 

$

603,349

 

 

$

356,293

 

 

$

959,642

 

Developer fees

 

 

132,901

 

 

 

17,800

 

 

 

150,701

 

Due diligence

 

 

105,770

 

 

 

-

 

 

 

105,770

 

Financing costs

 

 

13,721

 

 

 

-

 

 

 

13,721

 

Land acquisition

 

 

808,423

 

 

 

2,101,800

 

 

 

2,910,223

 

Property tax

 

 

44,416

 

 

 

46,857

 

 

 

91,273

 

Land use/planning

 

 

8,982

 

 

 

6,880

 

 

 

15,862

 

Insurance

 

 

989

 

 

 

1,700

 

 

 

2,689

 

Legal fees

 

 

30,778

 

 

 

18,173

 

 

 

48,951

 

Testing and inspections

 

 

-

 

 

 

6,518

 

 

 

6,518

 

Permits

 

 

35,794

 

 

 

171,384

 

 

 

207,178

 

Permit expediter

 

 

-

 

 

 

488

 

 

 

488

 

Third party architect

 

 

-

 

 

 

27,986

 

 

 

27,986

 

Medicaid bed waiver

 

 

-

 

 

 

1,204,226

 

 

 

1,204,226

 

Other

 

 

3,441

 

 

 

3,582

 

 

 

7,023